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Healthcare Spending: CMS Researchers See a Mixed Landscape on Inflation

December 7, 2017
by Mark Hagland
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CMS researchers have found that the slightly lowered healthcare spending inflation rates of the past few years will return to historical norms going forward

Real deceleration in healthcare utilization moderated healthcare spending Inflation in the United States in 2016, according to an analysis just published Wednesday in the Health Affairs Blog, though signs are now present that trends around healthcare inflation may well return to historical patterns. Those were some of the key findings of a team of researchers from the National Health Expenditures Team at the federal Centers for Medicare and Medicaid Services (CMS), including Micah Hartman, Anne B. Martin, Nathan Espinosa, and Aaron Catlin (the article made it clear that the commentary represented the views of the authors, and not official CMS commentary).

“Total nominal U.S. health care spending increased 4.3 percent and reached $3.3 trillion in 2016,” the researchers reported”—with that $3.3 trillion (actually $3.337 trillion) surpassing the $3.2 trillion total in 2015 and $3.026 trillion in 2014. “Per capita spending on healthcare increased by $354, reaching $10,348. The share of gross domestic product [GDP] devoted to health care spending was 17.9 percent in 2016, up from 17.7 percent in 2015 [and 17.2 percent in 2014]. Health spending growth decelerated in 2016 following faster growth in 2014 and 2015 associated with coverage expansions under the Affordable Care Act (ACA) and strong retail prescription drug spending growth. In 2016 the slowdown was broadly based, as spending for the largest categories by payer and by service decelerated. Enrollment trends drove the slowdown in Medicaid and private health insurance spending growth in 2016, while slower per enrollee spending growth influenced Medicare spending. Furthermore,” the article’s authors wrote, “spending for retail prescription drugs slowed, partly as a result of lower spending for drugs used to treat hepatitis C, while slower use and intensity of services drove the slowdown in hospital care and physician and clinical services.”

Why had inflation slowed in the few years leading up to 2016? “Over the past ten years the health sector has experienced major changes influenced largely by overall economic conditions, a low inflationary environment, and a more recent dramatic increase in health insurance coverage associated with the Affordable Care Act (ACA),” the article’s authors wrote. “During the period 2008–13, health care spending increased at historically low rates of growth, averaging 3.8 percent per year. Over this period, the Great Recession of 2007–09 and the subsequent mild recovery affected health insurance coverage and the use of health care. Additionally, medical price inflation was at historically low levels, in part because of lower economywide price growth and various legislative actions aimed at slowing health care spending growth.”

But things had sped up again in 2014-2015, the authors noted. “Following that period, 2014 and 2015 saw dramatic increases in health insurance enrollment, as major provisions of the ACA expanded insurance options under private health insurance Marketplaces and the Medicaid program—factors contributing to 8.7 million people gaining private health insurance and 10.2 million gaining Medicaid coverage in 2014 and 2015,” they noted. “In addition, growth in spending for retail prescription drugs was very strong in 2014 and 2015 (12.4 percent and 8.9 percent, respectively), mainly the result of an increase in spending for hepatitis C medication. As a result, health care spending increased 5.1 percent in 2014 and 5.8 percent in 2015.”

Importantly, of course, the researchers noted, “Within the ten-year period 2007–16, the US experienced, among other events, the most severe economic recession since the Great Depression, followed by a mild economic recovery; medical price inflation that was at historic lows; and major changes to the health care system associated with the ACA. During these years, health care spending increased at the lowest rates in the history of the National Health Expenditure Accounts, but low economic growth led to an increase of 2.0 percentage points in the share of the economy devoted to health care, from 15.9 percent in 2007 to 17.9 percent in 2016. The resulting average increase of 0.2 percentage point per year is nearly equal to the historical annual average over the past half-century.”

In other words, inflation in overall U.S. healthcare spending has now returned to something like “normal,” at least as gauged by historically predictive patterns. “In 2016, as expected, health care spending growth slowed following the major expansion of health insurance coverage in 2014 and 2015, when the ACA expanded eligibility for the Medicaid program and provided access to private health insurance marketplaces,” they wrote. “The insured share of the population stabilized at 91 percent in 2016, the same as for 2015 but higher than the shares of 89 percent in 2014 and 86 percent in 2013.”

