The Future of Provider Payment

The right set of payment reforms could address many of the systemic problems and lead to net cost reductions of 15-25%.

Over the last several decades, public and private payors have experimented with a variety of payment mechanisms to manage rising premiums and underlying medical costs. Although there were early successes, such as Medicare’s introduction of diagnosis-related group (DRG) payments for inpatient stays, costs have continued to climb at unsustainable rates. The number of uninsured and underinsured individuals, meanwhile, has also continued to rise, turning healthcare into a major political issue. The experts at Booz Allen Hamilton believe that the right set of payment reforms could address many of the systemic problems—including misuse, underuse, and overuse of medical care—and lead to net cost reductions of 15 to 25 percent.

To manage costs, the healthcare industry is focusing primarily on demand-side levers, such as consumer-driven health plans and cost shifting within traditional plans. But demand-side levers are not enough. The industry requires dramatic restructuring on the supply side to promote innovation and competition. Consumers will not change their behavior until they can choose from a range of differentiated provider value propositions that balance cost, quality, and service. History has shown that provider payment is a key lever for prompting supply-side change in the U.S. healthcare system—practice follows payment.

As momentum builds for change, there’s broad agreement that the current fee-for-service system has failed because it often rewards providers for activity and complexity but not necessarily for the most appropriate care. Industry players—health insurance plans, employers, the government, and other stakeholders—accept that reform is warranted but are deeply divided on what shape that reform should take and how we should get there. There are two major schools of thought: The “incremental reformers” want to leverage the fee-for-service model that has evolved over decades into the mainstay of our current system, while the “fundamental reformers” want to revolutionize the underlying system to become more outcome focused and market oriented.

Booz Allen has identified four promising models for reforming the payment system but believes that one solution in particular—evidence-based, bundled case rates—offers the most promise.

Booz Allen's Joyjit Saha Choudhury, Kristine Martin Anderson, and Karl Kellner are the authors of "The Future of Provider Payment."

study posted November 28, 2007