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A Vision for Payment and Delivery System Reform:Moving from FFS to Improved Quality, Better Health, and Cost

Containment

Prepared by Vishaal Pegany and John Connolly

January 2014


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TABLE OF CONTENTS

Executive Summary 3

Overview of Health Spending Trends 5

Reforms in Medicare 6Bundled or Episode-Based Payments 7 Accountable Care Organizations 9

Medicare Physician Group Practice Demonstration 10 Medicare Shared Savings Program 11 Medicare Pioneer ACO 12 Lessons from Medicare Bundled Payments and ACOs: Moving Forward to Contain Costs and Increase Qualityand Coordination 14

Medicare Independent Payment Advisory Board 16

Reforms in Medicaid 17Team-Based Care 17Managed Care as a Vehicle for Integrated Care Coordination 18Payment Models for California’s Community Clinics and Health Centers 19Health Homes and Behavioral Health Homes 20Safety-Net ACOs 22

Commercial Market Innovation 24Pay for Performance 26 Value Based Insurance Design 27

Reference Pricing 28Centers of Excellence Contracting 29

Excise Tax on Cadillac Plans 30

State Regulatory Action 31 All Payers Claims Database 31Oversight of Anti-Competitive Markets 32Rate Regulation 33Global Spending Caps 35

Conclusion 35


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EXECUTIVE SUMMARY

As the coverage expansions of the Affordable Care Act (ACA) bring millions of uninsuredindividuals into health coverage, the United States’ and California’s health systems must nowturn to face another of their most pressing problems: rapidly rising health care costs withsuboptimal health outcomes. The United States continues to spend vastly more of its resources

on health care than any other county, yet its health outcomes are far from the best in the world.1 The high costs are not simply a problem of using more health services; in fact, people in the U.S.use physician and hospital services less than those in other counties.2 Instead, the higherspending results largely from the high cost of many services—a consequence of the limitednegotiating power of the many different payers for health care services.3 In addition, the U.S.has higher use of particularly high-cost technologically advanced services, such as diagnosticimaging, which sometimes have questionable added impact on health outcomes. The dominanceof fee-for-service (FFS) payment further contributes to steep cost growth because it lacksincentives for efficiency or integrated care, resulting in fragmented provider networks andpoorer outcomes.4,5 To address these problems and obtain greater value for each dollar spent onhealth services, payment and delivery systems must evolve to provide better care and improvedoutcomes while reducing or maintaining overall spending.

As the ACA tests new payment and care delivery models, there must be an increasing shift topay-for-value approaches that require greater accountability on cost, quality, and outcomes.California’s history of innovation with delivery systems and payment models positions the stateto lead as an implementer of reforms across multiple payers, both public and private. Thoughthe state has made substantive efforts in payment reform, these approaches are largelyincremental as they involve a limited set of payers. The Governor’s Let’s Get Healthy Taskforce,and the companion Berkeley Forum initiative have identified goals for lowering health carecosts, but California currently lacks a comprehensive strategy to align financial incentives acrossmultiple public and private payers that promote better care and improved outcomes at a lowercost. The release of the Center for Medicaid and Medicare Innovation Center (CMMI) StateInnovation Model (SIM) is a unique opportunity to develop this strategy, given the sheer size of

the state and its multiplicity of payers. Even if the full participation of all payers is not obtained,the larger scale of this project has the potential for spillover effects across the entire system.

Strong improvements in cost, quality, and outcomes will require a system-wide shift from FFS tofee-for-value payment, which also requires a coordinated effort across payers. In California, 44percent of insured residents are enrolled in managed care, but 78 percent of total state healthexpenditures are paid FFS. 6 To transform the payment and delivery system, the Berkeley Forumhas laid out a vision for California: 1) reduce the 78 percent in FFS to 50 percent; and 2) increase

1 Johnson T. 2012. Healthcare Costs and US Competitiveness. Council on Foreign Relations. Available at:http://www.cfr.org/competitiveness/healthcare-costs-us-competitiveness/p13325 2 Squires D. 2012. Explaining Higher Health Care Spending in the United States: An International Comparison ofSupply, Utilization, Prices, and Quality. The Commonwealth Fund. Available at:

http://www.commonwealthfund.org/~/media/Files/Publications/Issue%20Brief/2012/May/1595_Squires_explaining_high_hlt_care_spending_intl_brief.pdf 3 Ibid.4 Laugesen MJ, Glied SA. 2011. Higher Fees Paid To US Physicians Drive Higher Spending For Physician ServicesCompared To Other Countries Health Affairs 30(9): 1647-1656. Available at:http://content.healthaffairs.org/content/30/9/1647.full.pdf 5 Steinbrook R. 2009. The End of Fee-for-Service Medicine? Proposals for Payment Reform in Massachusetts. NewEngland Journal of Medicine 361: 1036-1038. Available at: http://www.nejm.org/doi/pdf/10.1056/NEJMp0906556 6 Berkeley Forum for Improving California’s Healthcare Delivery System. 2013. A New Vision for California’sHealthcare System: Integrated Care with Aligned Financial Incentives. Available at:http://berkeleyhealthcareforum.berkeley.edu/report/


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the percentage of state residents who receive care from integrated care systems from the current29 percent to 60 percent.7 This vision will require collaboration and coordination amongpayers—public and private.

Innovative local efforts, health plans, ACA demonstration projects, and other states all offer valuable lessons for broader payment reform efforts in California. This paper forms actionable

recommendations for a statewide approach that is both based on these earlier experiences andtailored to California’s unique regulatory and policy landscape. We urge policymakers andstakeholders to take full advantage of the SIM grant and the multiple payment reformopportunities in the ACA. In this broad effort to attain improved outcomes and reduced costs, we recommend the following six payment and delivery system reforms:

1. Transition from FFS towards global payments for providers that have the capabilitiesand infrastructure to coordinate care, manage financial risk, and meet clinical qualitytargets.

2. Build on California’s history with the “delegated model” of placing greater financial riskon provider organizations and leverage these organizations’ infrastructure and expertiseto implement integrated delivery systems and accountable care organizations;

3.

Utilize financial incentives and quality measures to improve the health of vulnerablepopulations with co-occurring physical and behavioral health conditions that requirecare coordination;

4. Deploy the purchasing power of large employers, purchasing coalitions, and CoveredCalifornia to drive significant changes in the market that reward value over volume andreduce costs.

5. Advance consumer-driven health care to promote competition among providers andhealth plans by making cost and quality information easily available and meaningful.

6. Implement regulatory oversight of anticompetitive behavior among providers, whichdrives prices upward without increasing the value.

The paper forms these recommendations by first reviewing health spending trends in California

and compares them to national trends. The next section discusses payment and delivery systemreforms that Medicare has tested, as well as current pilots that the ACA authorized in theprogram. The following discussion explores reforms in Medicaid and several specialconsiderations for safety net providers. The paper then examines new value-based approachesthe commercial insurance markets, and the discussion concludes by raising some newregulatory actions that hold promise for slowing the rise in costs while increasing value.

California is positioned to succeed in many of these reforms because the state’s stakeholdershave either already tested several of them in some form or implemented early prototypes. While various reform approaches may have originated with certain private or public insurers, many ofthem have applications across payers. Consequently, payment and delivery system reformsshould be coordinated among the broadest coalition of payers to have the strongest statewideimpact on provider and consumer behavior.

7 Ibid.


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OVERVIEW OF HEALTH SPENDING TRENDS

The rise in national health spending has slowed in recent years, 8 and California spending figuresreflect that trend. California’s rate of per capita health spending growth slowed to 2.5 percent in2009, partly due to the Great Recession.9 At the national level, debate among researcherscontinues about how much the recent slower growth is attributable to the loss of private

insurance coverage.10 There is some agreement that part of the national trend in reduced healthcare spending also results from other factors, including greater provider efficiency, increasedconsumer cost-sharing, and slower development of medical technology and pharmaceuticals.

Overall U.S. spending per capita in 2009 was $6,815 while California’s per capita spending was$6,238, the ninth lowest in the nation. California follows the trend in which lower per capitaspending states tend to have lower per capita income, higher uninsured rates, and youngerresidents. California spends less per capita than the national average on hospital, drugs, andnursing home care, but spends more than the national average on physician services. In 2009,California had hospital admissions and inpatient days at 79 and 74 percent of the nationalaverage, respectively.11 Hospital care is typically the most expensive category of care, andCalifornia likely spends less because it has a younger, healthier population and a significant

share of its insured population enrolled in managed care plans.