Meanwhile, they said, “The slower growth in health care spending in 2016 was more in line with the average annual rate of growth during the period 2008–15 and was higher than growth for the overall economy. Because the unique factors that influenced the health sector over the past decade did not have as great an effect in 2016, this may be an initial indication that this year marks a return to the more typical relationship between annual rates of growth in health care spending and growth in nominal GDP. As a result, future health care expenditure trends are expected to be mostly influenced by changes in economic conditions and demographics, as has historically been the case.”

What about hospital and physician care spending? Hospital spending in 2016 represented 32 percent of total U.S. expenditures, the same as since 2013; but the inflation rate was 4.7 percent, slower than the 5.7 percent in 2015. Slower growth in hospital care spending last year “reflected slower growth of 2.3 percent in the use and intensity of services, which was lower than the increase of 3.4 percent in 2015. This deceleration followed two years of accelerated growth in nonprice factors, as utilization increased in 2014 and 2015 largely because the share of the population with health insurance increased (from 86 percent in 2013 to 91 percent in 2015)—a result of implementation of the ACA and improved economic conditions.

Meanwhile, “Total spending for physician and clinical services grew 5.4 percent, reaching $664.9 billion, and accounted for 20 percent of total health care spending in 2016,” the researchers found. “Although growth was slightly slower in 2016 than in 2015 (5.9 percent), spending on physician and clinical services increased more rapidly in 2016 than expenditures for all other health care goods and services,” with “continued strong growth in spending for freestanding ambulatory surgical and emergency centers contribut[ing] to the faster growth in spending for clinical services,” and indeed, with “growth in the use and intensity of physician and clinical services… a driving factor in overall growth in spending for physician and clinical services, accounting for almost three-quarters of the 5.4 percent increase,” despite a deceleration in Medicare and Medicaid spending on physician services.


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At the SHIEC Annual Conference, National Coordinator Rucker Offers a Cautious Opening Keynote

August 20, 2018
by Mark Hagland
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National Coordinator Donald Rucker, M.D., offered SHIEC attendees a cautious look at some of the current issues facing HIEs

At the 2018 SHIEC Annual Conference, sponsored by the Strategic Health Information Exchange, and being held August 19-22 in Atlanta, Donald Rucker, M.D., National Coordinator for Health Information Technology, delivered the opening keynote address on Monday morning, under the title, “Reshaping U.S. Healthcare: A Progress Report on Improving Interoperability and Usability of Clinical Information.”

Dr. Rucker, who was named National Coordinator in April 2017, told the 500 attendees assembled at the national association for health information exchange (HIE) organizations, that forward progress around health data exchange has to be understood in the context of a growing demand on the part of the purchasers, payers, and consumers of healthcare for the attainment of greater value in U.S. healthcare. And while he sidestepped specific questions emerging in the industry on some of the more contentious issues of the moment—including some degree of controversy within the HIE sector around the evolution of the draft of TEFCA—the Trusted Exchange Framework and Common Agreement by the Office of the National Coordinator for Health IT (ONC)—a mechanism to promote data exchange and interoperability in healthcare, conceived in response to requirements in the 21st Century Cures Act.

TEFCA remains controversial, particularly in the HIE sector, more than seven months after its release in draft form.

“All of us have to be aware of what the broader surround is” around this discussion of interoperability, Dr. Rucker told his audience. “Obviously in this audience and in ONC’s work, we focus a lot on interoperability. But interoperability is just part of the national discussion about what we get in healthcare, what we’re paying for. You can call it the search for value, but it’s a deeply important national consumer question. So this entire meeting, these discussions, have to be in that context. How do we add value for the American consumer?”

Rucker continued, “It’s been a very funny 50 years in healthcare. In 1965, when Medicare started and we took market prices out of the healthcare economy—you know, market prices are a way we signal value in other industries. And when we took that market pricing out of healthcare, we sort of had to create an immense sea of government policies. And I think it really is time to rethink those. And part of the discussion is, how do we rethink those, while understanding that you can’t predict who will get sick? How do we do that? Now, Congress has obviously had many opinions on that. And the opinions on that that matter most for us in this room were probably legislated in the 21st Century Cures Act.”

