A map for navigating the new landscape of federal performance-based healthcare payment schemes.

If health reform offers a map of where healthcare is headed, it would appear policymakers have recognized that trying to control costs by negotiating payments alone has reached the end of the road.

As a result, new public-payer schemes are driving providers away from fee-for-service and toward payments tied to improved outcomes. Providers are under pressure from all sides to do more with less, and to coordinate care, data, and results. In this environment, pharmaceutical manufacturers will increasingly find access to their products challenged by providers trying to contain costs as they care for patients under capitated payments and pay-for-performance schemes.

As the rules of the road change, the pharmaceutical industry needs to adapt commercial strategies to align with their customers’ objectives and incentives—so that providers, manufacturers and payers can continue to deliver quality care to patients and remain financially viable.


The Patient Protection and Affordable Care Act (ACA) is chock full of new payment models and laboratories that portend an accelerated shift away from fee-for-service payments, which pay more for more, regardless of results. Following are several examples of the Big Squeeze occurring in healthcare, schemes that pay less for more, tied to results, which will affect providers, manufacturers and payers in the months and years to come.

Expanding Episodes of Care under Capitated Payments. The ACA establishes a Medicare pilot program to develop a capitated payment system covering all hospital services—in-patient, physician out-patient, and post-acute care—for episodes of care that start three days before hospitalization and end 30 days after discharge. The pilot program will be expanded if costs are reduced while maintaining equal or better quality of care.

Under Medicaid, demonstration projects would: pay bundled payments for episodes of care that include hospitalizations; make global capitated payments to safety net hospital systems; and allow pediatric medical providers organized as Accountable Care Organizations (ACOs) to share in cost savings.

Accountable Care Organizations. The Centers for Medicare and Medicaid Services (CMS) has published a proposed rule on ACOs and the Medicare Shared Savings Program. An ACO is a group of healthcare providers that agree to coordinate the care of Medicare beneficiaries to achieve better care for individuals, better health for populations, and lower growth in healthcare expenditures. (Compared to a benchmark expense established by CMS, ACOs that meet quality standards and achieve savings on the costs of care for Medicare beneficiaries assigned to the ACO will be eligible to keep a share of the savings.) Participating providers would continue to be paid on a fee-for-service basis, but would be eligible to earn a bonus under the Shared Savings Program. Only Part A and Part B expenses would be tracked. Additionally, ACOs would be responsible for tracking and reporting on 65 performance metrics across five domains: Patient/Caregiver Experience; Care Coordination; Patient Safety; Preventive Health; and At-Risk Population/Frail Elderly Health.

For the first two years of a three-year commitment, a participating ACO could elect to bear no financial risk, and potentially earn a smaller share of savings compared to a benchmark. To earn a larger share of cost savings, the ACO would have to bear some risk to repay losses to CMS if costs exceed the benchmark. After two years, every ACO would have to bear the risk of repaying losses.

The emergence of ACOs could transform care for Medicare beneficiaries by offering incentives for providers to deliver better outcomes at lower costs. The model could have ripple effects on the commercial market. On the other hand, up-front investments and financial risk may confine ACOs to a niche segment of the provider landscape. Which scenario will occur should become clearer in the coming months as providers assess the potential risks and rewards of becoming ACOs. If the benefits outweigh the risks, and the ACO model takes off, there could be significant implications for manufacturers of both oral and infused drugs.


Medicare Payment Reductions and Restructuring. The ACA includes several key payment reductions for Medicare and Medicare Advantage (MA). These include a reduction of Medicare payments to hospitals for preventable readmissions and for hospital-acquired conditions, and a reduction of MA payments, with carrots and sticks added for performance. MA plans facing cuts will be scrambling to qualify for bonuses to make up for lost revenue.

Payments to MA plans will be restructured by setting payments to different percentages of Medicare fee-for-service rates, with higher payments for areas with low rates and lower payments for areas with high rates. Phase-in for this revised payment schedule will begin in 2011 and last for three years for plans in most areas, and last as long as four to six years for plans in other areas. In addition, there will be payment adjustments for coding practices related to health status of enrollees. Beginning in 2012, bonuses will be in play for plans receiving four or more stars (based on the current five-star quality rating system for MA plans) with qualifying plans in qualifying areas eligible to receive double bonuses.

