Healthcare: Payment reform is key - Something to teach | KPMG | BE

Payment reform is key

Payment reform is key

The reality is that, in most countries, current payment systems work directly against the delivery of integrated care. Existing payment systems tend to pay for care activities within organizations rather than rewarding the efforts to integrate care across them. Similarly, instead of paying for outcomes or integrated care paths, payment systems usually pay for individual activities and other input characteristics (such as beds used or the presence of professionals).


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Yet most now accept that this approach actually stimulates high volumes of these activities and input characteristics, whether or not they add value to the system or the patient. Few markets struggle with this challenge more than the US.

“Perverse incentives abound in most healthcare Payment systems.”

"In the US, the payment system is hostile to any meaningful change,” Arthur Southam, Executive Vice President, Health Plan Operations, Kaiser Permanente, comments. “Virginia Mason almost faced bankruptcy by becoming very efficient and lean and preventing readmissions – it kills you financially. In the current system, you cannot expect high value care to arise. At Kaiser, we’re able to do the right thing largely because we’re not paid by the piece but by the package.”

Addressing perverse incentives

These same perverse incentives abound in most healthcare payment systems.1 Even those that have replaced their ‘pay per piece’ system with a ‘pay per admission’ or ‘per elective intervention’ system seem to suffer from a clear supply-induced demand effect. Similarly, the option to pay overall budgets achieves little more, particularly when the system draws borders between organizations whose services should be more integrated.

It is clear, therefore, that payment reform – where perverse incentives become more aligned by encouraging the delivery of high-quality, appropriate care – is a necessary condition for health system transformation.

But it is not a sufficient condition. Indeed, unless more is done to address the perverse incentives ubiquitous to our payment systems, any calls for leadership, cultural change or implementation of best practices will ultimately fail.

Looking around the world, it becomes clear that there are several innovative contracting models available to respond to these challenges. So while population based and episode-based models each have their place (depending on the type of care that is being paid for), there is a clear move towards establishing a more ideal model.2

How to get there, however, will vary depending on the characteristics of each system. And while different histories, regulations, needs and payment systems will all require different approaches, one thing seems certain: success can only be achieved by moving away from paying for inputs, and moving towards paying for outcomes,or value delivered.

1 Contracting Value: Shifting Paradigms – KPMG International, 2012.

2 Contracting Value: Shifting Paradigms – KPMG International, 2012.

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