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Health Care

Alternative Payer Models Show Improved Health-Care Value

May 14, 2013 by Jon Kaplan, Jan Willem Kuenen, Mike Pykosz, and Stefan Larsson

In the global struggle to manage the cost of health care, payers, providers, and policymakers are increasingly focusing on value—that is, on improving outcomes while also maintaining or lowering costs. To that end, health systems around the world are experimenting with a variety of alternative models for care delivery and reimbursement that differ from traditional fee-for-service medicine.

The U.S. health-care system offers a kind of “natural experiment” for evaluating the differential impact of some of these models on the cost and quality of care. The United States is one of the few countries that employ multiple payer models in parallel, and has done so for some time, making possible a real-world comparison of their impact on health outcomes and costs.

A case in point is Medicare, the government program that covers some 52 million Americans who are 65 and older or who suffer from chronic disabilities or end-stage renal disease. Roughly three-quarters of the Medicare-eligible population see doctors and other providers on a traditional fee-for-service basis, with the costs of the services reimbursed directly by Medicare. About a quarter, however, are enrolled in Medicare Advantage health plans provided by private insurers. These plans offer a more managed system of care delivery—for example, through preferred provider organizations (PPOs), health maintenance organizations (HMOs), capitated health networks, and other delivery models. Medicare pays the insurer a set amount per patient, and it is the insurer’s responsibility to pay any claims.

What distinguishes these Medicare Advantage plans both from traditional fee-for-service medicine and from one another is the degree to which they make use of three organizational mechanisms that are meant to encourage the delivery of cost-effective quality care: a selective network of providers, financial incentives that are aligned with clinical best practices, and active care management that emphasizes prevention in an effort to minimize expensive acute care.

Research has begun to suggest that these health plans are successful at cutting costs compared with fee-for-service medicine. One recent study, for example, found that utilization rates in some major categories, including emergency departments and ambulatory surgery or procedures, generally were 20 to 30 percent lower for patients enrolled in Medicare Advantage HMOs than for those with Medicare fee-for-service coverage.

But what has been the impact of such plans on health care quality? In the past, there were widespread concerns, especially on the part of the general public, that cost savings came at the expense of quality of care. In the 1990s, for example, HMOs came in for major criticism for denying medically necessary services to patients, ostensibly in order to control costs. And even today, the assumption that higher cost is synonymous with better quality remains widespread.

To better understand this issue, The Boston Consulting Group recently analyzed claims data for some 3 million Medicare patients. We found that on three internationally accepted dimensions of health care quality—single-year mortality, recovery from acute episodes of care requiring hospitalization, and the sustainability of health over time—patients enrolled in Medicare Advantage plans had better outcomes than those participating in Medicare on a traditional fee-for-service basis. The Medicare Advantage patients had lower single-year mortality rates, shorter average hospital stays, and fewer readmissions. They also received higher levels of recommended preventive care and had fewer disease-specific complications.

Our findings demonstrate that the more managed plans do not compromise quality. Just the opposite: they deliver higher-quality care than fee-for-service medicine and thus do a better job of improving health care value. Payers, providers, and policymakers worldwide can learn a lot from the differences between fee-for-service and the alternative care-delivery models used in Medicare Advantage plans.

See Michael E. Porter and Elizabeth Olmsted Teisberg, Redefining Health Care: Creating Value-Based Competition on Results (Boston: Harvard Business School Press, 2006); and Improving Health Care Value: The Case for Disease Registries, BCG Focus, December 2011.
Bruce E. Landon, Alan M. Zaslavsky, Robert C. Saunders, L. Gregory Pawlson, Joseph P. Newhouse, and John Z. Ayanian, “Analysis of Medicare Advantage HMOs Compared with Traditional Medicare Shows Lower Use of Many Services During 2003–09,” Health Affairs 31 (December 2012): 2609–2617.
Roseanna Sommers, Susan Dorr Goold, Elizabeth A. McGlynn, Steven D. Pearson, and Marion Danis, “Focus Groups Highlight That Many Patients Object to Clinicians’ Focusing on Costs,” Health Affairs 32 (February 2013): 338–346.