Editor’s note: This is the first post in a Health Affairs Blog series by Catalyst for Payment Reform Executive Director Suzanne Delbanco. Over the coming months, Delbanco will examine how different methods of payment reform are being employed and how well they’re working. This post provides an overview of payment reform; the next post will examine pay for performance.

Fed up with the status quo, large employers, other purchasers, and health plans have been on a steady march to change how we pay for health care, moving away from paying for care based on volume to paying for value.  Some of our health plan colleagues have noted that this march has become an “arms race” to see who can achieve the greatest payment reforms most rapidly.  In releasing the first-ever National Scorecard on Payment Reform last March, Catalyst for Payment Reform (CPR) started to measure this progress in the private sector, including the prevalence of specific payment methods.  The Scorecard revealed what many of us already know—the vast majority of payment (89 percent) is still tied up in fee-for-service and other methods that are agnostic about the quality of care.

Within the 11 percent of payment meeting CPR’s definition of “value-oriented,” the Scorecard found that 43 percent of those payments give providers financial incentives by offering a potential bonus or added payment to support higher quality and more affordable care, such as fee-for-service with shared savings.  The other 57 percent of payments put providers at financial risk for their performance if they do not meet certain quality and cost goals, such as bundled payment.  A complete breakdown appears in the table below.


We fully expect our 2014 National Scorecard—to be released next fall—will show additional progress.  On the face of it, this is a good thing; and yet, we still know very little about whether the “progress” we are seeing is meaningful.  Are these new models of payment producing the value we think they should?  Is it possible we could see a huge surge in so called “value-oriented payment,” that doesn’t produce higher quality, more affordable care?  Are we on the right path to achieve CPR’s goal of ensuring at least 20 percent of payment is proven to enhance value by 2020?

To answer these questions, throughout 2014, CPR will examine the evidence for different types of payment reform.  Which approaches are proven to work, how, and under what circumstances?  Over the next 12 months we will share our findings in this forum, examining the current evidence for everything from pay-for-performance, to bundled payment, to non-payment policies.

To set the stage, how does Catalyst for Payment Reform define payment reform and its many incarnations?  And what other variables factor in to the success or failure of different approaches?

CPR’s definition of payment reform

While there are many different definitions of payment reform, Catalyst for Payment Reform defines payment reform as payment methods that reflect or support provider performance, especially the quality and safety of care that providers deliver, and are designed to spur provider efficiency and reduce unnecessary spending.  If a payment method addresses only efficiency, CPR does not considered it value-oriented — it must include a quality component.  Otherwise, how can we ensure payment reform has its desired effect of improving both the affordability and quality of care for patients?  A quality component helps guard against the incentives plans and providers may have had in the 1990’s managed care era, when payment models may have increased the temptation to withhold needed care.

Payment reform typically lies at the intersection between health plans (or a government payer) and providers.  This is where incentives can be created for higher value care (efficient, affordable, high-quality care).  While it can be important for health care purchasers to provide financial incentives to health plans to encourage better performance, like improving customer service, such incentives do not directly impact health care providers.   Therefore, CPR does not focus on these types of incentives in its efforts to spur payment reform.

Payment reform: a continuum of financial risk

While the possibilities for payment reform are broad, most changes to payment generally fall into one of three categories.  First, some types are “upside only risk,” meaning the payment reform gives health care providers the chance for a financial upside, but no added financial risk, or downside.  Common examples include pay-for-performance bonuses or care coordination fees for physicians serving as medical homes.

Next, some reforms are “downside only risk,” meaning they put providers at financial risk in the event that added resources are needed to care for a patient (in situations where additional care could have been avoided). The most common examples apply to hospitals, such as non-payment for preventable hospital-acquired conditions or readmissions.

Finally, some payment reform endeavors contain “two-sided risk,” in which health care providers have the opportunity for financial gains and losses.  One illustration of this would be a risk-sharing payment arrangement in an Accountable Care Organization (ACO) like setting, where there is the potential for providers to share in any savings, but also the risk that the provider will have to absorb costs if they spend over budget or do not meet quality targets.

As we examine what types of payment reform programs and strategies work, when, and how, we will be keeping a close eye on the role that financial risk plays in motivating providers to deliver the right care at an affordable price.  One of CPR’s hypotheses is that some downside risk may be needed to provide the “stick” along with the “carrot” to motivate changes in provider behavior and practice patterns.  As we examine the evidence, we will see if this hypothesis holds true.

Additional variables impacting the success or failure of payment reform

It is also important to mention two additional variables that can affect the success or failure of various payment reform programs and strategies. The first variable CPR has dubbed “consumer shift;” when purchasers and payers incentivize consumers to seek care from high-value providers (using various benefit and network design options). Such approaches can boost payment reform efforts by enhancing providers’ willingness to accept new forms of payment in hopes they might receive greater market share.

The second variable is government policy, which can potentially hinder or enhance the success of payment reforms.  For example, a strong state law mandating price transparency could complement a pay-for-performance program, helping consumers select high-value providers, who are additionally rewarded through the pay-for-performance program.

In addition, CPR has also observed that local market forces impact the success and failure of various payment reform programs and strategies.  We’ve already seen several examples of this in conducting analyses of five markets (Columbus, Long Beach, Memphis, Twin Cities, and Grand Rapids) using our Market Assessment Tool. For example, provider consolidation can have a profound impact on the ability of purchasers or payers to negotiate with providers for reforms.

Over the next several months, as we take an in-depth look at the evidence and living examples of payment reform, we’ll also remark on the role that consumer incentives, local market forces, and government regulation play in these strategies.  Next month, we’ll start by taking a look at the evidence around pay-for-performance, an “upside only” reform. We are excited to embark on this journey, sharing our findings on Health Affairs Blog, and ideally engaging in a critical dialogue with readers about what types of payment reform are leading to better value.