risk-adjusted base payments can support the move to value

As healthcare reform takes hold across the nation, primary care physicians are preparing for the shift to value-based payment by including risk-adjusted base payment in their payment models. Among other goals, these models aim to cover the additional costs associated with keeping people well, beyond merely treating disease, and aligning payment with expected use of resources.

Risk-adjusted base payment models predict the overall resources-in dollars- required for primary care physicians to deliver proactive, well-coordinated care to patients based on their illness burdens. Traditional risk adjustment creates a per member capitation payment based on age bands split for gender. Risk-adjusted payment models, however, which may assign a value to each clinical condition, capture wider variations in clinical need among patients and allow for more accurate risk assumptions depending on how many conditions the models consider. These values take into account the direct costs of primary care services, as well as the indirect costs of managing chronic conditions and referrals and coordinating care when a patient is hospitalized or visits the emergency department (ED).

Enhanced Funding lor Primary Care

Value-based payments, which reward providers for the quality and efficiency of care, as opposed to the volume of patients treated, are slowly and steadily gaining a foothold through new care models such as accountable care organizations (ACOs) and patient-centered medical homes (PCMHs). These innovative payment and delivery models herald an important change in focus from treating disease to managing health and wellness-an emphasis that requires providers and their care teams to spend more time on patient care and care coordination across an increasingly complex healthcare system. In many ways, these are not new concepts. What is new is the extent of these financial incentives in payment arrangements and how they align to the care delivery systems.

At the center of this paradigm shift are primary care physicians. These providers have the ideal vantage point, knowledge, and skills needed to manage the care of individuals as well as entire patient populations, which will be critical for success under value-based payment. With chronic disease at an all-time high-more than 45 percent of Americans ages 65 and older suffer from two or more chronic illnesses, compared with about 37 percent a decade ago, according to results of surveys conducted by the Centers for Disease Control and Prevention-the system will become increasingly reliant on primary care physicians.®

But how will payers appropriately pay these physicians for their expanded roles? Many primary care practices are already overburdened with large patient panels, productivity demands, and onerous administrative activities. How can we ensure that these critical caregivers are adequately compensated? How will primary care practices afford the requisite investments in staffing, technology, and outreach to drive results in value-based care?

To ensure success under value-based payment, payers should provide enhanced funding to primary care providers. These base payments are not the much-maligned capitation payments of the 1980s and early 1990s. Those lump sums were given to providers to manage all of their patients' medical needs with little or no regard to illness burden-which resulted in some physicians avoiding patients with medically complex conditions in favor of healthier ones for economic survival. Nor do the base payments rely on the data analytics available today. These payments are risk-adjusted to reflect the medical complexity of each provider's patient panel and to support the direct and indirect costs of expertly managing a group of patients for the short and long term (including outreach to patients who never connect with their primary care physician).

The Risk-Adjusted Base Payment Model

To illustrate the value of the risk-adjusted payment model, let's review what care would look like for a diabetic patient with congestive heart failure (CHF). Beyond the traditional diabetes-control services, care might include regular sessions with the practice's nutritionist and wellness coach, email or text message reminders when the patient is due for an HbA1c test and other preventive care, regular communication with a cardiologist about the management of the patient's CHF, and outreach via phone or email from a medical assistant when the patient misses appointments.

The Shift from Volume to Value

Today, private and public payers in every state are experimenting with value-based delivery and payment models, including PCMHs, ACOs, episode-of-care payments, and global payments. From 2008 to May 2013, for instance, the number of PCMHs that received accreditation by the National Committee for Quality Assurance (NCQA) grew from 28 to 5,739.b ACOs have experienced similarly swift growth-from about 100 in 2011 to more than 600 nationwide in early 2014.c Moreover, that number is expected to double by the end of 2014.d As value-based care delivery and payment continue to penetrate the marketplace, there will be a greater need for these risk-adjusted base payment models. If we're going to distribute financial and outcomes risk more evenly with providers, it stands to reason that their compensation should reflect that risk and provide an incentive for the practice behaviors designed to manage it.

Translating Risk into Payment

Under risk-adjusted base payment models, a patient who is expected to use an average amount of primary care services would have a relative risk score (RSS) of 1. An individual who is predicted to use twice that amount would have an RSS score of 2, while someone who is expected to use half the norm would have an RRS of 0.5. The RRS then can serve as a multiplier for an average monthly payment amount to a primary care physician to cover additional costs related to care coordination. The model is based on the assumption that patients with complex clinical profiles should receive more attention from their primary care providers to lessen the chances of future utilization.

