A population-based payment (PBP) system refers to a health cost control model that creates a system of budget-based financial incentives for participating providers, usually all hospitals, physicians, ancillary facilities, and other providers. Under a PBP system, participating providers assume financial risk in the provision of care to defined populations. These models contain strong financial incentives for providers to deliver well-coordinated, high-quality, and person-centered care. Similar to hospital global budgets, PBP systems replace the Fee-for-Service (FFS) incentives of existing itemized payment models but extend these incentives beyond just hospitals to all physicians and most other providers. The goal of this payment model is to create a payment system that structurally (through combined corporate ownership of different provider-types) and financially (at-risk financial incentives) integrates hospital, physician, preventive and population-based health care to reduce health care costs and promote preventive and person-based care. While hospital-based payment models can help curtail primarily hospital-based spending (approximately 31% of total US health spending), PBP payment models can be structured to cover both hospital, physician and other care encompassing 70-90% of health spending.
Theoretically, a PBP model could provide a state with the most comprehensive model for overall cost control, covering a majority of healthcare services and provider types and placing participating providers at-risk financially for delivering cost-effective and high-quality care to patients attributed to the model.
Three key features characterize PBP models:
- they are prospective, with payments to all providers constrained by an overall budget and requiring providers to take on risk for costs of care that exceed the budgeted amount;
- they require patient attribution, a provider organization is accountable for the cost and quality of care delivered to a specific population; and
- they allow provider organizations to proactively manage care and costs for the covered population.
These models also encourage providers to develop integrated delivery networks of care, both structurally– through combined ownership of different types of providers–and financially–through shared-risk payment structures. Under well-developed and financially/clinically integrated PBP systems, a majority of providers in a state will be given strong financial incentives to integrate and coordinate care to produce lower-cost and higher-quality outcomes for patients attributed to the model. Similar to other budget-based payment models (e.g., global hospital budgets and accountable care organizations), PBP systems hold participating providers financially accountable for lowering the cost and improving the quality of care for the patients they serve.
PBP payment systems can be implemented on a payer-specific or state-wide all-payer basis. If a state wanted to develop a state-wide, all-payer approach, a state could follow the Vermont approach by creating a state-based or independent corporate organizing entity that would receive prospective payments from Medicare, Medicaid and the participating commercial insurers on a per member per month basis for each beneficiary attributed to each payer specific ACO. This organizing entity then would create the system of budget-based financial incentives which could hold providers at-risk financially for hitting spending targets and outcomes. This internal financing structure would first attribute patients to primary care physicians (PCPs), which enables the development of health care spending targets or budgets encompassing most all health care services and payments associated with each PCP’s attributed patients. The organizing entity would then create risk-sharing arrangements with the individual PCPs and PCP groups. Additionally, the organizing entity could create spending targets or budgets for other provider entities, such as hospitals. Because hospitals are larger and able to manage and absorb larger levels of financial risk, the organizing entity could reduce the level of financial risk it faces by allocating a large portion of financial risk for meeting total health care spending targets to participating hospitals. Thus, this model involves the creating of financial accountability and risk sharing structures that ideally will align the financial interests of participating payers, physicians, and hospitals.
PBPs can also be created by commercial insurers, such as Kaiser Permanente or a state’s Blue Cross plan, and involves the development of a provider organizational and financing structure. For PBP models involving specific commercial insurers, a state could encourage or pass legislation mandating that one or more large commercial payers develop and operate a PBP payment model. The commercial payer could then develop prospective budgets, or spending targets for each PCP or PCP group, based on the historical health spending for care to these attributed patients. In future years, the insurer and the PCPs can share the financial risk for meeting these prospectively established spending targets/budgets. Because PCPs and PCP groups are small and limited in the level of financial risk they can manage or absorb, the sponsoring commercial payer generally would assume the vast majority of the financial risk associated with meeting these annual budgets/spending targets. The commercial payer would then “underwrite” (assume the financial risk for) all or most losses incurred by spending that exceeds the prospectively established budgets and/or provide risk-sharing arrangements with participating PCPs involving limited levels of financial penalties for budget overruns and more substantial financial rewards for reduced spending relative to budget. These systems also generally provide additional financial incentives for PCPs improve the quality of care for and be more attentive to the health care needs of their attributed patients.
Vermont’s All-Payer accountable care organization (ACO) is one such model. The model links Medicare, Medicaid and commercial ACO models under the umbrella of one entity, the state’s “OneCare” organization. Vermont One Care entity receives PBP payment from Medicare, Medicaid and the largest commercial insurer in the state – Vermont Blue Cross. Under existing ACO arrangements, the PBP attempts to link providers both financially and clinically under the budget-based financial and quality of care incentives that ACOs face to lower costs and improve health care outcomes. Although, the Vermont model is intended to emulate the financial and clinical incentives and care delivery features of a private and highly integrated corporate entity, such as Kaiser Permanente, the individual payer ACOs involved in the Vermont model are only virtual organizations and lack the high level of financial and clinical integration achieved by a private corporation, which owns its own hospitals, physicians and other key providers and thus can mandate participation and subject these providers to very strong financial incentives to lower cost growth and improve care quality.
The Vermont experience demonstrates the challenges associated with developing a PBP model, including: 1) developing the required level of clinical and financial (through risk sharing) integration necessary to be successful through the use of an ACO structure; 2) ensuring the participation of all hospitals, physicians, other providers (such as Federally Qualified Health Centers) and payers, particularly ERISA plans, which may be exempt from any state mandate to participate in the model; and 3) the difficulties of a voluntary model in which core participants may exit if they determine the model does not serve their strategic and financial interests.
Other examples of state-based PBP models for specific payers include Oregon’s Medicaid global budget program which reported savings and some improvements in quality during the first two years, BlueCross BlueShield of Massachusetts’ Alternative Quality Contract (AQC) which attributes commercially insured patients to primary care physicians and holds these providers partially accountable for the total cost and quality of the care they deliver to their attributed members (with BlueCross retaining the large share of financial risk) and Kaiser Permanente, which as noted has created a high integrated financial and care delivery model under its corporate ownership of hospitals, physicians and other providers and an extensive system of risk-sharing and care integration arrangements across the Kaiser health plan and owned providers.
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