Ezekiel J. Emanuel, MD, PhD

 To describe the extent of and longitudinal changes in physician practice variation with respect to implant costs, institutional postacute care (PAC) provider utilization, and total episode payments, as well as to evaluate the association between physician volume and quality and these outcomes.

We combined claims and internal hospital cost data for

34 physicians responsible for 3614 joint replacement episodes under bundled payment at Baptist Health System (BHS). Multilevel multivariable generalized linear models were employed and the intraclass correlation (ICC) was used to quantify between-physician variation.

 There was significant between-physician variation in implant costs, institutional PAC provider utilization, and total episode payments not explained by observable variables (

<.001 for all). Over 5 years, the ICC decreased from 0.26 to 0.06, 0.15 to 0.13, and 0.12 to 0.10 for implant costs, institutional PAC provider utilization, and total episode payments, respectively, but differences were not statistically significant. Both higher physician case volume and quality were associated with decreased total episode payments and institutional PAC provider utilization, but not with changes in implant costs.

practice variation was observed under bundled payment at BHS

and decreased to a greater degree for implant costs than institutional PAC provider utilization or total episode payments. Institutional PAC provider utilization and total episode payments were associated with physician volume and quality. Although some organizational strategies achieve gains by reducing physician practice variation, variation reduction is not an absolute requisite for success under bundled payment.

Amid the proliferation of orthopedic bundles, organizations can benefit from understanding whether strategies must reduce physician practice variation in order to succeed. Analyzing the experience of a long-standing participant in Medicare orthopedic joint replacement bundles, we found that although some strategies achieve gains by reducing physician practice variation, variation reduction is not an absolute requisite for success under bundled payment.

There was significant physician practice variation in implant costs, institutional postacute care (PAC) provider utilization, and total episode payments.

Over time, physician practice variation decreased to a greater degree for implant costs than for institutional PAC provider utilization or total episode payments.

To increase value and address substantial cost and quality variation in care, CMS has rapidly expanded orthopedic bundled payment initiatives. By receiving a single “bundled” amount for an entire episode of care, hospitals and physicians are accountable for quality and costs under bundled payment.

After early success bundling acute care among a small group of providers in the voluntary Acute Care Episode (ACE) demonstration,

 CMS extended its focus across the care continuum. In 2012, it launched the Bundled Payments for Care Improvement (BPCI) initiative,

 a large national program through which many hospitals voluntarily accept bundled payment for joint replacement episodes encompassing acute and postacute care (PAC). More recently, in April 2016, CMS used the BPCI framework to initiate the Comprehensive Care for Joint Replacement model,

 a mandatory program that initially held approximately 800 hospitals in 67 metropolitan areas financially accountable for the costs and quality of episodes spanning hospitalization through 90 days of PAC.

Early evidence from BPCI suggests that bundled payment can reduce episode costs and produce savings for both CMS and hospitals while possibly increasing quality.

 Because physician practice style contributes to large variation in hospital and postacute spending for surgeries such as hip replacement,

 variation reduction is frequently championed in bundle payment strategy.

 However, there is little empirical evidence about whether organizational strategies must reduce physician practice variation in order to succeed.

In this study, we describe physician practice variation at Baptist Health System (BHS), a continuous participant in Medicare joint replacement bundles since 2009. BHS achieved high performance—demonstrating notable reductions in total episode payments and hospital savings during a period when joint replacement expenditures rose nationwide

—by engaging physicians to reduce surgical implant costs and postdischarge utilization of institutional PAC providers.

 We evaluate the extent of and longitudinal changes in physician practice variation with respect to implant costs, institutional PAC provider utilization, and total episode payments, as well as the associations among physician volume and quality and these 3 outcomes.

The study was divided into 4 periods. The first was the baseline period (July 2008-December 2008), when BHS received nonbundled fee-for-service payments prior to ACE participation. The second was the ACE period (July 2009-June 2012), during which BHS implemented joint replacement bundles for acute hospitalization. The ACE period consisted of 3 years: ACE year 1 (July 2009-June 2010), ACE year 2 (July 2010-June 2011), and ACE year 3 (July 2011-June 2012). The third was the transition period (July 2012-September 2013), when BHS prepared to transition to BPCI Model 2 and did not receive bundled payment. The fourth was the BPCI period (October 2013-June 2015), in which BHS implemented joint replacement bundles for episodes spanning acute hospitalization through 30 days of PAC. The BPCI period consisted of 2 years: BPCI year 1 (October 2013-June 2014) and BPCI year 2 (July 2014-June 2015).