Despite present trends, California’s per capita spending is expected to grow from $8,251 in 2012to $13,755 in 2022, representing an average annual growth rate of 5.2 percent. 12 As a share ofgross state product, health spending is also estimated to increase from 15.4 percent in 2012 to17.1 percent in 2022. At the household level, this growth means that the percent of medianincome devoted to premiums will increase nearly 20 percent (from 13.5 percent to 18.2 percent)for single coverage and nearly by a third (from 23.8 percent to 32.2 percent) for family coverage between 2011 and 2022.

Because rising health care costs often result in cost shifting through higher premiums, and lowto middle-income Californians currently experience stagnant wages, the promise of a more

affordable healthcare system remains a challenge. The following sections of the paper outlineand assess a range of approaches to addressing this persistent and pressing problem. Weconsider the different reforms according to which payer initially tested them—Medicare,Medicaid, and commercial insurers. Yet, we also raise the applicability that many approachesmay have for other payers and providers because coordinated, multi-payer action wouldmaximize the impact on the overall delivery of health services in California.

8 Kaiser Family Foundation. 2013. Available at: http://kff.org/health-costs/slide/annual-percent-change-in-national-health-expenditures-by-selected-sources-of-funds-1960-2011/ 9 Berkeley Forum for Improving California’s Healthcare Delivery System, op cit.10 Cutler DM, Sahni NR. 2013. If Slow Rate Of Health Care Spending Growth Persists, Projections May Be Off By $770Billion. Health Affairs 32(5): 841-850. Available at: http://content.healthaffairs.org/content/32/5/841.full.pdf 11 California HealthCare Foundation. 2012. Health Care Costs 101: California Addendum. Available at:http://www.chcf.org/~/media/MEDIA%20LIBRARY%20Files/PDF/H/PDF%20HealthCareCosts12CA.pdf 12 Berkeley Forum for Improving California’s Healthcare Delivery System, op cit.


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REFORMS IN MEDICARE

Medicare is the largest purchaser of health care services in the U.S., and the program has manyparts that deliver a range of services to many individuals with costly and complex health needs,including seniors, people with disabilities, end-stage renal disease, and amyotrophic lateralsclerosis (commonly known as ALS or Lou Gehrig’s disease). Medicare has four major parts,

which separately pay for beneficiaries’ hospital services (Part A); outpatient and laboratoryservices, as well as durable medical equipment (Part B); prescription drugs (Part D); and amanaged care program (Medicare Advantage) to coordinate all of these services for beneficiaries who prefer this model of care. (See the box below for a more detailed description of Medicare’sparts and the appendix for additional information about the ways that providers are paid).Outside of Medicare Advantage, Medicare is a FFS program in which providers are paidpredetermined fixed amounts. Many of its payment reforms aim to shift the delivery systemtoward pay-for-value approaches that coordinate Medicare’s different parts, improve outcomes,and control rising costs.

The Medicare program has tremendous clout to drive payment and delivery system innovationin the overall market. Commercial insurers and health plans often create benefit packages

comparable to Medicare coverage. They also closely track program and policy changes inMedicare as an indication of where the market is headed, and often follow Medicare’s lead byadopting these changes themselves. For this reason, the bundled payment and accountable careorganization (ACO) demonstration projects in Medicare could lead to replication by otherpayers if they prove successful in achieving the triple aims of providing better care and improvedhealth at a lower cost.

The Four Parts of Medicare

Part A: Hospital Insurance ProgramPart A helps pay for inpatient care provided to beneficiaries in hospitals and short-term stays in skillednursing facilities, and also covers hospice care, post-acute home health care, and pints of bloodreceived at a hospital or skilled nursing facility.

Part B: Supplementary Medical Insurance ProgramPart B helps pay for outpatient services, such as outpatient hospital care, physician visits, and othermedical services, including preventive services such as mammography and colorectal screening. Part Balso covers ambulance services, clinical laboratory services, durable medical equipment (such as

wheelchairs and oxygen), kidney supplies and services, outpatient mental health care, and diagnostictests, such as x-rays and magnetic resonance imaging.

Part C: The Medicare Advantage ProgramPart C allows beneficiaries to enroll in a private plan, such as a health maintenance organization,preferred provider organization, or private fee-for-service plan, as an alternative to the traditional fee-for-service program. The private health plans pay for all benefits covered under Medicare Part A, PartB, and Part D.

Part D: The Outpatient Prescription Drug BenefitPart D helps pay for outpatient prescription drug coverage through private health plans, either stand-alone prescription drug plans (PDPs) or Medicare Advantage prescription drug plans. Plans arerequired to provide a “standard” benefit or one that is actuarially equivalent, and may offer moregenerous benefits.

Source: Medicare: A Primer. Kaiser Family Foundation, April 2010. Available at:http://kaiserfamilyfoundation.files.wordpress.com/2013/01/7615-03.pdf


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Bundled or Episode-Based Payments

For inpatient hospital stays, the Medicare program has moved away from reimbursing hospitalsfor each discrete service on a FFS basis to a diagnosis-related group (DRG) payment structure. ADRG is a system that pays a single amount for the set of services offered to a patient for acutecare provided in a hospital setting (e.g. implanting a pacemaker).13 California has begun to

implement a DRG payment structure for FFS hospitalizations in its Medi-Cal program.

In contrast to DRGs, a bundled payment structure encompasses a treatment episode with a well-defined timeframe that additionally includes the pre- and post- acute care treatment services(e.g., in a skilled nursing facility) that extend across multiple settings and service providers.14 Inthis structure, providers are incentivized tocoordinate to efficiently use resources and best practices, deliver quality outcomes, andshare any resulting savings. In the event of aless than desirable outcome, such as areadmission, the bundled payment essentiallyprovides a “warranty” because the providers

bear financial risk for the post-acute careperiod.

During the early 1990s, Medicare conductedthe five-year Coronary Artery Bypass GraftDemonstration to test bundled payments thatincluded a 90-day post-discharge period. Thedemonstration saved the Medicare program$42 million, representing 10 percent lowerspending trends.15 Similar to the waycapitation payments cover the gamut of careprovided to a patient for an enrollment

period, bundled payment effectively establisha budget for a treatment episode.

While bundled payments have demonstrated cost savings, implementing bundled payments canprove onerous for health plans and providers. The parties must often engage in intensivecontractual negotiation to agree on an overall price, as well as to obtain internal buy-in amongmultispecialty providers regarding how they will apportion this payment and any shared savingsif expenses are below target. Further, Medicare has over 400 DRGs, and not every condition is acandidate for bundled payments because a treatment episode must be well defined. Integrateddelivery systems may be well-suited to bundled payments because of their highly coordinatedprovider networks, while less integrated delivery systems may have difficulty setting up such analigned system of care for a specific condition or treatment.

13 The patients within each category are assumed to have similar characteristics and utilize comparable hospitalresources. DRGs also risk adjusted for severity.14 The associated monikers for bundled payments include episode-based payment, episode payment, episode-of-carepayment, case rate, evidence-based case rate, global bundled payment, or global payment.15 Health Care Financing Administration. 1998. Medicare Participating Heart Bypass Center Demonstration,Extramural Research Report.

Medicare Recommendations

The Bundled Payment and Accountable CareOrganization demonstrations provide theframework to implement the followingrecommendations:

Recommendation 1: Transition from FFStowards global payments for providers that havethe capabilities and infrastructure to coordinatecare, manage financial risk, and meet clinicalquality targets.

Recommendation 2: Build on California’s history with the delegated model and leverage theinfrastructure and expertise of physicianorganizations to implement integrated deliverysystems and accountable care organizations.


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An additional challenge for insurers is that they may need to implement bundled payments formultiple conditions to reach a critical mass of consumers to ultimately achieve savings. This taskmay prove to be a heavy lift given the administrative work required to negotiate and support bundled payments. For the abovementioned reasons, bundled payments have largely beenimplemented by a “coalition of the willing”providers and insurers.

Since September 2010, the IntegratedHealthcare Association (IHA), anorganization with a mission to increase value in health care and a broadmembership from the health carecommunity, has tested bundled paymentsthrough an initiative funded by the federal Agency for Healthcare Research and Quality(AHRQ). This effort specified episodes ofcare for 6 acute conditions and involvedpreferred provider organizations (PPO).16

Health maintenance organization (HMO)products, including the public Medi-CalManaged Care (MMC) and Medicare Advantage plans, were not conducive to bundled payments because their physicians were already paid through capitation. Theintended goal for the IHA effort is that bundled payments can translate to moreaffordable health products for consumers;however, RAND will soon publish anevaluation of its implementation.

The Medicare Bundled Payments for CareImprovement (BPCI) initiative authorized by the ACA allows participatingorganizations to redesign more efficientdelivery systems in which providerscollaborate more effectively across thecontinuum of care. Different approachesmay include using evidence-based medicineor better streamlining processes.17 Participating organization can select from 4different models. In Model 1, participantscan focus on all DRGs while Models 2-4require them to choose among 48 selectedDRGs. (See text box to the right for a fulldescription.)

