Value-based care includes a wide range of terms and payments models. This brief defines key terms and alternative payment models, including policy tradeoffs and state examples. States might consider using one or more alternative payment models to target different challenges.
Key Terms
- Alternative Payment Models (APMs): Sometimes used interchangeably with the term “value-based care,” APMs refer to any value-based payment model that incentivizes providers to offer high-quality and cost-efficient care. APMs deviate from traditional fee-for-service (FFS) payment models by accounting for the provider’s performance on cost and quality metrics and can include upside risk, downside risk or both. Provider participation in APMs can be voluntary or mandatory depending on APM design. The Health Care Payment Learning Action Network (HCP-LAN) classifies value-based payment models based on the level of financial risk assumed by health care providers, whether payments are tied to value and quality, and the duration of time the provider is responsible for the risk. For more on the HCP-LAN framework, see the first brief in this series, Introduction to Value-Based Care.
- Benchmarks: Benchmarks are the standards for measuring provider performance on cost and quality in APMs. If cost and quality benchmarks are too stringent, providers may not be willing to participate in the APM and assume the risk. If benchmarks are too lax, payers may not achieve intended quality improvements or cost control.
- Downside Risk: The uncertainty associated with assuming financial risk for the actual cost and quality of care against established cost or quality benchmarks. In models with downside risk—sometimes called “two-sided risk”—providers are financially responsible for failure to meet cost and quality benchmarks. In downside risk models, risk can be assumed solely by providers or shared between providers and payers.
- Fee-For-Service (FFS): The most prevalent payment system for health care in the U.S., FFS is a payment method in which health care providers are paid based on the number and type of health care services they deliver (e.g., office visits, tests and imaging). Under FFS, payers reimburse only for specific services that are covered, approved and delivered to patients. This may incentivize providers to deliver more and higher-priced services that might or might not improve health outcomes.
- Population-Based Payments (PBP): A spectrum of alternative payment models under which a provider entity agrees to accept responsibility for the health of a group of patients for a specified duration of time in exchange for a set amount of money. Providers assume accountability for managing the total cost of care, quality and outcomes for a defined patient population across the full continuum of care. PBP models may be designed around a particular population, condition or set of services. More advanced PBP models may include multiple populations and a broader range of conditions or services that the provider is responsible for managing within the payment. Examples of PBP models include capitated payments and global budgets, and PBP models can be integrated into accountable care organizations and bundled payments models (described in more detail below).
- Upside Risk: The uncertainty associated with potential financial risk for the actual cost of care or quality against established cost or quality benchmarks. Models with upside risk—sometimes called “one-sided risk” or “shared savings”—reward providers for meeting cost or quality benchmarks but do not penalize providers for failure to do so.
- Value-Based Care: A spectrum of health care delivery models designed to realign financial incentives and other aspects of the health care system to hold providers accountable for improving patient outcomes while giving them greater flexibility to deliver the right care at the right time. While the term is sometimes used interchangeably with “alternative payment models,” value-based care may refer to other activities, such as data collection and analysis, as discussed in the first brief in this series, Introduction to Value-Based Care.
Alternative Payment Models: Overview, Tradeoffs and State Examples
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Overview |
Tradeoffs |
State Examples |
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Accountable Care Organization (ACO)
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Groups of clinicians, hospitals or other health care providers that come together voluntarily to deliver coordinated, person-centered, high-quality care to a population of patients. ACOs may or may not be organized as an independent legal entity and led by physicians or by a hospital or health system.
ACOs may be linked to one or more APMs and accountable for quality or cost-savings through upside risk, downside risk, or both.
ACO models may increase the level of provider risk over time. For example, a provider may take on only upside risk in the first year of the model and assume an increasing amount of downside risk in years two or three of the model.
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ACOs aim to provide patients with the right care at the right time, coordinate care, avoid unnecessary or low-value care, improve quality of care and achieve cost savings.
ACOs linked to more advanced APMs may require more technological and administrative infrastructure to operate, and may require providers to meet requirements for risk-bearing organizations in some states.
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Idaho Healthy Connections Value Care Program
Vermont All-Payer ACO Model
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Bundled Payments or Episode-Based Payments or Episode-of-Care Payments
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Sometimes used interchangeably, bundled or episode-based payments (or episode-of-care payments) are a type of APM that bundles payment or sets a total budget for some or all services delivered to a patient over a period of time for a specific procedure, such as a joint replacement, or condition, such as pregnancy. Providers may assume upside risk, downside risk or both in bundled or episode-based payment models.