Further, while the largest section of the 21st Century Cures Act focused clinical trials and drugs, [since] clinical trials drive the single biggest part of the American drug spend. Title IV of that law was all about interoperability. When you talk with people on the Hill, they don’t think about it as interoperability, they think about it as, I couldn’t get my MRI results out of my patient record, or I had to take off a day of work” in order to obtain care or manage personal health information. “These are members of Congress. And when you have the backdrop of the modern app economy; and everybody uses technology.”

For example, Rucker noted, most likely, most of the conference’s attendee’s probably used smartphone apps to calculate traffic to the airport, confirm flights, check out local maps upon arrival, and so on. “We have increasingly extraordinary expectations in the app world, and Congress when you look at21st Century Cures asked, how can we get that type of app economy into healthcare? The law was passed almost unanimously. And much of the same intent in terms of empowering consumers and getting to the modern economy, is absolutely in President Trump’s intention.” Meanwhile, he noted, I had a meeting just two weeks ago with Health and Human Services Secretary Alex Azar, “and he asked me the same question three times: what are you doing to get this technology into the hands of consumers? So he’s absolutely on the case. So are Seema Verma and Adam Boehler at CMS,” he said, referring to the Administrator of the Centers for Medicare and Medicaid Services, and the recently appointed director of the Center for Medicare and Medicaid Services.

Burden reduction goals cited

“Part of what’s in Cures,” Rucker told his audience, “is not just interoperability, but burden reduction.” And, he said, “As we look at healthcare data, doctors are pretty unhappy about their EMRs. You look at the amount of time they spend” in physician documentation. With regard to that, he said, “In order to really harness interoperability, we need to make the computer a tool that has more happiness in it, and more value-add, rather than a black hole into which a lot goes in but not a lot comes out. The rest of the world uses computers to dominate things; that’s not the dominant picture in healthcare.”

More specifically, Rucker said, “In listening to literally thousands of doctors, one problem is the massive amounts of boilerplate text in our notes. There was a study published last month in the Annals of Internal Medicine that showed that the average physician note involves 4,000 characters of text in the United States, but only 1,000 in the rest of the world. That 3,000 characters gives you a sense of the delta of the documentation burden. Levels 3 and 4 CPT codes generate voluminous notes. It’s daunting; it’s like a game of three-card monte, in terms of finding anything that’s not just boilerplate. So the proposal is for a revenue-neutral, specialty code-neutral merger of codes from levels 2 through 5, so there’s no incentive to do all this sort of boilerplate documentation on things you wouldn’t need to do. There’s a special add-on code for category 6 patients, the most complex patients. We believe this will leave documentation revenue-neutral” for physicians. “If implemented by all payers, we believe it will free up 5-10 percent of time for physicians. This is an absolutely dead loss to the economy.”

A bit later, Rucker noted that “There has always been tension in electronic health records, in terms of what you have in structured form, versus in freetext data. I think that over time, as computers get more powerful, we’ll see machine learning, using big data. Big data us gathering steam in healthcare. But I think we’re going to see a series of modern tools to help clinicians, patients, the whole system, be smarter. This will take time,” he added.

What’s more, Rucker said, an additional challenge that he considers significant is that, “As we look at the query part of this, it’s been pointed out that there’s not a way to look at population-level data. You can use FHIR [the Fast Healthcare Interoperability Resources standard] to look at individuals. But we have a lot of national needs to look at populations of data. Right now, there’s no standard way for anybody to look at a population of patients electronically. And that’s critical, because most American healthcare is still paid for by third-party payers. And they do not have an elegant, computational way of figuring out what they’re getting from providers on their behalf. There’s a lot of thinking to be done on how we measure value.”

