Moving (realistically) from volume-based to value-based health care payment in the USA: Starting with Medicare payment policy

With employers and policy-makers in the USA desperate to slow the rate at which health expenditures grow, it has become trendy in recent years to argue that health care payers need to move from ‘volume-based’ to ‘value-based’ payment. ¹ The same appeal was recently made in England. ² The exhortation is as appealing and arguably correct as it is facile. Currently, no alternative value-based reimbursement model of sufficient scale, scope and experience exists. A paradigm shift from volume- to value-based payment will require two things: many more years— probably as long as a decade—of research and testing to produce valid measures of quality; and, as a necessary part of this effort, the refinement of existing individual payments so that they can become the building blocks for new aggregate reimbursement methods such as bundled episodes or global payments. Fortunately, USA policy-makers can use the Medicare programme to facilitate this major transition, provided they can summon the political will to do so. Due to its unsurpassed market power, as the largest single purchaser of health care, Medicare provides a vehicle for achieving price reform that can eventually be used to develop new value-based reimbursement models. ³

Over the last 40 years, Medicare has exerted more influence on the organization, finance and delivery of USA health care than any other individual payer. ⁴ Driven by intermittent threats of financial insolvency, ⁵ the programme has managed to achieve significant (albeit temporary) cost containment several times through pioneering reimbursement reform and related payment reductions for overvalued services. ⁶ Policy-makers successfully slowed Medicare's: growth of inpatient hospital expenditures in the mid-to-late 1980s and again in the late 1990s, the growth of physician expenditures in the mid-to-late 1990s, and the growth of outpatient and home health care expenditures in the late 1990s. ³ The famous Balanced Budget Act of 1997, in particular, provides an example of how policy-makers can use Medicare payment policy to achieve both significant federal budget deficit reduction ⁷ and reduced Medicare spending growth. ⁸

For comparison, countries such as France and Canada generally establish global budgets on what they will spend from public funds each year on health care. ⁹ Because these countries also routinely negotiate fixed prices for most health care providers and products—while providing universal coverage—much of their innovative focus has often been on trying to manage the volume of health care through waiting lists and/or the rationing of more expensive treatments and health care products based on medical necessity or efficacy. ¹⁰ By contrast, the public health care sector in the USA has never succeeded in any sustained effort at restraining the volume of health care delivered. And because Medicare cannot restrict the number of beneficiaries it serves, once anyone meets basic age or disability criteria, the programme has been forced to become a global leader in the only other area of health care open to manipulation: payment (or prices).

Although Medicare does not have the medical service controls, utilization review protocols or selective contracting options that private insurance plans in the USA use to partially limit the volume of care delivered by providers, ¹¹ adjusting payments alone can engender more equity and cost control. In the 1990s, policymakers successfully adjusted Medicare payment policy to address some of the income disparities between primary care physicians and procedural specialists. ¹² In recent years, the programme has managed to reduce spending on diagnostic imaging by an amazing 13% in 2007, and then slow annual expenditure growth on imaging to just 1% (2008). It did so by simply reducing payments for the technical component of various imaging exams (CT and MRI scans), which was warranted given that imaging was the area of health care for which Medicare expenditures had been growing the fastest since 2000. ¹³

The most popular payment and delivery reform currently gaining political momentum in the USA involves accountable care organizations (ACOs). Yet the structural hindrances to ACOs flourishing are numerous and formidable. ¹⁴ Not all primary care physicians would be invited into, or want to join, an ACO. It is not clear how much financial risk ACOs would be asked (or able) to manage. ¹⁵ ACOs that become especially large in specific geographic areas could trigger antitrust concerns regarding their potential exploitation of excessive market power, ¹⁶ which is already a growing problem in various parts of the USA. ¹⁷ Individual specialties that have prospered from distorted pricing, such as cardiology, will resist moving to more integrated, multi-specialty models of ACOs. And most specialists, hospital administrators and other stakeholders in the status quo will vigorously oppose any efforts to constrain the volume of profitable care. ¹⁸ Given this daunting set of obstacles to ACOs thriving anytime soon, policy-makers should focus first on recalibrating the health care prices over which they have regulatory control.

In the coming years, Medicare's administrators will test a variety of new reimbursement models. This innovation in Medicare payment policy will be critical for the success of the landmark health reform signed into law by President Barack Obama in March 2010: the Patient Protection and Affordable Care Act (ACA). The law creates an organization within the Centers for Medicare and Medicaid Services—the Center for Medicare and Medicaid Innovation—charged with testing new payment systems. Among others, these new systems will include: bundled payments for episodes of care, global or capitated payments, and blended versions of these and other salaried approaches. Under these new models, payments will go not to individual providers, but to larger specialty group practices (e.g., Marshfield Clinic), integrated delivery systems (e.g., Group Health Cooperative of Puget Sound), and virtual physician organizations (e.g., Community Care of North Carolina). ¹⁹ Medicare does not need extensive payment reform that affects all of its 46 million plus beneficiaries in order to slow the rate of expenditure growth and drive delivery system improvements. Just 20% of the programme's beneficiaries—those with five or more chronic conditions—account for two-thirds of the programme's expenditures, while 5% of Medicare beneficiaries account for almost 45% of programme spending. ²⁰ Annually, this small minority of very ill Medicare beneficiaries sees nearly 15 separate physicians, makes 40 office visits, and fills 50 prescriptions. ²¹

The ACA also establishes (by 2014) an Independent Payment Advisory Board ‘that is required to make annual recommendations on changes in Medicare payment if Medicare spending is projected to exceed specified targets.’ ²² In terms of government spending and budgetary policy, Medicare cannot afford to exceed these spending targets because more than US$450 billion in future programme spending is needed to finance the ACA's dramatic expansion of health insurance coverage. Consequently, Medicare's testing of new payment models in the next few years will likely have an enormous impact on the success or failure of Obama's ACA. Policy-makers should start with focusing on and improving what they actually control (and the refinement of which is necessary in order to move to more comprehensive, value-based reimbursement): the thousands of individual prices that Medicare pays to medical providers.