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Think Tank

How Can State Hasten Payment Reform?

California is leading the way in the effort to change how health care is paid for in the United States, but even in the Golden State most commercial payments to providers are still based on fee-for-service arrangements that reward volume rather than quality or outcomes.

According to the California Scorecard on Payment Reform released last month, almost 42% of commercial payments to providers in California are tied to how well the providers deliver care, measuring quality, outcomes and efficiency. Compared with a national average of about 11% in the National Scorecard on Payment Reform released in the spring, California is ahead of the curve.

However, the 42% of providers who are reimbursed for care based on value in California are countered by the 58% reimbursed for the number of tests and procedures they perform.

We asked stakeholders what California can do to hasten and improve health care payment reform.

We got responses from:

Inform Public, Encourage Competition

There are a number of ways California can hasten and improve health care payment reform. First, Catalyst for Payment Reform a not-for-profit organization committed to changing how we pay for care, urges large employers and other health care purchasers in California — private and public — to send consistent signals to health care providers that the time for payment reform is now. 

To that end, CPR’s standard health plan request for information questions and model health plan contract language on payment report is in the public domain. These tools allow purchasers to highlight the importance of payment reform and to source and contract with health plans on that dimension.

Second, CPR urges private and public purchasers to learn from one another through CPR’s National Compendium on Payment Reform, a searchable, sortable database of payment reform pilots and programs. For example, Sharp Community Medical Group has had success improving care and reducing costs by teaming up with Aetna to launch an accountable care organization. Their efforts, described in CAPG Magazine (page 26), are featured in the compendium.

Third, CPR urges policymakers to examine the state laws and public policies that address the building blocks of payment reform such as price transparency and adequate competition among health care providers. In a 2013 Report Card on State Price Transparency Laws, CPR gave California a “D” based on how well the state’s laws help consumers gain access to meaningful information about the cost and quality of providers. And we know from recent media reports, including coverage by California Healthline, that provider consolidation in California continues, resulting in higher prices for consumers. There is a role for policymakers here, as they can help ensure consumers have the information they need to vote with their feet, encouraging providers to compete more aggressively on cost and quality. CPR outlines some ideas in Ensuring Competitive Markets for Health Care Services.

Finally, as CPR pointed out when we released the California Scorecard on Payment Reform in late September, while the Golden State is outpacing the national average on the percentage of private-sector payment tied to value, the jury is still out when it comes to its impact on the quality of care. In the long-term, to ensure payment reform delivers on its promise, we need to track both how we pay for care as well its impact on quality.

Exchanges Should Embrace Managed Care

The California Association of Physician Groups is committed to the delegated, coordinated, accountable care model as practiced and constantly refined by California’s elite medical groups and independent physician associations. This model has decades of experience and proven outcomes, and it continues to demonstrate innovation and success in so many of the critically important drivers of quality and cost transformation.

We consider it unfortunate that, with the notable exception of Kaiser Permanente, the California exchange — Covered California — has only a few HMO products to offer at the time of its launch. This will restrain the positive progress and impact that highly effective quality and cost management can deliver in coordinated care programs for individuals and populations. High deductible, narrow network PPO models are not structured to achieve the objectives of quality care and cost containment, and, based on what we know of the provider network at this time, there are legitimate concerns over patient access, choice and satisfaction.

A recent study conducted by management consulting firm Oliver Wyman estimates that 25 million to 31 million Americans are currently receiving health care services from an accountable care model, and more than 40% of Americans live in areas with at least one ACO. The number and variety of organizations adopting this care model demonstrates providers’ strong belief that this healthcare delivery model is seen as a key component of the future of American health care.

We hope the exchanges — in California and nationwide — will review and reverse their perpetuation of fragmented, uncoordinated care models, and we will work toward that goal. CAPG members will continue to deliver effective, high quality, value-based care and to advocate for and disseminate this model throughout our state and beyond. The people of California deserve the benefits of coordinated care, and the sustainability and excellence of our health care system require it.

Covered California Has Potential to Be Catalyst

The best thing that California could do to hasten and improve health care payment reform would be for the state health benefit exchange, Covered California, to use its active purchasing power to set up true “managed competition.” 

According to this system for health exchanges originally developed by Alain Enthoven of Stanford, each insurance plan offers the services of a distinct integrated health care delivery system. So, effectively, we would be incentivizing the development of a series of competing Kaiser Permanentes, though they would not all have to be formally integrated. Each of these non-overlapping integrated delivery systems would compensate its providers for improving the health outcomes of its members rather than for the volume of services they provide. 

This could not be accomplished in one year, but there should be a multi-year plan to transition to this kind of system with this end result as the clearly stated goal. There are already the seeds of such a system in the current offerings on the exchange. Insurers are, to some degree, offering non-overlapping networks of providers, and there are integrated delivery systems offering products on the exchange. 

