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How insurers are adjusting payment to medical providers

Dan Gorenstein Sep 30, 2014
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Commercial insurers are ditching or at least tweaking the way they pay medical providers, according to a report out Tuesday from the group Catalyst for Payment Reform.

For years, commercial insurers as well as state and federal governments have paid doctors and hospitals under what’s called fee-for-service. To many in the health care world, fee-for-service is seen as one of the key drivers behind the run-up in health care costs, because it offers a financial incentive to provide extra services that may not be needed.

“I believe fee-for-service generates a lot of waste, and overuse of health care services can be not just wasteful, but harmful,” says Harvard Health Economics professor Meredith Rosenthal.

Rosenthal says, based on her research, alternatives to fee-for-service can reduce the volume of services by as much as 20 percent. Rosenthal is quick to add that there’s no great evidence yet on the effectiveness of any of the alternatives.

“How to design a payment system to obtain the best value for money and value in health care is a very complicated question. And that’s where we are really learning,” she says.

So what options are out there?

Here’s a list of four payment methods starting with the most traditional, presented with the caveat that these brief descriptions are intended for those of us who aren’t health care wonks.

Fee-for-Service: A payment model in which providers get paid for specific tests, services or procedures.

It’s the granddaddy of payment models and a scourge for many health reformers.

Pay for Performance: A payment model in which on top of the usual fees providers are paid, they can earn extra money for meeting certain health care quality goals or other performance targets, like increased efficiency.

In its report, Catalyst for Payment Reform says this is by far the most popular reform this year. You can think of it as health care reform with training wheels.

Shared Risk: A payment method in which providers accept some financial liability if they spend over a targeted budget. If they go under budget, providers keep a portion of the savings.

A classic intermediate step that carries risk and reward; sort of reform with a safety net. It’s not very common.

Full Capitation/Global Payment: A fixed payment to providers for care they give over a set time period, like one month or a year, no matter how much care the patient utilizes.

This is the most aggressive payment method, where providers keep all the savings and eat all costs that go above the fixed payment. Some see this as medical providers taking on the role of insurer.

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