Payers and providers are learning how to work closely together to succeed in contracts that reward value instead of volume.


At the moment, most healthcare services are paid for under fee-for-service (FFS) contracts, but that statement may not hold for much longer. Nearly every insurer in America is experimenting with one or more alternative payment structure, and forward-thinking hospitals and physician practices are eagerly partnering with them to gain experience in a new way of doing business.

The approaches range from highly targeted—for example, a value-based payment for a single procedure—to full capitation for a population of patients:

While the specifics differ greatly, the payment approaches all share a common goal: to improve the value of healthcare services.

The Scale of Experimentation

In many cases, the insurers and providers that are involved in value-based contracts see themselves embarking on a journey for which the final destination is not yet clear. For example, Aetna’s new shared savings contract with one oncology practice supports the patient-centered medical home model, but is likely not the final word on cancer care reimbursement.

“We think that these new types of contracts are transitions, but each one builds on the other, and the end result will be a win for everyone,” says Michael Kolodziej, MD, Aetna’s national medical director for oncology strategies.

The landscape is changing so rapidly that it is hard to pin down the scope and scale of experimentation. At the most basic level, every hospital that serves Medicare patients is in a value-based contract: 1.25 percent of hospital payments are tied to quality and patient experience indicators in the current federal fiscal year, while hospitals are at risk for up to 2 percent of their Medicare pay based on their readmission rates.

Similarly, physicians’ Medicare payments are being tied to cost and quality data (i.e., known as the value-based payment modifier). Large physician groups will see this change in their 2015 Medicare payments, based on their performance in calendar year 2013, while all physicians will be subject to the modifier by 2017.

Meanwhile, the Centers for Medicare and Medicaid Services (CMS) is sponsoring a wide array of other value-based arrangements—including accountable care organization (ACO) contracts and bundled payment initiatives—and private payers are being just as aggressive. Indeed, Aetna expects 20 percent to 25 percent of its medical costs to run through some form of value-based network contract in 2014 and is committed to increasing that percentage to 45 percent by 2017.

Value-based insurance approaches include a number of different structures, including reference prices for specific services, capitation, bundled payments, shared savings, and the creation of narrow networks of high-value providers.

Montefiore’s Medicaid Managed Care Contracts

When CMS announced that New York-based Montefiore Medical Center was the top financial performer in the first year of the government’s Pioneer ACO Program, Stephen Rosenthal, Montefiore’s vice president of network management, gave away the secret. “We attribute our success to our more than 17 years of experience using a value-based payment model and the fact that we achieved the Triple Aim of excellent care, improved outcomes, and lowered costs.”

pg11_feature-1_montefioreMontefiore’s results in the CMS demonstration project were impressive: monthly per-beneficiary spending for its ACO participants was $104 less than that for a local market comparison group.

That performance stems from its value-oriented roots, which are anchored in the health system’s experience of working under capitated arrangements with health plans offering Medicaid managed care, Medicare Advantage, and employer-sponsored coverage. In the mid-1990s, the academic medical center worked with its physicians to create an integrated provider association (IPA) and a care management organization to manage the risk associated with these capitated lives. Today, the care management organization is responsible for about 350,000 patients served by nearly 3,000 employed and affiliated physicians.

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“Montefiore has invested in a management infrastructure, including utilization management, physician credentialing, and claims payment, that really supports its success from a population management perspective,” says Shawn M. Fitzgibbon, senior vice president of government programs at EmblemHealth, which has had a capitated Medicaid contract with Montefiore for many years.

Through delegated arrangements with insurers, Montefiore’s care management organization performs claims processing services for its managed care business, so it has real-time access to claims detailing the utilization patterns of its attributed population within the Montefiore system. EmblemHealth, which is responsible for 3.4 million lives in New York, supplements that information with claims data from capitated member encounters with other providers.

Creating the infrastructure. Key to Montefiore’s success has been its effective physician network; in Montefiore’s case, that organization is the IPA.

The IPA’s governing board should be thoughtfully constructed to represent the various constituencies within the physician network, Rosenthal says. For Montefiore, half the board members are employed physicians, and half are independent practitioners. Also, because primary care is so important to care management, half of the board members are primary care physicians.