We obtained both Medicare claims and internal hospital cost data directly from BHS.

 Using Medicare data, we constructed care episodes that were consistent with the health system’s BPCI arrangement with CMS and encompassed acute hospitalization plus 30 days of PAC.

 Data were not available during the transition period between ACE and BPCI when BHS was not paid by CMS under bundled payment.

Our analytic sample consisted of 3614 patient episodes from a panel of 34 physicians who performed at least 1 joint replacement surgery in both the ACE and BPCI periods. Overall, 51 orthopedic surgeons affiliated with BHS performed a combined total of 3725 joint replacement surgeries on Medicare beneficiaries under Medicare Severity Diagnosis Related Group 470, Major joint replacement or reattachment of lower extremity without major complications or comorbidities. We excluded physicians who performed surgeries only in the ACE period (n = 9) or BPCI period (n = 8).

Patient demographics and clinical data were calculated from Medicare claims, and patient illness severity was estimated using the Elixhauser Comorbidity Score.

 Medicare data were also used to calculate 2 quality of care measures, 30-day readmission and emergency department (ED) visit rates, based on CMS demonstration project specifications.

 Characteristics of operating physicians (gender, years of experience, allopathic vs osteopathic degree, graduation from US or non-US medical school, and board certification status) were obtained from publicly available information on consumer websites.

We evaluated variation in 3 outcomes of interest: implant costs, total episode payments, and institutional PAC provider utilization. Internal hospital cost data were used to quantify the costs of orthopedic implants (implant costs), while BHS used a time-driven activity-based costing approach

 to quantify other nonsupply hospital costs. Medicare data were used to calculate the sum of all Medicare payments for an episode of care (total episode payments) by combining claims for all acute hospital facility payments, physician fees during hospitalization, and total PAC payments through 30 days post discharge. Total PAC payments consisted of those corresponding to outpatient visits, ED visits, readmissions, physician fees, durable medical equipment, and utilization of PAC providers, such as skilled nursing facilities (SNFs), inpatient rehabilitation facilities (IRFs), and home health agencies (HHAs).

We used Medicare data to define a dichotomous variable (institutional PAC provider utilization) as discharge from hospitalization to either SNFs or IRFs as institutional PAC providers, compared with discharge home or home with HHA services. Patients were discharged to 1 of 4 destinations in nearly all (99.4%) episodes.

Finally, we defined several variables to evaluate associations between physician practice characteristics and our outcomes. We assessed practice quality by calculating the proportion of episodes for each physician with prolonged length of stay (PLOS), a validated measure of complications of orthopedic lower extremity joint replacement.

 PLOS evaluates the pattern of patient discharges as a function of length of stay (ie, number of days in the hospital) and identifies a point at which discharge is less likely than continued hospitalization, representing a complication. We assess practice volume using total case volume over the study period. Due to data skewness, we analyzed volume as a continuous variable, as well as a dichotomous variable with the top 10 physicians by volume (each with more than 100 cases and representing more than 70% of total cases) defined as high-volume physicians.

Descriptive statistics were reported using means and SDs for continuous variables and percentages for categorical variables. Multilevel generalized linear models, adjusted for study year and patient and physician characteristics, were employed to evaluate the extent of physician variation in the 3 outcomes of interest. Models were clustered at the physician level and included a physician random effect. To account for multiple patients per operating physician and heteroscedasticity, all models utilized clustered standard errors with the Huber-White correction.

We utilized linear random effects models with a log link and gamma distribution for the outcomes of implant cost and total episode spending.

 To evaluate institutional PAC provider utilization, we used a random effects model with a logit link and binominal distribution to estimate the logit of the probability of discharge to institutional PAC providers as a linear function of covariates and operating physician random effect.

