Payment transformation goals for the health plan industry

The U.S. healthcare industry has become increasingly complicated and has continued to face issues throughout the past several decades. According to the Centers for Medicare & Medicaid Services (CMS) National Health Expenditure Data, healthcare spending for 2018 totaled $3.6 trillion, averaging $11,172 per person and constituting 17.7% of the nation’s gross domestic product (GDP). This figure is expected to grow 1.1 percentage points faster than GDP every year, with a projection of the nation’s total healthcare spending to reach $6.2 trillion by 2028, making up 19.7% of GDP. This unsustainable growth in healthcare expenditures is largely attributed to the traditional fee-for-service (FFS) reimbursement model, under which the vast majority of the industry continues to operate.

In a FFS model, providers are financially incentivized to perform services in large volumes with limited financial accountability over the quality of care delivered. This model does not align health plan and provider incentives and deemphasizes patient-centered care, often resulting in increased medical costs due to unnecessary or duplicative services and suboptimal care outcomes. In recent years, there has been a major push to address these issues and implement value-based care (VBC) programs, which are aimed at optimizing cost efficiencies, while aligning provider and health plan incentives and improving the quality of care.

The Healthcare Payment & Learning Action Network (LAN)

LAN is a group of private and public healthcare leaders that was launched in 2015 by the Department of Health and Human Services (HHS) through CMS. Their purpose is to provide thought leadership, publications, resources and other insights related to best practices that can help commercial, Medicare (i.e., both traditional and Medicare Advantage programs), and Medicaid health plans and providers transition from FFS models towards models that drive two-sided risk.

Two-sided risk models substantially transform how healthcare is paid for and delivered by shifting more of the financial accountability from health plans to providers, while still holding providers accountable for quality of care standards. It is very unlikely for health plans to quickly shift from a FFS model to a two-sided risk model; rather, it is a journey to first take on one-sided risk models before transitioning to two-sided risk models.

The lack of sustainability in the current U.S. healthcare system has prompted LAN to set aggressive industry goals across all commercial and government lines of business for 2022 and 2025, to increase the percentage of healthcare payments tied to two-sided risk payment models, which will require health plans and providers to continue to work closely together. Both parties must align on program goals and incentives, and at the same time, continue to update and advance their payment models, operational processes and technical systems, in order to meet the demands of the ever-changing healthcare landscape.

Challenges with switching from FFS to VBC

Convincing providers to modify their business model to support shared-risk is a marathon, not a sprint. The first step for health plans is to engage providers in a one-sided risk model to get them comfortable with VBC programs before gradually transitioning to a two-sided risk model where providers take on more risk. This requires health plans to implement flexible payment transformation solutions that can support both one-sided and two-sided risk programs.

It’s very important that these solutions are thoroughly fleshed out so that they suit the health plan and provider’s program goals and incentives. Attaining mutual understanding and agreement (i.e., among the health plan and provider) of program goals, and efficiently administrating required operational and technical capabilities, are both imperative and of equal importance for program success. Implementing these capabilities without agreement on program goals will result in a failure to reach the desired VBC program quality and financial outcome targets.

Capabilities requirements

VBC models require health plans to expand people, processes and technology to support the capabilities required for VBC programs such as program population management, quality outcome measurement, information sharing, care delegation management, cost efficiency measurement and financial settlement. These new capabilities introduce a wide spectrum of implementation challenges related to both technical enhancements and operational improvements that are necessary to support a robust, end-to-end payment transformation.

Aligning incentives

In both one-sided and two-sided risk models, health plan and provider incentives must be closely aligned to achieve program success. VBC models require a reformed care delivery approach as providers increase their focus on individual patient health improvement; health plans must support providers through developing actionable insights into patient performance and quality metrics. It is necessary for both the health plan and provider to agree on a clear program definition and a road map to transition from a one-sided risk model to a two-sided risk model to mitigate future conflict.

What happens if we ignore this problem?

The expected continued increase in healthcare spending (jumping 1.1 percentage points faster than GDP every year) contributes to an overly burdensome and broken system, where expenses occupy increasing amounts of state and national budgets, employer budgets, health plan and out-of-pocket expenses. The entire industry as a whole is operating under an inefficient system; therefore, the entire industry needs to take action.

LAN has slightly different incremental goals from government to commercial lines of business over the next five years, but has the same overarching goal of migrating a majority of healthcare payments tied to two-sided risk models by 2025 (100% adoption for Medicare contracts and 50% for Medicaid and commercial contracts).