16 The 6 conditions are: total knee replacement, partial knee replacement, total hip replacement, knee arthroscopy with meniscectomy, diagnostic cardiac catheterization, and angioplasty with stents.17 Centers for Medicare and Medicaid Services. Available at: http://innovation.cms.gov/initiatives/bundled-payments/

Medicare Bundled Payments for Care

Improvement (BPCI) initiative PaymentModels

Model 1: Retrospective Acute Care Hospital StayOnly: The episode of care is limited to the inpatientstay, and the hospital accepts a discounted rate forthose in the Inpatient Prospective Payment System.Physicians receive the customary reimbursementsin the Medicare Physician Fee Schedule.

Model 2: Retrospective Acute and Post Acute CareEpisode: The episode of care is the inpatient stayand all associated services, and the duration willconclude either 30, 60, or 90 days post discharge.

Model 3: Retrospective Post Acute Care Only:The episode of care begins with the provision ofpost-acute services with a participating skillednursing facility, inpatient rehabilitation facility,long-term care hospital or home health agency. Thepost-acute services must be provided within 30days of discharge and can end, at minimum, 30, 60,or 90 days after the episode began.

In both Models 2 and 3, spending targets will beestablished by discounting what Medicare hashistorically paid for the care episode. The hospital

and physicians will continue to be paid FFS, butthese payments will be reconciled against thespending target. If they fall below the target, thehospital and physician can share the savings.Conversely, if they exceed the target they mustrepay Medicare.

Model 4: Prospective Acute Care Hospital StayOnly: In lieu of Medicare Part A (for hospitalservices) and Part B (for physician services), asingle, prospectively determined bundled paymentis made to the hospital and covers all servicesprovided by the hospital, physicians, and other

practitioners.1

This payment includes relatedreadmissions for 30 days after discharge.


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In early 2013, several California hospitals were selected to participate in Models 2-4 of the BPCI,of which a consortium of hospitals designated IHA to facilitate implementation. 18 If bundledpayments were included in a broader SIM demonstration (beyond Medicare), likely participants would include commercial PPO products given the previous lessons from the IHA effort. TheBPCI is still underway, and findings are still a number of years away; yet in the near term, theupcoming RAND evaluation on IHA’s efforts may shed further light on how bundled payments

could be pursued in the California SIM demonstration.

Ohio incorporated episode-based payments in its SIM Model, with a long-term aim of ultimatelypaying for 50% of the state’s health services under this model. Over the next three years,implementation will begin with Medicaid FFS providers, who will continue to receive FFSpayments, but with cost and quality benchmarks for 20 types of episodes of care. Providers withhigh quality scores and costs below the benchmarks will receive incentive payments, and those with spending above the targets will absorb some of the cost overruns through risk-sharingarrangements. Moreover, Ohio will include episode-based payments in its Medicaid managedcare contracts. The state then plans to encourage managed care plans to incorporate thesemodels in commercial and Medicare markets. The Buckeye State expects to save 0.5-1.5% ofmedical inflation from this payment reform over a 2- to 4-year timeframe.19

Accountable Care Organizations

The Medicare program has also introduced a more comprehensive payment and delivery systemreform model, dubbed an “accountable care organizations” (ACO). Like bundled payments, ACOs aim to coordinate care among Medicare’s different providers; however, this innovation ismuch more ambitious in that it involves amore expansive set of services and providers,and includes global budget targets and quality benchmarks for participating providers.20 Medicare will prospectively define thesemetrics for a specified set of services and a

defined population of Medicare beneficiariesthat the ACO serves.21

Simply put, an ACO is an integrated deliverysystem that includes financial incentives forproviders to improve quality and outcomes while delivering services at a lower cost to adefined population. Similar to HMOs, thecornerstone of ACOs is primary care andprevention and often includes the medicalhome model at its center (to be discussed in alater section). The array of care providers that form the integrated delivery system within an ACO includes primary care, specialty care, and hospitals, but may also include behavioral healthcare, home and community based services, and other supports. Purchasers of health care, such

18 Ibid. 19 Health Management Associates. 2013. HMA Weekly Roundup: Trends in State Health Policy. January 15. Availableat: http://www.healthmanagement.com/assets/Weekly-Roundup/011514-HMA-Roundup.pdf#nameddest=infocus20 This prospective budget could be established by using claims and cost data on previous utilization.21 Purington K, Gauthier A, Patel S, Miller C. 2011. On the Road to Better Value: State Roles in Promoting AccountableCare Organizations. The Commonwealth Fund and the National Academy for State Health Policy. Available at:http://www.commonwealthfund.org/Publications/Fund-Reports/2011/Feb/On-the-Road-to-Better-Value.aspx

The Key Principles of an ACO

Payment reform: managing a prospective budget by setting spending targets that motivateproviders to be effective (e.g., provide patientstimely, appropriate care) and efficient (e.g.,reducing duplication of services and avoidable

medical errors) and share in any resultingsavings;

Accountability: performance measures thatcapture quality and cost metrics; and

Coordinated continuum of care: integrateddelivery systems that promote care coordination,improved quality, and cost containment.


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as health plans, can contract with an ACO or develop one, and the broad and loosely configuredproviders in preferred provider organizations (PPOs) can be assembled to function as an ACO with the right incentives. As will be later discussed, the “coordinated continuum of care” aspectof ACOs holds promise in overcoming many of the barriers to services and effective caremanagement that often lead to poor outcomes and high costs produced under fragmented caredelivery models in Medicare and Medi-Cal.

Though sharing common elements from both FFS and managed care, ACOs should beconsidered a unique care delivery model distinct from traditional approaches. Some havedescribed ACOs as the next generation health maintenance organization (HMO). While there issome truth to this characterization, it is not entirely accurate, and there are importantdistinctions to note. ACOs are not a managed care plan, and it is not necessary for them to be inthe business of insurance. ACOs also do not require full capitation payments, and can function with FFS payments to providers. Because capitation payments are not a necessary component of ACOs, there is not always an incentive or requirement to lower utilization (though often the goalis to reduce the frequency and duration of hospitalizations). Instead, there is a greater emphasison linking financial rewards to quality (e.g., the most appropriate, cost-effective care),outcomes, and cost data.

Medicare Physician Group Practice DemonstrationThe ACO concept builds on the prior Medicare Physician Group Demonstration Project (PGPD), which was in effect between 2005 and 2010. In Medicare, the majority of enrollees receive carethat is paid for on a FFS basis—their hospital care covered by Medicare Part A and physicianservices covered under Medicare Part B. Without modifying the existing FFS payment structure,the PGPD tested physician “pay-for-performance” payments under a “shared savings” model.The goal was to address the problem that these two siloed parts of Medicare have not always worked together to reduce hospitalizations through effective outpatient care. The PGPDprovided early lessons about the ways Medicare providers can collaborate in a FFS context toenhance quality, cost effectiveness, and improved outcomes.

The PGPD included 10 physician group practices that served FFS Medicare beneficiaries. Eightof the 10 group practices were part of integrated delivery systems and were affiliated with ahospital. The PGPD had three overarching aims:

1) Encourage care coordination between Medicare Part A Hospital Services and MedicarePart B Physician Services;

2) Deliver services more efficiently by investing in care management processes; and3) Provide financial incentives to physicians for improving health care quality (processes

and outcomes).

To make the greatest impact on care coordination, the PGPD focused on ambulatory caresensitive conditions (ACSC). These conditions often involve costly hospitalizations, which arepotentially avoidable if the patient receives high quality outpatient care. The interplay betweenMedicare Parts A and B and its effect on overall health care costs, quality, and outcomes isespecially important for ACSCs. To better manage ACSC, the project participants implementednew practices and models (patient engagement, care management, care transitions betweenhospital and community settings, and expanding the role of non-physician staff) and invested inelectronic tools (e.g., disease registries and analyzing claims data to better anticipate needs).

To measure provider performance, the PGPD included 32 consensus-based quality measures, both preventive care processes (e.g., hypertension and cancer screenings, or care management


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activities) and health outcomes for three ACSCs: diabetes mellitus (e.g., LDL cholesterol level),congestive heart failure (e.g., beta-blocker therapy), and coronary artery disease (e.g., lipidprofile). The performance-based payment was tied to whether participants met a combination ofquality and cost goals, and a spending target was established for total per capita Medicare Part Aand Part B for the beneficiaries assigned to each group practice.

To trigger the performance payment, the physician practice groups must have achieved aspending growth rate that was 2 percent lower than the comparison group of non-participating beneficiaries in the same geographic area with similar characteristics.22 Additionally,performance on the quality measures must meet either national benchmarks or specified qualityimprovement targets. Depending on the number of quality targets met, the cost savings beyondthe 2 percent threshold were shared between the physician and the Medicare program at 80 and20 percent, respectively.

