Healthcare payment methods changing quickly


The physician’s payment environment is evolving: pay for performance, bundled payments, shared savings programs, capitation. As these payment options gain a stronghold in the healthcare market, the fee-for-service structure as we now know it may go the way of the dodo bird.

“Payment reform is now seen as self-evidently fundamental to U.S. health reform, quality improvement and cost containment,” said a December 2012 working paper from the UnitedHealth Center for Health Reform and Modernization.

blood pressure machine and money

The fee-for-service payment model is based on volume. Physicians are paid for each covered service. The more services performed and the more expensive the services are, the greater the reimbursement.

Risk-based models pay for value. Under some of these structures, physicians have skin in the game if they do not meet outcome and/or cost targets. But a June 2012 Harris Interactive survey found that only 12 percent of doctors polled thought they were well prepared or adequately prepared to assume greater financial risk for managing their patients’ care.

The ability of a practice to be financially successful under a risk-based model depends on numerous factors. They include the size and health status of the patient population, types of services provided under the contract, and practice operating costs, among other things.

The American Medical Association (AMA) has developed a “how-to” manual designed to help physicians evaluate, negotiate and manage risk-based reimbursement plans.

The manual, “Evaluating and Negotiating Emerging Payment Options,” focuses on key issues, including how to determine a fair price and how to reconcile any payments received to ensure their accuracy. It also provides information covering the effect these reimbursement models increasingly will have on how employed physicians are paid.

Evaluating the budget

Payers’ proposals for risk-based plans are based on utilization projections. The AMA manual identifies four steps needed to evaluate a payer’s budget proposal:

  • Determine the services to be included, defined by specific codes and modifiers. Additionally, make sure any service not explicitly included is excluded.
  • Determine the volume of services that might be used by patients included in the covered population. Generally, a large panel of demographically diverse patients benefits from “the law of large numbers” and is protected from adverse selection. The cost of managing a patient with a chronic illness can vary greatly. Before entering into contract negotiations, ask the payer to provide all the risk factors that went into adjusting the utilization budget so that you can conduct your own analysis as to the budget’s financial viability.
  • Determine the cost allocation for each of the covered services, and compare those costs with what you would receive under the fee-for-service payment method. To do this, divide the total payment available by the type and number of services expected to be used by the patient population, using a scale like the Medicare resource-based relative value (RBRV) scale. RBRVs take into account the cost of the physician’s work, practice expense and professional liability insurance. The relative value unit is then adjusted geographically for cost-of-living differences across the nation.
  • Determine whether the practice can provide the covered services within the payer’s allowance. There is always the potential for patients to use more services than anticipated under the utilization projections.

Therefore, a practice must know whether it has enough of a margin to absorb such extra risk. This involves establishing baseline costs for running the practice, using a detailed cost accounting approach.

The AMA recommends retaining an actuary to review risk-based proposals. An actuary can determine whether the payer’s utilization projections are accurate and help a practice understand and manage risks under the plan.

The AMA guide also provides an in-depth understanding of how the various risk-based payment options operate. Physicians learn what questions to ask payers about the methodologies they will use in determining factors like performance targets, quality measures and physician profiling, and how they will approach making payments.

“Evaluating and Negotiating Emerging Payment Options” and an accompanying webinar are available on the AMA’s website at Under Resources, click Practice Management Center, then Payment Options.