Skip to main content

Why Harold Miller Says Population-Based Payment Isn't the Silver Bullet Medicare Thinks

Analysis  |  By Amanda Schiavo  
   March 13, 2023

Very few hospitals are utilizing this payment system, but Medicare wants to change that.

There is an assumption that many within the healthcare industry believe to be true, that there are only two ways to pay for healthcare: fee-for-service and population-based payment. But this mentality hurts patients and providers more than it helps, says Harold Miller, president, and CEO of the Center for Healthcare Quality and Payment Reform.

"The assumption that people come to believe is that fee-for-service is inherently evil and bad, and that population health is good," Miller says. "But it's only really good from the payer perspective in the sense that it controls their cost. It's not good from the perspective of the patients, or from the perspective of hospitals or physicians who need to be paid adequately to deliver the services that patients need. And that may end up in many cases being more than whatever fixed amount of money that a health plan would like to give them."

Miller recently sat down with HealthLeaders to discuss this topic in depth.

HealthLeaders: Explain the correlation between risk- and population-based payment.

Harold Miller: Population-based payment is a euphemism that people are using these days for capitation which means paying a fixed amount per patient to somebody—it could be to a hospital and the hospital global budget models are based on the hospital getting a fixed payment for every patient who lives in their service area, and health systems and accountable care organizations. The idea is to give them a fixed payment for each of the patients who are assigned to them.

The risk is that the hospital or the health system have this amount of money which essentially becomes a budget for that number of patients, and they are responsible for delivering all or most of the healthcare services that the patients need for that amount of money. If it turns out to cost more than the amount of money that they're getting, then a hospital or health system has to eat that cost. So that's why they're at risk, they're going to lose money if it costs more to deliver services to the patients than the money they receive.

HL: What percentage of hospitals are currently utilizing this model?

Miller: Very few are doing this right now. Increasingly that's what Medicare and some other health plans are trying to do, is to move towards that. The challenge is you essentially have to have a very large number of physicians as part of your system because you have to be able to manage a large number of patients in order to be able to take on that risk for them.

Now, there are smaller versions of population-based payment out there. There's the notion of population-based payment for primary care physicians where they are only essentially at risk for the services that they deliver. That is often referred to as practice capitation.

But there is this push toward big population-based payments where Medicare or a health plan would give this population-based payment to some system and then the system would be at risk. It's an odd concept, frankly, because that's what health plans are supposed to do. Health plans are supposed to be taking a premium and being at risk for the spending. So, if they're going to turn around and then give all the money to a health system or a hospital and have them be responsible for all the services, then what do you need the health plan for? So, you're essentially turning health systems and hospitals into insurance plans, which is not what they're designed to do—they're designed to deliver care to patients.

HL: Why, if this is such a funky way of doing things, would Medicare want to push providers into population-based care?

Miller: Because it takes away their risk of having to spend more money and transfers their risk to someone else. From a payer's perspective, this is a great thing. They have a fixed amount of money that they are spending, they don't have to worry about spending more than that amount of money, and they pass off the risk to somebody else. The problem is from the patient's perspective, that's not a very good thing. Today, health plans are at risk, and everybody knows what health plans do because they're at risk. They try to prevent patients from getting services. The one advantage the patient has is the patient has a physician or a hospital that's advocating for them and saying the patient needs this service or this particular kind of care and the health plan should pay for it. But, if the physicians in the hospital are suddenly at risk and are being told that they only have this amount of money, and if they do something more expensive for a patient that means the hospital and the physicians are going to lose money, then who's advocating for the patient?

HL: Has Medicare acknowledged the risk to patients and hospitals if they continue to push this model?

Miller: No. The assumption is that they are attaching quality measures to all of these programs. The problem is that the quality measures that they attach, have nothing to do with the things that are the most expensive. For example, Medicare has created this program called the ACO REACH program, which was originally called direct contracting, where they were going to give a population-based payment to an accountable care organization and hold them accountable for the total cost of care on the patient. And there's a series of quality measures associated with it. But there are no quality measures for cancer care. There are no quality measures for rheumatoid arthritis care. There are no quality measures for osteoarthritis. So, if in fact that ACO gets more patients with the kind of lung cancer that needs more expensive treatment, or it gets patients with other more expensive conditions, the ACO will lose money, and if they, for whatever reason decide not to give patients the more expensive treatments that they need, there's no quality measure that would identify that.

It's a real problem that became apparent when Medicare had a program called the oncology care model that they terminated and are going to try to reboot in a year. But basically, it held physicians accountable for the cost of oncology care. And physicians said, although they were able to do a variety of things to improve the quality of care, they couldn't save Medicare money. In fact, it was viewed as a failure because it didn't save Medicare money. And the reason was that drug costs were driving up expenses. The physicians were not going to give cheaper drugs to patients just to save money.

HL: So, if I'm the CFO of a hospital or health system dealing with this model, how does that make my job harder?

Miller: It depends on the circumstances. A lot of people have focused on Maryland and what Maryland has in terms of global budgets for hospitals. So, say you're the hospital and rather than paying you for each thing you do, I'm going to give you a fixed budget based on the number of people who live in your community, and you have to live with that.

Now, if the hospital is currently doing a lot of unnecessary things, or if its population is shrinking in the community, then that's a great thing from the hospital’s perspective. Now the hospital doesn't have to worry about the fact that it's going to be delivering fewer services and losing revenue.

The problem is on the upside. What if you're a hospital and you all of a sudden have COVID-19 patients coming in the door and you have to bring in more staff and you have to buy more equipment and PPE and everything else that goes along with it, but somebody has told you 'Oh no, you have a fixed budget'.

Under the current system, the hospital can bill more because they have more patients needing the services that they're delivering. But, under the global budget, they can't do that. They have a fixed amount of money and have to figure out how they’re going to ration care to patients.

Imagine needing food, and you say you’re going to give the grocery store a monthly payment and then that grocery store must be responsible for providing enough food to each customer who comes in. Imagine what the grocery store is going to say. They are not going to say 'Oh sure, we'll provide a big selection of products.' [No, they are going to offer a limited number of products]. That type of system doesn’t respond to needs.

The situation is worse in healthcare because the hospital or the physicians do not control many of the most expensive things that they deal with—drugs being a perfect example of that. So, if you give the oncologist a fixed budget and say, 'you know, this is all you get' and the drug prices have gone up, where are they supposed to get the money to pay for that? The only way they can do that is to cut back on other things. They have to hire fewer nurses, or they have to deny patients the kind of care that they need.

Amanda Schiavo is the Finance Editor for HealthLeaders.

Get the latest on healthcare leadership in your inbox.