On the whole, the project participants were successful in meeting quality targets: all 10participants met at least 29 of the 32 quality measures.23 Further, the participants increasedtheir quality scores by at least 9 percentage points over the 5 years for diabetes, heart failure,and cancer screening. Collectively six of the 10 participants achieved savings of $78 million.

However, only half of the participants weresuccessful in exceeding a 2 percent savingsmark; within this group, one participantproduced 50 percent of aggregate savings. While several factors may have preventedcertain physician groups from realizingsavings in the pilot,24 the results show thatthese reforms hold promise for lower costsand demonstrate the clear value of qualityperformance benchmarks. These paymentmodels deserve further and broaderexamination, and the ACA does so with the

Medicare Shared Savings Program (MSSP)and Medicare Pioneer ACOs.

Medicare Shared Savings ProgramThe MSSP attempts to establish and evaluatethe ACO concept on a much larger scale thanthe PGPD. ACOs that wish to participate inthe MSSP must serve at least 5,000 MedicareFFS beneficiaries and lower spending below a benchmark level to share in savings. CMS will use data about beneficiaries’ previous use ofhealth care services to identify a benchmark spending level for each ACO. The benchmarkessentially reflects what CMS would have paid for beneficiaries’ care without the ACO being inplace.

22 Concurrent risk adjustment was applied to account for changes in illness severity and case mix.23 Sebelius K. 2009. Report to Congress: physician group practice demonstration evaluation report. Department ofHealth and Human Services. 24 The participants identified factors that may have inhibited further savings: 1) the physician group practices werealready located in low-cost markets, thereby presenting challenges in garnering additional savings; 2) the comparisongroup was not an accurate reference point for comparing cost savings because they may have had a lower risk profile,and in some markets, could have received care from the same lower-cost facilities in the demonstration; and 3) theconcurrent risk adjustment process, a model that uses diagnoses in the current year to project what the health plan

will expend for these conditions in the same year, was not one typically used in most commercial markets.

One-Sided vs. Two-Sided MSSP ACOs

To share in savings in the one-sided ACO model,participants must exceed a MSR that is based onthe number of beneficiaries in the ACO (on asliding scale, the smaller ACO will have an MSRof 3.9 percent while larger ACOs will only have anMSR of 2 percent due to its large populationsize). The two-sided model has an MSR of 2percent regardless of the number of beneficiaries.

While ACOS are encouraged to use resourcesmore efficiently so they achieve savings beyond

the MSR, there are limits to the total amount ofsavings that can be shared: for one-sided ACOsthe cap is 10 percent savings while two-sided

ACOs have a cap of 15 percent. The cap on theamount of losses that could be shared in the two-sided model reaches 10 percent in the third yearof the demonstration.


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Another distinguishing feature of the MSSP is that participants can choose between one-sidedand two-sided ACO models, depending on their experience in managing population health andfinancial risk. If a minimum savings rate (MSR) is met, one-sided ACOs can share up to 50percent of the amount of the savings, but are not financially liable for any cost overruns ifspending exceeds budget targets. In the two-sided model, however, ACOs are rewarded with a

more generous shared savings rate of 60 percent, yet they would also be responsible for thatshare of spending that is in excess of the budget target. In contrast to the PGPD that onlyallowed participants to share in savings that exceeded the defined target, the MSSP allows for“first-dollar savings” once the ACO meets the MSR. This feature allows the ACO to share in theinitial savings under the MSR as well as the additional savings beyond the MSR.

The amount of savings will depend on the number of quality targets met. The MSSP includes 33nationally recognized quality measures organized into 4 areas (and include more outcomemeasures than the largely process-focused PGPD):

1. Patient/caregiver experience (7measures);

2.

Care coordination/patient safety (6measures);

3. Preventive health (8 measures); and4. At-risk populations:

a. Diabetes (6 measures) b. Hypertension (1 measure)c. Ischemic vascular disease (2

measures)d. Heart failure (1 measure)e. Coronary artery disease (2

measures)

During the first year of the demonstration,CMS will administer shared savings payments based on a “pay-for-reporting” model. In thisarrangement, quality performance will notdetermine the amount of shared savings;instead, 100 percent complete and accuratereporting will allow providers to receive theirfull share of savings. In the second year, the demonstration shifts to a pay-for-performancemodel. Once the cost savings are met, CMS will evaluate provider performance on the qualitymeasures by comparing them to specified benchmarks and calculating an overall performancequality score that will dictate shared savings. For example, an organization with a quality scoreof 90 percent will receive 90 percent of the potential shared savings (i.e., 45 percent for one-sided ACOs and 54 percent for two-sided ACOs). To date, over 200 ACOs participate in MSSP,and a formal report on the first year performance period is not yet available. However, CMSprojects that the first three years of the demonstration will generate median savings of $1.31 billion if 50-270 organizations participate.

Medicare Pioneer ACOThe MSSP is a permanent Medicare program to facilitate ACO development, but recognizingthat many organizations already have experience providing coordinated care, CMS launched amore rigorous initiative known as the Pioneer ACO Model. The Pioneer ACO uses the same

Medicare Advanced Payment ACO

In order to successfully establish an ACO, upfront

capital is often necessary to make the necessaryinvestments in technology infrastructure and

business practices. Given that this can be a barrier for rural providers and small practices(physician-owned), CMS launched the

Alternative Payment ACO Model as a companionprogram to encourage participation in MSPP.The organizations participate in MSSP, butreceive advance payments that cover the fixedand variable costs associated with implementingnew care improvement activities. The advancepayments are intended to allow theseorganizations to more quickly realize savings to

Medicare, and they must be repaid from theaccrued savings during the project period. As ofJanuary 2013, two California organizations have

been selected for the Advanced Payment ACOModel: Golden Life Healthcare LLC ofSacramento, CA and National ACO of BeverlyHills, CA.


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quality performance measures as the MSSP, but hones in on the two-sided ACO model. Pioneer ACOs must have a minimum of 15,000 beneficiaries, or 5,000 in rural areas. The purpose of thePioneer ACO effort is to test specific payment models to better understand the extent offinancial risk that can be borne by providers in exchange for greater shared savings thanprovided in MSSP.

Another key difference between MSSP and the Pioneer ACO is how beneficiaries are attributedto the demonstration project for calculating clinical and financial performance. For the MSSP, beneficiaries will be “retrospectively” assigned to an ACO at the end of the year if they receivedat least 1 primary care service from a physician within the ACO. In the Pioneer ACO initiatives, if beneficiaries seek care from a physician that is participating in the ACO, they will be“prospectively” assigned to the ACO. This assignment allows the ACO to better anticipate needsand coordinate care; however, the demonstration guidelines limit the extent to which ACOs canperform patient engagement activities. Both demonstrations do not “lock-in” beneficiaries toreceiving care only from the ACO; beneficiaries still have the choice to seek care outside of the ACO. Essentially, CMS envisions that providers will treat all beneficiaries equally and beneficiaries will be “blind” to being served in an ACO.

During years 1 and 2, the Pioneer ACO will initially follow a shared savings model. In 2011, CMSselected 32 organizations to be Pioneer ACOs. While the results overall are mixed, key resultsfrom the first year indicate that Pioneer ACOs can deliver quality care while containing costs:

• Overall, the Pioneer ACOs serving 669,000 beneficiaries accomplished a lower spendinggrowth (0.3 percent) than comparable FFS non-participating beneficiaries (0.8 percent).

• All 32 organizations performed higher than the established benchmarks on 15 qualitymeasures, but only thirteen (40 percent) organizations qualified for shared savingspayments.

The first-year findings also highlight the considerable costs incurred by all the Pioneer ACOs for better care coordination and improved quality, which may have hindered the majority of them

from even reaching a financial break-even point. For these reasons, the sustainability of thismodel may require refinements in the way beneficiaries are attributed to and engaged by the ACO, such as increased flexibility for the ACO to do patient engagement and marketing toenrollees. The results also suggest that providers may eventually “hit a wall” in achievingsavings, as well as the importance of selecting quality measures that are achievable and clinicallyimpactful (since they are often replicated by commercial payers developing ACOs).

Some have suggested that the Pioneer ACO model may be limited in its shared savings modeland not sustainable in isolation from other payers. Therefore, they suggest that ACOs adapt intwo ways: 1) incorporate value-based provider payments, risk-adjusted global capitationcontracts with robust rewards based on outcomes, and patient incentives that include referencepricing and tiered networks;25 and 2) include other payers.