The significance of between-physician variation was determined by testing whether the variance of the physician random effect differed significantly from 0 and was reported using the intraclass correlation (ICC). The ICC is a measure that reflects the proportion of overall variance explained by variation between, rather than within, clusters of individual observations. In this study, the calculated ICC corresponds to the proportion of variation explained by differences in practice patterns among physicians (ie, between-physician variation), as opposed to among cases for individual physicians (ie, within-physician variation). A linear threshold method was used to calculate ICC for institutional PAC provider utilization.

 To compare changes in the ICC across the study period, we used bootstrapping to calculate standard errors for ICCs in ACE year 1 and BPCI year 2 before using the 

 statistic and pairwise tests for each outcome to evaluate whether there were significant differences between the 2 years.

Random effects models were also used to calculate and compare between-physician variation and ICC for implant costs and total episode payments across our study period (ACE year 1 vs BPCI year 2). Because bundle definitions did not include PAC until the BPCI program period, we compared between-physician variation and ICC for PAC provider utilization among ACE year 1, ACE year 3, and BPCI year 2.

Separately, we used random effects models to test the associations among physician quality and case volume and our 3 outcomes of interest. All cost and spending figures were adjusted for inflation and reported in 2015 US$ equivalents. Implant cost data were aggregated at the level of individual physician per quarter and weighted by episode volume. Analyses were conducted using SAS version 9.4 (SAS Institute; Cary, North Carolina). All tests of significance were 2-tailed and considered statistically significant at an α of .05. The University of Pennsylvania Institutional Review Board approved the study.

The overall patient and program characteristics across the BHS bundled payment program have been described previously.

 From that sample, we included 34 physicians in this analysis, 97% of whom were male, 100% whom had obtained allopathic medical degrees, 91% of whom had graduated from US medical schools, and 82% of whom were board certified (

). On average, physicians in this cohort had 26 years of experience and a total volume of 106 cases across our study period, ACE year 1 to BPCI year 2.

The mean age of patients cared for by these physicians was 72 years. They were predominantly female, and the mean Elixhauser Comorbidity Score was 1.1, with the 5 most common coexisting clinical conditions being hypertension (76%), diabetes (21%), hypothyroidism (21%), obesity (19%), chronic obstructive pulmonary disease (16%), and depression (10%). Readmissions and ED visits occurred in 5% and 6% of cases, respectively.

Overall, mean implant costs decreased 5.8% across the study period, from $5026 in the first year of bundled payment (ACE year 1) to $4732 through 5 years (BPCI year 2). There was also an overall downward shift in distribution of implant costs among physicians. Compared with ACE year 1, for example, more physicians in BPCI year 2 had average implant costs between $4500 and $5000 (22 vs 9) and fewer physicians had average implant costs of $5550 or greater (1 vs 10) (

After accounting for patient and physician characteristics, higher implant cost was associated with younger patient age and earlier study year. There was a decline in between-physician variation across study year and program period (

]), from an ICC of 0.26 in ACE year 1 to 0.06 in BPCI year 2, a difference that was not statistically significant on pairwise testing (

= .26). Adjusted random effects analysis demonstrated statistically significant between-physician variation in implant costs (overall ICC = 0.11) unexplained by observable variables (

The proportion of patients discharged to institutional PAC providers remained relatively steady during ACE: 42% in ACE year 1 and 40% in ACE year 3 when PAC was not included in bundled payment. When PAC was included in bundles under BPCI, however, discharge to institutional PAC providers decreased to 31% in BPCI year 1 and to 25% in BPCI year 2. Across the ACE program period, most physicians discharged at least half of their patients to institutional PAC providers (

). In comparison, by BPCI year 2, most physicians discharged at least half of their patients to home or HHAs (80% of physicians in BPCI year 2 compared with 38% and 42% in ACE year 3 and ACE year 1, respectively).

