The Department of Health and Human Services last Monday announced performance goals and timelines for transitioning Medicare payments from volume to value. It also announced a public-private partnership to encourage employers, health insurers, physicians and hospitals to adopt similar goals.

Through the Affordable Care Act, HHS already been testing several alternative payment models including accountable care organizations (Medicare Shared Savings Program) bundled payments (Bundled Payment for Care Improvement Initiative) and primary care medical homes among others. The goal was to reduce Medicare spending by incentivizing clinically integrated provider organizations to assume financial risk linked to reduced unnecessary utilization and improved outcomes. 

Last year, 20 percent of Medicare’s $417 million fee-for-service payments were made through alternative payment models like these. Secretary Burwell last week set the goal of increasing the percent of payments through value-based payment models to 30 percent by 2016 and 50 percent by 2018. In addition, HHS proposed that by 2016, 85 percent of all Medicare FFS payments have a component that is based upon quality or efficiency of care. That would increase to 95 percent by 2018.  Currently about 80 percent of all Medicare FFS payments meet this standard through factors such as the physician value-based modifier and the readmission/hospital acquired condition reduction program.

What’s it mean?

First, it’s no surprise. With health costs expected to increase at 6 percent annually for the next decade (per the CBO) and increased enrollment in the Medicare program as boomers age in, there is consensus that the status quo no longer works. The Medicare Trust fund faces insolvency in 20 years unless how much is spent and how it’s spent is addressed. So changing incentives from volume to value, a popular idea, is a necessary part of the solution to Medicare’s fiscal challenge (though sticky issues like end-of-life care, adherence to evidence-based practice, medical liability reform, costs of specialty drugs and other issues are not addressed directly in the proposed programs). Bending the Medicare cost curve is a critical element in our country’s fiscal recovery, and might be a hot topic in coming political campaigns if left unaddressed.

Second, the success of expanded value-based models is dependent on employers to jumping on board. Employers pay the lion’s share of the Medicare program’s shortfall through higher premiums and higher prices from doctors, hospitals and drug manufacturers whose products and services are marked up. Employers believe changing incentives is necessary; they are more aggressive in these efforts than Medicare, using narrow networks, carve outs, reference pricing and other strategies to bend the cost curve and shift risk to providers as well as to their own employees. It will be the response of large employers that determines the effectiveness of this HHS effort more so than the dictum from CMS that Medicare will up the stakes for value based payments.

Third, most providers will fail to reach the HHS targets. They’re ambitious to say the least, and for a hospital and its physicians, the costs of expanding these risk-based programs, and the ability to manage risk operationally is an expensive undertaking. Some will choose to accelerate their efforts; others will opt to operate their own Medicare Advantage plan to address Medicare risk a different way, and a few will pass altogether. Will Medicare succeed in increasing its use of value-based incentives with providers? Yes, but perhaps not as much nor as fast as anticipated in HHS’ announcement.

Final thoughts

Hats off to HHS for laying down the gauntlet for the transition from volume to value. But staged press conferences to announce bold goals, however worthwhile, often disappoint because markets fail to respond as fast or effectively as anticipated.

And in every hospital, management, physician leadership and the board should step back, size up the options and chart a course in response to the volume to value transition that’s likely to gain momentum.