In year 3, Pioneer ACOs that are successful in achieving cost-savings during the first two yearsmay receive population-based (global) payments that have no limits on rewards and risks.Population-based payments are prospective per-member-per-month payments in lieu of all orsome of the FFS payments that were originally made in the ACO. In contrast to the one-sidedshared savings model, this shift to population-based payments in the two-sided shared savings

25 Toussaint J, Milstein A, Shortell S. 2013. How the Pioneer ACO Model Needs to Change: Lessons From its Best-Performing ACO. JAMA 310(13): 1341-2. Available at: http://jama.jamanetwork.com/article.aspx?articleID=1745687


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and loss model places greater financial risk on providers and thereby provides strongerincentives for care coordination.

There are two recent cases in which commercial ACOs when given a global budget weresuccessful in bending the health care cost curve. Between 2009-10, the Massachusetts BlueShield Blue Cross Alternative Quality Contract (AQC) achieved an average 2.8 percent reduction

(1.9 percent in year 1 and 3.3 percent in year 2) in health expenditures when compared to thosenot participating in the demonstration.26 It was cautioned that initial savings might have moreto do with directing enrollees to lower cost providers than reductions in utilization. There werealso marked improvements in quality for chronic care management, adult preventive care, andpediatric care during year 2.

The second example involves the California Public Employees Retirement System (CalPERS), which launched an ACO prior to the ACA in partnership with Blue Shield of California, an HMO.The ACO used a global budget in concert with a narrow network delivery system serving apredetermined population of 41,000 members. In contrast, the Medicare ACOs have broadernetworks with no pre-assignment members, which may complicate management of providerrelationships and coordination of care.

While this particular model established targets for improved care and initiatives for qualityimprovement, it will soon include financial incentives for quality performance, which willincorporate patient satisfaction goals and measures. During a two-year period, the CalPERSBlue Shield ACO was able to reduce PMPM cost increases to a total compound growth rate of 3percent, which is less than half the rate of premium growth during the prior decade.27 The ACOredirects any savings towards lowering the rising enrollee health care premiums.

Lessons from Medicare Bundled Payments and ACOs: Moving Forward to Contain Costs and Increase Quality and Coordination

To improve outcomes while lowering or maintaining costs, those who pay for and provide healthcare must move away from FFS and build upon value-based models like bundled payments and

ACOs. The dominance of FFS payments under the status quo will continue to escalate costs andfail to provide the necessary incentives for providers to coordinate care and deliver goodoutcomes. Evidence continues to mount regarding the most effective coordinated deliverysystems that link payments to clinical performance. Over time, it will become clearer whichapproaches hold the greatest promise and feasibility for particular providers. For those withmore experience with value-based payment, accepting a higher level of financial risk may yield better care and greater cost savings. Alternatively, for providers with little or no experienceoutside of FFS, payers could phase in financial risk and offer up-front financial support forneeded investments in IT systems or care coordination capabilities.

California may be positioned to succeed in implementing bundled payments and ACOs becauseof its significant experience with the “delegated model,” a typical component of an HMO. In the“delegated model”, health plans (HMOs) transfer financial risk to physician organizations,typically multispecialty medical groups and independent practice associations. In exchange, thephysician group receives capitation payments that create a global budget to cover a set of

26 Song Z, Safran DG, Landon BE, Landrum M, He Y, Mechanic RE, Day MP, Chernew ME. 2011. The 'AlternativeQuality Contract,' Based On A Global Budget, Lowered Medical Spending And Improved Quality. Health Affairs 30(1):51-61.27 Markovitch P. 2012. A Global Budget Pilot Project among Provider Partners and Blue Shield of California Led toSavings in First Two Years. Health Affairs 31(9): 1969-1976.


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beneficiaries may be lower payment levels that do not support capital investments ininformation technology and workflow processes, though this may be counterbalanced withincreased patient volume under an expanded Medi-Cal program.29 Medi-Cal managed care plans would likely have to facilitate ACO development among the providers in their networks to secureall of the necessary agreements between them.

As accumulated experience demonstrates which services are best suited to specific value-basedmodels, coalitions of payers should include these models in provider contracts. California’s Let’sGet Healthy Task Force recently released a draft of its State Health Care Innovation Plan (SIMgrant application), and it has tasked IHA with assisting its members, a broad and diverse groupof stakeholders, to test and implement value-based payment models. Given the ballooning costof health care, the movement toward valued-based payment must happen across the spectrumof payers and providers to have a substantial impact. Without an aligned movement away fromFFS, stakeholders will simply shift costs to payers and consumers that continue to operate underthis system, rather than achieving system-wide savings. As a consequence, the innovationsdiscussed above should not just occur within Medicare, but also across commercial markets andthe Medi-Cal program. To spur the testing and broad implementation of value-based paymentmodels across the delivery system, Medicare also offers a model for a stronger public authority

to drive successful approaches to reducing health spending and increasing quality.

Medicare Independent Payment Advisory Board

One of the major changes that the ACA made to Medicare was the creation of the MedicareIndependent Payment Advisory Board (IPAB). IPAB serves as a potentially very powerful toolfor implementing payment reforms, and it could serve as a model for other public programs andstate governments seeking to curb health spending. IPAB is charged with developing proposalsto limit Medicare spending if spending exceeds certain target growth rates.30 The Secretary forthe federal Department of Health and Human Services is required to implement therecommendations of IPAB unless Congress enacts an alternative proposal that accomplishes anequal level of savings.

Historically, Congress has received proposals to reform Medicare from an entity known as theMedicare Payment Advisory Commission (MedPAC). However, in contrast to IPAB, theserecommendations are not required to be linked to a budgetary target, and MedPACrecommendations are not binding because Congress is not required to act on them. The conceptof IPAB, a board of health care experts with independent decision-making authority, was borneout of the inability of Congress to enact reforms to bring Medicare within specified spendingtargets—often a result of potential backlash from constituencies and stakeholders.

To this date, the President has been unable to appoint the 15 full-time members of IPAB becauseof political gridlock in the U.S. Senate. In November 2013, the Senate adopted a rules changethat prevents usage of the filibuster for presidential appointees. Members may soon beappointed so they can begin to meet upcoming deadlines for reform proposals. A previousestimate from the CMS Office of the Actuary indicated that IPAB could help achieve $24 billion

29 Robinson JC, Dolan EL. 2010. Accountable Care Organizations in California. Integrated Healthcare Association. Available at: http://www.iha.org/pdfs_documents/home/ACO_whitepaper_final.pdf 30 In developing their proposals, IPAB cannot ration care, increase taxes, change Medicare benefits or eligibility,increase beneficiary premiums and cost-sharing requirements, or reduce low-income subsidies under Medicare PartD. Because the ACA includes scheduled payment reductions to providers and supplies, the board is also limited intheir ability to recommend changes in these categories until after 2019.


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in Medicare savings between 2015 and 2019.31 However, the CMS actuary projects Medicarespending to remain below ACA targets through 2015, which has made IPAB action unnecessarythus far.32 In the future, many stakeholders will closely follow IPAB’s actions, and Californiacould use a similar board to reform payments and control costs within its delivery systems.

REFORMS IN MEDICAID

Many of the reforms in Medicare attempt toovercome the fragmented care produced bydifferent parts of the Medicare program (Parts A,B, and D) that are rooted in FFS payments.California’s Medicaid program, known as Medi-Cal, shares a commonality with Medicare inhaving fractured payment and delivery systems, with managed care delivering certain services(physical health and some psychological services)and FFS providers delivering others (psychiatricand substance use disorder services). For this

reason, pay-for-value approaches can also havean impact in better integrating and coordinatingcare for special Medi-Cal populations, such asindividuals with multiple physical and behavioralhealth conditions or those involved with the criminal justice system.

Today, an ever-increasing share of California’s Medi-Cal beneficiaries now receive servicesthrough the program’s contracted managed care plans, which have a variety of qualityimprovement incentives and programs. In conjunction with the pronounced move towardmanaged care, provider payment from the plans should incorporate additional value-basedpayments and delivery system innovations to continually improve quality. Some approachesmay be similar to those in the Medicare program, while others may be more unique to Medi-Cal

providers, with particular models reflecting provider types and the services delivered. In anycase, pay-for-value approaches hold promise across programs, providers, and payers, and theyshould also be tailored to and piloted within Medi-Cal to simultaneously increase quality andcontrol costs.

