Is There a Better Way to Pay for Healthcare than the Prevalent “Fee-for-service” Model?

Is there a better way to pay for healthcare than the prevalent “fee-for-service” model? 

The answer to this question has been pursued for years.  Recently, it has become even more urgent due to the changes in Medicare reimbursements (Hospital Readmission Reduction Act), the Affordable Care Act, and recent targets set by the Obama Administration to increase alternative payment methods in Medicare.  The goal of payment reform is to find a better way of paying for healthcare that results in better value (i.e. higher quality, lower cost, resulting in better health).  In other words, the right care, at the right time, in the right setting, at the right price.

A new discussion

Until now, experiments using alternative payment methods, with this goal in mind, have shown mixed results.

This is why the Statewide Value Committee (SVC), a multi-stakeholder group that works to assist in accelerating the improvement of the healthcare system in the state of Wisconsin, began new discussions about payment reform. Early in 2014, the Alliance, a business coalition of self-insured employers and member of the SVC, raised its hand to be part of a payment experiment. A small group was formed, along with the ThedaCare Center for Healthcare Value including myself, with the SVC leadership to lead the effort. In order to effectively understand this issue from all angles, we needed to gather open-minded, thoughtful, action-oriented people.  A critical element to the success of the project was that multiple viewpoints and perspectives would be heard, recognized, and addressed.  It was important to include those stakeholders who would challenge each other in lively discussion, so that the best ideas would be generated.  Of course, the process of convening stakeholders with these unique qualities turned out to be a lengthy one.

Statewide payment retreat

Finally, this past December we held our first Payment Reform retreat in Madison, WI. The individuals who convened, representing their organizations, spent a day and a half in search of a better payment model.  The goal was to develop a new model that would reward value not volume, benefit local and regional members, and ideally serve as a model for the nation. In addition to the conveners, the invited group included company executives, hospital finance directors, physicians, and public sector leaders, plus external (out-of-state) guests who shared their expertise, experiences, questions, and suggestions.  While seemingly on different sides of the healthcare equation table, all shared a vested interest in improving the healthcare payment system.

To facilitate the conversations at our gathering, we used A3 thinking to contemplate, plan, and devise a strategy for payment reform.  A3 thinking is a combination of problem solving processes, a storytelling method, a way of thinking, and a management system. It starts with grasping the situation – trying to deeply understand the problem to be solved.  Then we ask, “Where do we want to go? What is our target? How will we define success?”  Next, we determine the gap between current state and target state.  Where are our gaps?  What’s causing them?  What experiments can we run to prove or disprove our theories of cause and countermeasure (solution)?  Finally, we ask, “What’s the most effective countermeasure that meets our time and budget parameters? What is the plan to implement? How will we measure to ensure success? What will we do next?”

In preparation for the retreat, we developed a list of questions to get to know the group better.  We used a set of questions to gauge each member’s background, how he or she viewed the problem of payment reform, and his or her experiences with payment initiatives. The answers were compiled so that when the group convened face-to-face, time could be more effectively used to learn, discuss, and make proposals.

Payment reform examples in action

During the course of the retreat, we heard the Alliance describe its great work over the years, and how this led them to the current payment experiment. We also heard from others who have implemented alternative payment methods, including:

  • Blue Cross Blue Shield of Massachusetts and its Alternative Quality Contract (HMO contracts with payment linked to quality outcomes);
  • Integrated Healthcare Association (IHA) in California, which rewards and publicly recognizes physician organizations who are accountable for the total cost, cost trend, and resources used for all care provided to their commercial HMO/POS members as well as the quality of this care;
  • State of Minnesota and how it tiers providers to encourage consumer behavior;
  • Bellin-ThedaCare Healthcare Partners, the highest in quality and lowest in cost of all Pioneer ACOs – and the challenges it still faces with the new payment model.

Setting the target

Level-setting our own understanding, and hearing about other payment models utilized around the country was a helpful start. But what were our goals? How would the group define “success?” We knew all of our analyses and proposals would need to point back to support the target we established.  So, this ended up being a very critical conversation; one we thought we had a good handle on going into the retreat, but later, realized we needed to spend additional time on.  Discussion topics centered on questions about relative vs. absolute targets, timing, and how to achieve sustainment after the target is reached.  In the end, the group agreed on a target of 0% increase in Total Cost of Care (TCOC: measured by employer + employee share) by 2018 (three years to improve, three years to sustain).

Once a target was established, the group then reflected on what they knew, what they’d heard, and brainstormed design considerations, along with questions to consider and areas of focus. One key point that came out of the discussions was the interweaving of “payment model” and “plan design.”  We couldn’t design a payment model without thinking about the effects on the entire system of healthcare delivery processes.  We had to incorporate aspects such as how a primary care physician is selected, how consumers choose where they have elective surgeries, and what kinds of co-pays are designed into a plan. So, while the initial intent was to focus strictly on payment design, in the end, we recognized that it couldn’t – and shouldn’t – be a detached objective. We also discussed the concept of physician compensation and the impact a productivity-focused model could have on our ability to achieve the target.


The group split into work groups and simultaneously developed two different high level models. Coincidentally, both had a strong primary care focus, with the theory that a goal of preventing illness and maintaining or improving health is part of the value equation for all.

One payment model discussed was the “capitation-acting primary care focus” which included health outcome and total cost of care measures. The other model could be described as “accountable primary care with incentives,” which includes highest value specialists.  These two models create additional accountability for providers, both financially and clinically, but offer more autonomy in care management. There also was a theme of increased trust and collaboration between providers and employers, including the sharing of data so providers can have a complete picture of what is occurring in their patient’s medical life. 

Key learnings from the Payment Reform Summit: 

  • There was general agreement, which included the physicians who were in attendance, that “fee for service” needs to step aside for a more progressive payment system that rewards value.
  • Some employers appreciated and were comfortable with the concept of pay for what you use – therefore, the value proposition must be clear.
  • Data is king. Without it, a facts-based conversation is nearly impossible, and the discussion becomes opinion-based.
  • It is currently financially unsustainable for providers to move to a value-focused delivery model unless a meaningful percentage of the commercial payers in their market transition to value-based payments.

Where to next? While one segment of Alliance representation was on board, the Alliance community is much broader and must be part of the discussion. Other members, including the Alliance board, will be instrumental in adding more detail and context. Additionally, in order to truly have an impact, other groups must be part of the experiment – or somehow aligned – in order to actually influence the market.  To be effective in payment reform, we need others to join this movement both in Wisconsin and at the national level.  The work is hard, the path isn’t clear, but the future is inevitable. And this group intends to pave the way!

For more information about the work of the ThedaCare Center for Healthcare Value please visit

For more information about The Alliance please visit

Rachel Regan
Program Manager, Payment Initiatives
ThedaCare Center for Healthcare Value


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