Three Alternative Payment Models Reducing Cost and Improving Care

Traditionally, healthcare has been paid with a fee-for-service model where providers are paid separately for each service provided. This model can make it difficult for patients and healthcare payers to estimate the total cost prior to seeking care. But alternative payment models are becoming more widely used. Bundled payments, capitation, and reference-based contracting can benefit patients, and their self-funded employers, by increasing price transparency, lowering cost, and improving quality.

Alternative Payment Models

Bundled Pricing

Bundled pricing means charging one price for a related set of services instead of billing separately for each service. This lets patients know their costs upfront and receive one statement for the episode of care. Bundling prices for episodes of care can lead to higher quality care, better patient experience, and lower cost.

To manage their healthcare spend, self-funded employers are increasingly using bundled services to steer their employees toward high-value healthcare. As bundling gains traction, more aggregators/bundling services are entering the market. But, just because an episode of care is bundled does not mean it is the best price. It is important to know which aggregators offer high-value pricing and single-point solutions for common, shoppable procedures like knee replacements. This is why The Alliance vets providers and only contracts with those who offer high-quality services at a low cost.

Employers can also build incentives for pre-and-post-procedure compliance into their benefit plan design for bundled services to improve patient outcomes. For example, if an employer knows they will save significantly if their employee gets surgery at a specific bundled provider, they can share a portion of the savings with their employee to encourage use of that high-value provider. They can also incentivize proper preparation and post-procedure care. This reduces the medical cost of complications and improves patient outcomes.

Capitation

Alternative payment models such as capitation encourage employees to seek care. Instead of being paid per service, with capitation, a provider is paid a set amount per patient for a set period (usually one month). In this payment system, the provider is paid the same fee for each enrolled patient whether the patient seeks care during the set period or not.

For example, self-funded employers may decide to use capitation to pay for direct primary care. Employees can seek care as many times as they need in that month, covered by their employer. The capitation fee is based on the average expected healthcare utilization of each patient in the enrolled group. Higher utilization costs are assigned to groups with greater expected medical needs.

Capitation can discourage unnecessary procedures and reduce out-of-pocket costs because physicians are not being compensated on a per-service basis. However, a downside to this payment model can be patient over-enrollment. Physicians may take on a higher volume of patients to match the revenue they would make in a fee-for-service model. This can make patients feel they do not have enough time with their doctor, a familiar complaint in healthcare. This potential issue is balanced by the ability for patients to see their physicians as many times as they want in one month for one fee. This encourages employees to take a proactive role in their health, reducing costly and dangerous medical conditions in the future.

Reference-based contracting

Traditional payment models contract based off discounts of a provider’s “chargemaster” price. Referenced-Based Contracting by The Alliance provides the baseline employers need to pay a fair price for services. Rather than focusing on savings off billed charges The Alliance pays providers based on a percentage of Medicare. Medicare is the largest individual purchaser of healthcare in the world (over $1 trillion annually). Medicare’s pricing is a good reference point because their rates are tailored to geography, the cost of living, and provider overhead.

Today, almost all of The Alliance contracts are based on a percentage of Medicare. This allows us to pay, on average, 175 – 275% of Medicare. This is much lower than the state-wide average of 307%, according to RAND in 2020. The Alliance is continually improving our contracts to protect self-funded employers and their employees from out-of-network surprise bills and save them money. This payment model protects employees from unexpected charges while also providing the ability to better predict future healthcare costs.

Reference-Based Contracting by The Alliance offers a more transparent and appropriate benchmark to measure relative value while also enabling employers to use benefit plan design to incentivize employees to utilize low-cost, high-quality providers. Done correctly, using alternative payment models can reduce out-of-pocket costs for patients, their families, and their employers while improving the quality of care. As the healthcare landscape continues to change, The Alliance stays updated on emerging payment models, trends, and high-value providers and aggregators. To learn more about our bundled prices and Reference-Based Contracting by The Alliance, contact us.