Team-Based Care

The need for care integration and coordination is profound in the Medi-Cal program. Medi-Calcovers some of the most vulnerable Californians with the greatest need for health services andcommunity supports. Medi-Cal enrollees with co-occurring physical conditions, or co-occurringphysical and behavioral health conditions, often receive care in multiple settings and throughdifferent and disconnected systems. These systemic shortcomings cause some beneficiaries toexperience significant barriers to effective care. Value-based payments and delivery systemreforms must support and reward team-based care. DHCS should offer new payment modelsthat spur investment in appropriate staffing and infrastructure, and Medi-Cal managed careplans should expand and continue to test effective performance bonuses for best practices andimproved health outcomes. Policymakers at the state and county levels must also coordinate

31 Kaiser Family Foundation. 2010. Explaining Health Care Reform: Medicare and the new Independent Payment Advisory Board. Available at: http://kaiserfamilyfoundation.files.wordpress.com/2013/01/7961-02.pdf 32 Oberlander J. Morrison M. 2013. Failure to Launch? The Independent Payment Advisory Board’s UncertainProspects. New England Journal of Medicine. Available at: http://www.nejm.org/doi/full/10.1056/NEJMp1306051

Medicaid Recommendation

Within Medicaid, patient-centered medicalhomes, capitated payment structures forcommunity clinics and health centers,managed care plans, and safety netaccountable care organization can helpachieve the following recommendation:

Recommendation 3: Create financialincentives and quality measures to improvethe health of vulnerable populations with co-occurring physical and behavioral healthconditions that require integrated carecoordination.


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behavioral health and community supports that they deliver with the physical health benefitsthat the health plans cover.

The Frequent Users of Health Services InitiativeThe Frequent Users of Health Services Initiative’s (FUHSI) innovative work with under- oruninsured populations has relevant lessons for integrating and coordinating care through a

team-based model for both the traditional and newly eligible Medi-Cal populations. Administered by the Corporation for Supportive Housing with special funding provided by theCalifornia Health Care Foundation and The California Endowment, the FUHSI operates in sixCalifornia counties: Alameda, Los Angeles, Sacramento, Santa Clara, Santa Cruz, and Tulare.The program’s approach involves assigning participants to primary care providers and havingcase managers and outreach workers coordinate their primary care, behavioral health, andsocial service needs. Since social services needs, such as vocational skills, employmentassistance and housing, often fall outside the scope of traditional medical services, these services were provided by peer educators or licensed clinical social workers.

Overall, program participants in FUHSI experienced a range of medical, behavioral, and socialchallenges. Many individuals experienced chronic medical conditions (65 percent), substance

use disorders (54 percent), mental illness (33 percent), homelessness (45 percent), and wereuninsured during enrollment (63 percent). Because they lacked a regular source of care,program participants frequently utilized emergency departments for care and the initiativesought to redirect their use patterns towards more appropriate settings, such as outpatient care.

A FUHSI evaluation found that after receiving care management, there was a 60 percentreduction in emergency room visits and charges, a 64 percent decrease in inpatienthospitalization admissions, and a 69 percent decrease in inpatient hospitalization charges. Thecost savings due to FUSHI are beneficial for hospitals with a financial stake in treating theuninsured. After the Medi-Cal expansion begins on January 1, 2014, HMO-based Medi-Calmanaged care plans will have primary responsibility for this type of care management for thepreviously uninsured who will newly enroll.

Managed Care as a Vehicle for Integrated Care Coordination

California has a relatively high concentration of HMOs when compared with the rest of the U.S.,largely a result of the public Medi-Cal program increasingly relying on an HMO delivery system.In its 1115 waiver, the state mandatorily enrolled seniors and persons with disabilities into Medi-Cal managed care plans, and the ACA expansion population is expected to enroll in managedcare plans wherever geographically available.

In Medi-Cal managed care plans, capitation payments are based on a per-member-per-month(PMPM) basis and are risk adjusted according to the aid category of the enrollee. For specifiedservices, capitation effectively provides a global budget for the managed care plan to organizeand finance a continuum of care for its enrollees. If actual expenditures fall below the budget

provided by capitation, the managed care plan makes a profit; if expenditures are higher thanexpected, the managed care plan is financially liable. To prevent plans from limiting appropriatecare, Medi-Cal requires external quality reviews, consumer satisfaction surveys, and thesubmission of Health Care Effectiveness Data Information Set (HEDIS) performance measures.

For the reasons mentioned, capitation drives the managed care plan to focus on appropriateservice utilization and cost containment through health promotion activities emphasizingprimary care and preventive services. Capitation also provides the managed care plans flexibilityto organize and deliver care, including the workforce that delivers the service. Capitation-based


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payment structures can support integrated care coordination models that may include bothlicensed clinicians and paraprofessional staff. In contrast, FFS payments incentivize amultiplicity of services that can be billed, and in most cases, requires a higher-level workforce,such as licensed physicians, deliver the service. With assigned primary care physicians andappropriate care coordination and case management support, managed care has theinfrastructure to create health homes for plan enrollees (discussed in greater detail below).33

Payment Models for California’s Community Clinics and Health Centers

Community clinics are a prominent part of Medi-Cal managed care plans’ provider networks.They often have the capability to coordinate providers of a broad set of services through team- based care, sometimes co-located within one facility. As a consequence, clinics should havepayment structures that encourage more connected and coordinated care across multipleservices, particularly for Medi-Cal beneficiaries with complex conditions.

Federally Qualified Health Centers (FQHCs) receive per-visit payments for Medi-Cal beneficiaries based on the prospective payment system (PPS). These rates are calculatedaccording to health centers’ average cost per visit, essentially reimbursing “at cost” for all of the

services that they provide. These rates vary according with the overall set or scope of servicesthat the clinic offers. For example, if a particular facility provides a broader set of services thanother clinics, it would receive a higher PPS to include financial support for those additionalcapabilities.34

Yet, PPS in its current form prevents managed care plans from using new payment methods todrive improvements in care quality and cost effectiveness at community clinics. Managed careemphasizes case management, care coordination, and cost effectiveness through utilizationreview and capitated PMPM payments. A PPS payment may include compensation for otherclinic services, but it remains tied to a single visit and only with certain billable providers.Therefore, PPS still serves as an incentive for clinics to increase their volume of visits, withoutmore powerfully motivating health promotion activities and coordinated, team-based delivery

models, which involve other health professionals and increase cost effectiveness.

Many community clinics and health centers in California do receive payments that includeincentives to improve quality, yet they often involve no financial risk that would encourage costeffectiveness. Clinics that contract with Medi-Cal plans often receive a pay-for-performance bonus for meeting defined quality benchmarks; some also participate in health plans’ sharedsavings programs that do not involve potential financial downsides.35 However, newer modelsthat include capitated payments could also allow health centers to achieve greater efficienciesand flexibility for team-based care.

The Department of Health Care Services, Medi-Cal managed care plans, and clinics are currentlyexploring more value-focused payments through an Alternative Payment Methodology (APM).DHCS would have to define an APM with a State Plan Amendment that would be submitted toCMS. An APM would have to be both financially equal to clinics’ current PPS rates and agreed to

33 One barrier to integrating services in the health home models is that California carves out Medi-Cal specialtymental health and SUD services as county administered services. Because silos present barriers to effective carecoordination, beneficiaries would benefit in the long-term from carving these services into managed care.34 National Association of Community Health Centers. 2013. Health Centers and Payment Reform: A Primer.

Available at: http://www.nachc.com/client/Health%20Centers%20and%20Payment%20Reform.pdf35 John Snow, Inc. 2013. Implications for California Community Health Centers. California Family Health Counciland the Regional Associations of California. Available at:http://www.jsi.com/JSIInternet/Inc/Common/_download_pub.cfm?id=13162&lid=3


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by participating FQHCs.36 This option would allow for more innovation in clinic payment, and anew APM would not prevent clinics from receiving other pay-for-performance bonuses orshared savings that reward quality and cost efficiency.

Under an APM, a health center could receive a-per-member-per-month (capitated) payment foreach beneficiary who chooses the health center as primary care provider. This approach would

divorce payment from the billable visit (capped at one visit per day) under PPS, allowing plansto innovate with team-based care utilizing lower-cost medical, behavioral health, and socialservice professionals. Clinics would also gain the flexibility to test new approaches to deliveringcertain services, such as group visits, online communication, and same-day warm hand-offsamong providers of a range of needed services (e.g., medical care, behavioral health services,and community supports).

The California Primary Care Association (CPCA) and the California Association of PublicHospitals (CAPH) have developed a pilot proposal that would establish a capitated paymentstructure. Community clinics’ movement toward a value-based payment structure could enablethem to design better care delivery processes, utilize staff more efficiently and effectively, andultimately achieve better patient outcomes. These transformations also may allow them to be

more competitive, patient-centered providers of choice for many beneficiaries. For thesereasons, DHCS, health centers and community clinics, and health plans should continue topursue capitated payment pilots. Again, this payment structure could hold particular promise toimprove care quality and containing costs when combined with a pay-for-performance bonustied to performance benchmarks.