Identifying high-need patients. Montefiore’s care management organization stratifies the patient population by level of need, says Rosenthal, who serves as the organization’s president and COO. “Then we go about looking for those who are the most needy,” he says.

Case managers assess these high-need patients to identify their clinical issues and, equally important, their social issues, including housing stability and availability of transportation to physician appointments. Each high-need patient is assigned to a nurse manager supported by a team that helps the patient with social and logistical needs. A problem list is developed for each of these patients, and each problem is mapped to an intervention. For example, a patient with poorly controlled blood sugar is referred to a certified diabetic educator, while a homeless patient is referred to a social worker to help arrange housing.

pg12_feature-1_montefiore“We have a workflow that allows us to manage large numbers of chronically ill patients in a cost-effective way and connect them to the right services at the right time, so that we are maximizing their health status and, ultimately, trying to drive unnecessary medical costs down while improving quality,” Rosenthal says.

About 10,000 patients with multiple comorbidities and social challenges are being intensively managed in this way at any given time. Montefiore’s care management organization spends about 6 percent of the premium it receives on care management services.

Rosenthal embraces the opportunity to help patients with their complex social problems. “If we’re not actively involved in the community, we’re just going to be butting our heads against the wall forever,” he says. “The opportunity here is to actually make inroads in the community around self-management, around all those things that create the health issues that will show up in 10, 15, or 20 years.”

For example, a major challenge in the Bronx is diabetes; more than 12 percent of the county’s residents have been diagnosed with the disease. By working one-on-one with patients, either telephonically or face-to-face, Montefiore’s certified diabetes educators and care managers can teach the patients’ self-management techniques, ensure that they are following their prescribed medication regimens, and help them make healthy lifestyle changes to improve their quality of life and lessen the need for more expensive healthcare services. Montefiore has also improved asthma outcomes (see the exhibit below).

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Preparing for change. Many states, including New York, are expanding their use of managed care, moving behavioral health services into capitated contracts, and adding new populations (e.g., developmentally disabled) into managed care. “Anybody that’s thinking about how to be successful in this area has to think about where the environment is going and to understand what unique characteristics and potential investments might be needed—not only today but on a future basis,” Fitzgibbon says.

CMOH’s Specialty Medical Home

Last year, Aetna and Consultants in Medical Oncology and Hematology (CMOH), a nine-physician practice in southeastern Pennsylvania, announced their collaboration on a patient-centered medical home model for oncology. In their new contract, Aetna uses a common medical home payment approach—a management fee plus shared savings—to support specialty care.

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Reducing high-cost utilization. CMOH is the only oncology practice to be designated as a Level 3 patient-centered medical home by the National Committee of Quality Assurance. That means CMOH meets all the requirements of the medical home model, including the following:

  • Team-based care
  • Care coordination
  • Standardized clinical protocols
  • Patient education, navigation, and engagement
  • The use of electronic health record (EHR) technology

The medical home model has helped CMOH reduce high-cost utilization. In 2012, CMOH patients had 71 percent fewer emergency department visits and 51 percent fewer hospitalizations for chemotherapy patients, compared to national benchmarks. Needless to say, payers are taking notice.

“I’m happy to report that three of our practice’s major contracts that cover more than 50 percent of our patient base are using alternate payment methodologies built around the oncology patient-centered medical home model,” says John Sprandio, MD, the practice’s lead physician.

Taking it step by step. That said, while Sprandio and Kolodziej think their new contract is a major step toward paying for value-based cancer care, they do not see it as the final solution. “We are exploring a number of payment systems for cancer care, and they are all likely temporary solutions,” Kolodziej says. “Ultimately, Aetna hopes that we can get enough oncology practices delivering high-value care within a value-based model that we can start a network of excellence for our patients to use.”

Likewise, Sprandio sees the oncology medical home as an evolutionary step. In the foreseeable future, he expects patient-centered medical home standards, services, and performance metrics will essentially become a prerequisite that oncologists must meet to be in insurance contracts.