Addressing the controversies around TEFCA

Much later in his speech, Rucker addressed, if somewhat glancingly, some of the controversies among providers and HIE leaders about the provisions of TEFCA. “For those of you who haven’t read the law under Cures… Congress had heard a lot of complaints about people being charged to use networks, so Congress said, there shall be this public-private network to coordinate common agreement among these networks,” he said, referring to the provisions in the draft regulation around QHINs—qualified health information networks, and the Recognized Coordinating Entity (RCE) that is supposed to be created in order to supervise the QHINs envisioned under the regulation. ONC has suggested that a private-sector organization might ideally serve as the RCE, a suggestion that has created some concern and confusion in the industry, particularly among HIE leaders. “That’s a work in progress. We’ve gotten a lot of comments” about that large element of the regulation, he noted. “We have to figure out how to put this recognized coordinating entity together. There will be notice of funding opportunity, or NoFo. We are deeply aware that these decisions impact not only policy, but also a lot of operations issues. As a matter of public policy, we want to expand the scope and permitted purposes of these networks,” he said. “And over time, we want to increase the public purposes, so it’s not just single conversations about getting my chart from one provider to another. We want discussions among payers. And there are public health issues,” as well as input from the medical research community.  “So there are broader purposes to this work in progress, but that will be out there, and there will be lots of comments on that,” he said, referring to the broad goals around the TEFCA rulemaking.



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Assessing CMS’s Risky Move on Risk: Has Seema Verma Pushed MSSP ACOs Into Uncharted Territory?

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Will Seema Verma’s August 9 announcement light a fire under the MSSP program ACOs—or will it cause them to flee?

Though not entirely unexpected, the announcement last Thursday evening (August 9) by Administrator Seema Verma and her fellow senior officials at the federal Centers for Medicare and Medicaid Services (CMS) nonetheless created quite a stir within patient care leaders in U.S. healthcare. As Managing Editor Rajiv Leventhal reported that evening, “The Centers for Medicare & Medicaid Services (CMS) is proposing a new direction for ACOs (accountable care organizations) in the Medicare Shared Savings Program (MSSP), with the goal to push these organizations into two-sided risk models.”

Leventhal went on to note that this new proposal, named “Pathways to Success,” which had been anticipated for months, “looks to redesign the program’s participation options by removing the traditional three tracks in the MSSP model and replacing them with two tracks that eligible ACOs would enter into for an agreement period of no less than five years: the BASIC track, which would allow eligible ACOs to begin under a one-sided model and incrementally phase-in higher levels of risk; and the ENHANCED track, which is based on the program’s existing Track 3, providing additional tools and flexibility for ACOs that take on the highest level of risk and potential rewards. At the highest level, BASIC ACOs would qualify as an Advanced Alternative Payment Model (APM) under the Quality Payment Program.”

Right now, Leventhal pointed out, “[T]he MSSP model includes three tracks and is structured to allow ACOs to gain experience with the program before transitioning to performance-based risk. The vast majority of Shared Savings Program ACOs have chosen to enter and maximize the allowed time under Track 1, which is an “upside-only” risk model. MSSP Tracks 2 and 3 involve downside risk, but participation in these tracks has been limited thus far.” And that is in this context: “Broadly, CMS is now essentially proposing that the contract agreements of upside-only ACOs be two years, rather than allowing six years (two, three-year agreements) like the government has previously permitted. Overall, there are 561 MSSP ACOs out of 649 total Medicare ACOs, with 82 percent of those 561 MSSP ACOs taking on upside risk only.”

In other words, Verma and her fellow CMS officials are banking on the proposition that they can compel/force hospital, medical group, and health system leaders to move quite quickly from upside risk to upside/downside risk, and not simply drop out of the MSSP program.

So, just how risky (pardon the embedded pun) is that gamble on the part of Verma and CMS? Well, the proposal has elicited quite a range of responses from the industry in the past few days. But, as Leventhal reported on Friday, one very major player in this landscape, NAACOS—the Washington, D.C.-based National Association of ACOs—is pretty much hopping mad, calling the proposal “misguided,” and noting that the changes, if finalized, “will upend the ACO movement by creating havoc with a significant overhaul introducing many untested and troubling policies.” In the policy world, that’s about as close as one gets to tweeting in all capital letters.