After multivariable adjustment, higher institutional PAC provider utilization was associated with earlier study year, female patient sex, younger patient age, higher Elixhauser Comorbidity score, and readmissions. Between-physician variance in institutional PAC provider utilization decreased over the study period from 0.59 in ACE year 1 to 0.48 by BPCI year 2, with ICCs of 0.15, 0.14, and 0.13 in ACE year 1, ACE year 3, and BPCI year 2, respectively, without a statistically significant overall change (

= .86). Overall, the extent of between-physician variation (overall ICC = 0.09) unexplained by observable variables was also statistically significant (

Over the 5 years of the study, mean total episode payments decreased 21% from $23,634 in ACE year 1 to $18,699 in BPCI year 2. Compared with ACE year 1, there was an overall narrowing and downward shift in distribution of total episode payments among physicians. For example, the number of physicians with total episode payments less than $20,000 increased from 6 to 21 and there were fewer physicians with total episode payments greater than $27,500 (9 vs 2) (

After accounting for readmissions and ED visits, as well as patient and physician characteristics, higher total episode payment was associated with younger patient age and earlier study year.

Between-physician variance in total episode payments increased slightly over time (

), and the ICC decreased by a statistically nonsignificant amount, from 0.12 in ACE year 1 to 0.10 in BPCI year 2 (

= .81). The extent of between-physician variation (overall ICC = 0.07) unexplained by observable variables was also statistically significant (

Association Between Physician Practice Characteristics and Outcomes of Interest 

In multivariable analyses, increasing physician clinical practice volume was associated with small but significant decreases in total episode payments (coefficient, —0.00022; 

<.001) and institutional PAC provider utilization (coefficient, —0.00020; 

<.001), but not changes in implant costs (coefficient, 0.00015; 

= .32). Results from analysis using a dichotomized volume indicator did not yield qualitatively different results. Similarly, lower practice quality, defined as increasing proportion of episodes with PLOS, was associated with increased total episode payments (0.2086; 

= .002) and increased institutional PAC provider utilization (2.2347; 

= .001) but not changes in implant costs (0.1695; 

This study demonstrates that bundled payment strategy can reduce costs and generate savings by decreasing variation in some practices but not others. Three conclusions are particularly notable.

First, our analysis demonstrates the presence of and change in physician practice variation in implant costs, institutional PAC provider utilization, and total episode payments. In ACE year 1, practice variation between physicians accounted for 15% to 26% of overall variation in these outcomes. The decreases in between-physician variation by BPCI year 2 demonstrate the role of practice variation reduction in decreasing costs and utilization.

This observation is illustrated by the downward shift and narrowing in distributions of our outcomes: Over time, more physicians achieved lower mean implant costs and total episode payments, and fewer physicians discharged a significant portion of patients to institutional PAC providers. Furthermore, the presence of statistically significant physician variation across the study period that was unexplained by observable variables suggests that attention to individual physician practice patterns may help other organizations identify cost and utilization reduction strategies under bundled payment.

Second, this study suggests that reducing physician practice variation may not be an absolute requisite for succeeding in joint replacement bundles. Although physician practice variation only accounted for a portion of overall implant costs and differences in ICC were not statistically significant, we nonetheless observed a steady decrease in between-physician variation over time. In the first year of the bundled payment program, BHS leaders used quality and cost data transparency to leverage physician engagement and lower implant costs program-wide over several rounds of negotiations.

 The observed trend in physician variation reflects the result of this strategy: more consistent pricing across available implant options and systematic cost reductions across physicians.

Articles

This study demonstrates that variation reduction is an important, but not requisite, component of organizational success under orthopedic bundled payment.

Physician Practice Variation Under Orthopedic Bundled Payment

The United States is simultaneously moving toward value-based payments for populations and precision medicine for individuals. During this evolution, innovations in payment and delivery that enhance tailoring of treatments to individuals while improving the value of care are needed. We propose one such innovation that would allow physician payment and patient cost sharing to better reflect the value of care by allowing the appropriateness of a service for a given patient in a given clinical situation to play a more meaningful role in the design of such incentives. We introduce the idea of a payment modifier, based on indication and appropriateness, and discuss its advantages and challenges to implementation.

As the United States moves toward value-based payments for populations and precision medicine for individuals, innovations in payment and delivery that enhance tailoring of treatments to individuals while improving the value of care are needed.

Incorporating the appropriateness of a service into physician payment and patient cost sharing may encourage the delivery of higher-value care.

