Catalyst for Payment Reform

Intro to Payment Reform


Intro to Payment Reform

What Is Payment Reform?

For over fifty years in the United States, we have largely paid health care providers on a “fee-for-service” (FFS) basis, under which each medical service and procedure is paid for separately.  Many agree FFS creates incentives for providers to deliver more, and more expensive care.  To counteract these perverse incentives, recently there has been a movement to reform health care payment.  Payment reform efforts focus on methods that reflect or support provider performance, especially the quality and safety of care that providers deliver, and are designed to spur provider efficiency and reduce unnecessary spending.  A health care payment reform program is a contractual arrangement between a health care purchaser or payer and a health care provider that utilizes an alternative method of payment designed to create the right kind of incentives.


Why Should Employers and Other Health Care Purchasers Care About Payment Reform?

As health care costs for employers, other health care purchasers, and consumers continue to rise, with little evidence that the quality of health care is improving, there is hope that changing how we pay health care providers to deliver health care can lead to innovation and improvements that will decrease overall health care spending and improve the quality of care.[1]


What Are the Latest Trends in Payment Reform?

Spurred by a desire for better value for health care spending along with elements of the Affordable Care Act, there has been a proliferation of payment reform programs in both the public and private sectors in recent years. Commercial health plans have dramatically shifted how they pay providers and hospitals, and purchasers have pushed their health plans to experiment, evaluate and improve their methods. In 2010, only 1-3% of payments were tied to performance.[2] By 2014, 40% of national commercial health plan payments were designed to encourage health care providers to deliver higher-quality and more affordable care.[3]  Moreover, the federally funded Health Care Payment Learning & Action Network set aggressive goals for payment reform in the U.S. health system, seeking to ensure that at least 50% of payments flow through alternative payment models by 2018.[4]

Today, the majority of payments to health care providers is still done through traditional methods, though this may no longer be true in the next year or two.  However, most payment reforms now in action simply layer added incentives on top of traditional methods of payment, such as FFS.  This means the incentives created by FFS are still in place, though the additional incentives may serve somewhat to counteract them. It is important now that rigorous and standardized evaluation of existing payment reform programs assesses their effectiveness at producing better quality and lower-cost care. Lastly, stakeholders are just beginning to address the importance of aligning the incentives for health care providers and consumers.[5]

What Payment Reforms Are Available in the Market?

Today, the vast majority of payment reform programs utilize one or more of the following payment methods:

  • Quality incentives (e.g. FFS plus pay for performance)
  • Payment for non-visit functions (e.g. care coordination fees, investments in health information technology)
  • Non-payment policies for specific services or events (e.g. hospital acquired conditions/early elective deliveries)
  • Fee for service (FFS) plus shared savings and/or shared risk
  • Bundled payment for episodes of care in which provider payment is based, in part, on quality performance
  • Capitation (full, partial, or condition-specific) in which provider payment is based, in part, on quality performance


In most cases, these payment methods are put into place in contracts between health care payers and providers.  Some employers have also created direct contracts with providers to deliver services under an alternative payment arrangement.

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