Payer Perspective on Value-Based Health Care in Orthopaedics
Daniel B. Murrey, MD, MPP
Christopher Naso, MPH
Brandy Keys, MPH
Dr. Murrey or an immediate family member serves as a paid consultant to or is an employee of SCA Health and Optum and has stock or stock options held in BioMedFlex, OrthoMedFlex, Sintx, and United Health Group. Christopher Naso or an immediate family member serves as a paid consultant to or is an employee of Baxter Healthcare and has stock or stock options held in Baxter Healthcare. Neither Brandy Keys nor any immediate family member has received anything of value from or has stock or stock options held in a commercial company or institution related directly or indirectly to the subject of this chapter.
INTRODUCTION
Patients rarely pay the majority of their medical care costs alone. Payers, either as a government entity or a private company representing themselves, employers, or other stakeholders, are key participants in the move to value-based care. They can be either facilitators or barriers to this change, and as such, physicians must learn to partner effectively with them. By better understanding their needs and perspectives more fully, physicians will be better able to forge a positive working relationship that delivers mutual success.
ROLE OF THE PAYER
To understand the perspective of payers on value-based health care, it is important to first understand the role of payers in the healthcare system. Payers serve as organizing entities connecting those who fund the cost of medical care, typically employers, individuals, or health plans, with those who provide health care services across a defined geographic area. They do this via four distinct functions, each of which may be performed by the payer itself or delegated to another entity (Table 1): (1) network development, which develops a network of high-quality providers and negotiate rates; (2) network management for quality assurance and utilization review, which determines whether claims meet clinical necessity and quality-based contractual criteria; (3) claims management, which processes claims that can be done by a third-party administrator, health plan, or other risk entity; and (4) serving as a risk-bearing entity, which takes ownership for all or a portion of costs and may base payment on quality metrics and health outcomes.
TABLE 1 Roles of the Payer | |||||||||||||||
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TYPES OF PAYERS
The marketplace is largely made up of federal and commercial insurers, with other entities such as workers’ compensation and personal liability insurance playing a smaller role. The largest federal payer is Medicare, which has two forms: traditional Medicare and Medicare Advantage. Historically, traditional Medicare has primarily paid fee-for-service (FFS) claims on a fixed fee schedule that is adjusted annually. In more recent years, Medicare has increasingly introduced value-based reporting or performance adjustments through programs such as Merit-Based Incentive Payment Systems as well as experimental pilots in bundle arrangements such as Comprehensive Care for Joint Replacement (CJR) and Bundled Payments for Care Improvement Advanced (BPCI Advanced) models. Patients are enrolled in traditional Medicare on achieving eligibility but may opt into a Medicare Advantage program run by a commercial payer. In this instance, Medicare pays the commercial payer a capitated fee for those patients and the commercial payer is responsible for managing the group for that fee, subject to bonuses or penalties based on quality and access. Medicaid differs from state to state but is usually paid in a manner similar to traditional Medicare, albeit typically at lower rates, but a few states are experimenting with value-based models. Some states manage Medicaid themselves based on their own fee schedule while others contract with commercial payers to manage it. Commercial payers, such as United, Cigna, CVS Aetna, Humana, and Blue Cross Blue Shield (BCBS) plans, are private companies who create plans for employers and individuals who are not eligible for or participating in a government plan.
Commercial insurers differ in significant ways from federal payers. For traditional Medicare and most Medicaid plans, the payer plays all four roles using a fixed fee schedule (not negotiated, although there is variability by region and by different criteria across providers) and are obligated to maintain a network open to any participating provider willing to abide by their rules. Conversely, commercial payers must negotiate rates with each provider within the network and are driven by market demand to include providers based on affordability, access needs, quality, and network stability.
In addition, commercial payers most often are not the risk-bearing entity. Most national commercial plans (eg, United, CVS Aetna, Cigna) derive the bulk of their business by performing the first three functions on behalf of larger self-insured employers (usually with more than 250 employees), whereas the employer bears the cost of care plus administrative fees charged by the payer. BCBS plans tend to have a larger proportion of individual policies (risk held by insurer, sometimes called fully insured) and small business plans (risk split between business and insurer, sometimes called partially insured), but also derive a significant portion of their business from these self-insured businesses.
National commercial payers play an important role for companies that work across multiple states. The payer’s national footprint allows employers to offer common benefits to all employees via a single carrier, rather than cobbling together multiple state plans. Some BCBS plans have also entered multistate business through mergers to create Anthem (14 BCBS plans) and HCSC (5 BCBS plans).
Multistate or national payers create uniformity of benefits and administration required by regulatory compliance for the employers and have negotiated to create national provider networks that support those companies irrespective of where they grow. The revenue from large employers is great enough and the risk pool is large enough that they can afford the ups and downs of claims experience and would rather do so than pay extra to the insurer for mitigating that risk.