Both agree that new payment approaches—such as shared savings incentives that encourage providers to operate efficiently and the management fees that insurers pay physician practices—will help oncology practices make the changes that are needed to thrive under value-based payment reform.

Those changes include evaluating patients using a structured process, assessing and recording pain levels, standardizing data presentation, using decision-support tools, and conducting telephone triage conversations in a way that elicits the correct information about symptoms so standardized protocols can be used to address them. “This has to be a part of the fabric of the way care is delivered,” Kolodziej says.

Getting around challenges. The average size of a U.S. oncology practice is about five physicians, and groups that small often lack the managerial resources or expertise needed to reengineer their practices, implement technology, and track performance to deliver high-value care. “One of the biggest challenges is the fact that the practice has to be relatively sophisticated in terms of operations to be able to execute all of this,” Kolodziej says. “Only about 60 or 65 percent of oncology practices are on an EHR and, honestly, you can’t do this unless you’re on an electronic medical record.”

COMH, with nine physicians, acquired its electronic medical record system and began its evolution to the medical home model more than a decade ago, pioneering some components of high-value cancer care, such as nurse triage phone lines and same-day appointments to avert unnecessary hospital admissions and ED visits.

Today, Sprandio is helping 10 practices—ranging in size from a single oncologist to 44—adopt the medical home model. Additionally, Community Oncology Alliance, an advocacy organization, has developed a wide array of supports to help practices adopt the medical home model.

Blue Priority Narrow Network

When Anthem Blue Cross Blue Shield Wisconsin decided to put together its first narrow network in the Milwaukee and Green Bay areas, it went looking for a partner ready to engage in cutting the underlying cost of care for area employers. By working closely with a health system partner to give members targeted and personalized care management, Anthem believed it could improve the health status of a defined population while controlling costs, says John Foley, Anthem’s vice president for provider engagement and contracting.

Enter Aurora Health Care and its Aurora Accountable Care Network, which treats 1.2 million individuals a year in 90 communities. It includes 15 hospitals, 160 clinics, and 1,500 physicians, as well as a reference lab, home nursing, and home IV services. Because of Aurora’s patient-centered medical home environment, there’s also a care team available 24/7 for patients.

Sharing risks and programs. In its agreement for the Blue Priority network, Aurora takes on the clinical operating risk and Anthem keeps the insurance risk. Aurora is involved in negotiating each employer contract, says Rick Klein, Aurora’s executive vice president for growth and market development. Aurora and Anthem use historical claims data to price the product and agree on a PMPM [per member per month] target. “We’re at risk for a percentage above that target, and we get some additional value below it,” Klein says. “We are managing to that total cost of care on a per-episode basis.”

Anthem’s medical directors and Aurora’s physicians together evaluated the strategies, policies, and protocols that each organization was using to manage groups of patients with different chronic diseases. For example, both Anthem and Aurora had diabetes management programs that educate recently diagnosed members/patients about the disease. But physician leaders decided to use Aurora’s program for the Blue Priority plan because it had a higher engagement rate. “When your physician asks you to do something, you’re more inclined to do it than when your insurance company asks,” says Foley.

Accessing claims data. Like all value-focused providers, Aurora is constantly measuring itself against national benchmarks in three value domains: clinical excellence, affordability, and patient experience.

Thanks to Aurora’s relationship with Anthem, the health system has access to more specific performance data. Using claims data, Anthem is able to identify areas where a specific Aurora physician or group of physicians needs to improve. “If they don’t hit a clinical quality marker, we go in as part of our standard protocol and perform a random medical record audit, and then go to the physicians with the data,” Foley says.

Sharing information. Based on previous experience, Aurora determined that the management of chronic disease patients is most effective when they use physicians and support services in their own communities, says Klein. To this end, Anthem and Aurora developed a fast-track system that allows for easier communication between the two organizations.

When an Anthem case manager is on the phone with a patient who needs care, he or she can hand the call off to an Aurora care manager to arrange an appointment for the patient at a local clinic. “Aurora knows a prescription was written; we know it was filled,” says Foley. “So we can let them know, ‘The patient has not yet filled that prescription—you guys need to do some outreach.’”

