Tuesday, 15 March 2016 21:13

Making the Move from Fee-For-Service to Pay-For-Value: Industry Support Key to Success

Written by Pam Jodock


The transition from fee-for-service to pay-for-value has been referred to as one of the greatest financial challenges the U.S. healthcare system currently faces. Although the change is expected to occur over an extended period of time, it is anticipated there will be an initial phase during which provider revenues may decrease as the industry determines appropriate definitions of bundles and payment levels. At a time when the average hospital operating margin hovers around the 2-percent mark, there is little room for error in understanding the cost of doing business and pricing products and services accordingly. 

With the Centers for Medicare & Medicaid Services (CMS) announcing aggressive goals for transitioning Medicare hospitals and providers from fee-for-service to pay-for-value payment models, and commercial health insurers following suit, HIMSS wondered how well-prepared for the change provider organizations consider themselves to be. This transition will be extremely complicated. Most of the industry’s legacy revenue cycle technology was designed to support a fee-for-service environment and does not include the functionality required to support a value-based payment system. This is a critical point in time, not only to ensure the successful transition from one payment model to another, but, if we are to realize the third goal of the so-called triple aim – reducing healthcare costs – we must consider how we administer this change in the most efficient and cost-effective way.

The first annual HIMSS Healthcare Cost Accounting Survey was designed to check the pulse of provider readiness for value-based payment models and identify ways in which HIMSS and others can help providers manage this major challenge in the most effective, least disruptive ways possible.


In January 2015, U.S. Department of Health and Human Services (HHS) Secretary Sylvia Mathews Burwell announced that by the end of 2016, a total of 30 percent of all Medicare payments made to hospitals and physicians would be based on pay-for-value payment models – and that by the end of 2018, that number would be increased to 50 percent. In addition, Secretary Burwell said that the remaining fee-for-service payment arrangements would be adjusted so that 85 percent of Medicare hospital payments would be tied to quality or value by the end of 2016, with an increase to 90 percent by the end of 2018. The announcement of these ambitious goals was quickly followed by the creation of the Health Care Payment Learning Action Network (the LAN) and the Health Care Transformation Task Force, national collaborative efforts aimed at expanding the adoption of value-based payment models beyond Medicare and into the private sector. 

The LAN is a private-public partnership with a stated goal of allowing a diverse group of industry stakeholders (including payors, providers, employers, purchasers, states, consumer groups, and others) to discuss, track, and share best practices on how to transition to alternative payment models, including accountable care organizations (ACOs) and bundled payment arrangements. The stated goals of the group are to:

  • Serve as a convening body to facilitate joint implementation of new models of payment and care delivery;
  • Identify areas of agreement around movement toward alternative payment models and define how best to report on these new payment models;
  • Collaborate to generate evidence, share approaches, and remove barriers;
  • Develop common approaches to core issues such as beneficiary attribution, financial models, benchmarking, quality and performance measurement, risk adjustment, and other topics raised for discussion; and
  • Create implementation guides for payors, purchasers, providers and consumers.

The Health Care Transformation Task Force is a private industry effort that includes some of the nation’s largest commercial health insurers, providers, and purchasers. Members of the group have voluntarily committed to having no less than 75 percent of their business operating under value-based payment models by no later than January 2020. The stated focus of the Task Force is to create or enter into contracts that “successfully incentivize and hold providers accountable for the total cost, patient experience, and quality of care for a population of patients, either across an entire population over the course of a year or during (a) defined episode that spans multiple sites of care.” The initial focus will be on ACOs and bundled payment models. Deliverables include: 


  1. Policy recommendations for CMS, focusing initially on improving patient attribution, financial stability, quality measurement, and patient engagement.
  2. Publishing best practices for ACOs, addressing improving patient attribution, financial stability, quality measurement, and patient engagement. 

Bundled Payments

  1. Conducting an environmental scan of all bundled payment approaches being used in the private and public sectors.
  2. Developing evaluation criteria for measuring the open source and proprietary bundle definitions.
  3. Developing a KLAS-like comparative profile of current bundled payment options.

All of these endeavors have a shared goal of moving the nation toward achieving the Institute of Healthcare Improvement’s Triple Aim of:

  • Improving the patient experience (including quality and satisfaction);
  • Improving the health of populations; and
  • Reducing the per-capita cost of healthcare.

The combination of these efforts demonstrates that much consideration is being given to the requirements and expected outcomes of alternative payment models. However, little attention seems to be being paid to the infrastructure necessary to meet these requirements or effectively demonstrate outcomes. 

A September 2014 report by the Commonwealth Fund found that 25 percent of hospital spending in the U.S. is related to administrative expenses – a whopping $200 billion. Further, the study found that between 2000 and 2011, hospital administrative costs in the U.S. rose 25.3 percent, going from consuming 0.98 percent of our gross domestic product in 2000 to 1.43 percent in 2011. One of the major components of hospital administrative costs in the U.S. is the complexity involved in working with multiple payors with varying payment rates, rules, and documentation requirements. As we consider leveraging alternative payment models to improve the quality of care received in the U.S., we must be mindful of the administrative costs associated with doing so. For example, consider the administrative costs associated with monitoring multiple definitions of “quality” or “value,” or the administrative cost of tracking and billing all of the activities involved in an episode of care when the definition of what is involved in that episode of care is based not on a national standard, but on the entity paying for it.  