Shared savings programs offer another valued-based payment model that may hold promise forhealth centers and community clinics that serve Medi-Cal patients. As discussed above in thecontext of Medicare, clinics may have the capability to achieve savings in the overall cost of carefor certain beneficiaries through skillful management of ambulatory care sensitive conditions,and the ability to share in these savings may be an opportunity for some providers. 37 However,since many clinics serving Medi-Cal patients are already in managed care networks, they may

already be achieving many of the potential efficiencies that are possible within the limitations ofthe visit-based PPS payment structure. A shared savings program may have greater effect withinthe context of a Medi-Cal ACO (to be discussed further in ACO discussion below), which wouldconnect clinics, hospitals, behavioral health providers, and community supports to achieveoverall savings and quality improvements for a defined population of beneficiaries.

Health Homes or Behavioral HealthHomes

In addition to new payment models tosupport team-based care for safety netproviders, the “patient centered medicalhome” (PCMH) or “health home” offers acare delivery model that connects providersof a range of services. Because of thecomplex and intricate needs of many Medi-Cal beneficiaries and the managed carecarve-outs of behavioral health services,

36 National Association of Community Health Centers, op. cit.37 John Snow, Inc op. cit.

Medicaid Recommendation

Within Medicaid, patient-centered medical homes,managed care plans, and safety net accountablecare organization can help achieve the followingrecommendation:

Recommendation 3: Create financial incentivesand quality measures to improve the health of

vulnerable populations with co-occurring physicaland behavioral health conditions that requireintegrated care coordination.


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DHCS should replicate FUHSI’s team approach to care coordination by implementing healthhomes or behavioral health homes. Health homes provide a whole-person orientation thatorganizes both primary and behavioral health care services under a single treatment plan.Equally important, the health home addresses any psychosocial needs that facilitate betterpatient outcomes (e.g., assistance with housing, employment and life skills training). WhileCalifornia has incorporated some aspects of the health home in its Section 1115 “Bridge to

Reform” low-income health programs, there is considerable variation in the scope of servicesdelivered and counties’ resources for more formal health homes.

While Medi-Cal managed care plans provide a coordinated network of providers and active caremanagement for their enrollees, it is largely for primary and specialty medical care. Behavioralhealth services and community and long-term services and supports are currently carved-out ofmanaged care and instead provided throughstand-alone programs. When one provideris not accountable for the spectrum ofhealth needs, it often results in fragmentedand episodic care that fails to detect ormanage conditions early and impedes

“warm handoffs” to appropriate providers.The sobering statistic that individuals withsevere mental and illness (SMI) die 25 yearsearlier than the average American,38 oftendue to mismanaged physical conditions(e.g., diabetes, heart disease, and asthma),supports the need for increased carecoordination that addresses the healthneeds of the whole patient.

Fortunately, the Governor and theLegislature recently approved implementation of the ACA Medicaid Health Home option, which

offers considerable additional federal funds to build health homes in Medi-Cal providernetworks (see text box).39 Similarly, behavioral health homes would serve Medi-Cal enrollees with behavioral health problems who would prefer to have their mental health and/or substanceuse disorder provider arrange and coordinate their care. ACA Medicaid health home funds couldsupport important investments in comprehensive care management, care coordination, healthpromotion, comprehensive transitional care/follow-up, patient and family support, and referralto community and social support services. The additional financing could also support the use of both licensed medical staff such as physicians and nurse case managers, as well asparaprofessional staff such as health educators that are integral in supporting good outcomes(e.g., coaching patients to adhere to medication).

The concept of a patient centered medical home-neighborhood (PCMH-N) also represents a wayfor Medi-Cal managed care plans and county governments to collaborate to facilitate access toneeded services. While the PCMH or health home is the central hub where the patient’s healthcare needs are coordinated, the constellation of specialty and ancillary providers function as

38 National Association of State Mental Health Program Directors Medical Directors Council. 2006. Morbidity andMortality in People with Serious Mental Illness. Available at: http://www.dsamh.utah.gov/docs/mortality-morbidity_nasmhpd.pdf 39 Assembly Bill 361 (Chapter 642, Statutes of 2013).

Medicaid Health Homes

Section 2703 of the Affordable Care Act allowsstates to receive 90% federal funding to support theestablishment of health homes for beneficiaries

with chronic conditions. The funding is available

for 8 quarters and through a state plan option.

The Medi-Cal program could achieve a sizablelong-term return on its investment resulting frommore coordinated care and disease managementfor high-risk beneficiaries. California should usethis option as a means to integrate care acrossproviders of all Medi-Cal services, despite certainservices and delivery systems remaining carved outof managed care.


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PCMH-N. While the enhanced 90 percent FMAP is limited to care coordination activities,40 thecapitation payments made to managed care plans provide the flexibility to pay for a broader workforce involved in the patient’s care, including arrangements with PCMH-N.

Ohio also offers a model of broadly implementing PCMHs through its SIM grant. The state plansto expand the PCMH model statewide within its Medicaid program, and it will encourage

commercial and Medicare providers to adopt the model as well. Ohio’s initiative has three majorcomponents. First, it will offer funding to individual providers, especially small practices, toenable them to form PCMHs. Second, certain services of PCMHs (e.g., care coordination, non-traditional visits, and population health management) will become billable through the state’sMedicaid program. Third, payments will encourage efficiency and team-based care through bonuses based on quality and cost performance, shared savings, and capitation.41 Californiashould similarly attempt to develop these practices within the Medi-Cal program through theMedicaid health home option and APM for community clinics. The state’s policymakers andstakeholder coalitions should simultaneously seek to align these practices across all health caremarkets, including commercial insurance and Medicare.

These innovations would be very important for both current Medi-Cal beneficiaries with

disabilities and co-occurring disorders, as well as many groups of the Medi-Cal expansionpopulation. New enrollees’ health utilization profile is expected to be somewhere betweendisabled adults and parents in Medi-Cal. Yet, within the Medi-Cal expansion, three principalgroups will have disproportionate health care needs: 1) reentry/parolees; 2) the chronicallyhomeless; and 3) individuals living with HIV.42 The need to better integrate and coordinate careis timely because California counties have recently taken on responsibility for low-leveloffenders due to Assembly Bill (AB) 109. Counties should take advantage of the opportunity toconnect parolees/community reentrants to needed services covered through Medi-Cal, as manyof these individuals exit the criminal justice system and will be newly eligible for Medi-Cal in2014.

The need for integrated care coordination through health homes is apparent given the daunting

health needs of California inmates. Roughly two-thirds report drug abuse or dependence andover half report a mental health issue. With regard to this population’s physical health needs,there is a high need to address infectious diseases: HIV (1 percent), tuberculosis (13 percent),and hepatitis B and C (13 percent) and the chronic conditions of hypertension (18 percent) andasthma (14 percent).43 While the challenge of improving care and health outcomes for thispopulation remains considerable, so are the opportunities. Better engagement and servicedelivery and coordination could have valuable benefits for not only those beneficiaries, but alsofor the future safety and quality of life in California’s communities.

Safety-Net ACOs

Safety net ACOs would enable even broader networks of Medi-Cal providers to share data,coordinate care, and meet quality and cost benchmarks on a community-wide or regional scale—

40 Specialty mental health and substance use disorder services delivered by counties can be billed to Medi-Cal viaShort Doyle Medi-Cal. Other discrete services not provided under the managed care capitation rate can be billed on aFFS basis.41 Health Management Associates. 2013. HMA Weekly Roundup: Trends in State Health Policy. January 15. Availableat: http://www.healthmanagement.com/assets/Weekly-Roundup/011514-HMA-Roundup.pdf#nameddest=infocus42 Lee H, McConville S. 2011. Expanding Medi-Cal: Profiles of Potential New Users. Public Policy Institute ofCalifornia. Available at: http://www.ppic.org/content/pubs/report/R_811HLR.pdf 43 Davis LM, Nicosia N, Overton A, Miyashiro L, Derose KP, Fain T, Turner S, Steinberg P, Williams E. 2009.Understanding the Public Health Implications of Prisoner Reentry in California: Phase I Report. RAND Corporation.


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as they have for Medicare provider networks. Medi-Cal delivery systems serve populations withcomplex needs and co-occurring health conditions who would benefit greatly from anintegrated, high-performance safety net. Moreover, many of California’s local safety net deliverysystems do not have coordinated provider networks, and the Department of Health CareServices (DHCS) should actively collaborate with Medi-Cal Managed Care plans and counties tospur the development ACO-style networks.

The Medicaid health homes option in the ACA could provide a needed financial foundation forsafety net ACO formation.44 The complexity of the ACO model may especially present challengesfor safety net providers that subsist on lean Medi-Cal provider payments and lack the necessaryinfrastructure (e.g., health information technology), primary and specialty care providercapacity, and experience with integrated provider networks. Again, ACA Medicaid health homefunds could support important a range of improvements in care management and coordination,as well as care transitions and community supports and services. In sum, the health homesoption could enhance the existing infrastructure of managed care plans and create the necessaryconnections between presently fragmented systems and providers that could form safety net ACOs.