Adding further financial stress, MA plans will be required to operate with a medical loss ratio (MLR, the percentage of premiums expended on medical care) of 85 percent or more. Plans with lower MLRs will have to remit payments to the CMS, beginning in 2014, and face suspension or termination from the program for failing to meet the MLR in subsequent years.

The ACA also mandated a new value-based purchasing program for hospitals under Medicare. Under new rules published recently by CMS, Medicare will cut payments to hospitals by one percent and use that money to create a bonus pool. Hospitals that do better than average on a variety of measurements, or show the greatest improvement from the previous year, would earn bonus payments, totaling $850 million in the first year. The bonus pool would increase to two percent of Medicare payments in October 2016.

The bonuses initially will be paid largely according to how hospitals perform on 12 clinical-care measures, including: giving anti-clotting medication to heart attack patients within 30 minutes of arrival; providing antibiotics to surgery patients just before an operation; and taking steps to avoid blood clots in surgical patients. The rest of the bonus payments will be determined by how patients rate hospitals on their experiences according to hospital-conducted patient surveys.


New Entities. The ACA creates several new entities for a variety of purposes. These include an Innovation Center within CMS to test, evaluate, and expand different payment structures and methodologies in Medicare, Medicaid, and the Children’s Health Insurance Program. The Innovation Center aims to reduce program expenditures while maintaining or improving quality of care. Payment-reform models that improve quality and reduce the rate of cost growth could expand throughout these programs.

The ACA also creates the Independence at Home Demonstration Program, which will provide in-home, primary-care services to high-need Medicare beneficiaries. Participating teams of health professionals will share in any savings—if they reduce preventable hospitalizations, prevent hospital readmissions, improve health outcomes, improve the efficiency of care, reduce the cost of healthcare services, and achieve patient satisfaction.

CMS Dialysis Bundled Payment. Apart from the ACA, CMS recently expanded its bundled payment system for dialysis to include all services and drugs, oral and infused, related to dialysis. The Medicare end-stage renal disease (ESRD) program is the largest expense in the Medicare budget; ESRD costs the program over $25 billion per year. Medicare is the largest payer by far, because all patients with ESRD wind up in Medicare. The shift to a totally capitated payment system puts enormous pressure on dialysis providers to control costs.

At the same time, CMS is setting quality standards dialysis providers must meet. In January, CMS issued a final rule that establishes performance standards for dialysis facilities and provides payment adjustments to individual ESRD facilities based on how well they meet those standards. The new rule also establishes a scoring methodology and incentive payment structure under the new End-Stage Renal Disease Quality Incentive Program, which provides for public disclosure of individual dialysis facility performance scores. CMS began paying these facilities under the new methodology as of Jan. 1, and the new quality program will apply to payments on or after Jan. 1, 2012.


While healthcare reform has laid out the road map to the future, much planning and construction lie ahead. To survive and flourish in this new reality, the pharmaceutical industry will need to adapt and refine its commercial strategies for marketing to providers that are held to improved clinical outcomes and lower costs. Increasingly, providers will respond to messaging and real world evidence from pharma that demonstrate how their products address the challenges providers are wrestling with as a result of payment reforms:

  • Inpatient drugs must demonstrate how they will reduce costs, improve outcomes, and help avoid hospital acquired conditions and readmissions;
  • ACOs will want to see how drugs prescribed by participating providers will reduce costs under Parts A and B within a one-year timeframe so that ACOs may earn bonuses;
  • Dialysis providers will want to know how oral and IV drugs prescribed to ESRD patients can reduce the cost of dialysis while maintaining measured patient outcomes;
  • Hospitals, ACOs, and dialysis centers will want to know how drugs improve their respective performance scores that affect reimbursement, including how patients rate their experiences.

Manufacturers should expect providers in various sites of care to have different concerns than they have in the past. Addressing those concerns is not a question of messaging alone, but of developing the content in clinical trials and real world evidence. A product’s value proposition will have to be demonstrated and supported in ways that matter to providers caught in the Big Squeeze.

  • Kevin O'Leary

    Kevin O'€™Leary is a senior principal at IMS Consulting Group, part of IMS Health. He is responsible for business development, thought leadership, client relation- ships, and delivery of work for engagements with pharmaceutical manufacturers.


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