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Obamacare 2.0: the White House's radical new plan to change how doctors get paid

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The White House is making its biggest bet yet on the future of health care — and it has nothing to do with getting more people health insurance.

The Obama administration announced Monday a sweeping new plan that will directly affect thousands of hospitals and doctors across the country. The federal government now plans to pay Medicare doctors more if they help patients get healthier — and less if their patients just stay sick. This would be done by tying 85 percent of all Medicare payments to outcomes by the end of 2016 — rising to 90 percent by 2018.

The idea is to move away from the broken and expensive "fee-for-service" system, which pays doctors a flat amount for every surgery and physical they perform — even if they do nothing to actually help a patient.

If this works, the White House hopes it will do two things. The first is improve the quality of health care in the United States, by paying doctors the most when they provide the best care possible.

Second, and perhaps more importantly, the Obama administration sees this new plan as a way to cut health care spending by dis-incentivizing unnecessary medicine. Wasteful care is a huge problem in the United States: the Institute of Medicine estimates we spend $210 billion annually on medicine that doesn't make us any healthier.

Back when the White House was drafting Obamacare, some advisors pushed for a target just like this to be included in the legislation. It would commit the federal government to moving quickly, they argued.

But the Obama administration ultimately settled on a smaller step: launching dozens of little experiments that all tinkered with doctor payment, but didn't make sweeping changes.

Today's announcement is, in some ways, the big change that some health care experts pleaded for in 2010. It's the first time the federal government has set a specific goal for moving towards a health care system that rewards value.

"It's a really big deal for the largest insurer in the United States to signal to hospitals and doctors that it intends to move aggressively in this direction," says Chas Roades, chief research officer at the Advisory Board, a hospital consulting firm.

Doctors get paid more when they deliver more medicine

The best way for a doctor to make money in the United States for decades now has simple: prescribe treatments.

The American health-care system by and large runs on what experts describe as a "fee-for-service" system. For every service a doctor provides — whether that's a primary care physician conducting an annual physical or an orthopedic surgeon replacing a knee — they typically get a lump sum.

That's how most businesses work. Apple gets more money when it sells more iPads and the Ford gets more money when it sells more cars. But health care isn't like iPads or cars. Or, at least, it's not supposed to be.

When patients buy knee replacements, for example, what they're buying isn't really knee surgery itself. What they're trying to buy is an improvement in their health.

But here's the thing: most American doctors aren't paid on whether they deliver that improved health. Their income largely depends on whether or not they performed the surgery, regardless of patient outcomes. Their patient's knee could be good as new or busted as always at the end — but, in most cases, that doesn't factor into their surgeon's ultimate pay.

This can make health care expensive, as it provides a big financial incentive to do extra scans and tests and procedures that might not, at the end of the day, improve patient's health.

There are certainly many non-financial incentives for doctors to help their patients get better; it's hopefully a big part of why they got into medicine in the first place. Being a better doctor can translate into a good reputation, and more patients, too. But those motivations are often in tension with most doctors' financial interests.

The whole system is moving towards value-based payments

There is a growing movement in health care to change this and tether payments to patients' outcomes. Patients should be able pay for the benefit they get from their knee replacement, the thinking goes, not the surgery itself.

The non-profit Catalyst for Payment Reform estimates that 10.6 percent of all health care dollars paid are paid in some type of value-based arrangement, where the patient's outcome factors into how much the health care provider earns.

Obamacare is running dozens of little experiments in the Medicare program that also try to pay doctors more when they provide higher quality care. The Obama administration estimates that approximately 20 percent of all Medicare dollars are now value-based, up from essentially zero when the Affordable Care Act was passed.

There are now penalties, for example, if a patient returns to the hospital after something was screwed up the first time. Those seem like they might be working; the number of preventable readmissions has steadily dropped since late 2010.

readmissions

The Affordable Care Act also created Accountable Care Organizations: larger groups of doctors that band together and take a lump sum of money to care for a specific group of patients, much like what the White House wants lots of providers to do under this new plan. The ACO experiment has seen mixed success but the program is growing quickly: there were 366 ACOs scattered across the country at the start of 2014.

But all these experiments have been on the margins of the American healthcare system. Until now.

The Obama administration's new plan

Health and Human Services has set the agency's first-ever target for moving towards value-based payments.

It plans to tie 85 percent of all Medicare payments to outcomes by the end of 2016 — rising to 90 percent by 2018.

A subset of those payments — 30 percent in 2016 and 50 percent in 2018 — will have to be part of what the government calls "alternative payment models." These are contracts where groups of doctors and hospitals and pharmacists — a big enough network, essentially, to cover a patients' whole spectrum of health care needs — get a lump sum of money to take care of a set number of patients.

In many of these models, doctors who provide good care for less money get to keep a portion of the leftover funds. But if they spend too much and go over budget, these hospitals and doctors are on the hook for the extra costs.

The Obama administration says that, under the Affordable Care Act, about 20 percent of Medicare dollars now go out under this alternative payment model. These new benchmarks are meant to move more rapidly towards a system where, a few years from now, these type of doctor payments are the norm rather than the exception.

"We've made some progress, but I think one of the key questions is how do you take this progress to the next level?" Health and Human Services Secretary Sylvia Burwell said at a Monday press conference. "That's what today's announcement is about."

Big hospital systems with more resources to map out strategy plans and purchase software to track patients' health may have an easier time adjusting to the new strategy.

Solo doctor offices, who haven't had as much experience working as part of a health care team, could face a larger challenge.

"We're in a period of great change and change causes anxiety," says American Medical Association president Robert Wah. "Some of those sources of anxiety due stem from the regulatory and payment system...they are frustrated with that."