Health economist David Cutler thinks the government and private payers are moving in the right direction with payment reform, including by promoting new models such as bundled payment and ACOs.


Payment reform is the right route to getting America’s healthcare costs under control, says economist David Cutler. In January, Sylvia Mathews Burwell, secretary of the U.S. Department of Health and Human Services, announced three important targets in the pay-for-value movement:

  • Thirty percent of Medicare payments will be tied to quality or value through alternative payment models, such as accountable care organizations (ACOs) and bundled payment programs, by the end of 2016.
  • Fifty percent of Medicare payments will go through those alternative payment models by the end of 2018.
  • Eighty-five percent of Medicare fee-for-service payments will be tied to quality or value by the end of 2016.

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A few days later, several of the nation’s largest health systems and insurers, coming together as the Health Care Transformation Task Force, said they plan to shift 75 percent of their business to ACOs, bundled payment, and other alternative models by 2020.

“Those are enormous steps,” says Cutler, who is especially optimistic about the promise of bundled payment and ACOs.

Encouraging Bundled Payments

While Cutler has no formal role in influencing federal policy, his perspective is valued by policymakers. A member of the Institute of Medicine and an advisor to several presidential candidates (among his many honors), Cutler currently serves on the Massachusetts Health Policy Commission, which is working to reduce medical spending in that state.

One of his perspectives: HHS should aggressively push bundled payments for acute care.

Cutler’s research has documented that the 17 most expensive conditions among Medicare patients account for half of Medicare spending, as described in a March 2012 study in the New England Journal of Medicine. While many of the most expensive conditions are chronic diseases, they are costly because of associated acute treatments. For example, the most expensive condition is osteoarthritis; Cutler and his colleague found that most episodes of care for osteoarthritis involve elective joint replacements.

Medicare and private insurers have documented that bundled payment programs reduce costs. Writing in a Journal of the American Medical Association blog post, Cutler said the Center for Medicare and Medicaid Innovation’s (CMMI’s) Bundled Payment for Care Improvement demonstration program is a logical starting point to expand bundled payments. “One straightforward reform would be to extend the programs there into a mandatory, nationwide program,” he wrote.

In an interview, he suggested two ways this could work: CMS could assign a target payment for a bundle of services, and the various providers in an episode of care would have two-sided risk for the bundle. At the end of a performance period, CMS would evaluate how many of the episodes of care cost less than target and how many cost more—and adjust its payments to the provider group accordingly. If the providers’ total costs during the performance period fell below the target, they would divide the savings; if their costs exceeded that amount, they would share the loss.

A starker approach would be for CMS to set a flat payment for a bundle of services. “The other way would be for CMS to pay a single amount and have providers figure it out,” Cutler says. “That may be more rapid [change] than many providers are ready for.”

Encouraging ACO Participation

About 400 provider organizations are participating in the federal government’s Medicare Shared Savings Program (MSSP) and Pioneer ACO initiatives, with mixed results and enthusiasm.

Cutler says private insurers have demonstrated that the ACO model reduces spending while improving quality. In his home state of Massachusetts, one of the nation’s first accountable care initiatives—the Alternative Quality Contract introduced by Blue Cross Blue Shield of Massachusetts—generated savings of nearly 10 percent by its fourth year of operation.

He believes more providers will participate in CMS’s ACO programs if the incentives are right, because history shows that the healthcare sector is extremely responsive to changes in incentives. The introduction of diagnostic-related groups (DRGs), the Balanced Budget Act of 1997, and the Hospital Readmissions Reduction Program are examples of public policies that prompted hospitals and health systems to change their operations in response to financial incentives.

“Every time we look, what we see is that the response to policies is far bigger than most people would have guessed,” Cutler says. “It happens time and again. We’re now talking about the healthcare spending slow-down, and it’s not surprising that it’s happening at the same time we put in incentives to be more efficient.”

The uneven performance among MSSP participants and the decision by several Pioneer ACOs to drop out of the program may reflect that the right mix of financial incentives is not yet in place. “One thing that is important is the extent to which the groups get to share savings or realize losses,” Cutler says. “Those are things that can be adjusted, particularly in the first couple of years.”

Another type of incentive may come from the new legislation that ended the sustainable growth rate formula for physician pay. The law approved by Congress in April provides a 5 percent bonus each year from 2019 to 2024 for clinicians who receive a significant share of their revenues through an alternative payment model that includes downside financial risk and quality measurement. “That is an opportunity to encourage more providers to move into the ACO program,” Cutler says.

Determining ‘How to Do It’

But getting providers to the game is half the battle, says Cutler. “The real issue is how do we make it work?” says Cutler. “What’s amazing to me is how ready the provider system is for a new payment model. Everywhere I look, there is readiness for it, combined with a sense of, ‘Please help to make this work well, so that it’s not just a complete free-for-all and we have no idea what to do.’”

Cutler recalls a meeting of hospital chief medical officers at which he posed the question: “Suppose you’ve been ordered to save money. How would you do it?”  Meeting attendees said that, in fact, they had been ordered to save money.

“I said ‘How many of you feel like you have a good handle on how to do that?’ and no one raised their hand,” he says. “I think the ‘what to do’ is a little clearer than the ‘how to do it.’” 

He was pleased to see that CMMI announced the Transforming Clinical Practice Initiative, which will support 150,000 clinician practices through a collaborative learning process during the next four years. “I will be very curious to see how that goes,” Cutler says. “Can it reach out to physician offices and clinics all across the country and say, ‘Here’s how you can do it’? Because we’re going to need that as much as we need to get the incentives right.”


Lola Butcher is a freelance writer and editor based in Missouri.

Interviewed for this article: David Cutler, PhD, is the Otto Eckstein professor of applied economics, Department of Economics, Harvard University, and was named Harvard College Professor in 2014. 

Discussion Starters

Forum members: What do you think? Please share your thoughts in the comments section below.

  • Are you confident in your organization’s ability to improve the value of care? If so, what are your primary strategies?
  • What incentives are needed to make participation in the federal government’s ACO programs attractive?
  • What is the most important lesson from your participation in bundled payment or ACO initiatives so far?

Publication Date: Wednesday, July 15, 2015