The actuary’s role in payment reform

Spector_JulietWith the goal of more affordable medical spending, there has been continued attention to increasing the value of healthcare through arrangements in which healthcare providers and payers work together through sharing financial risk (i.e., payment reform) to better align incentives to provide quality care at more affordable prices. Although the idea of integrated delivery systems and providers taking on risk is not new, there has been a renewed focus on these value-based arrangements. It is important for stakeholders to understand the elements of these arrangements as well as some of the practical issues and impediments that have determined their past success or failure.

The Society of Actuaries (SOA) engaged Milliman to prepare this issue paper for public educational purposes. It is intended for a multidisciplinary audience, including providers1; health insurers; health actuaries; Medicare, Medicaid, and the Patient Protection and Affordable Care Act (ACA) policymakers; and those pursuing an actuarial career. This paper helps the multidisciplinary audience understand the actuary’s role in payment reform. In addition, the paper can be used by actuaries to think about key issues when pricing their employers’ and clients’ own payment reforms.

To properly implement payment reform, several stakeholders are involved, including policymakers, healthcare attorneys, actuaries, healthcare providers, coding specialists, data analysts, information technology specialists, administrators, etc. (“the payment reform team”). The actuary, an expert on risk, can help the provider understand the various risks the provider is taking when selecting a payment model. The actuary also leads the pricing exercise and helps quantify the risk, calculates the correct price for the selected payment model, and helps project and model the cash flows.

The main body of the paper, at a high level, can be broken down into the following four sections:

1. The risks and various payment models. All payment arrangements have the potential for both adverse risk as well as opportunity, depending on the circumstances. Additionally, no one payment structure is the best in all circumstances.

2. General pricing implications to think about when pricing and modeling all payment models.

3. Ten case studies of various payment models to further illustrate ideas from prior parts of the paper. The case studies illustrate the value that actuaries can add to projects for the stakeholders. They also illustrate what potential payment reform projects could look like.

4. Best practices and key takeaways observed for the various payment models.

Despite the many roadblocks payment reform faces, it appears that increased data sharing, results of decreased total costs of care and better quality, and implementation challenges shared through literature—along with the results of actual Medicare, commercial, and Medicaid programs—are propelling the momentum forward. In this paper, we have outlined the general steps and considerations for designing, implementing, and measuring results of existing payment reform models. As stakeholders become more skilled at managing the practical details of these contracts and enhance their infrastructures to collect and process meaningful quality and savings metrics for their target populations, defining the key features that hinder or help the success of payment reform models will become easier. In doing so, providers and stakeholders will refine and implement more sophisticated payment reform models to better manage costs and quality of medical care.

1The term “providers” is meant to be broad and includes any provider or organization that provides healthcare services, including doctors, hospitals, C-suite, board members, management, etc.