Arkansas' Unprecedented Use of Performance Pay to Contain Health-Care Costs

The state is making an unprecedented effort to cut health costs by instituting performance pay into its health-care industry and paying doctors based on quality instead of quantity.
by | July 1, 2013 AT 3:00 AM
Bethany Mollenkof/MCT

What happens to a state’s health-care industry when Medicaid providers and private insurers agree to overhaul their payment policies to start reimbursing doctors based on quality instead of quantity? Arkansas is about to find out.

The state is making an unprecedented effort to bend the health-care cost curve -- a problem that's taken a backseat as the nation has focused on the Affordable Care Act (ACA). Arkansas has been at the center of the ACA conversation with its game-changing plan for a privatized Medicaid expansion that several Republican-led states considered. A little-noted element of that plan is that any insurer on the state’s new insurance marketplace will be required to participate in a new initiative to implement performance pay statewide.

It’s arguably one of the most exciting experiments yet aimed at cutting Medicaid costs, according to health-care professionals.

“It’s something that every Medicaid agency wants to be able to do,” says Matt Salo, executive director of the National Association of Medicaid Directors (NAMD).

“In this country, we have talked for a long time about health-care reform," says Andy Allison, Arkansas’ Medicaid director and president of NAMD. "The ACA was really health insurance reform. This is true health-care system reform.”

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Here’s how it works: For specific instances of care (i.e. a pregnancy, heart attack or hip replacement), the state has created official standards for how much it should cost to treat the entire episode, taking everything from doctor visits to hospitalizations to prescription drugs into account. The state will also identify the principal health-care provider responsible for an individual episode.

Providers will still be paid as they are now (i.e. fee-for-service), but the state will track each provider’s costs for these cases. At the end of the year, the principal provider will be evaluated based on how their average costs compare to the state's standards. If their average costs are lower, they’ll be paid a bonus; if their costs are higher, then they’ll have to pay money back to the state; and if their costs are about average, then nothing happens.

It’s not just the state Medicaid program that will be paying for performance under this model. The state’s private insurers, Blue Cross Blue Shield and QualChoice, have agreed to do the same thing. That means, except for Medicare, Arkansas’ entire health insurance sector is going to be paying for quality instead of quantity.

“We had the idea that if we could create similar incentives and similar expectations, then we would have a better chance of putting enough volume behind it to make changes in behavior,” says Steve Spaulding, chief operating officer at Arkansas Blue Cross Blue Shield. “We believe there's plenty of money in the system to provide very good health care. What we have to do is spend the money better.”

Getting Providers On Board

For the Medicaid program, it was an idea born out of necessity. Arkansas' program faced a $400 million shortfall in FY 2013, and everybody involved knew they had to get costs on a sustainable path for the long term. The private insurers also saw an opportunity to keep their premiums at a reasonable level with other reforms coming under the ACA.

Really, the only group with something to lose was the providers. For the first time, they would be held accountable for how much their work cost. State officials brought them into the planning process early on, but there have still been some hiccups.

For example, the original plan was for the principal providers to be paid a prospective sum for an episode that they would either keep or pay back to the state, depending on how their costs compared with the state's standards. But providers objected because Arkansas has a very decentralized and nonintegrated health-care system with more individual doctor practices and fewer large conglomerates. Asking providers to haggle over their payments before any services had been performed might not be a good idea because it could hinder cooperation and distract from care, they argued, so the state switched to the retrospective model now in place.

“We've been careful not to say that we endorse this model, but we've also been quick to say that we're going to be involved in its development,” says David Wroten, executive vice president of the Arkansas Medical Society. “We knew something was going to be done, so we wanted to be at the table.”

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Things still aren’t perfect in the provider community’s eyes -- for example, private insurers reimburse hospitals at significantly different rates, making the total cost of care different depending on which hospital a patient is being treated at and who’s paying -- but the program is underway. After analyzing historical data, the state and the insurers set the new standards, the feds signed off on the plan, and in October of last year, doctors started to be evaluated on their performance in three episodes: upper respiratory infections, late pregnancies and ADHD. Two more episodes --congestive heart failure and total joint replacement -- were added in February.

But while the initiative is exciting, NAMD's Salo notes that it's only been applied to a relatively small slice of the overall health-care sector and Medicare has yet to participate, leaving the state’s biggest payers on the sidelines. “How much are they really going to move the needle using just these episodes?”

Indeed, it’s still too early to say exactly how much the initiative is impacting Arkansas’ health-care spending; initial projections said the Medicaid program could save as much as $4.4 million in FY 2013 and another $9.3 million in FY 2014. The state's Medicaid director, however, says that internal estimates show that the state’s overall health-care spending has been flat since the program launched. That would be a significant win, he says, because 0 percent actual growth versus 6 percent projected growth equals $250 million in savings.

And because the performance payment structure can be expected to hold costs down indefinitely, if those estimates prove accurate, that’s money that Arkansas can expect to save every year going forward.

“This is not artificial. That money is now out of our base,” Allison says. “It does not take very long to have a profound impact if our state or if our country can make the decision to do this.”

Checking Up on Health News: links to stories you may have missed from around the Web

  • Michigan has become the center for one of the more interesting Medicaid expansion debates. But as Gov. Rick Snyder considers calling a special session to pass a bill, the Associated Press reports that they have a problem: New carpeting
  • A new law passed by Congress last week is putting the squeeze on what kinds of food can be sold at public schools, according to Bloomberg.
  • A good rundown of the challenges facing health exchange open enrollment, which is now less than 100 days away, from Kaiser Health News.
  • Following up on a previous health letter, 18 mayors want the Obama administration to ban people from buying soda with food stamps, the Philadelphia Inquirer reports.
  • Won't spoil the twist, but this Bloomberg piece details how far one hospital was willing to go to increase its reimbursements from Medicare and Medicaid.
  • The labeling of foods with genetically modified ingredients is likely to be a bigger issue in coming years, and advocates scored a recent victory when Maine became the second state to require it, Mother Jones reports.