However, there are also some very thin networks being offered on the exchange, made up of providers that will receive a very low unit price for their work, hence incentivizing them to increase the volume of care they provide. We may be pennywise and pound foolish in our fervor for low premiums in year one if it comes at the expense of some of the best aspects of the California delivery system and pushes people into networks with limited capabilities to improve population health. 

There are plans for offerings of new ACO-type products on the exchange. We should not only provide public support for that direction, we should head in that direction as the official policy of the Covered California. This would align with the offerings of many large businesses, including many members of the Bay Area Council, that are putting a very strong emphasis on improving the health of their workforces rather than simply treating them once they become ill.  It would also align with the development of ACOs within the national Medicare program. 

For payment reform to be successful, we must align payments across different payers, and Covered California has the opportunity to be a very powerful catalyst in this movement.

Patient-Centered Medical Home Is Best Model

The recent remarkable success of a patient-centered medical home project in Fresno demonstrates the effectiveness of pairing the PCMH care delivery model with a blended payment model. The California Academy of Family Physicians, a partner in the project, is calling on public and private payers to adopt this payment model and support PCMH development that delivers higher-quality, lower-cost care.

CAFP also is calling on the State of California to use its policies and resources to encourage the adoption of this payment model.

The Fresno PCMH project, launched in July 2012, is a collaboration of CAFP, the self-insured Fresno Unified School District and the primary care physician group, Community Medical Providers.  Among 2,500 patients (10% of FUSD’s beneficiaries), several care measures were substantially improved while savings totaled nearly $1 million over 12 months.

The goals were to improve the quality of care in specific disease areas including diabetes, cardiovascular disease and behavioral health; improve prevention and medication adherence; and reduce costs associated with emergency room visits, hospital admissions and prescription drugs.

The blended payment model included three tiers: fee-for-service; a $10 per-member-per-month fee for care coordination, increased access and health information technology; and bonus payments for achieving quality improvements and cost reductions.

At the end of the year-long pilot, the number of patients with diabetes for whom blood sugar had been confirmed as under control increased by 50%. Among patients with diabetes and patients with HIV, blood pressure control and LDL control increased significantly. Breast cancer screening and body mass index counseling increased across the entire patient population and patient satisfaction improved.


Medication adherence among high-risk members increased, high-risk member costs decreased, overall inpatient admissions and emergency department visits decreased, and the cost of total claims decreased by 9% for a gross savings of $972,519.


These goals were achieved because of key practice changes, made possible by the blended payment model, including adding a complex case manager who proactively reached out to high-risk patients; a quality improvement coach who coordinated ongoing change measurement, management and feedback; and patient registries to better track care.


These primary care physician practices successfully made improvements in areas that the literature and past experience show often are difficult to change. CAFP and its partners now are expanding these efforts to support other practices in improving care while decreasing costs. To make this possible, we seek other payers to partner with us.

The state can play an important role in encouraging the growth of medical homes and payment that supports them, including through the State Innovation Model Initiative. The state also has the unique ability to convene payers and enable them to act as a group, adopt this model expansively and support a statewide PCMH project.

Participate, Pay Attention to What Works

Federal, state, and private health care purchasers are actively pursuing payment reform in a variety of ways, albeit with limited coordination between the different purchasers. The question of payment reform in California not only focuses on what we should do as a health care system to align incentives around value, but also how to engage in the conversation and spur the effort.

While much attention is being paid to implementation of specific insurance-related provisions of the Affordable Care Act, such as the opening of state or federally-run health insurance marketplaces or the expansion of Medicaid, those programs have limited ability to change the incentives behind physician and hospital reimbursement and how we actually pay for care. At best, the new Medicaid and marketplace coverage will represent 15% of the insurance market in the U.S.

Byproducts of the ongoing expansion of access to care are likely increased use of health services and more spending for the previously underinsured or uninsured. In response, purchasers (i.e. Covered California, Medi-Cal, and employers) are attempting to put downward pressure on premium growth. In turn, the insurers themselves are negotiating with providers around reimbursement rates and methods. Sometimes, those negotiations turn to building accountability into reimbursement through private accountable care organization models that have both quality and cost components. More often than not, the use of older solutions like capitation and discounted fee-for-service are relied on with limited or non-existent quality incentives.

In addition to the private sector payment models, there are also demonstration and pilot programs being implemented due to the Affordable Care Act that can provide evidence to guide payment reform. State Innovation Model and Health Care Innovation grants, Medicare accountable care organizations, community transformation grants, Medicaid health home demonstrations, price transparency grants, and other publicly-supported initiatives can also provide useful information on best practices and successful models for payment, population health, and care delivery that can be applied to localities, states, and providers. Closely examining how these programs and payment mechanisms work in comparison to each other to influence both cost and quality will be an important aspect of understanding what to change in California’s health care payment system and reaching some level of consensus around what works and what does not.  

How do we engage in discussion and reach consensus around what Californians value about their health care, and what models work the best to advance population health, health outcomes, and patient experience while also making sure that our providers and insurers can operate in a sustainable fashion over time to meet those needs? I am not sure I know the answer, but I am excited to see us try.