A Primer on Operationalizing Alternative Payment Models


MACRA’s anticipated future impact on the healthcare industry has many provider organizations contemplating what actions and resources are necessary to participate in alternative payment models (“APMs”). Provider organizations facing the immediate options of getting involved with a CMS or commercial APM have significant operational decisions to make that will impact the future make-up of their organizations. Today we will discuss some of the considerations in preparing for APM participation.

CMS has launched numerous initiatives that allow organizations to begin the transition to accepting financial risk that are classified within the following categories of risk models:

  • Patient Center Medical Home Payments
  • Bundled Payments
  • Shared Savings
  • Shared Risk

These initiatives fall within the APM Framework established by the Alternative Payment Models Framework and Progress Tracking Work Group. The framework is premised upon seven principles that align with CMS’ goal to gradually push the industry into APMs so providers invest in and implement innovative approaches to clinical care. Over time, this will presumably result in a patient-centered health care system on a national basis. Stated differently, CMS is incentivizing the transition from fee-for-service (“FFS”) to fee-for-value (“FFV”) via the adoption of APMs based on the assumption that by improving costs and clinical quality, the overall value of care received by patients will improve.  The greatest challenge provider organizations face in transitioning is simultaneously interacting in both FFS and FFV payment models. Many provider organizations do not have access to enough revenue from FFV payment models to cover the reduction in revenue from FFS to complete the transition.

Provider organizations contemplating APM participation must first address the most important consideration in setting an APM strategy: which is determining the rate and amount of downside risk to assume. The desired pace and the provider organization’s available resources will help determine which program initiative/mechanism(s) to participate within.  Provider organizations must also find partners that can help advance their APM(s)’ performance, which will be assessed based on the quality and cost of care provided as compared to benchmarks derived from peer data.

The current reality for many provider organizations is a situation in which they face significant investment risk on the upfront costs of care redesign without a corresponding new payment model directly available from payer partners to generate a revenue stream. Leaders of provider organizations often express uncertainly about the best strategy for APMs due to practical limitations such as the amount of operational change their physicians are willing to accept or the amount of funding available for needed investments. We suggest those provider organization leaders open new lines of communication with payers, as successfully executing upon pay for performance (“P4P”) contracts is requisite to fund APMs.

Commercial payers realize that value-based care successfully operationalized yields the tremendous benefits associated with the Triple Aim. Due to these potential benefits, commercial payers are beginning to offer providers a well-designed financial benefit which encourages the adoption of new practices to improve overall patient value. However, a recent White Paper by the Health Care Payment Learning & Action Network, APM Measurement Effort, reports that only 25% of health care dollars spent are classified within the APM Framework’s Category 3 (APMs Built on FFS Architecture Category) or Category 4 (Population-Based Payment Category), which reflects the limited payments made by commercial payers to APM entities to date.[1]

While commercial payers’ implementation of APMs has been uneven when comparing individual carriers, the trend at large has been a slow pace of adoption. However, a constant cited among existing APM participants is the robustness of the collaborative relationships between commercial payers and providers will likely be the differentiating factor between success and failure. Providers and payers must work together in partnership to forge a common framework to determine the operational targets and capabilities required to operate within  different financial risk models.  Key questions will need to be addressed such as:

  • What APM offers the optimal risk and reward tradeoff?
  • What APM offers the best performance targets?

As these questions are answered, provider organizations and payers can focus on the design of the P4P contract by determining how the “Building Blocks” of the payment system will be defined. The four fundamental “Building Blocks” in a payment system are:

1)   The definition of the services that will be covered by a single payment

2)   The mechanism for controlling utilization and spending

3)   The mechanism for ensuring good quality and outcomes

4)   The mechanism for ensuring adequacy of payment   

This framework is applicable regardless of the level of financial risk being contemplated. The framework will help address key operational considerations such as data sharing, performance measurements, and patient attribution. Arrangements which give providers a key indication of the behaviors being encouraged and discouraged, limit the opportunity for uncontrollable outside events to skew performance data (e.g. introduction of high cost specialty drugs, or catastrophic clinical events outside the control of the care team), and keep performance and risk-adjustments limited to a reasonable number are all best practices worth pursuing.

Creating APMs and entering into P4P contracts are critical strategic decisions which require deliberate consideration and corresponding action. We highly recommend provider organization assess how partner organizations can contribute to their APMs’ success. Beyond identifying payers and discussing the reimbursement possibilities, we further recommend modeling revenue and expense scenarios to determine the anticipated financial impact. Having a firm understanding of how clinical performance, and any additional resources needed to improve clinical performance, will affect future cash flows, financing needs, physician compensation, and other operational considerations is important to mitigating unforeseen risks and ensuring providers have access to the resources they need to run a successful APM. HORNE has expertise in APMs and is prepared to be your partner in navigating the transition to the new value-based paradigm.


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[1] Based on the data they collected between May 19, 2016 and July 13, 2016 that represents 67% of covered lives in the United States.

Topics: APMs, MACRA Summary

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