At a Glance

Lessons from outcomes-based fee-for-service payment models that can be applied to population health management models include the

  • Focus on outcomes, not processes. 
  • Limit the number of outcomes measures used.
  • Ensure that the amount distributed is substantial enough to motivate behavior change.
  • Communicate results clearly and transparently.
  • Ensure that the financial consequence of poor performance is proportional to the cost increase it generates.
  • Focus on reducing the rate of excess preventable outcomes.  

The distribution of shared savings is the mechanism used to reward participating providers for effective population health management.

Government and commercial payers are aggressively attempting to enter into capitated payment contracts with provider organizations, including accountable care organizations and medical homes, to manage the healthcare needs of their enrolled populations. But population health management poses many new challenges for healthcare providers. Managing the health of a population differs fundamentally from providing individual services on demand because it requires that both the cost and the demand for services be managed. It also involves a much greater degree of actuarial financial risk because failure to effectively meet the basic goals of this approach can produce significant adverse financial consequences.

A critical component of population health management is the ability to identify and reward individual providers that are providing good care, achieving good outcomes, and generating lower costs. In essence, the distribution of shared savings is the financial mechanism by which participating providers are rewarded. There are numerous ongoing fee-for-service payment system return efforts in states such as Texas and New York that have focused on introducing payment adjustments for the outcomes achieved by providers. Redistributing payments based on quality in a fee-for-service system and distributing shared savings in a population management system serve essentially the same function. Therefore, the lessons learned from outcomes-based fee-for-service payment reforms are directly applicable to the distribution of shared savings under a population health management model. 

Lessons from Outcomes-Based Fee for Service

Successful outcomes-based fee-for-service payment models typically have six key payment system-design characteristics, each of which is equally applicable to the distribution of shared savings under population health management.

Focus on outcomes, not processes. Measures of quality have frequently focused on adherence to care processes, such as those created or endorsed by the National Quality Forum and The Leapfrog Group. The proliferation of process measures has made the use of such measures in determining payment or distribution of shared savings a complex challenge. For most process measures, there is no direct link to the cost or payment associated with the aspect of quality being measured. Attempts to use process measures for payment or distribution of shared savings typically create artificial and complex rules for associating the lack of adherence with the process to a financial measure. 

Instead of focusing on adherence to care processes, the focus of payment and distribution of shared savings should be on outcomes. Typically the term “outcome” is used to refer to the end results of care. However, outcomes also can refer to preventable events, such as a preventable readmission that could be tied to unnecessary expense, patient inconvenience, and risk of complications, but not necessarily physical harm. 

The five outcome measures primarily used in payment reforms to date are preventable readmissions, complications, emergency department visits, hospital admissions, and outpatient services, all of which generate added cost through the delivery of otherwise unnecessary services. By eliminating or reducing preventable or unnecessary care, quality is improved, harm to patients is avoided, and costs are reduced. 

Less is more. There has been a tendency to use myriad quality measures as the basis for distributing shared savings, resulting in “dashboards” that sometimes resemble the instrument panel of a jet plane. For the purposes of distributing shared savings, the focus should be on a measure of total cost of care combined with a few outcomes measures. By focusing on a manageable number of measures, a provider can concentrate on the behaviors and processes need to improve performance. Although care processes can be useful for improving performance, they should not serve as the basis for distributing shared savings. 

Rather than assuming the administrative burden of collecting and reporting adherence to rigid, standardized processes and developing a complex formula for determining how those processes together can be used to measure overall performance, it is far more effective to keep things simple by focusing on a few outcomes that have the potential to have the greatest impact on population health. Successful efforts to improve outcomes will inevitably result in improved processes. The focus should be on the desired end result and not the details of how that result was achieved.

