4 Reasons Hospitals Should Consider Alternative Payment Models

Efforts are underway to shift from fee-for-service to value-based care and alternative payment models. These models include capitation and bundled payments. They can benefit patients, self-funded employers, and providers by increasing price transparency and reducing costs.

Capitation

The capitation model pays healthcare providers a fixed amount per patient, member, or month (PMPM). Originally used by health maintenance organizations and preferred provider organizations as part of managed care in the 1990s, this payment structure is also used by some integrated delivery systems and ACOs.

Capitation payments encourage healthcare providers to focus on quality and reduce waste in the form of unnecessary medical services. It can also help to cut costs by enabling providers to find more efficient ways to deliver care, such as through telehealth or remote patient monitoring solutions.

However, this type of reimbursement model can have some drawbacks. One potential problem is that capitation can incentivize the overuse of services, as providers may be tempted to rush through appointments or not provide patients with high-quality care to maximize revenue. Healthcare leaders must have access to real-time patient data to identify these risks and develop a mitigation plan. That is why healthcare providers should consider alternative payment methods to help mitigate possible problems.

Bundled Payments

With the current demand in the healthcare systems, hospitals and healthcare professionals should know what are alternative payment models and their benefits.

According to experts, one benefit of APMS is bundled payment integration. Bundled payments reimburse providers for a set fee for an entire clinical episode rather than for each service individually. The bundle’s precise makeup- known as an episode of care- can vary by medical condition or procedure. Acute care hospitals and physician practice groups are actively pursuing bundled payment models.

These payment arrangements can be prospective or retrospective. Prospective models allow providers to negotiate a bundled price for the clinical episode in advance. In contrast, retrospective models reconcile the total costs of a care episode with a predetermined target price. Providers that deliver care below the target price receive a reconciliation payment, while those that overspend face penalties. Early evidence indicates that bundled payments can reduce medical spending growth without negatively impacting patient outcomes. While research is still needed to evaluate the effectiveness of bundled payment initiatives, it’s clear that they offer a promising pathway for reducing health system costs and improving patient outcomes.

Reference-Based Contracting

The reference-based contracting (RBP) pricing model brings transparency and lower prices to healthcare services traditionally billed by hospitals. RBP models use a database of aggregated healthcare price information to establish a new point of reference to negotiate with providers.

In addition, RBP programs reimburse medical providers based on Medicare rates, which are typically much lower than traditional insurance amounts. This results in savings that can be passed on to plan members.

While implementing RBP programs isn’t without challenges, many companies have found that it helps reduce their overall health costs and offers attractive employee benefits that help with recruitment and retention. Some employers have saved up to 12% with reference-based contracts.

A key element in the success of an RBP program is patient advocacy and education. In cases where patients experience balanced billing, a good patient advocate can resolve the issue quickly and ensure plan members are aware of their rights and responsibilities.

ACOs

Under the traditional fee-for-service model, doctors receive payment for each test, procedure, and service they deliver. This incentivizes providers to deliver more care, even when it isn’t medically necessary or appropriate. However, ACOs can counter that by linking financial rewards to delivering high-quality care and reducing overall health costs. They’re expected to eventually replace the fee-for-service model as the standard for Medicare reimbursement. Some ACOs use a variable allocation that distributes savings based on merit, while others may use fixed allocation modeled after fee-for-service payment rations. Depending on the contract, ACOs may also share losses and repay payers for actual costs exceeding a benchmark. Some experts warn that the race among hospital systems to form ACOs could consolidate hospitals and doctor practices, limiting patient choices and increasing prices. Additionally, it needs to be clarified whether bundled payments will address geographic access disparities or prevent providers from cherry-picking lower-risk patients.