As Leventhal wrote on Friday, “Much of the discussion following the rule’s release will likely center around the BASIC track, which essentially limits ACOs to stay in “upside-only” risk models for just two years, compared to the existing allowance of six years. What’s more, those ACOs in an MSSP Track 1 upside-only model would only be able to get 25 percent of any savings they take in, compared to 50 percent, which is the current max.” What’s more, he noted, “When ACOs are in a one-sided risk model, they do not share losses with the government when they overspend past their benchmarks, but they do share in the gains. As such, in these one-sided risk models, CMS is on the hook for any losses all on its own.”

NAACOS issues forceful comments

In its Friday press release condemning the “Pathways to Success” proposal, NAACOS stated that “The downside financial risk for patient care would be on top of the significant financial investments ACOs already make, according to [NAACOS president and CEO Clif] Gaus, jeopardizing years of effort and investment to improve care coordination and slow cost growth.” And the press release quotes Gaus as stating that “CMS discusses creating stability for ACOs by moving to five-year agreements, but they are pulling the rug out from ACOs by redoing the program in a short timeframe with untested and troubling polices.”

Indeed, NAACOS notes in its press release that “CMS predicts fewer ACOs participating in the future, beginning with the 2019 performance year.” And it adds that “NAACOS repeatedly has voiced concerns about forcing ACOs to take downside financial risk before they are ready, advocating instead that ACOs that demonstrate certain cost and quality achievements may remain in the one-sided model. A NAACOS survey earlier this year of ACOs required to move to an ACO model with downside financial risk in 2019 showed that more than 70 percent of responding ACOs are likely to leave the program if forced to assume financial risk. Given the proposals put forth today, 70 percent could be an underestimate, with even more ACOs leaving the program.”

Nor was NAACOS alone in its strong condemnation of the proposal. The Chicago-based American Hospital Association (AHA) also released a statement on Friday, with the nation’s largest hospital association attributing its statement to executive vice president Tom Nickels. Nickels was quoted as stating that, “While we acknowledge CMS’s interest in encouraging providers to more quickly move toward accepting risk, drastically shortening the length of time in which ACOs can participate in an upside-only model ignores the reality that providers are starting at vastly different points and will have vastly different learning curves when moving toward value-based care.”

Indeed, Nickels said in the statement, “The proposed rule fails to account for the fact that building a successful ACO, let alone one that is able to take on financial risk, is no small task; it requires significant investments of time, effort and finances. Hospitals and health systems must build upon their current infrastructure, which entails forming new and different contractual relationships and incentivizes successful strategies. While some have already taken significant steps toward achieving such alignment, others are not as far down this path. A more gradual pathway is critical for hospitals and health systems that are interested in participating in risk-bearing models – particularly those that are exploring such models for the first time.”

Seema Verma stands firm

In her telephonic press conference on Thursday evening at the time of the release, and covered by our Associate Editor Heather Landi, Administrator Verma was quite firm in terms of her insistence that it’s time to force the MSSP program forward. Asked whether she and her fellow CMS officials want to improve the MSSP program, or whether they would consider simply eliminating it, Verma stated that “We’ve taken a lot of time to study the implications of the program, and how it’s performing. We have some concerns about the impact on consolidation in the market; we’ve heard that from a lot of providers that having the ACOs is creating more consolidation and larger health care systems and reducing the number of individual providers, so we have some concerns about that.”

What’s more, she told the press, “What we’ve learned from reviewing the six years of data from the program is that there are successes, and there are successes when providers are willing to take on two sided risk, and when they are willing to be responsible for achieving sharing as well as losses, they actually save dollars while also improving quality. We’re trying to build upon the successes but also address the shortcomings of the program. And, those shortcomings are, allowing providers to continue without taking on any risk. And when we have that situation what we’re seeing is that we’re actually losing dollars, losing money. And we feel that given where the Medicare program is, we need to always focus on delivering value for patients and fort taxpayers. When we developed this program, we wanted to move the entire program towards providers taking more risk because we know that works. We want to work with ACOs that are serious about participating in the program and investing in the type of changes that are going to deliver value to patients.”