Bundled or episode-based payment models hold providers accountable for a total budget that covers all the services within an or episode of care, including specialists.
More advanced payment models for bundled or episode-based payments are considered population-based payments where providers are paid a fixed fee for the bundle or episode of care in advance and may cover a specific condition—such as diabetes—for a longer period of time or a wider range of services.
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Bundled or episode-based payments may align incentives for providers—particularly specialists—to work together to improve quality and coordination of care while controlling costs.
However, bundled models may penalize providers that serve higher risk patients unless those risks are included in the design of the model. The impact of these models on cost savings and quality is mixed, varying by the procedure or condition addressed in the bundle or episode of care.
Bundled payments may be challenging to successfully implement for patients with chronic conditions when the set of services or duration of the episode of care is not clearly defined or may be impacted by co-occurring conditions.
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Ohio Episodes of Care Program
Colorado Maternity Bundled Payment Program
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Capitated Primary Care Payments
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A type of population-based payment in which primary care physicians are paid a fixed fee for a duration of time (usually per member per month) for a defined set of primary care services. Providers assume both upside and downside risk in capitated primary care payment models.
Capitated primary care payments are not tied to a specific procedure or clinical condition, such as a joint replacement, which distinguishes them from a bundled payment. Capitated primary care payments also cover a limited set of primary care services delivered by the physician, as opposed to global payments which also include non-primary care services such as hospital care.
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Capitated primary care payments may improve predictability of payments for primary care providers and give physicians more flexibility to meet patient care needs. It may also incentivize primary care physicians to achieve key quality metrics more than FFS payments and may be a more financially sustainable way for primary care providers to deliver patient-centered, team-based care.
However, if payments are not risk-adjusted for the health status of the patient, providers may be incentivized to select healthier patients and refer sicker patients to other providers. To ensure that high-value services, such as disease screenings, are adequately incentivized, high-value services may be tied to quality benchmarks in the capitated primary care payment model design or carved out and continued to be paid in FFS.
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Washington Multi-Payer Primary Care Transformation Model
Maine Primary Care Plus
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Global Budgets or Global Payments
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A type of population-based payment in which predetermined payment amounts are made to a group of providers or a health system (such as a group of health care organizations like hospitals) covering most or all of a patient’s care across providers during a specified time period.
Global payments are usually paid monthly per patient and are intended to cover a group of patients for all conditions and services within the global budget. Quality metrics are integrated into global budget design to promote high quality care and prevent care rationing. Providers assume both upside and downside risk in global budget models.
Global payments differ from bundled payments and capitated primary care payments in their coverage of a wider array of services for a larger population of patients over a longer period of time (instead of only the services associated with a given condition or procedure).
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Global budgets may incentivize efficiency and lower costs because providers are responsible for expenditures exceeding the set payment amount. Global budgeting may also increase budgetary certainty for providers and reduce uncertainty around claims costs for payers, while ensuring flexibility. This predictability and stability may be particularly impactful for providers such as rural hospitals that struggle under FFS.
Global budgets can be one of the most complex APMs to administer. This model may potentially result in increased financial risk to providers and incentivize a reduction in services or selection of healthier patients because they can constrain total provider revenue.
When the global budget includes only a limited set of services, such as hospital care, it may push costs for non-included services, including primary care, to other parts of the health care system. One way to address these concerns may be to account for higher risk complex patients and include high-value services in the global budget design.
Global budgets often include multiple payers and may require federal-state collaboration.
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Maryland Total Cost of Care Model
Pennsylvania Rural Health Model
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Patient-Centered Medical Home (PCMH), Medical Home, or Health Home
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A model of primary care that is patient-centered, comprehensive, team-based, coordinated, accessible and focused on quality and safety. PCMHs are not a place, but rather a partnership between the patient, their family, a primary care provider and multidisciplinary care team to personalize and coordinate care to meet the patient’s needs.
PCMHs may be linked to APMs and accountable for quality or cost-savings through upside risk, downside risk or both.
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PCMHs aim to improve patient and provider satisfaction, cost savings, improved quality of care, more preventative care and effective management of chronic disease.
Obtaining PCMH certification may be expensive and time intensive due to the technological and administrative infrastructure needed to support the process. PCMHs vary significantly in design and purpose, and further research is needed to investigate the features that contribute to PCMH success.
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Montana Patient-Centered Medical Homes
Minnesota Health Care Homes
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