Health Policy

Congress Is Getting the Transition to Alternative Payment Models Wrong


Alternative payment models (APMs) are a hot topic these days, and everyone seems to agree that we need to transition toward them and away from fee for service (FFS). But how should we do it?

First, let’s think about this task as government policy makers would think about it.

They would probably start by saying, “We need to find a way to give incentives to providers and payers to try out these different APMs.” This would be fairly easy to do through Medicare, so they would create some Medicare APM programs and structure them in a way that makes the benefits of joining large enough that lots of providers will want to participate.

And for the sake of uniform provider incentives, they would also want to encourage private insurer-provider diads to start using APMs, preferably ones as similar to the Medicare APM programs as possible. And so they would probably have to offer private insurers and/or providers money to do so.

These two approaches are what we’ve seen policy makers do. Medicare has a number of different APM programs. The best-known ones are the Medicare Shared Savings Program (to get providers to enter into ACO contracts with Medicare) and the Bundled Payments for Care Improvement initiative (to get providers to enter into bundled payment contracts with Medicare).

And to encourage private insurer-provider diads to start using APMs as well, they have created a couple different initiatives:

  1. Medicare joined up with a bunch of private payers to institute a patient-centered medical home program called Comprehensive Primary Care Plus.
  2. In 2015, congress passed the Medicare Access and CHIP Reauthorization Act (MACRA). A major part of this law is something called the Merit-based Incentive Payment System (MIPS). MIPS applies to all providers receiving reimbursements from Medicare, and it says they will now get a bonus or penalty based on a few criteria (quality, cost, EHR use, and quality improvement efforts) UNLESS they are actively participating in enough APMs (including qualifying programs with private payers!), in which case they are exempted from MIPS bonuses/penalties and instead they get an automatic 5% bonus.

Congress has not passed any major direct-to-private-insurer incentives to create APM programs (unless you count the Comprehensive Primary Care Plus program), but congress is influencing private insurers indirectly through providers because providers who want to get the 5% bonus and be exempted from MIPS will be pressuring private insurers to sign APM contracts with them.

So there we see the evidence of how policy makers have been thinking about this challenge of transitioning to APMs.

What should they be doing?

(At the outset, bear in mind that none of the recommendations below are incompatible with a goal of achieving universal coverage, even if these recommendations are founded upon an understanding of the principles of how healthcare markets work.)

First, policy makers need to discard the assumption that, for APM usage to increase, artificial incentives need to be created. The Healthcare Incentives Framework makes it clear that if an APM could truly offer increased value to patients, it would naturally arise in the market IF there are no barriers to it doing so. Therefore, policy makers need to be undertaking a search for barriers to APMs arising naturally and eliminate them. And only after doing that, if they want to accelerate the uptake of APMs, they could also offer artificial incentives.

Are there barriers to providers and payers implementing APMs of their own accord? Yes.

An APM is simply a contract between a provider and a payer, so let’s look at each party individually to understand those barriers.

Providers: Their incentive is to provide care of all kinds. After all, this is how they make money. And any investment that enables them to win more profit by raising their value relative to their competitors and that is not too risky will be desirable to them . . . AS LONG AS providers can be reasonably assured that patients really will flock to them as a result of their higher value, which requires patients to be able to identify their value as being higher and also have an insurance plan that doesn’t ruin their incentive to choose them. (That big caveat in the last sentence is too big a topic to cover here, but there are barriers to patients identifying and then choosing the highest-value providers, and therefore those barriers also act as barriers to providers being willing to enter into APM contracts, so they need to be eliminated as well.) Overall, from a provider perspective, if an APM contract being offered by an insurer meets those requirements of probable value improvement and acceptable riskiness, they will usually be happy to participate.

Insurers: Their incentive is to minimize the total cost of care because they are getting a fixed amount of money in premiums, so any healthcare expenditure that is prevented is money that stays in their pocket (assuming those frustrating medical loss ratio rules instituted by the Affordable Care Act don’t come into play). The problem is, insurers don’t have much control over the total cost of care. Sure, they can try to negotiate the lowest prices possible, but providers are the ones that largely determine the total cost of care because they are the ones with the ability to prevent care episodes and to determine how much care is needed for the care episodes that cannot be prevented. The point is that insurers have the incentive to reduce the total cost of care, but providers are the ones able to make that happen. Therefore, insurers need to pass along their cost-minimizing incentives to providers with these APM contracts. And insurers are happy to give money to providers to institute and run these programs if they can reasonably expect to lower the total cost of care more than what they are spending on them.

With all that as context, what specifically should policy makers be doing to transition our healthcare system to APMs?

First, make sure providers are willing to join APM contracts by reasonably assuring them that if their investments into the program successfully increase their value, they will win more market share (and, therefore, profit).* How can they do that? By enabling patients to identify the highest-value provider up front and also ensuring that they actually have an incentive to choose the highest-value provider. Again, this is too big of a topic for this post, but you can see the links above for details. The result of those changes is that it would make providers see APMs as a potential for being very beneficial not only to their patients but also their profitability, which would probably result in them even taking the lead in designing many of the APMs since they’re the ones who know best what changes in care delivery could make a difference.

Next, make sure insurers are also willing to sign on to these APM contracts. Since insurers don’t like investing a lot of money into a program and then being required to give away all the financial rewards of that investment, a crucial component of this would be eliminating the Affordable Care Act’s medical loss ratio requirements (admittedly not an easy task).

Next, lest insurers forever keep all the savings generated by those APM contracts and thereby drive up their profits to record levels, policy makers need to enhance the ability for more patients to compare the cost and quality of different insurance plans. This could be done by enabling more groups of people (such as HR executives in charge of their company’s insurance plan options) to shop for insurance plans on sites like, which lists the cost and quality of the plans side by side and also allows users to filter down to the plan types they want. That way, insurers will want to lower premiums because they will be assured that patients shopping for insurance will see that they are offering higher value (particularly in the form of lower premiums), so more patients will choose them, thus raising their profit as a result of increased market share.

Next, they need to commit government payers to sign on to other APM contracts that private insurers and providers have initiated. This would enable providers to get all insurers to reimburse them using the same contract, which would give them uniform incentives and make a huge difference in how much they are able to optimize toward that program.

Finally, if they do all that and are still unsatisfied with how fast this shift to APMs is happening, they could expand payments (artificial incentives) to join APMs. Continuing the 5% MIPS exemption bonus Medicare already implemented is a good start. But they could also offer grants to providers and private insurers to try out APMs so that hesitant parties don’t have to risk their own money doing so.

This approach is very different from the one currently being used by policy makers, and it would require changes that might be more difficult to make, but it would also not be limited by our current understanding of the “best” APMs. Instead, it would create the right environment for our healthcare system to continually shift toward better and better payment models as they are invented and refined by those who understand the issues best.

* An increase in market share does not automatically increase profitability, but this is a shorthand way of saying that it will increase their market power, which leads to increased profit either through a low-margin high-volume pricing strategy or a high-margin low-volume pricing strategy. My prediction is that, given where prices in U.S. healthcare are these days, the vast majority of providers would find that the profit-maximizing pricing strategy would be a lower-margin higher-volume option inasmuch as their capacity allows.

Taylor J. Christensen is an internal medicine physician and health policy researcher who blogs about how to fix the healthcare system at