Further complicating matters for providers is the potential revenue impact of the move from fee-for-service to pay-for value. According to information released in the 2013 American Hospital Association Annual Survey Data, prepared by Health Catalyst, the years between 1990 and 2010 saw a dramatic shift in revenue mix for hospitals. In 1990, a total of 42 percent of a hospital’s annual revenue was attributed to commercial payors; by 2010, that had dropped to 35 percent. During that same time period, the percentage of revenue from Medicare increased 3 percent: something hospitals expected because of the aging of baby boomers. What hospitals didn’t expect was the shift from commercial payors to Medicaid. In 1990, Medicaid was responsible for only 10 percent of a hospital’s revenue; in 2010 that increased to 16 percent. 

According to Health Catalyst, this trend is expected to continue, driven in part by the Medicaid expansion provided for in the Patient Protection and Affordable Care Act. This change in payment mix has a direct impact on a provider’s bottom line – in 2012, the average Medicare hospital margin was -5.4 percent. During this same period the commercial healthcare market saw a dramatic increase in the number of high-deductible health plans (HDHP) being purchased. According to the National Center for Health Statistics, 37 percent of individuals under the age of 65 who had health insurance in 2014 were enrolled in a HDHP, and only a third of those individuals also had a health savings account. 

Historically, 50 percent of patient financial responsibility goes unpaid. It is unclear how patient financial responsibility will be structured under a pay-for-value benefit plan. What is known is that during this initial stage of pay-for-value, every penny of revenue will count; it will be critical for providers to find a way to collect payment as early in the episode of care as possible. One way to address this will be to offer price transparency at the point of care so conversations may be had early in the process regarding how much the patient will owe and how and when they will pay. Central to these conversations will not only be information about various treatment options, a comparison of their efficacy, and the costs associated with each, but patient access to financial counseling when these costs exceed the patient’s ability to pay.

Adding insult to injury, in 2013 hospitals reported a decrease in their operating margins despite an increase in revenue. Although revenue increased by an average of 5 percent, expenses increased at an average rate of 7 percent, the result of technology upgrades, higher salary and benefit expenses, higher supply and drug costs, and provider taxes to fund the Medicaid fee programs. 

Given these economic conditions, it will be critical for providers participating in alternative payment models to understand their cost structure in complete real-time detail. They will need to be prepared to evaluate their expenses on a frequent basis, looking for every opportunity to reduce costs and improve operating margins. And they will need to have revenue management processes in place that address the increasing role consumers play in their revenue stream to ensure that they are maximizing all payment opportunities. 

HIMSS Healthcare Cose Accounting Survey

The responses to the Survey clearly indicate that although hospitals and provider organizations are willing to embrace value-based payment models, few believe that their organization is well-prepared to do so. Nearly 50 percent of respondents currently participate in an alternative payment model, but only 3 percent believe their organization is really ready to make the change. Healthcare providers and delivery systems are looking to HIMSS and other professional associations and industry groups to help them develop a consistent approach to the terminology/definitions and business processes and tools used to support these new payment models and to help build the technical infrastructure necessary to facilitate the underlying activities. They are specifically interested in:

  • Tools to track and evaluate quality of care;
  • Better communication between disparate providers;
  • Consistent definition of quality by specific type of disease; and
  • A consistent approach to:
    • Cost accounting;
    • Establishing price;
    • Sharing pricing information with patients; and
    • Managing the exchange of clinical and financial information between all entities involved in a particular episode of care.


Over the next several months, HIMSS will prioritize provider needs according to the results of the survey, share our findings with policymakers and healthcare officials, and collaborate with strategic partners to support these needs. This summer HIMSS will launch a task force aimed at understanding and supporting the development of tools and infrastructure to support emerging alternative payment models. The task force will publish thought leadership articles, deliver educational sessions, and gauge the progression of industry readiness for pay-for-value through annual surveys that update and trend the HIMSS Cost Accounting Survey data referenced in this year’s report. If you or someone you know would be interested in participating in these efforts, please contact Pam Jodock, senior director of HIMSS, at This email address is being protected from spambots. You need JavaScript enabled to view it.

Providing this level of leadership and support to those being held accountable for achieving the goals of payment reform – improved quality of care for specific populations, reduced per-capita healthcare costs, and improving the patient experience – will ensure a smoother transition and greater opportunity for success. Adopting a consistent approach to clinical requirements, business processes, and rules of engagement will guarantee that cost savings achieved on the clinical side are not negated by additional expenses being incurred on the administrative side. 

About the Author

Pam Jodock has more than 30 years of health care experience.  As the Senior Director of Health Business Solutions for HIMSS, she is responsible for the overall management and strategy development for HIMSS Health Business Solutions initiatives, which include Revenue Cycle Improvement; ICD-10 Implementation/Operationalizing; Clinical and Administrative Implementation of Alternative Payment Models; Clinical and Business Intelligence; Administrative Simplification; and Coding Integrity.  Pam is a graduate of Eastern Oregon University with a BS in Politics, Philosophy and Economics.

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Last modified on Tuesday, 15 March 2016 21:21