The stakes need to be high enough. The amount distributed from shared savings must be substantial enough to motivate the behavior changes necessary to improve outcomes. Achieving significant improvements in outcomes will require considerable effort. Without sufficient financial motivation, behavioral changes are unlikely to occur. Although this principle may seem obvious, some major payment reform efforts have failed to adhere to it. For example, the Centers for Medicare & Medicaid Services (CMS) has eliminated any payment increase associated with a series of post-admission complications (referred to as hospital-acquired conditions [HACs]). However, the HACs are very narrow in scope and have a minimal impact on hospital payments. Indeed, CMS has estimated the HACs’ impact to be less than 0.02 percent of Medicare hospital payments, an amount unlikely to motivate the behavior changes needed to improve outcomes related to inpatient complications.a

The impact must be proportional. The five outcome measures that primarily have been used in payment reforms have a direct and unambiguous relationship with the cost and payment for the care delivered. Because there is a direct link to payment, the financial consequences of an outcome measure can be made proportionate to the size of the actual cost increase it generates. 

For example, a preventable readmission should be associated with a payment adjustment that is proportional to the cost of that readmission. Because the payment model establishes the payment amount for the readmission, it simultaneously provides a measure of the financial consequence of a preventable readmission as an inherent byproduct. Although the need to have financial incentives proportional to financial impact also may seem obvious, some major payment reform efforts also have failed to adhere to this principle. The Affordable Care Act (ACA), in addition to the HAC payment adjustments previously described, also requires a 1 percent reduction in Medicare payments to hospitals that have higher-than-expected rates of HACs. Because HACs have nowhere near a 1 percent impact on Medicare hospital payments, this penalty is disproportionate, excessive, and fundamentally unfair.

Having a direct and unambiguous financial measure of the impact of a preventable outcome makes it a straightforward matter to determine the net impact of performance across multiple outcomes. Having such a measure resolves one of the most vexing problems with attempting to use process measures in a shared savings program, which is determining the overall financial impact of multiple disparate process measures when there is no direct measure of the financial consequences of failing to adhere to the process measures. 

Transparency includes being understandable. The ultimate objective of any payment reform or shared-savings program is to motivate behavioral change that leads to better quality and lower costs. Individual providers will be better able to improve quality of care if the methods used to identify outcomes are expressed in a clinically meaningful manner that communicates actionable information in a form and at a level of detail sufficient to support sustainable behavior changes. For example, knowing that a hospital has a higher-than-expected readmission rate due to any cause does not provide information that is actionable. In contrast, knowing that coronary bypass patients have a higher-than-expected readmission rate due to an infected graph or angina (indicative of a failed bypass) provides information that can direct quality improvement efforts. The methods used to identify outcomes and risk-adjust their rates must be transparent (open for examination and review), unambiguous, and understandable to be effective. Major payment reforms have not always adhered to this fundamental principle. For example, Medicare’s Hospital Value-Based Purchasing Program contains a multitude of process and outcome measures combined together under an arbitrary and overly complex formula that is virtually unintelligible and therefore ineffective in facilitating real behavior change. 

Focus on excess preventable outcomes. Although many negative outcomes are preventable, and others may become more preventable over time with improved techniques and technology, negative outcomes will never be completely preventable, even with optimal care. Thus, except for a few “never events” that are almost always related to preventable medical errors, even the best-performing hospitals will have some preventable outcomes that do not necessarily reflect errors in judgment, lapses in execution, or poor-quality care in general. Because negative outcomes are not always preventable, the determination of distributions from shared savings should be based on the extent to which preventable outcomes exceed, or are less than, those of peers. This measure is determined through risk-adjusted comparisons of the rate of preventable outcomes for each provider. Using excess preventable outcomes as a basis for determining distributions is a way of acknowledging that preventable outcomes cannot be entirely eliminated.

Creating an Operational System

The basic model for creating an operational shared- savings system can be found in the ACA requirement for hospital payment adjustments for readmissions. In this provision of the ACA, excess readmissions are determined on a risk-adjusted basis through a comparison with the national readmission rate; this information is then used to determine each hospital’s level of excess readmissions and associated payment adjustment. A limitation in CMS’s implementation of this ACA provision is that the readmission rates are compared for only a limited number of conditions, but the payment adjustment is applied to all Medicare hospital payments, resulting in payment adjustments that are not proportional to the financial harm incurred. A second limitation is that the readmissions included are for all causes, resulting in a payment adjustment that lacks clinical creditability. 

