Changing the Healthcare Landscape: Payers’ Role in Delivering Change

In this blog series and companion eBook, Aligned Incentives: How Employers, Payers, and Providers Can Partner to Fix Healthcare, we unpack the role each of these sectors must play to help create the sustainable healthcare system fixes capable of renewing the U.S.’s reputation as one of the most innovative, effective, and affordable healthcare delivery systems in the world.


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All three sectors can drive improved healthcare system value, but they also cannot do it alone. In this series, we examine what the health system needs from each sector, what each sector needs from the health system, and how together they can chart a path forward to change healthcare for the better. 

In Part I of this series, we explored the role that employers play in delivering healthcare transformation and the associated challenges and opportunities they have in this role, including battling the inherent 10+% premium increases each and every year. Now, we turn our attention to the sector of the healthcare industry that is responsible for pricing the premium increase.

Payers’ Role in Delivering Change

What do payers need from the health system? Willing partners. Health plans cannot innovate by themselves. They need the commitment and participation of partner employers and providers to deliver meaningful change through their products and programs.

What does the health system need from payers? To break the fee-for-service status quo and lead the transition to a value-based system. To do this, insurers must be aware that it will be especially difficult for providers of healthcare services to make the necessary care model and associated administrative changes—unless they (insurers) first lead the way with payment models that support that change.

It is a known industry data point that health plan members are more than twice as likely to trust their providers over their insurers. It can be easy to downplay the role the health plan has in delivering innovation in the industry by over-simplifying their role as the administrative and intermediary “middle step” between employers and providers. But this really couldn’t be further from the truth. Providers respond to the incentive structures baked into the insurer’s products, and employers entrust their employees’ benefits to a health plan partner in order to access the plan’s network of providers' contracts. As a result, one might argue that this sector is where the biggest levers for transformation reside.

I spoke with Kristie Putnam, who at the time was VP for Provider Partnership Innovations at Regence Blue Cross (a regional health plan) and has since transitioned to the role of market president for Agilon Health, a company-focused on partnering with providers to lead the transition to value-based healthcare. As Kristie put it, the concept at the core of health plan innovation is, "This idea that we, as an industry, need to move away from a fee for service payment model that rewards volume, to one that rewards value."

Why the Fee-for-Service Cycle Must Be Broken

As discussed in the series introduction, misaligned incentives drive much of the inefficiency in the healthcare system. Fee-for-service healthcare has already been underlined by Kristie above, and elsewhere in this series, as a key source of flawed healthcare incentives. Let’s go a little deeper on this concept, and dig into why fee-for-service is often identified as a root cause of industry problems. 

A vast majority of healthcare providing organizations receive most of their revenue from traditional fee-for-service models, and nearly half of these organizations receive over 75% of their revenue from a fee-for-service model. 2 This means that while providing services, providers track and bill for every encounter, supply, diagnostic, and dose.  Those codes are then billed out as facility fees and professional fees. The outcome is predictable: when you bill for every little thing you do, you are incentivized to do more. This isn’t to say that individual providers are out to milk every encounter for the billable service they can provide. In fact, it is almost certainly fair to say that most health professionals do not operate this way. But these incentives must have subconscious impacts, and more crucially, they influence how we build our health systems; which programs we invest in, which skills we develop, how we reward work, and which services we promote.

The work to be done

If payers are to take the lead in driving value in healthcare, they must first and foremost focus on properly realigning incentives. Let’s look at a couple of business and payment models deployed in service of incentive alignment. 

Vertical integration of payers and providers. While vertical integration comes in many forms across any industry, vertical integration in this context refers to a business model in which both a payer and provider integrate with a shared bottom line. An arrangement like this, the thinking goes, can align incentives if the organization that owns the delivery system also owns the financial risk for care delivered to members. When those two conditions are met, that organization is more likely to develop different care models that incentivize lower utilization (cost), while optimizing patient outcomes. A similar dynamic is also trending upward around the country—with an increase in vertical integration between payers and retail pharmacies.