Multistate or national payers create uniformity of benefits and administration required by regulatory compliance for the employers and have negotiated to create national provider networks that support those companies irrespective of where they grow. The revenue from large employers is great enough and the risk pool is large enough that they can afford the ups and downs of claims experience and would rather do so than pay extra to the insurer for mitigating that risk.
However, when a national payer is not the risk-bearing entity but simply manages the network and payment administration for a large employer that is self-insured, their incentives to reduce total cost of care (TCOC) are diminished or may even by eliminated. They are often paid by a percentage of the total spending, so reducing cost could actually lower their revenues. Their main incentive is to retain the employer’s business by simply being more affordable or having a better network than other national payers, not actually to reduce total spending. This dynamic has allowed the cost of commercial plans to employers to increase steadily so that more employers are willing to consider advancing affordability through bundled payments and site-of-service incentives or restricting choice through tiered networks and health maintenance organizations (HMOs).
HMOs limit the choice of provider to only those in-network whereas preferred provider organizations offer better pricing if an in-network provider is chosen but out-of-network care is still covered. Staff-model HMOs such as Kaiser Permanente also own or directly employ some or all of their provider network, including physician groups and facilities, combining traditional insurance functions with care delivery systems in a single vertically integrated organization.
Medicare Advantage takes Medicare risk and shifts it to a commercial payer for them to manage. That payer can then either manage the risk themselves or subdelegate it to an independent practice association (IPA), physician group, or health system. Delegation may be conditioned on using certain networks and/or achieving standards for quality and access. Currently, United Healthcare, Humana, and various BCBS entities administer most Medicare Advantage plans. In general, commercial payers have not subdelegated portions of risk based on disease category, such as musculoskeletal disease. When they subdelegate, they would typically delegate either all of the professional fee component (physician payments) or the global fee to an IPA entity with a primary care base sufficient to manage that care and spending. Specialists either continue to see their patients at the Medicare rate or can negotiate with the IPA like any other payer to accept a rate different than standard Medicare to be in-network for that IPA and continue to receive their business. In some instances, the IPA will subdelegate specialty risk to a specialist group or network who then has to service that patient population for a fixed fee.
BALANCING ACCESS, AFFORDABILITY, QUALITY, AND NETWORK STABILITY
Payers must balance affordability of their network with stability of the network. Eliminating a provider because they will not agree to lower rates creates dissatisfaction among patients who must switch doctors and/or frustration if there is a limited provider selection in the network. That dissatisfaction is reported back to
the employer who was trying to use health insurance as a tool to retain employees, so the default is to satisfy employees by keeping open networks rather than pushing for lower costs. Preferred provider organization plans have traditionally been used to satisfy this desire by enabling employees to see both in-network and out-of-network providers, but with higher associated costs.
the employer who was trying to use health insurance as a tool to retain employees, so the default is to satisfy employees by keeping open networks rather than pushing for lower costs. Preferred provider organization plans have traditionally been used to satisfy this desire by enabling employees to see both in-network and out-of-network providers, but with higher associated costs.
After many years of employee wage and benefits shifting to cover increased health care costs rather than increased wages, the average worker has seen wage stagnation relative to health care coverage that still continues.1,2 Eventually, the pendulum must swing back to enhance wage growth at the expense of health care cost inflation. Payers use designations such as Blue Distinction® or “centers of excellence” to create tiered networks that still allow choice but reward patients for choosing providers who deliver higher quality, more affordable care.
In markets such as Southern California, where HMOs have been long established, patients and employers are increasingly opting for them, particularly staff model HMOs that have undergone significant care redesign. With greater affordability relative to other market options, Kaiser Permanente has seen steadily increasing market share there even with limitations to patient choice of provider.3
These circumstances are further influenced by local market dynamics, such as market concentration and historical business and contractual arrangements between employers, payers, and providers. The American Medical Association issues a yearly report, “Competition in Health Insurance: A Comprehensive Study of the U.S. Markets,” that outlines the market power of health insurance companies in all states. In 2020, the American Medical Association found that BCBS of Alabama had more than 85% of the commercial market share in Alabama, BCBS of Michigan had more than 65% of the commercial market share in Michigan, and Anthem had more than 60% of the commercial market share across all metropolitan statistical areas in Kentucky.4 These are some of the more highly concentrated markets in the country. Payers in these dominant circumstances have little market incentive to strive for value-based care contracting because employers need their network to access care for their employees and providers need their network to attain patients, and it is difficult for other payers to compete for market share. Opportunities in these highly concentrated markets may be limited but may best be found among competitors of the dominant payer. Competitor payers may be more likely to take on the work needed for value-based care activities to break into the market. Alternatively, direct-to-employer provider models and employer-led collaboratives such as Pacific Business Group on Health that focus on cost and quality considerations may be the best alternative in these circumstances.