Building appropriateness into incentives has advantages, including reliance on evidence-based practice guidelines, coexistence within fee-for-service and prospective payment models, and maintaining physician and patient autonomy.

Incentives for appropriateness could be implemented using a payment modifier, which has advantages and limitations in the current healthcare system.

Alongside a shift toward value-based payments for populations, the US healthcare system is entering an era of precision medicine centered on tailoring treatments to individuals.

 Yet today, although value-based payment and insurance design encourage physicians and patients to think about cost and quality, neither payment systems nor benefit design explicitly take into account the appropriateness of a service for a given patient in a given clinical scenario.

Currently, a physician or hospital that delivers the same service to 2 patients in different clinical situations is reimbursed an identical amount. A coronary stent for a heart attack (on average, higher value) or stable angina (on average, lower value) garners the same payment, as does a magnetic resonance imaging scan for uncomplicated back pain (on average, lower value) or back pain with neurologic signs (on average, higher value). The patient also faces identical cost sharing across higher- and lower-value scenarios. However, the appropriateness of these services clearly varies by patient factors and the clinical situation.

Appropriateness is central to value. The benefit of a given service depends not only on its quality, but also on its clinical indication.

 Payment systems and benefit design could be improved by building appropriateness into physician and patient incentives, allowing them to complement population-level incentives, such as financial risk, that lack individual-level nuance. Within the existing payment and benefit design infrastructure, one potential approach is the incorporation of an “appropriateness modifier” that varies payment and cost sharing based on the clinical appropriateness of a service in a given situation.

For physician payment, an appropriateness modifier would adjust an existing fee upward when a service is delivered in a high-value situation or downward when it is delivered in a low-value situation. The indication can be based on patient characteristics, such as comorbidities or clinical presentation. The modifier could include only upward adjustments (analogous to “1-sided” population-based payment models without financial risk) or only downward adjustments (analogous to lowering fees for “never events”). Alternatively, the appropriateness modifier could include both upside and downside adjustments (analogous to “2-sided” alternative payment models with shared savings and shared risk). Because physicians tend to evaluate payment changes by their impact on income compared with a reference point, such as the prior year's income, 2-sided incentives may be necessary to promote higher-value decisions while encouraging buy-in.

For patients, cost sharing could be adjusted to mirror the incentives in physician payment. Co-payments could be lowered to not blunt demand for certain services in highly appropriate contexts (eg, interventions during urgent situations) or raised to discourage other services in less appropriate situations (eg, elective services that lack proven benefit relative to conservative management). Combining the appropriateness modifier for physician payments with an analogous clinically nuanced modifier for patient cost sharing could be synergistic in encouraging physicians and patients to make higher-value choices.

 Moreover, modifying the existing structure of co-payments using clinical appropriateness would be transparent and familiar to patients, although it would need to be implemented and communicated in a simple manner.

Because the disutility of a loss (lower fee or higher co-payment) is roughly twice the utility of an equal-size gain (higher fee or lower co-payment), the former is likely a more powerful tool for affecting behavior than the latter.

 However, even if total physician payments or patient cost sharing remained unchanged, patients would still benefit if the proportion of services delivered in appropriate scenarios increased. How large of a change in payment optimally balances budgetary effects with behavioral response is an empirical question requiring further evidence to elucidate.

As a starting point, an appropriateness modifier could be implemented among services for which clear differences in appropriateness are observable and supported by guidelines. This initial set of services may be small, given the lack of clinical detail in administrative data. However, the physician-driven Choosing Wisely recommendations offer candidate services.

 Examples of more appropriate and less appropriate situations, respectively, could include imaging for carotid artery stenosis in symptomatic versus asymptomatic patients, stents in unstable versus stable angina, imaging for headache or low back pain with versus without red flag signs (eg, neurologic deficits or fever), and conventional versus hypofractionated irradiation for certain malignancies where they have equal efficacy.

 Given that the value of a service is more likely to be a continuum rather than a binary state of high versus low, distinguishing highly appropriate and less appropriate situations for a particular service might capture a small subset of the situations in which it is delivered, leaving the remainder under status quo incentives.