While Medi-Cal managed care plans and counties could convene their provider networks tonegotiate the necessary agreements regarding IT infrastructure, data reporting requirements,and formal provider relationships, taking up this Medicaid Health Home option would requirean initiative of DHCS. DHCS certainly has a great deal to tackle in the coming months with ACAimplementation, yet it should make this state plan option a priority. The effect of this provisionof the ACA could generate major improvements in the performance of the safety net, andultimately for the neediest Medi-Cal beneficiaries.

Once participating stakeholders have the necessary infrastructure in place, plans and providerscould then design quality and cost performance targets and shared savings arrangements thatmake sense for them. These benchmarks could be similar to those of Medicare ACOs describedabove, but they should focus on the needs of each regional safety net.45 For example, specific

performance goals could include expanding regular preventive services, integrating behavioralhealth with physical health care services, or reductions in unnecessary specialty visits andavoidable hospital readmissions.

In Los Angeles County, LA Care Health Plan is supporting the development of a safety net ACOknown as HealthCare First South Los Angeles.46 The safety net ACO serves a low-incomepopulation in which over one-third of the population is below the federal poverty level andnearly one-third receive public assistance. With 40 percent of enrollees lacking a regular sourceof care, many are forced to travel for routine care or experience long wait times for specialtycare. Because the population experiences a high chronic disease burden for physical and behavioral health, there is also a strong need to provide better coordinated care. Based onstakeholder input, the goals for the safety net ACO include:

44 Section 2703 of the Affordable Care Act: http://medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Long-Term-Services-and-Support/Integrating-Care/Health-Homes/Health-Homes.html 45 Connolly J. 2013. Redefining the Relationship between California’s State and County Governments: CreatingHealthier Communities through Innovative Collaboration and Financing. ITUP. Available at: http://itup.org/wp-content/uploads/downloads/2013/04/StateCo_Indigent_Health0403131.pdf 46 Dolan E. 2011. Building ACOs in the Safety Net: Lessons from HealthCare First South Los Angeles. IntegratedHealthcare Association. Integrated Heathcare Association. Available at:http://www.iha.org/pdfs_documents/resource_library/SafetyNetIssueBrief_December2011.pdf


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• Improve the quality of care delivered, illustrated with concrete metrics;

• Primary care-centricity;

• Integration and care coordination to link primary, secondary, and tertiary care; and

• A decrease in healthcare costs.

To implement these goals, work is underway to build the necessary provider network, caremodels, and financing structures. Notably, the goal for primary-care centricity emphasizes thepatient-centered medical home concept that serves as a building block for the ACO as a “medicalneighborhood.” As the HealthCare First South Los Angeles safety net ACO undergoes pilottesting, policymakers and other Medi-Cal health plans should monitor its progress to evaluatethe potential for this model to bring improvement in quality, efficiency, and health outcomes inother parts of the state.

Delivery system improvements of this nature will also be essential to the broad sustainability ofsafety net providers. Through the ACA, many uninsured Californians who currently rely on theseproviders will have a broader provider choice if they are newly eligible for and enroll in Medi-Calmanaged care and Covered California plans. If safety nets are to retain patients who enroll inthese coverage expansion programs, and if they are able to access the stable payment streams

associated with them, safety nets must be competitive with other providers in terms of cost andquality.

Many Californians will also remain uninsured because they are unaware of coverage options,unwilling to unroll, or are undocumented. These individuals will continue to depend on safetynet providers, and the state’s counties will remain responsible for administering and financingindigent care programs for the remaining uninsured. Counties should seek the best outcome fortheir investment, and establishing high-quality and cost-effective safety net ACOs would be aconsiderable step in that direction.

COMMERCIAL MARKET INNOVATION

The commercial insurance market has threemajor parts—the large group, small group, andindividual markets—and these markets tend tohave very different dynamics. Depending on thenumber of employees in a firm, individuals withemployer-based coverage are covered throughthe small or large group market. If an individualdoes not have access to employer-basedcoverage, they can purchase a plan in theindividual market. Collectively, just a little overone-half of Californians have either employer- based (45 percent of Californians) or individual

private insurance (6 percent of Californians). In2011, commercial health plans and insurerscovered 14.1 million Californians. Threequarters of commercially insured enrollees (group and individual) are enrolled in one of thefollowing carriers: Kaiser, Anthem Blue Cross, and Blue Shield of California.

Large employers dominate the large group market, and large purchasers of health insurancehave also formed coalitions to gain greater negotiating power when purchasing coverage frominsurance carriers. In some cases, large private purchasers of health coverage have applied their

Commercial Market Recommendation

The commercial market innovations of pay-for-performance, and the value basedinsurance design concepts of referencepricing and centers of excellence contractingprovide a way forward for achieving thefollowing recommendation:

Recommendation 4: Deploy the purchasingpower of large employers, payer coalitions,and Covered California to drive significantchanges in the market that reward value over

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negotiating power to induce shifts in payment and delivery system structures to yield higher-quality care at a lower cost. Next to Medicare, commercial markets have led in value-basedinsurance design (VBID), an approach used to prompt providers and consumers to increasehealth care value through increased transparency and accountability for cost and quality.

In contrast, purchasers in the small group and individual commercial markets have far less

negotiating clout and a more limited ability to drive delivery system and payment reforms. Yet,the ACA has the potential to change that dynamic. The new health insurance exchange, knownas Covered California, has the ability to pool the negotiating power of the small businesses andindividual consumers who purchase through its new marketplace. Under the ACA, the numberof Californians covered by individual plans will increase as the uninsured and other state

residents purchase coverage through Covered California. Enrollment in the individual marketalone could reach nearly 3 million by January 2015.47

Importantly, California has chosen to establish an Exchange under an “active purchaser” model.This Exchange model empowers Covered California to negotiate the details of the insuranceproducts offered in its marketplace and to exclude issuers that cannot satisfy its terms. As aconsequence, Covered California’s negotiating power offers a key opportunity to push insurers

47 Covered California. 2013. Fact Sheet: Enrollment Forecasts, Reporting Schedule, and Background Data. Availableat: https://www.coveredca.com/news/PDFs/CoveredCA-Enrollment_Projections-9-30-13.pdf

California Commercial Health Insurance Market Products and Regulation

Products: Private health insurance can be provided by a state-licensed health insuring organization orself-funded employee health benefit plan.

An employer can also choose to self-insure, which means that they would directly fund the cost of careprovided to their employees. When employers self-insure, they typically contract with a third-partyadministrator that manages benefits and processes claims. When an employer self-insures, they areno longer regulated by state law but instead by federal law through the Employment RetirementIncome Security Act.

If health insurance is provided by a state-licensed health insuring organization, the most popularproducts by enrollment are health maintenance organizations (HMO) and preferred providerorganizations (PPO). Other product offerings may include point-of-service plans, high deductiblehealth plans combined with health savings or health reimbursement accounts, and conventional healthplans.

• For the small and large group market, employers can contract with either an HMO or PPOto cover their employees.

• In the individual market, individuals typically purchase an HMO or PPO plan.

Regulators: California has a dual regulatory structure for its health insurance market. The Departmentof Managed Health Care (DMHC) regulates HMOs, some PPOs, as well as vision and dental plans.DMHC is housed with the California Health and Human Services Agency and reports to the Secretaryand Governor. The California Department of Insurance (CDI) regulates most PPOs and traditional FFSplans. An elected State Insurance Commissioner oversees CDI and does not report to the Governor.

Source: How Private Insurance Works: A Primer – 2008 Update. Kaiser Family Foundation. Available at:http://kaiserfamilyfoundation.files.wordpress.com/2013/01/7766.pdf ; California Health Plans and Insurers: AShifting Landscape. March 2013. California Health Care Foundation. Available at:http://www.chcf.org/~/media/MEDIA%20LIBRARY%20Files/PDF/C/PDF%20CAHealthPlansInsurersAlmanac2013.pdf


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toward value-based payments and delivery system reforms. Moreover, if large privatepurchasers and Covered California adopted a coordinated purchasing strategy to shift insurerstoward value-based payments, they could have a strong impact on payer and provider behavioracross California.

Multi-payer coalitions of this nature should continue to increase awareness of the unnecessary

spending and utilization that continue to drive up costs and motivate a coordinated movementtoward value. Landmark work by Dr. Atul Gawande and the Dartmouth Atlas found widespreadgeographic variation in health spending and utilization.48 This research also demonstrated thathigher health spending was not associated with better quality,49 which brought greater nationalattention to the need for increased value in each health care dollar

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