Flaws inherent in the current health care reimbursement system combined with increased fiscal, budget and program cost concerns at the federal and state levels make payment reform necessary. Many view the rate of increase of health care spending by government entities, employers and individual purchasers to be unsustainable — particularly in a time of economic pressure. Measures taken by payers to date, including shifting cost to patients, utilization control and other limits to access, have not been successful in stemming dramatic increases in the annual cost of providing health care in the U.S. This failure, along with political change in Washington, provides the impetus for health care payment reform at the federal level in 2009.

Critics of the current payment system have long observed that it rewards intervention rather than prevention and does not incentivize quality. There is a widespread belief that inconsistencies in clinical practice patterns increase system cost. Analysis conducted by the Congressional Budget Office (CBO) and others has identified medical technology and practice variation as key drivers of health care spending increases.

The current systems to evaluate quality and effectiveness are fragmented across public payers, commercial insurers and independent commercial entities. In response, there is interest in establishing a centralized technology assessment or comparative effectiveness entity at the federal level that would evaluate evidence and assess relative value of treatments and technologies.

There is consensus among policy experts that broad reductions or freezes to provider payments are neither feasible nor desirable — particularly given that these controls would not address utilization, an underlying cause of cost increases. Instead, experts suggest that payment reform should fundamentally change how payers pay and what they value. These changes could include:

  • Broader (or universal) health insurance coverage
  • Investment in information technology or other infrastructure
  • Development of a government entity to evaluate health care quality and effectiveness

Payment reform will likely focus on quality, a realignment of financial incentives and simplification.

  • Quality: Quality will be assessed by reviewing standards of care based on robust clinical evidence. This evidence would be obtained through increasingly transparent clinical research and evaluated by rigorous, independent coverage analysis. Payers will conduct formal or informal comparative-effectiveness analyses. If new products or services are covered, innovative payment structures will be used to incentivize quality. These are likely to include pay-for-performance (P4P), value-based purchasing and bundled or global payment arrangements that could include elements of gain sharing. Actual payments will increasingly be based on quality reporting. Payers will continue to reduce or eliminate payment for preventable errors, including hospital acquired conditions.
  • Alignment of Incentives: Payment reform will incorporate a realignment of financial incentives not only in order to increase quality, but also to reward prevention and care coordination, decrease cost and increase access. This realignment may be the most difficult part of payment reform to implement as stakeholders will resist a shift in the allocation of a fixed pool of health care dollars. In an era of constrained resources, realignment implies that there will be financial winners and losers among stakeholder groups.
  • Simplification: Payment is currently made through a complex system that lacks transparency. There is broad interest in simplifying the payment system to decrease overall administrative cost. Payers would like to compensate providers to more accurately capture the actual cost of providing care. Current methods estimate costs via retrospective cost or charge based analysis and lack desired precision. Providers are concerned about receiving adequate payment and predictable funding streams that provide reasonable profit margins and allow for investment in infrastructure, innovation and public health needs.

One place where we expect all three trends to converge will be in Congressional efforts to reform Medicare payments to physicians. Congress must act before January 1, 2010, to prevent a scheduled 20 percent cut in physician reimbursement rates. After several years of piece-meal, short-term fixes, Congress is looking to enact a long-term solution. Any reforms to Medicare's payment system will certainly influence professional payment made by Medicaid and commercial insurers as well.

How should payers, providers and industry prepare for payment reform? 

  • Invest in Evidence Development. Manufacturers of medical technology must focus more than ever on robust evidence development that reveals both clinical effectiveness and value demonstrated through targeted health economics analysis. Coverage decisions will increasingly compare the clinical and economic value of treatment alternatives. Payers want the highest quality at the lowest price, and product design and evidence development planning will need to meet that expectation.
  • Leverage data on quality. Minimally, in an environment with increased scrutiny on cost and quality and greater needs to evaluate both, all providers must increase their focus on quality and efficiency of the services they provide to patients. Health care providers will need to provide detailed data on the quality of care provided and be prepared to enter into financial risk sharing arrangements with payers that reward them for quality care that is provided efficiently. Providers who are able to thrive in this environment will have a competitive advantage in their markets.
  • Position for realignment. Each stakeholder group invested in providing health care will need to position themselves to demonstrate the value of the care or services that they provide. The upcoming year will be one where constituencies will be positioning to gain ground, or at best, not to lose ground, as health care spending is realigned.
    • Manufacturers of innovative medical technology will need to continue their efforts to gain recognition of the differential value that their drugs, devices or diagnostics bring to patients and seek ways for that value to be appropriately measured through comparative effectiveness, health economics and budget scoring analyses. In an era of shrinking resources, the battle for market access will increasingly be won on the quality of the data that they are able to provide rather than on any “softer” advocacy from patient, provider or other groups.
    • Health systems must continue to advocate for stable (or increased) funding from payers and increased coverage to reduce costs of providing care to the uninsured. Both are vital in order to maintain access to critical care, investment in public health and to protect hospitals' roles as the primary employers in many communities.