Payment reform: some observations on skepticism


There have been some blog posts (here and here) about a discussion on payment reform at the Massachusetts Health Data Consortium last week. While I did not attend, the commentary is provocative and I would like to offer a few observations. The discussion included some critical perspectives on the prospects for implementing payment reform and whether its implementation will really bend the trend.

My main point in response to the dialog is that payment reform needs to be understood as part of a dynamic trajectory, a multi-stage game. Couple variations on this theme:

Getting to critical mass
It is not surprising if, these days, the patients being managed by providers operating under risk models are not necessarily lower cost than patients be managed by providers on FFS. Payment reform requires two kinds of critical mass before impact will really be felt: 

  • Inside the provider panel: You need a large enough volume of patients within the panel under the new payment mechanisms to pay for the time and investments to build up the capability (infrastructure, workflows, and care practices).
  • In the provider service area: In vast majority of markets, the FFS providers still largely set the “market price” for care; the risk providers have little incentive much of the gains, especially without a critical mass of lives in narrow networks

Over time this critical mass will be achieved and then the impact will be felt. We are in an interregnum period.

It’s not the scenario you are in; it’s the future scenario you are trying to avoid
It is certainly possible that payment reform alone won’t bend the trend (e.g., if provider consolidation into more logical groupings to manage patients and risk end up being so large they can replicate the leverage large institutional providers have in some markets). And a number of other important preconditions were identified in the discussion (e.g. actionable cost and quality comparison data). But assuming payment reform fails to curb costs, the system will likely self-correct – probably into one of two different directions:

  • Retail: employer opt-out or shift to defined contribution will put more choice in the hands of the consumer; they have more incentives to economize (e.g. buying a lower cost, narrow network plan) and provider groups will be more directly exposed to market-like conditions. Notably, ACOs nurtured under payment reform could be logical units for providing this coverage (with a bunch of wrap around capabilities). Note also that defined contribution is a ready answer to employee backlash against ACO-driven constrained choice that Galvin hypothesizes
  • Regulator intervention: e.g. narrowing the differentials across providers for the same types of services (an idea under active discussion in Massachusetts)

Indeed, trying to avoid these kinds of outcomes can lead stakeholders to re-prioritize cost effectiveness in their thinking.

Aging, ailing baby boomers to the “rescue”
I suspect specialist and institutional backlash against the diminishing volumes under payment reform are exaggerated. The dynamic component here is demographics. While payment models should constrain utilization of higher end services by incentivizing “muscular” primary care, this will take time to evolve through the delivery system (and for providers to start seeing holes in their schedules). That time will allow baby boomers to age; their medical needs (even under well managed care models) should easily backfill any reductions in demand from resulting from accountable care (provided, of course, specialist capacity is not grown in the meantime). See here for some back-of-the-envelopes on how measured roll-out of ACO models (better phrased: slightly less wild-eyed optimistic growth scenarios) could leave specialists quite busy. (Note, though, stakeholders need to play along by not building a lot of capacity in anticipation of both demographics and traditional volumes).

There’s an inverse point here as well: It was argued in the discussion that the key trend driver today is unit cost, not utilization; payment reform intent on managing utilization is an indirect way of going after a pricing problem. True enough. Price may be driving today’s trends, but, given the baby-boomers, given the diabesity epidemic, utilization will assuredly come roaring back in the next 5-10 years. We need to get out in front of this prospective explosion. Also: utilization management affects mix which affects the average unit price.

You’ve got to stop the “trainwrecks” before they happen
Regarding the point about 10% of the population generating most of the cost and therefore payment reform is a fairly blunt instrument to apply for a narrowly scoped problem: There are ways to reduce the costs of the sickest 10% without compromising quality (think: end of life care and the dual-eligibles) but these are more likely to e step changes than trend benders. Over time, however, a portion’s of today’s 90% healthier population will become the 10% sickest. If payment reform affects how well the broader population is treated, we will see the pay-off in the end.