The thinking goes: if the system benefits from keeping people healthy, rather than treating them when they are sick, everyone wins. Since 2010, 40+ provider systems have formed new health insurance companies or acquired existing health plans.  Health systems like Kaiser Permanente have leveraged a vertically integrated business model like this to drive value to members for decades. But this is obviously a tremendous organizational transformation for any payer or provider to take on, and there are fair criticisms of this business model and some of the organizational values and outcomes it promotes, as well as potential anti-competitive concerns. Optimally, this model would look like proactive care teams seamlessly coordinating a patient throughout their healthcare experience. Opposite of that, it can look like rationed care, cost-cutting for the sake of cost-cutting, rate boosting for the sake of rate boosting, and/or failure to drive cost savings that substantially make their way back into member premiums.

This form of vertical integration has been implemented in numerous ways: from (1) a health system starting a brand-new health plan, to (2) mergers and acquisitions between health plans and health systems, or (3) a PPO or ACO growing and transitioning into a newly licensed insurance company. Lately, joint ventures are becoming more popular to accomplish the goals of vertical integration. This is because compared to the other methods, the joint venture shortens the time to form a company, brings its products to market faster, requires less health system capital, and can limit operating losses.

So then, aside from a fully integrated business model, which payment models and innovation programs are most promising today?

To answer that, let’s look at some of the core components of value-based programs and the strategies they deploy to engage primary care and specialty care providers. Value-based payment models introduce disruption to the existing fee-for-service model in a few key ways.  

1. Retrospective. Many programs leave the existing fee-for-service revenue cycle untouched, preferring instead to have a “true up” following some sort of performance period. For example, this can be used in a primary care-focused medical home model. This model assigns primary responsibility for a member to an attributed provider and provides an incentive to that provider to proactively manage that patient’s care in a way that keeps the patient healthy and decreases their utilization. Specialty care-focused programs often leverage a similar true-up model, which can be applied to a related bundle of health services and incentivize improvements on historical performance, expressed as a target price for that bundle.

2. Prospective. Often incorporated under some sort of Center of Excellence model, prospective pricing for a specific service often results in a close relationship between a provider organization and a payer (and/or employer) for the preferred delivery of that specific service. An early example came in 2010, when Lowe’s and the Cleveland Clinic agreed on fixed prices for specific cardiac care services which included various concierge services and travel arrangements. Models like this clearly involve some significant work in benefit design and the development of new health plan concierge capabilities that serve to incentivize members to go out of their way to seek services at the preferred Center of Excellence. And yet, it’s a viable option.

3. Capitated. This model involves an upfront pricing of all healthcare services that a specific population of patients will receive in a defined time period. It also involves purchasing ALL of the care that the patient population will need and shifting that financial risk exclusively to the providers. Payers and employers in this arrangement essentially have a fixed cost they are happy with, and the provider organization contracted to manage that population’s care must figure out how to do so within that budget.

Can you be a good partner?

Regardless of the mechanics of a given pay-for-performance model, a key consideration for health plans to wrestle with is whether they are ready to be a good partner. If providers are subject to new payment models or need to deliver improvement on a historical level of performance, is the payer prepared to help them do that?  There is a big difference between saying “we want to spend less on knee arthroscopies” and actually providing provider partners with the data, insights, best practices, and no-risk ramp-up time they need to adjust their delivery model.

As Kristie put it, "There isn't a clear line of sight on: if I do x, y, or z, how do I know that it's worth the investment, from a people or resources standpoint, to drive some savings on the backend?"  Remember that a health plan’s provider partners are doing their own risk/benefit analysis on all programs they participate in, so there must be support in charting the path, and the return must be worth their investment.

Delivering programs with this magnitude of change and realignment requires substantial systems reconfiguration support. Payers need to bring or find the expertise to design programs that will work in their markets, networks, and with their covered populations. They need to manage complex projects that often involve vendor integrations, employer sales, provider recruitment, risk analysis, process design, and the need to implement in a way that allows these programs to evolve, grow, and change over time.

Pulling it Together

Health plans ought to be at the center of industry innovation—driving change from a leadership position. But, like employers and providers, they cannot do this work themselves. Health plans must take the lead with business and payment models that fix the industry incentive structure and do so in a way that brings their business partners along on that journey. To successfully chart the path, this sector needs to be able to access subject matter expertise from professionals who have been around and delivered this work before, while supporting agile transformation, change management, and nimble project management, with the understanding that this is a journey. Quite intentionally, nothing about this work will look like business as usual.

4-Part Blog Series:

  1. Part I Intro - The Work to Be Done
  2. Part II - Employers’ Role in Delivering Change
  3. Part III - Payers’ Role in Delivering Change
  4. Part IV - Providers' Role in Delivering Change

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