The framers of the ACA perceived broad provider-payment reform as the best prospect for slowing the long-term spending trend. But they needed scoreable savings, and they could ill afford to alienate backers by forcing through major payment reforms at the same time. The ACA planted the seeds for accountable care organizations (ACOs), bundled payment for episodes of care, patient-centered medical homes, and incentives for reducing readmissions. Now those seeds offer a way forward.
In site visits and interviews conducted for our ongoing qualitative research, the Center for Studying Health System Change found strong provider interest in payment reform and efforts to prepare for it, with the prospect of increasing constraint on Medicare payment rates cited as motivation. We see a combination of reformed delivery of care and broader units of payment as having the potential to allow providers to generate savings through steps that are less threatening to quality of care and access than are cuts in payment rates. More concretely, payment on the basis of shared savings or partial capitation can reward providers for delivering care more efficiently. This approach is preferable to merely paying providers less and less for business as usual.
There is a historical precedent for harsh, simple-minded cuts setting the stage for broad-based payment reform. Up until the early 1980s, Medicare reimbursed hospitals for costs incurred, subject to ceilings. The Tax Equity and Fiscal Responsibility Act of 1982 substantially tightened those limits, leaving hospitals with no upside — they could not earn a profit by reducing costs — and a growing downside for those whose costs exceeded the limits. The next year, legislation was passed, with the support of the hospital industry, replacing cost reimbursement with the inpatient prospective payment system (IPPS), with rates initially calibrated to leave Medicare outlays unchanged. Hospitals then had the opportunity to reduce costs per admission by shortening lengths of stay and to earn a positive margin in the process.
The IPPS is generally viewed as a major policy success: it encouraged hospitals to seek efficiencies, and when they found those efficiencies, it allowed the federal government to share in the savings. Should ACOs and other reforms prove effective, they will provide broader opportunities to increase the efficiency of delivery beyond shortening lengths of stay, such as managing chronic disease more effectively so as to keep beneficiaries out of the hospital in the first place. But our current challenge is more complex than the one faced in the early 1980s. Broadening the unit of payment will require reaching across different types of providers and helping to stitch together real delivery systems in places where now there are none.