The models capture the wide variation of clinical need among patients. For individuals in the 0.5 percent of the population with the highest predicted primary care needs, scores may be 16 times the average. For the healthiest 30 percent of the population, scores may be only one-tenth of the average. This range represents a 160-fold variation among individuals. Compared with a traditional age/gender model, which might have a range of 16 age bands and a gender split that overlooks the great variability in health or illness among individuals of a similar age, a risk-adjusted payment model is significantly more precise-as demonstrated in a 2012 study published in Medical Care.6

The precision of these models can be quantified in another way: When the authors of the aforementioned study analyzed predicted-to-actual costs among a large number of primary care practices, one risk-adjusted payment model explained 72 percent of the variation in practice costs, while the age/gender model explained only 42 percent. Using the age/ gender model, a payer would overpay some practices and underpay others.

The beauty of risk-adjusted payment models is their flexibility and the simplicity of their application. Payers may apply the risk score to whatever capitation formula they've established. For example, one insurer's bundle of primary care services may include referral tracking, while another's may not. Accordingly, the base payment can reflect that deviation.

If the base amount for the required primary care services is $40 per patient per month, the amount allotted to a patient with an RRS of 1 would be $40, while the amounts allotted to patients with RRSs of 1.25 and 3 would be $50 and $120, respectively. The payer determines the average risk score for each provider's panel and then distributes money accordingly. It is essential to establish a minimum monthly payment for members at the lowest end of the risk spectrum-to support practice overhead-which could be as little as $6 per month.

The Benefits of a Risk-Adjusted Base Payment Model

Patients, payers, and providers benefit in multiple ways when payment is based on such a model. First and foremost, when primary care physicians are adequately compensated, patients receive appropriate services in the optimal setting, including comprehensive wellness visits, disease management, care planning, communication at home through mobile technology, end-of-life care planning, and more. These payment models are aimed at improving care quality, patient outcomes, and the financial performance of healthcare organizations.

Adequately funding primary care also enables primary care physicians to engage patients who typically eschew health care. Historically, in a fee-for-service environment, one in four individuals does not see a healthcare provider during the course of a year. It's critical that primary care practices reach out to these patients to assess their health and family medical history and engage them through whatever services they need, including preventive care.

From the provider's perspective, risk-based models foster more equitable payments, enabling primary care physicians to practice efficient, high-quality medicine. Allowing physicians to share in the "right" level of risk gives them incentives to accept and retain patients with complex medical needs, avoiding the practice of "cherry picking" and restricting access to care. Finally, when primary care physicians are able to deliver top-quality, proactive care, outcomes improve, boosting morale and fostering better relationships between providers and payers.

At a systemic level, risk-adjusted base payments hold the promise of reducing wasteful spending and improving care through identifying and better managing the most complicated, high-need patients. A widely cited 2008 study by PwC found that more than half-$1.2 trillion-of the nation's $2.2 trillion healthcare spending was being wasted.* More than a third of that waste was attributed to behavioral reasons-obesity, smoking, and non-adherence. Another third was classified as clinical waste, including preventable hospital réadmissions, poorly managed diabetes, and unnecessary ED visits. Focusing more intensely on primary care can help save money on redundant testing, preventable hospitalizations, readmissions, and other undesirable consequences of a fragmented healthcare system. This is a big step forward in creating a more sustainable delivery system that achieves improvements in care quality and, ultimately, outcomes.

The Road Ahead

The growing adoption of population health management through the proliferation of entities such as ACOs and PCMHs has reframed how we think about health and illness. Payers and providers have shifted their focus from the treatment of illness to condition management, clinical guidelines, and preventive health maintenance. Within a framework of population health, primary care plays a critical role in accessing care and reducing wasteful spending. The future is bright for high-performing primary care teams, and their clout will inevitably grow.

But the full promise of population health management will be realized only if payers and providers fully embrace value-based payment-reimbursement that approximates, as closely as possible, the true costs of delivering proactive, comprehensive care. Neither market forces nor healthcare policy drivers are likely to trigger a reversion to the fee-for-service methodology, so the path is clear for risk-adjusted base payments to play an important role in this new primary care paradigm. *

AT A GLANCE

> Value-based care delivery and payment continue to penetrate the marketplace, redefining the roles primary care physicians are expected to play.

> Risk-adjusted base payments can help ensure that these physicians receive stable, predictable monthly or quarterly payments for the added responsibilities they will take on managing the health of populations through accountable care organizations, patientcentered medical homes, and other value-based organizations.

> As payer and provider incentives become aligned in value-based care delivery, payment arrangements should be designed to reflect that alignment.

Risk-Adjusted Primary Care Payments Help New York Providers Improve Care

In 2009, a regional health plan in upstate New York undertook a pilot project using a risk-adjusted base payment model. Three of the health plan's primary care practices volunteered to adopt a patientcentered medical home (PCMH) model and accept these types of risk-adjusted payments. The plan's goal was to compensate the practices for additional activities that can improve care coordination, reduce emergency department (ED) visits and avoidable hospitalizations, and improve compliance with clinical guidelines. Success was measured across three dimensions: patient satisfaction, HEDIS quality scores, and appropriate utilization.

At the end of the first year, the practices saw significant results:

* Per member, per month costs decreased by $32.