Educating the market. About 40 employers signed up for the narrow network in the first year, and an individual consumer version of Blue Priority is being offered on the health exchange.

The sales cycle for the narrow network product has turned out to be longer than Anthem anticipated. “Employers expressed considerable enthusiasm, but many of them weren’t ready to jump in when the time came,” Foley says. “There is a lot of work to be done in getting the market to understand the nature of the product.”

The Aurora Accountable Care Network also participates in other narrow-network products, with more than 70 newly insured employers, and is currently in discussions with other carriers about similar arrangements. “We know that better care can lower costs,” says Klein. “Studies have shown that Aurora is the most efficient healthcare system in the Milwaukee and Green Bay areas. In 10 years, our care management program has saved more than $220 million; efficiencies and shorter hospital stays have saved another $20 million.”

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Triangle Orthopaedic and Bundled Payments

Triangle Orthopaedic Associates, a large medical practice based in Durham, N.C., and Blue Cross and Blue Shield of North Carolina (BCBSNC) were so pleased with their bundled payment arrangement for total knee replacements that, as of last November, they added hip replacements. And they are just getting started. “We are ready to do three or four more surgical procedures with Blue Cross,” says Triangle president Thomas A. Dimmig, MD.

The payer and provider refer to their bundled payment contract as a coordinated care arrangement. Using a prospective model, BCBSNC pays a single flat fee to Triangle for each surgery. That fee covers all expenses from 30 days before the surgery to 90 days after. Triangle pays all providers, including the hospital, anesthesiologists, physical therapists, and others involved in patient care, pursuant to its own contracts with them. Procedures are performed at North Carolina Specialty Hospital, of which Triangle is a part-owner.

Under this arrangement, BCBSNC members pay their out-of-pocket costs for the full range of services upfront. “This is a way for us to really simplify what happens on the patient side,” says Chris Adkins, Triangle’s chief administrative officer. “We have constantly heard how confusing it is for patients to get multiple bills. They would much rather just write a check once.”

pg15_feature-1_triangleAchieving results. A review of 100 knee replacement procedures performed under the Triangle bundled payment contract in 2013 revealed:

  • An average cost savings of 22 percent compared to other providers in the market
  • Patient outcomes better than national benchmarks
  • Fewer complications than the state average for knee replacements
  • A 97 percent patient satisfaction rating

The high satisfaction rate may reflect the close attention that patients receive from the coordinated care program. As soon as surgery is scheduled, Triangle’s bundled joint coordinator meets the patient to discuss the program and arrange a home visit. “We actually take a physical therapist to patients’ homes to see if we need to make changes before they have surgery,” Adkins says. “We want to make sure that there are no obstacles to this patient having the best outcome possible.”

The post-discharge physical therapy program is aggressive and monitoring for complications is continual. “If there is a sniffle or something, we are all over it because if they end up in the emergency room, it comes out of our back pocket,” Dimmig says.

Processing data manually. One downside of the bundled payment program: the need to manually process data. “Our systems are not really equipped to handle bundles, so data collection and tracking is very cumbersome—unfortunately, we’ve had to resort back to spreadsheets,” Adkins says. “And on the flip side, Blue Cross’ systems are not set up to process bundled payments so there is a lot of manual work on their side.”

Another challenge is educating patients about the benefits of choosing a bundled payment provider for joint replacement. BCBSNC plans to redesign its benefits so that members have lower out-of-pocket expenses if they do so, says Elaine Daniels, the insurer’s senior strategic network consultant. The insurer is also going to tweak its online transparency tool so that the advantage of choosing a bundled payment provider is more obvious.

Exchanging data. BCBSNC initially used the PROMETHEUS Payment® knee replacement bundle, which extends from 30 days before surgery to 180 days after. However, experience showed that this length of time was longer than necessary, Daniels says. Now, the insurer’s hip replacement contract with Triangle defines the bundle as the period of time from the surgery to 90 days after.