Advantages of an Appropriateness Modifier

The appropriateness modifier would offer several advantages. First, the definition of “appropriateness” would derive from practice guidelines based on the clinical literature. It builds on the progress of value-based insurance design (which focuses on the average value of a service) by considering the situation-specific value of a service for a given individual. Unlike the blunt overarching nature of population-level financial risk, this clinically nuanced tool that reflects the scientific evidence generated by the physician community itself may more easily garner physician support.

Second, the appropriateness modifier can be built into fee-for-service without requiring downside risk, although it could be similarly implemented in the fee schedule underneath a risk contract. Unlike the new Merit-based Incentive Payment System under the Medicare Access and CHIP Reauthorization Act, which increases or decreases all of a physician’s fees by a certain percentage, the appropriateness modifier impacts only those services for which evidence and guidelines can distinguish higher- from lower-value scenarios.

Third, unlike bundled payments, which have an unintended consequence of rewarding bundles triggered in lower-risk patients or less appropriate situations, thus increasing revenue and raising quality scores that are easier to achieve with lower-risk patients,

 the appropriateness modifier directly focuses on the clinical indication and reduces the incentive to generate volume in less appropriate situations. At the same time, unlike some managed care techniques that seek to directly constrain utilization, the value modifier retains the patient’s and physician’s freedom of choice among treatment options—indeed, even the lower-value options&mdash;while allowing spending to reflect the value of the clinical situation.

Fourth, the appropriateness modifier would enable specialists to have greater control over value through their own decisions rather than relying on primary care physicians to drive value through referral decisions, a process that could create tension between colleagues. Because the modifier can live within and be synergistic with alternative payment models, aligning specialist incentives with primary care physician incentives may enhance behavior change. Furthermore, aligning physician incentives with patient incentives could facilitate shared decision making.

Lastly, incorporating the appropriateness modifier into physician fees could have beneficial spillover effects outside of physician services. These include spending on facility-based services (which generate separate facility fees) and on pharmaceuticals (which often have separate costs, such as the bonus Medicare pays to physicians prescribing chemotherapies).

Challenges of an Appropriateness Modifier

Implementing an appropriateness modifier involves some challenges. Because diagnosis codes help determine appropriateness, an incentive to “upcode” patients into highly appropriate situations (through, for instance, the addition of diagnosis codes) would exist. Although upcoding is similarly a concern under population-based payment models with risk-adjusted spending targets, it could be mitigated by the inclusion of clinical data in determining appropriateness—data that are less susceptible to subjectivity.

The appropriateness modifier may complicate decision making. Physicians frequently find prior authorization burdensome, and any additional documentation required to justify higher-value situations may seem similarly unappealing. However, if implemented as a type of decision support tool (eg, with electronic prompts at the point of order entry), payers or physicians could render this complexity an advantage and provide a compelling alternative to prior authorization or other blunt utilization management techniques.

Finally, the set of services for which appropriateness is clearly distinguishable using existing administrative data today is limited. Yet with greater detail in diagnosis codes through 

International Classification of Diseases, Tenth Revision

 and greater availability of clinical data through electronic health records, payers and physicians could likely expand the set of services for which appropriateness is discernible, potentially influencing clinical areas thus far untouched by value-based insurance design.

Moving American medicine toward value for populations, yet precision for individuals, will require innovations in payment and delivery. Incorporating a clinically nuanced measure of appropriateness into payment and benefit design could offer a meaningful next step.&ensp;

The authors acknowledge seminar participants at Harvard Medical School and the Harvard T.H. Chan School of Public Health for comments and feedback.

Department of Health Care Policy, Harvard Medical School (ZS), Boston, MA; Department of Medicine, Massachusetts General Hospital (ZS), Boston, MA; Department of Medical Ethics & Health Policy, Perelman School of Medicine (ASN, EJE, KGV), and Center for Health Incentives and Behavioral Economics, Leonard Davis Institute (ASN, EJE, KGV), University of Pennsylvania, Philadelphia, PA; Center for Health Equity Research and Promotion, Philadelphia Veterans Affairs Medical Center (ASN, KGV), Philadelphia, PA.

 Dr Song was supported by the Office of the Director, National Institutes of Health (NIH Director’s Early Independence Award No. 1DP5OD024564-01).