Despite these limitations, the basic approach in the ACA can serve as a model for distribution of shared savings. Operationally, the following steps are involved for each outcome measure:

  • Calculate each provider’s actual historical outcome rate.
  • Determine an outcome norm based on the average performances across all providers or, if available, from state or national data.
  • Calculate the provider system’s risk-adjusted expected outcome rate based on the norm.
  • Compare each provider’s actual and expected risk-adjusted outcome rate to determine excess preventable outcomes.
  • Quantify the financial impact of the excess preventable outcomes for each provider based on the actual cost of the preventable outcome.

Two additional steps are needed to consolidate across outcome measures:

  • For each provider, consolidate the financial impact of excess preventable outcomes for each type of outcome into an overall financial impact. 
  • Use the overall financial impact of excess preventable outcomes as the basis for amount of shared savings distributed to each provider.

These steps essentially represent the core methodology used in the Texas and New York outcomes-based reform of the Medicaid fee-for-service and managed care payment systems. Both Texas and New York used commercially available methods to deal with the technical challenges of identifying outcomes that are considered preventable and risk-adjusting the rates of preventable outcomes. b These steps also represent a uniform and consistent approach for determining excess preventable outcomes across different outcome measures. If multiple disjointed methods of identifying preventable outcomes and risk-adjusting the rate of preventable outcomes were used, the result would be confusing and difficult to interpret. 

A uniform and consistent approach to measuring individual outcomes greatly facilitates the interpretation and use of the outcomes information for motivating and sustaining real behavior change.

Will It Work?

Initial efforts to focus on outcomes have resulted in significant savings. For example, Maryland’s Health Services and Cost Review Commission implemented a comprehensive payment adjustment for preventable inpatient complications.c In the first two years of the initiative, inpatient complications in Maryland decreased by 15 percent, with a resulting cost savings of $110.4 million. 

The Minnesota Hospital Association sponsored an intensive program to reduce hospital readmissions by providing reports and benchmarks that identified, compared, and forecasted preventable readmissions in each participating hospital. Although there was no direct payment adjustment, the program provided intensive support and best-practice tools focused on care coordination during the post-acute care period. During the first two years of the program, readmissions were reduced by more than 20 percent, preventing an estimated 5,441 readmissions, avoiding 16,000 bed days, and saving more than $40 million.d

Comprehensive Focus Critical

By basing the distribution of shared savings on a common core set of outcome measures, a uniform set of financial incentives for quality improvement can be established. Such a system is practical and readily implemented and has demonstrated large-scale success as a basis of payment system reforms. Because preventable outcomes are often the result of deficiencies in coordination and communication, a focus on systematic difference in rates of preventable outcomes emphasizes that the entire healthcare team has responsibility for improving outcomes. Linking financial incentives to measurable outcomes has the potential to discourage unnecessary spending, encourage coordination, and perhaps most important, reduce harm and maximize the quality of care given to patients. The ultimate success of population health management systems will be determined by their ability to provide a comprehensive focus on improving outcomes—financial as well as clinical—that will raise the quality of patient care while controlling the total cost of care.  

Richard F. Averill, MS, is senior vice president, clinical and economic research, 3M Health Information Systems, Wallingford, Conn. 

Norbert Goldfield, MD, is medical director, 3M Health Information Systems, Wallingford, Conn.

John S. Hughes, MD, is professor of medicine, Yale University School of Medicine, New Haven, Conn.


a. “Rules and Regulations,” Federal Register, Aug. 10, 2010.

b. Goldfield, N.I., et al., “Identifying Potentially Preventable Readmissions,” Health Care Financing Review, Fall 2008.

c. Calikoglu, S., Murray, R., and Feeney, D., “Hospital Pay-for-Performance Programs in Maryland Produced Strong Results, Including Reduced Hospital-Acquired Conditions,” Health Affairs, December 2012.

d. “Reducing Avoidable Readmissions Effectively,” Minnesota Hospital Association.


Publication Date: Tuesday, April 01, 2014

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