Market dynamics associated with providers and employers also play a role in the ability to engage in value-based care contracts locally. The Center on Health Insurance Reforms at Georgetown University conducted an analysis on six midsize healthcare markets with recent provider consolidation: Detroit, Michigan; Syracuse, New York; Northern Virginia; Indianapolis, Indiana; Asheville, North Carolina; Colorado Springs, Colorado.5 Two of these six markets represent some of the conflicting agendas that can undermine the push to value.
Northern Virginia Market Case Study
A case study has shown the Northern Virginia market to have several environmental factors.6 The region has a large city government workforce and is heavily unionized, more individuals are moving away from the city to the suburbs because of high housing costs, and brokers and employee benefit managers have been slow to embrace new models of care delivery and network design. These factors have contributed to a lack of desire by employers to pursue many cost containment strategies, such as narrow networks and alternative payment models. A narrow network places strain on employers and should be considered a last resort.
Other models, such as accountable care organizations (ACOs), faced similar reluctance with employers because ACOs were seen as a tepid endorsement of a narrow network, given that employees would be unaware of what was happening. Payers in Northern Virginia found it difficult to push for new approaches if a hospital or healthcare system had significant clout. The process is different with hospitals: value-based health care may be promoted, but the financial bottom line must be met. One challenge is maintaining the appearance of an ACO without joining one.
Both payers and providers found it challenging to break old referral patterns. Complacency was noted among payers, as they are not prepared to use penalties, and the incentives are not yet large enough to generate change in referral patterns. Payers and purchasers explained that the dominant health system’s reach across the region and market clout made excluding them from plan networks or pushing patients to use other facilities through tiering strategies impractical. From the provider perspective, the risk-sharing arrangements have no favorable terms and there is no economic incentive.
Stakeholders are exploring a variety of strategies in this market. Employer strategies include shifting employees to higher cost-sharing, high-deductible plans, and reference-based pricing. A payer sets a maximum price it is willing to pay for a given episode of care. If the facility charges more, the patient must pay the difference. This generally narrows the variability of prices in a market and encourages patients to comparison shop. Payer strategies include encouraging delivery of health services outside the hospital setting. This includes encouraging procedures in ambulatory settings and offering 24-hour clinical hotlines to reduce emergency department use. Provider strategies include acquiring physician practices, ambulatory care centers, and other nonhospital facilities to recapture revenue.
Indianapolis Market Case Study
Environmental trends in the market in Indianapolis, Indiana, include horizontal and vertical consolidation among the main hospital systems, market concentration by the largest payer, and largely administrative service-only contracts across payers.7 These factors have contributed to an increase in costs and relatively little uptake of alternative payment models and novel network design approaches.
After one hospital’s acquisition of a sleep laboratory, the laboratory immediately began charging the hospital’s negotiated rate, which was typically higher than that of the laboratory when it was an independent provider. After acquisition,
physicians refer patients within their health system rather than to lower-cost providers. Employers have long demanded broad networks for employees. With many administrative service-only contracts between payers and employers, higher list prices mean higher administrative fees for payers. It is not in the payers’ interests to keep prices down because they make more money when prices increase steadily.
physicians refer patients within their health system rather than to lower-cost providers. Employers have long demanded broad networks for employees. With many administrative service-only contracts between payers and employers, higher list prices mean higher administrative fees for payers. It is not in the payers’ interests to keep prices down because they make more money when prices increase steadily.
ACOs and/or bundled payments have not been actively pursued because of existing discount-based tactics and insufficient clout among small payers to push providers to take on more risk. Employers noted that previous strategies such as high-deductible health plans and employee wellness programs could no longer constrain cost growth because the burden was unsustainable for employees. Although interested in ACOs, employers also lacked the resources to engage in direct contracting, noting that the effort required is too extensive, and that interference from providers about direct contracting has thus prevented any progress.
Employer strategies discussed in the Indianapolis study include narrow or tiered networks, reference pricing, centers of excellence, engaging in direct contract negotiations with providers, and guiding enrollees to lower-cost care settings such as clinics that are onsite or nearby (this includes a capitated rate to deliver primary care services, and for some, a referral service that connects patients to a care manager, as well as lower-priced laboratory, imaging, and other services).
Codependent variables in the market include (1) employers ask the major payers to reduce costs by developing narrow network products; (2) payers seek reassurance from employers that there will be a market for those products; and (3) clinicians want to know that, if they make price concessions to be part of a narrow network, patient volume will increase, filling available beds.
Advantages of Value-Based Health Care
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