Triangle administrators meet with BCBSNC each month to review claims data for each patient treated under the coordinated care contract. This allows Triangle officials to know what care their patients are receiving from which providers. “They love seeing the claims detail because they can see any leakage claims—where did that patient go and how can they avert that in the future?” Daniels says.

CalPERS and Reference Pricing

Intrigued by the results of an initiative in California, many payers and purchasers are looking at reference prices—in which a purchaser(s) sets a price it is willing to pay for a given service—as one way to restrain healthcare spending. The attraction is obvious: The California Public Employees’ Retirement System (CalPERS) found that reference pricing reversed the upward trend in prices, saved the purchaser and its members millions of dollars, and improved quality.

“I think it will continue to grow,” says Michael Belman, MD, medical director at Anthem Blue Cross in California, which administers CalPERS’ claims. “It’s a useful tool in the toolbox for limiting the increase of cost trend.”

Starting with total joint replacements. CalPERS pioneered reference pricing in 2011 because it was tired of the inexplicable variation in hospital prices—ranging from $20,000 to $120,000—for hip and knee replacements. One of the nation’s largest healthcare purchasers, CalPERS announced it would pay $30,000 for a total joint replacement. It designated 41 hospitals as preferred network facilities because they charged relatively low prices for joint replacements, met certain quality criteria, and collectively provided sufficient access for CalPERS’ statewide membership.

CalPERS members who chose to have hip and knee replacements at facilities outside the network were required to pay the difference—at least in theory. “Interestingly, we found that hospitals outside the network lowered their prices to allow members to have the surgery at those facilities,” says Ann Boynton, deputy executive officer, benefit programs policy and planning.

Before reference pricing was introduced, the average price for hip and knee replacements charged to CalPERS had risen from $28,636 in 2008 to $34,742 in 2010. In 2011, the average price fell by 26 percent to $25,611—and the greatest impact came from non-network hospitals that cut their prices to retain business (Robinson, J.C. and Brown, T.T., “Increases in Consumer Cost Sharing Redirect Patient Volumes and Reduce Hospital Prices for Orthopedic Surgery,” Health Affairs, August 2013, vol. 32, no. 8, pp. 1392-1397).

Reference pricing saved CalPERS nearly $6 million in the first two years after implementation, while its members saved $600,000 in cost sharing (Robinson, J.C., “Reference Pricing: Stimulating Cost-Conscious Purchasing and Countering Provider Market Power,” Expert Voices in Health Care Policy, NIHCM Foundation, October 2013).

Responding to the market. More important than the dollars saved, Boynton says, is the demonstration that hospitals will lower their prices in response to market forces. “This gives empirical evidence as to what can happen when you shine a light on something,” she says. “Hospitals responded when people started saying, ‘Wait a minute—it’s going to cost me this much money?’”

CalPERS has extended the concept to put a pricing cap on colonoscopies, arthroscopy procedures, and cataract surgeries, which incentivizes its members to choose ambulatory surgery centers rather than hospitals. And it is evaluating the addition of spine surgeries to its hospital reference price program. That said, Boynton’s enthusiasm for reference prices is limited.

For one thing, she worries about the disintegration of care. Reference pricing incentivizes patients to choose the least-expensive provider that meets certain quality standards for a specific service, and that provider may not use an EHR system that allows information about the joint replacement surgery to be easily incorporated into the patient’s medical records maintained by his or her primary care provider.

Beyond that, Boynton wants quality and cost transparency to advance to the point where patients can make their own decisions without purchaser intervention. “The fact remains that, for most people, the information necessary to make a well-informed decision on a cost and quality basis does not exist,” she says. “I worry about putting too much responsibility on purchasers to do a lot of research and evaluation that, from my perspective, is the responsibility of the delivery system.”

Defining the ingredients. A reference-pricing program is appropriate only for elective procedures in which a patient has time to make a decision about site of service, and it will be effective only if there is substantial variation in price among competing facilities, Belman says. Plus, purchasers must have quality and patient safety data that allow them to identify hospitals that meet acceptable standards.