Some steps have already been taken, more so in the government line of business. In calendar year 2018, 24.3% and 18.2% of healthcare payments were tied to two-sided risk models for Medicare Advantage and traditional Medicare health plans, respectively. In contrast, only 10.6% of commercial healthcare payments were tied to two-sided risk models – a metric that shows that the commercial line of business has been slower to adopt these two-sided risk models. Holistically, though, the industry is gradually moving in the right direction; and together, commercial health plans and CMS can collaborate with providers to transform the healthcare world.

Doing business with CMS

As a result of the Affordable Care Act (ACA), access to Medicaid coverage and services has dramatically improved, which in turn increases spending. Because Medicaid is funded by both the state and federal government, the program’s costs aren’t fully covered by the federal government, leaving state taxpayers responsible for funding public healthcare. According to the Heartland Institute, the federal matching rate declines over time, so states will eventually have to find other ways to cover the costs of Medicaid recipients. Something must be done.

CMS is mandating that Medicare and Medicaid providers progressively assume more financial risk for the health outcomes of their patients and the cost of the care provided. Commercial health plans should be following suit. Thus, if a commercial health plan is offering Medicare Advantage, they should already be encouraging their providers to participate in one-sided risk payment models. By 2022, LAN has set a goal to have 50% of all traditional Medicare and Medicare Advantage healthcare payments tied to quality and value; and by 2025, targeting 100%. These are notably aggressive targets and will require continued improvement in processes and capabilities. This is in part why a gradual transition from a FFS model, to a one-sided risk model, and then to a two-sided risk model, is recommended for long-term success.

Effects on commercial health plans

Commercial health plans occupy the largest percentage of provider funds, are privatized with no direct oversight and are not standardized (i.e., similar to government programs), which will likely make adoption of two-sided risk models more difficult. Additionally, the current trend of increased year-over-year costs of healthcare spending is not only affecting commercial health plans and providers, but also employer groups, ranging from small businesses to some of the largest corporations. According to a 2019 Mercer survey, the average total health benefit cost by employee will increase by 3.9% in 2020. These increased costs are rising faster than overall inflation, making them unsustainable.

Employer groups who enter Administrative Services Only (ASO) contracts with a FFS health plan are especially suffering from these rising costs, as they are financially responsible for all of their employees’ medical claim expenses. Therefore, the health plan’s journey from FFS to value-based programs is crucial to employer groups involved in ASO contracts. The health plan’s achievement of value-based program goals will result in reduced medical expenses and improve the overall health of the insured employees.

LAN has established a pathway for success by setting the goals of 25% of total healthcare payments to be tied to two-sided risk models by 2022, and 50% by 2025. It’s important that health plans and providers take steps towards implementing these VBC programs, because failure to do so risks elongating the current trends of increased year-over-year cost and suboptimal care interactions (see FIGURE ONE).

Where is the commercial market segment at right now in regards to the adoption of two-sided risk models?

In 2019, LAN conducted a study on commercial health plan payments made during calendar year 2018. This study provides insight into where the commercial market segment is right now in regard to adopting two-sided risk models.

• 55.7% of payments were related to a standard FFS payment model, which has no link to quality or value. That is the majority!
• 14.2% of payments made were based on a FFS payment model, but had some tie to quality and value (e.g., pay-for-performance contracts).
• 19.5% of payments were tied to a VBC model that was built off FFS architecture, but did adopt one-sided risk (rewards to providers for appropriate care).
• Only 10.6% of payments were tied to a two-sided risk payment model, whether that be a VBC model based on FFS architecture with both upside and downside risk, or a population-based VBC model.

It is evident that commercial health plans are not nearly where they want to be, and there is a lot of work that needs to be done to get there; but with proper tools and guidance, this positive change is possible.

Where does a health plan start?

Starting a marathon can be incredibly difficult, but it doesn’t have to be. Health plans can begin by assessing where their VBC program portfolio is today and setting clearly defined goals for the future. Whether health plans are launching their first one-sided risk model or expanding to a two-sided risk model, there are many steps along the way. Health plans should determine the feasibility of the program, design a clearly defined and agreed-upon program, enable the necessary operational and technical capabilities, and monitor the program performance.

Baker Tilly encourages health plans to reflect on their own journey and challenges them to work towards crossing the finish line. Is your health plan ready to help LAN achieve its goals and take part in this industry-wide transition towards a more sustainable healthcare system that prioritizes reduced costs and improved patient health outcomes?

For more information on this topic, or to learn how Baker Tilly’s Value Architects™ can help, contact our team.