Varying responses—some positive

Not all associations involved in ACO development have responded as negatively as NAACOS and the AHA have. Indeed, the Los Angeles-based America’s Physician Groups, or APG, released a statement attributed to Valinda Rutledge, its vice president, federal affairs, which said, “Overall, APG considers the proposed rule a very balanced approach to various stakeholders’ concerns as well as a positive step forward in the movement from volume to value.  It also acknowledges what we already know—two-sided, physician-led Accountable Care Organizations (ACOs) not only provide superior quality care at a lower cost, they provide significant savings to the Medicare program—and more importantly, the American taxpayer.”

Further, APG’s Rutledge said, “In this proposed rule, a smooth pathway is provided for physician groups seeking to move into risk, which allows them to tap into other Medicare quality programs including the Quality Payment Program (QPP) and the incentive payments it provides.  Moreover, it allows physicians engaged in two-sided models access to additional tools to better coordinate care and provide the type of services patients need, and in the most appropriate setting, including the patient’s home.”

And, Rutledge added, “We know that many of today’s ACOs have experience in upside risk only.  The proposed rule acknowledges this and provides for a transition period instead of forcing groups into downside risk right away. We believe that no group should be forced into risk; however, when groups decide to accept the opportunity for shared savings, we also believe that they then should take on the responsibility of saving money for our healthcare system and the people and communities they serve.”

Where do we go from here?

There are many ways in which one could look at this situation; indeed, the landscape of reaction to the “Pathways to Success” proposal is practically a policy-focused Rorschach inkblot test, with those who believe that ACO development needs to be compelled forward towards acceleration, cheering Verma’s announcement, and those who believe that the success of the ACO phenomenon depends on a gradual ramp-up, criticizing it. But the real question is this: what practical effect will the announcement, and the proposal, have, on the ACO movement?

The reality is that Seema Verma and her fellow senior CMS officials are taking a huge risk in trying to push provider organizations very forcefully into downside risk, at a time when early ACO development work has revealed just how difficult that proposition really is. Among the major challenges that have been experienced by pioneering organizations: the ability to obtain, analyze, and use timely clinical and claims data to manage care and to vastly improve clinical, operational, and financial performance; the ability to align incentives between individual physicians, both primary care physicians and specialists, and patient care organizations, within ACO contracts; the core challenge of engaging patients in participating in actively improving their own health status; and the intensive fundamental IT and data analytics development needed to turbocharge all of this.

All of this is daunting even to the most advanced provider organizations. This past week, at our Health IT Summit in Boston, I had the privilege and pleasure of interviewing onstage Barbara Spivak, M.D., the president and CEO of the Mt. Auburn Cambridge Independent Practice Association, or MACIPA. Dr. Spivak noted that one of the very major challenges in succeeding in the MSSP program involves the effort and complexity involved in physician documentation around its quality measures. “One of key factors in physician burnout, particularly in primary care, is the documentation required for all of the quality metrics,” she told me. What’s more, she noted, even though MACIPA is a small organization, its physicians are still held accountable for hundreds of quality metrics that differ across various health plans; the only successful way of resolving that challenge is to narrow the broad range of measures demanded by the various payers in the various programs, down to a small number of more generalized measures. Dr. Spivak also cited an example of a potential future problem around CMS’s proposed fall risk documentation measure. Originally, she explained, physicians had to simply ask at-risk patients if they had two or more falls in the past six months and if they were injured. But a new CMS proposal may make things more complicated than that, Spivak noted. If the proposal passes, starting in 2019, physicians will have to ask these patients many more questions, including finding out details about stairs in the patients’ home as well as their vision. Our onstage interview took place on Wednesday morning, and the “Pathways to Success” proposal was announced Thursday evening. It will be interesting to see how physician leaders like Dr. Spivak react to it, given everything they already face.

