Physicians transitioning to risk-based payment—either by choice or by payer request—need to understand concepts that were traditionally more associated with health insurance than physician payment. These concepts include actuarial soundness and risk adjustment.

The AMA’s new webpage on payment essentials offers a nuts-and-bolts approach that physicians can use for evaluating proposals, negotiating agreements and managing revenue cycles under new payment models. These models call for physicians to stay within a specified budget while caring for a specified population under arrangements that may include shared savings, bundled payments and capitation.

This month, AMA Wire® will outline the Association’s expert advice in this vital area. Topics will include the ways forward on payment, what underlying factors can help physicians choose the path that most closely matches their needs and how physicians can establish their practice’s baseline costs for clinical services provided. First up is an overview on the transition to new payment models.

AMA Senior Attorney Wes Cleveland said it would be unwise for physicians to believe that the health care system would reverse its move away from fee for service and that, in the process, innovative new payment models would go away.

“These new systems are here to stay,” said Cleveland, who wrote several of the articles on the AMA payment essentials webpage. He added that the health system would be moving in this direction even if Congress hadn’t passed the Medicare Access and CHIP Reauthorization Act of 2015.

“This would be happening in in the commercial sector regardless of MACRA,” Cleveland said. “There was a huge impetus in the private sector to develop managed care. The development of these new payment models is motivated by the same concern—employers see the costs of health insurance going up and up and up. The new models are viewed as something of a necessity.”

Cleveland said disruptive new payment models will not work unless physicians are on board and actively providing input.

“It’s definitely going to have to be physician driven and led because they are the ones providing care and doing the heavy lifting,” he said. “If you have someone from the C-suite coming down and tell them how to practice medicine, it’s never going to get off the ground.”

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Under risk or budget-based payment systems, physicians’ income is tied to their ability to keep actual health care expenses below a budgeted allowance. That budget is based on past utilization of a particular patient population or a population with a particular condition.

Physicians need to see a health plan’s data on which its utilization budget is based and certification that the projection is actuarially sound.

When evaluating that budget, physician practices should determine:

  • Precisely the services that are to be included in the budget.
  • The volume of these services that the population to be covered by this budget will likely use.
  • The cost allocation for each of the covered services.
  • Whether the services covered by the budget can be provided within the budgeted allowance.

Physicians should insist that a health plan also provide all the factors used to risk-adjust the utilization budget. There is a long list of factors that need to be included in risk-adjustment formulas.

These include age and gender; benefit plan type and design (including co-payment or deductible levels);  localized geographic area; acute clinical stability; principal diagnosis; severity of principal diagnosis; extent and severity of co-morbidities; physical functional status; psychological, cognitive, and psychosocial functioning; non-clinical attributes, such as socioeconomic status, race, substance abuse, and culture; health status and quality of life; and patient attributes and preferences.

“Unless your utilization budget is adjusted to take into account factors that can significantly increase utilization, that budget will not likely be actuarially sound and your corresponding budget-based payment will be inadequate,” the AMA’s advice states.

Cleveland agrees. Because, without risk adjustment, there would be the unintended—and undesired—impact of threatening the financial viability of physician practices.

If these new business arrangements are going to be successful, two things need to happen. Physicians must be supplied with timely and transparent performance data and their performance needs to be risk adjusted, Cleveland said

Severity of chronic illnesses, such as diabetes and asthma, can vary widely. Treating all patients the same is one way to make a new payment model fail.

“If I have a couple of patients with real significant asthma who show up in the emergency department, I might be dinged for that, which is why accurate risk adjustment is so important” Cleveland said. “By necessity, some patients will require more treatment, so processes for evaluating utilization will require some sophistication and be nuanced enough to take in account differences in severity.”

These deals also require openness and having physicians, health professionals and payers acting as partners, according to Cleveland.

“Physicians have to be in a leadership role because they will be managing the patients,” he said, adding that they also need to receive appropriate financial reward for helping to generate savings. “It gives physicians heartburn when they do all the work to reduce costs and the health plans or other payers get all the benefit.”

Health plans also have much to offer physicians, especially with support tools such as data, an information technology infrastructure and case managers—often registered nurses—to help keep patients with chronic illness out of the hospital.

One example of how these partnerships are facilitating collaboration like never before is how some payers are embedding case managers into physician practices, Cleveland said. These patient managers act as liaisons between the clinical and payer side and also as a conduit for the transfer of data.

“There was a time when the relationship was adversarial and fraught with a lack of transparency,” Cleveland said. “If both parties can see the value each side brings, the prospect of a partnership has a lot of upside.”

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