If today's health care environment can be described as a “living laboratory,” then most industry experts would agree that payment models are the experiments. The fee-for-service model that's served us for so long is being replaced with different models, ones that typically move some of the burden of risk from payers (and employers) to care providers. This transition, sometimes called “value-based payment,” is intended to incentivize physicians and other health care providers to maintain a high quality of care as opposed to a high quantity of patients.

There are many different payment models operating in the marketplace, and each carries a different risk level for providers. New care delivery models or philosophies also emerging – patient-centered medical homes and accountable care organizations are two of the most prominent. Understanding how care models inter-relate – and how they are used in practice – will be increasingly vital as scientists in the living laboratory continue to develop hypotheses and test them.

The models and delivery systems described below will almost certainly change, but these are the most popular (and important) payment and delivery models in the health care marketplace today.

As will become clear, every payment model requiring data or risk assumption on the provider side of the equation also requires some level of coordination and technological assistance.

“The payment model has to be matched to the organizational level of the provider,” explains Dr. Burt Vanderlaan, medical director of network effectiveness at Priority Health. “As providers become more integrated and organized, then we can start to implement more of these value-based models.”



“Fee-for-service is a model that fits the way most of the system is organized today,” Dr. Vanderlaan notes.

And fee-for-service is still the most widely used payment model, although its dominance is expected to wane over time.

“Fee-for-service has been the dominant payment mechanism for decades,” says Bill Kramer, executive director for national health policy at the Pacific Business Group on Health. “The economic incentives under fee-for-service are to provide more services. The result has been that more services are provided than are necessary. There's an enormous amount of unnecessary, inappropriate or even harmful services that are provided to patients as a result of the incentives under fee-for-service. In other words, it's simply payment for volume of service, and there's not a reward for higher-quality services.”

But the payment model does have its advantages, which are often overlooked.

“Although we do happen to focus on the shortcomings of fee-for-service, we shouldn't lose sight of the fact that it does encourage and reward access, particularly in the area of primary care, where we have a lot of concerns about adequate access,” Dr. Vanderlaan says. “It's an incentive to physicians to maintain a full schedule.”


A pay-for-reporting model is fee-for-service with a twist: Providers are paid a little bit extra to report data back to the payer, typically involving quality metrics. And it's usually an intermediary step toward a pay-for-performance payment model.

“Pay-for-reporting is essentially just setting up the workflows to report,” says Jen Searfoss, JD, chief executive officer of the Searfoss Consulting Group. “Nothing in the National Quality Strategy is a quality outcome measure. It's about whether you really did what you said you did – did you ask about tobacco? And nobody knows the financial benefit of pay-for-reporting. So it's going away. We've sort of outgrown that, and now we're working on more meaningful payment models.”


“Pay-for-performance models are built on the chassis of fee-for-service,” Kramer explains, “and they add a bonus or a penalty based on quality measures.”

“It's the next real step up the ladder from fee-for-service, beginning to move along the continuum of more integrated care delivery,” Dr. Vanderlaan says. “It's not that difficult to put into place, and now we have a fair menu, nationally, of well-agreed-upon quality measures most physicians accept.”

The readmissions reduction program introduced by the Patient Protection and Affordable Care Act is just one example.

“We know that historically, hospitals got paid twice when a patient was discharged and then readmitted to the hospital, and there were too many hospital readmissions,” Kramer says. “We knew there were readmissions that would be avoidable if hospitals provided better care, as well as better discharge and post-discharge care. Under Medicare's fee-for-service system, there's now a penalty for hospitals that have a high number of readmissions.”

Because it's fairly easy to implement, pay-for-performance measures have been widely adopted by many commercial payers as well as Medicare and Medicaid.

“Both commercial payers and employers – the purchasers – feel that pay-for-performance doesn't go far enough,” Kramer notes, “because it still builds on this rusty chassis of fee-for-service, and the underlying incentive is still to provide more services. Although they encourage physicians and hospitals to provide higher-quality services through bonuses, most 'P4P programs don't provide a strong enough incentive to significantly improve quality. And in a fragmented delivery system, many hospitals, physicians and medical groups are not yet able to manage and be accountable for all of the services that they provide for a particular patient. We need to get off of that chassis and move onto a 21st century model – get outta the Studebaker and into a Tesla.”