Lessons Learned

Before entering any type of value-based contract, hospitals must take a hard look at their ability to take on risk and provide highly coordinated care. The first must-have attribute, Klein says, is the ability to communicate easily with patients, which allows the organization to reach out to patients rather than passively waiting for them to make contact.

Equally important: Hospitals must have the resources of an integrated delivery system, including the ability to manage patients longitudinally over time in various care settings, an integrated EHR system, alignment with physician groups, value-savvy physician leadership, and consistent clinical care processes. “Taking financial risk without having an integrated delivery system can lead to a number of problems,” Klein says.

Other lessons from leaders in value-oriented care:

Physicians on board. Value-based insurance contracts require value-oriented medical practices. “You have to have a physician champion who believes that this is the right thing to do for the practice, and the right thing to do for the patient,” says Kolodziej, the Aetna medical director. “You cannot allow the doctors you work with tosay “no.” They have to embrace a culture in which they measure their performance, they try to make it better, and they try to make it very patient-centric.”

Patients on board. Succeeding in value-based insurance approaches also requires providers to engage patients—who are not always easy to find. For example, some Medicaid patients tend to move frequently so keeping track of their mailing addresses and phone numbers can be a challenge. Plus, patients who have previously been covered by a Medicaid fee-for-service plan often use an emergency department for primary care.

“Compliance issues with regard to pharmacy—refilling scripts, taking them as directed, understanding the regimen if multiple drugs are involved—remains a big challenge,” Fitzgibbon says. “To change that orientation takes some time and engagement.”

Provider and Payer Success

Value-based insurance approaches require a true patient-centered partnership between payers and providers. The days of staring one another down across a conference table over a financial issue have been replaced by a team approach.

As partners in the Wisconsin Blue Priority network, Aurora and Anthem comanagement teams have weekly meetings that include physicians, on-site case managers (medical and behavioral), social workers, and disease management staff. The teams discuss high-risk patients, and integrated action plans are put in place. “This leads to greater patient compliance, which will lead to better outcomes,” says Foley. “It may increase our cost in the short term, but it will avoid the cost of long-term catastrophic events, such as ED visits or admissions.”

That same attitude is at play in Triangle Orthopaedic’s bundled-payment contract with BCBSNC. Technically, the provider is responsible for all of a patient’s healthcare costs within a 90-day period, but Dimmig trusts the insurer to play fair in instances when a patient requires non-orthopedic services. “If a patient ends up in the emergency room because he had a gallbladder attack, that doesn’t come out of our pocket,” he says. “BCBSNC has been very reasonable about these situations because they really want this program to succeed.”

Absolutely right, says Elaine Daniels, the BCBSNC executive: “The relationship we have with these providers has gotten so much stronger because we have this collaboration. We have the spirit of working together.”


Lola Butcher is a contributing writer and editor to Leadership and lives in Missouri.

Quoted in this article:
Chris Adkins is chief administrative officer, Triangle Orthopaedic Associates, Durham, N.C.
Michael Belman, MD, is medical director, Anthem Blue Cross, Sacramento, Calif.
Ann Boynton is deputy executive officer, benefit programs policy and planning, California Public Employees Retirement System, Sacramento, Calif.
Elaine Daniels is senior strategic network consultant, Blue Cross Blue Shield of North Carolina, Durham, N.C.
Thomas A. Dimmig, MD, is president, Triangle Orthopaedic Associates, Durham, N.C.
Shawn M. Fitzgibbon is senior vice president-government programs, EmblemHealth, New York City.
John Foley is vice president, provider engagement and contracting, Anthem Blue Cross Blue Shield of Wisconsin, Waukesha, Wis.
Rick Klein is executive vice president, growth and market development, Aurora Health Care, Milwaukee, Wis.
Michael Kolodziej, MD, is national medical director, oncology strategies, Aetna, Hartford, Conn.
Stephen Rosenthal is president and COO, The Care Management Company, Montefiore Medical Center, New York City.
John D. Sprandio, MD, is chief physician, Consultants in Medical Oncology and Hematology, and chairman, Oncology Management Services, Drexel Hill, Pa.

Publication Date: Wednesday, August 20, 2014