So the key question is this: will provider organization leaders, and most especially the leaders of physician groups, respond with enthusiasm to this new CMS proposal, or will they recoil from it, and begin to flee the MSSP program? One of the most difficult challenges for CMS officials lies in how to most precisely calibrate their pressing down on the levers of reimbursement in order to compel providers forward. If they push down too lightly, the pace of change will be sluggish; but if they push down too hard, it could send provider organizations fleeing. Seema Verma and her fellow CMS officials have taken a calculated risk with this new move, and, from the reactions so far, they could face an uphill battle in their quest to push physician groups and hospitals forward faster without causing them to jump ship altogether and flee the MSSP program. Only time will tell; but the economic imperatives facing the administration are clear, as the Medicare actuaries predict a 70-percent increase in overall U.S. healthcare spending over next several years. But for an administration that is ostensibly committed both to healthcare system solutions that are as free market-based as possible, and also committed to doing everything possible to curb accelerating healthcare system costs, the built-in contradictions are already forcing awkward policy and payment moves. Without question, CMS, and all of us, are clearly already in uncharted territory. And only time will tell how skillful the agency’s navigation across that territory will have proven; so—stay tuned.


Related Insights For: Payment


Pondering the Psychology of Incentives in Bundled-Payment Contracts

July 27, 2018
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Healthcare policy researchers, in an op-ed piece in the Health Affairs Blog, ponder the differences between prospectively and retrospectively based bundled payment incentives

A fascinating analysis of the trade-offs involved in different forms of incentivization appeared late this spring in the Health Affairs Blog, concerning prospective and retrospective financial incentives. Could the difference between the two make a real difference in how the payers and purchasers of healthcare stimulate the best behavioral outcomes from the providers of healthcare? The question is a very complex and nuanced one, and ultimately, the blog’s authors reach no firm conclusions either way. But pondering the different elements and possibilities is certainly a worthwhile exercise.

Under the headline, “When Designing Bundled Payments, Don’t Ignore the Lessons of Behavioral Economics,” Jeroen Struijs, Arthur Hayen, and Koen van der Swaluw, begin their analysis by stating that “In health care, all bundled payment models shift financial and clinical accountability to a single provider-led entity that then is responsible for a budget and the quality of care delivered for any given episode. The entity receiving the bundled payment earns a higher margin if a patient has fewer expenditures but also bears the financial risk of (re)admissions and complications. This payment model therefore produces an incentive for providers to coordinate care across settings and not to stint on needed care. When implementing bundled payment models, payers and providers can choose two main strategies regarding the payment flow, namely a prospective payment (which is made before services are rendered) or a retrospective payment (which is made after all services are rendered).”

Continuing on, they write, “Currently, there is ongoing debate about which payment strategy to follow. In a June 2017 Health Affairs Blog post, François de Brantes and Suzanne F. Delbanco stated that the difference between retrospective and prospective payments is not significant in practice. Paraphrasing their line of reasoning, the difference between the two is believed to vanish as retrospective payments are often based on upfront, negotiated benchmarks as well. The authors continue by saying that people’s “aversion to losses” would make a case for including downside risk to retrospective bundled payments, as a way of mimicking the incentives that follow from prospective bundled payments.”

But, these authors beg to differ on that point. “The universal lessons of behavioral economics have taught us otherwise, namely that people’s aversion to losses is precisely the reason why an upfront, negotiated benchmark is not the same as a prospective payment,” they write. “What is more, assuming downside risk in a retrospective payment arrangement will lead to different physician behaviors than when these physicians would assume full financial accountability for managing a prospective bundled payment. Understanding the difference in reference points under different payment strategies and their expected consequences for provider behavior is crucial in this discussion. As we will show, behavioral economics can be a useful paradigm for thinking about the behavioral implications of different payment strategies.”

For evidence to support their contentions, the authors dip into “prospect theory,” noting that prospect theory is “a descriptive model of decision making, which acknowledges, in contrast to conventional economics, that people respond to changes in wealth, instead of expected final assets. These changes are evaluated in relation to a neutral reference point (the status quo). Therefore, the same level of wealth can feel like poverty to a previously rich person and feel like riches to a previously poor person. In prospect theory, the status quo serves as the zero point of the value scale. Outcomes that are better than the status quo are perceived as gains. Worse than the reference point, they are losses.”