Global payments and partial capitation

Global payments can be seen as somewhat similar to bundled payments – providers are given a fixed dollar amount to care for a patient's condition – but unlike bundled payments, which focus on an episode of care, global payments focus on a patient's chronic condition (such as diabetes). The scope of global payments is therefore significantly wider than that of bundled payments. Instead of covering all of the services around a single episode of care, providers are contracted to manage a patient's health surrounding a chronic condition for a specific period of time.

However, doctors are quick to note that not every diabetic patient is the same. Some are better at managing their conditions or complying with medication programs than others. And some have other complicating chronic conditions. In other words, some patients are more costly to treat than others, and payers and providers are still working to ascertain how to budget correctly for each and every patient.

“The issue with global payments is predictability,” Searfoss says. “It makes sense to have bands of striation for the medium-risk and high-risk patients with certain conditions, but you can't have a patient-specific bundle and a global payment. And there's no physician or nurse who can say, 'The patient has this, this and this, so our budget should be this.' Even if the system shows them a number, we aren't that sophisticated yet, and it's going to be harder to crack until the systems get there. And employers aren't sure what to think about these models because they're not sure if it's wasted money or not.”

Practically speaking, there isn't much difference between global payments and partial capitation; there might be some small contractual differences in terms of who's responsible for paying hospital-admission fees for patients in a provider's population, but partial capitation also requires providers to assume responsibility for patients with one or more chronic conditions.

“In partial capitation arrangements, the physician and other providers take responsibility for the quality of care that's being provided for a specific demographic of patients, or for a defined set of services, such as primary care” Kramer says. “And that can result in better care, but at a lower cost and with better patient satisfaction – and providers usually like it, too. It also requires effective care coordination among primary care physicians, appropriate specialists and, in some cases, hospitals.

“In some ways, partial capitation is easier than other payment models because it's very focused,” he adds. “Providers only have to worry about their patients with the specified condition, like diabetes, for example. There are clinical standards of care for diabetic patients, and there are actually pretty good outcomes measures for diabetic care.”


Capitation is the payment model at the opposite end of the risk spectrum from fee-for-service.

“Under full capitation, a group of doctors and – usually – a hospital system will be paid a fixed amount for providing all the services needed for a group of enrollees,” Kramer explains.

“Compared to fee-for-service, under capitation, the provider is fully at risk for the quality, volume and intensity of services provided.”

Although there's been a lot of talk about capitation recently, it's not a new concept – it's just shifted slightly over the years.

“Generally, capitation has been used in situations in which the patient enrolls in a health plan with a fixed provider network, such as Kaiser Permanente. The enrollees are fully covered for services by that provider network; they're not covered if they go outside that network,” Kramer says. “That's the original, pure concept. It's evolved so that capitation is sometimes used for situations in which there's a preferred provider network and there's still some partial coverage outside the network.”

“A capitated contract essentially says, 'You will be given this amount of money per patient, per month. If you exceed that budget, you will not be paid for the excess.' The provider accepts the risk,” Searfoss says. “There is risk adjustment that happens for each patient, and the provider is given a budget for individual patients. It's very predictable for groups that have done this well and for some time, and it's the fastest-growing out of all the private payer models because it's effective and predictable.”

But like any other model, there are potential problems with capitation.

“There theoretically is an incentive to skimp on the services provided to patients under a capitation arrangement, so it's important to have quality measures to ensure that the patients are getting adequate and appropriate care and that they're also protected from malpractice if appropriate care is not being provided,” Kramer says. “The evidence shows that in general, the best care is provided by large integrated delivery systems, many of whom are paid on a capitated or similar arrangement.”And that means capitated arrangements might not make sense in certain areas of the country where large, coordinated health care facilities are unavailable.

“Capitation will be a prevalent model,” Searfoss says, “but to say that you're going to have a primary-care physician in the middle of nowhere in Montana on a capitated plan – there's no way. That physician is going to stay on a fee-for-service model. Rural areas will have to look at different options, because capitation works best in urban areas where you have a large number of health care resources. The moment you try capitation in rural areas, it doesn't work effectively.”

But overall, most industry experts agree that many of the payment models on the risk spectrum are stepping stones toward capitated arrangements.

“The evidence in terms of quality is that capitation, as long as it's combined with these other quality assurance features, has been shown to actually deliver better care than fragmented fee-for-service,” Kramer says.


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