So how might prospect theory apply with regard to stimulating the “correct” behaviors and actions among providers, in bundled payment systems? Here’s an experiment with implications for healthcare payment. “Losses are more painful than forgone gains, and whether something feels like a loss or a gain depends on our point of reference,” the authors write. “As a consequence, people systematically assign higher value to things they own than to things they can acquire: the endowment effect. The primary effect of endowment is not the increased appeal of money in our pockets but merely the pain of giving it up. The endowment effect and accompanied loss aversion have been leveraged by behavioral economists to bolster the impact of incentives. For example, in one experiment, Mitesh S. Patel and colleagues paid a group of employees $1.40 each day they achieved the goal of walking 7,000 steps. Another group of employees was instead allocated upfront the maximum attainable monthly amount ($42) as a prospective payment; the researchers then took back $1.40 each day that the goal was not achieved. While the incentive was identical in economic terms, only participants in the loss-incentive group outperformed the control group and also had a 10 percent higher chance of achieving their daily step goal than participants in the gain-incentive group.”

Looking at the upsides and downsides of both types of systems, the authors write that, “While the financial risks may be equivalent for providers in a prospective or a retrospective model, we reason that these different responses ultimately will result in different strategies and polices to achieve value, for the good or the bad. For example, providers under prospective payment systems could adopt more risky strategies targeted at expected high-cost outliers or risk selection of patients. The ongoing debate about whether to implement retrospective or prospective payment models is a multifaceted issue, depending on many factors, but, conceptually, it comes down to a trade-off between implementation efforts on one hand (in favor of retrospective payments) and incentive strength (in favor of the prospective payment) on the other hand. The strength of an incentive and, consequently, the resulting value for patients, could be a function of the timing of the actual payment.”

It’s hard to know how this might play out in actual systems among physicians in practice, of course, given the high level of complexity of the processes around healthcare delivery and payment. I suspect that one very big barrier to implementing more aggressive prospective systems might developing the experience over time to know precisely how much to weight prospective incentive payments, and around what elements or factors. And that process would be complicated by the question of the extent to which individual physicians in practice would be aware of minute elements in care delivery and management processes, and be able to control or change decision-making in the moment.

And all of this presupposes some level of consistency of processes among the multidisciplinary care teams that are responsible for delivering and managing care under bundled payment-based contracts—and right now, there really is none.

And, not surprisingly, Francois de Brantes had something to say about all of this. In the comments section following the article’s text, he praises the authors for some elements of the blog. “The authors…bring up several important points related to the behavioral effects of prospective payments against which payments are debited, and there’s good evidence on those effects,” De Brantes wrote. “But,” he quickly adds, “the authors also make a central assertion that is far more debatable. They claim that the reference point in a model in which actual spend is reconciled against a target budget are the individual services paid. That’s untrue. The reference point is the target budget or price. Much like has been done in the Medicare Bundled Payment for Care Improvement (BPCI), these prices are negotiated up front and are the true reference point. Any claims incurred are simply debited against the target price and, once the episode of care closes, the net result is either a debit or a credit. If it’s a credit, then the provider is owed money. If it’s a debit, the provider owes money.”

And that’s exactly where the problem around this is, de Brantes notes. “As such, an episode of care payment model with downside risk and a prospectively set target price is an endowment of sorts even though it technically doesn’t function as such since the provider doesn’t simply get to keep the difference between the endowment and the total cost of the services rendered,” he notes. “And there are several reasons why such a model is preferable. First, as the authors point out, a true endowment model could lead providers to cherry-pick patients or skimp on needed services. Second, there are many operational issues that provide a counterweight for the potentially greater effect of a true endowment. Third, field experience has shown that when providers receive timely and frequent (e.g. once a quarter and within 45 days of the end of a quarter) reports showing, by patient, the total actual costs incurred against the target prices for the episodes, the behavioral effect is very similar, if not identical. Fourth, back end reconciliations also allow for some flexibility in how to account for quality scores, for example by mitigating losses when quality is higher than expected or vice versa.”

In short, de Brantes says, “We agree with the authors that, at some point, a natural experiment that would compare the effects over time of the two models would help clarify the differential effect of one over the other. The evidence to-date, however, doesn’t seem to indicate that there would be much.”

In short, we are very early along in this journey, and evidence based on practical experience, of which types of levers work best in bundled payments, remains lacking. It will be fascinating to see what the evidence of the next couple of years offers us. Until then, everything remains fundamentally experimental in nature.


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