 Dr Navathe reports consultancies for Navvis Healthcare, Lynx Medical, and Indegene; grants received from Hawaii Medical Service Association and Oscar; and lecture fees received from Cleveland Clinic. Dr Emanuel is a board member of VillageMD, Abramson Cancer Center, and IMF External Science and Technology Advisory Group; is a member of the Peterson Center on Healthcare Advisory Board; and is employed by University of Pennsylvania and Oak HC/FT. He reports receiving lecture fees from Leigh Bureau, his speakers bureau, and royalties from book sales through publishers. Dr Volpp reports consultancies for VAL Health and CVS; research grants received from Hawaii Medical Service Association, CVS, Humana, Oscar, and Discovery/Vitality; and stock ownership in VAL Health. The remaining author reports no relationship or financial interest with any entity that would pose a conflict of interest with the subject matter of this article.

 Concept and design (ZS, ASN, EJE, KGV); acquisition of data (ZS, EJE); analysis and interpretation of data (ZS); drafting of the manuscript (ZS, ASN, EJE); critical revision of the manuscript for important intellectual content (ZS, ASN, EJE, KGV);  obtaining funding (ZS); and administrative, technical, or logistic support (KGV).

 Zirui Song, MD, PhD, Department of Health Care Policy, Harvard Medical School, 180A Longwood Ave, Boston, MA 02115. Email: zirui_song@post.harvard.edu.

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Allowing the appropriateness of services to play a more meaningful role in the design of physician and patient incentives may improve the value of care.

Incorporating Value Into Physician Payment and Patient Cost Sharing

	The use of physician incentives to create alignment with organizational objectives depends critically on the structure of a health system’s relationship with its physicians.

		Explicitly designed nonfinancial incentives are important to being able to modulate the effect of the conflicting incentives that are facing physicians today. 

		Network-based models, such as clinically integrated networks, and employment can  effectively utilize nonfinancial incentives to intensify effects of monetary rewards. 

		Employment-based, network-based, and contract-based physicians must have access to performance feedback—not just incentives for quality&mdash;to provide high-value care.

The spread of innovative payment models is driving health systems to engage physicians in providing high-value services. New reimbursement schemes are introducing health system—level incentives aimed at decreasing healthcare spending while improving quality—largely without changing the way individual physicians are paid for daily activities. For example, incentives at the system level are central to the Medicare Shared Savings Program, while individual physicians continue to submit fee-for-service (FFS) claims. The resulting misalignment of incentives at the front lines of patient care may hinder efforts to improve quality and control costs. CMS recently issued its proposed rule for the Medicare Access and CHIP Reauthorization Act of 2015, which will add complexity with a new Merit-Based Incentive Payment System that will adjust physician reimbursement based on quality, cost, clinical practice improvement, and advancing the use of electronic health records (EHRs).

 The payment adjustments will be made at either the individual clinician or group levels. With increasingly complex, and sometimes opposing, financial incentives facing systems and individual physicians, health systems are tasked with a daunting challenge in creating alignment around value-based care.

Transmitting organizational incentives to individual physicians by using financial approaches, like performance bonuses, and nonfinancial approaches, such as actively managing them, is not a new problem. However, innovative payment models, increased physician employment, and network-affiliation all necessitate reexamination of the optimal approach. In the predominant accountable care organization (ACO) model, where gains and losses are shared equally by all participating physicians, financial gains for individuals may not be large enough to drive a shift from volume to value without complementary motivational strategies.

 More stringent alternatives that hold individual physicians financially accountable for the total cost of their own patient panels create substantial risk. Moreover, physician attempts to decrease this risk potentially lead to unintended consequences, such as dumping high-risk patients.

 Although some degree of risk sharing can provide a middle ground, it is clear that financial incentives alone can drive widely varying—even opposing&mdash;effects on practice patterns. Consequently, nonfinancial incentives should figure prominently in creating alignment.

Importantly, the way health systems can meet this challenge is critically dependent on the structure of a health system’s physician relationships. For example, systems with loosely connected physicians may not effectively use managerial tactics that systems with employed physicians deploy with great success. In this article, we highlight key issues for health systems in aligning their physicians through incentive programs tailored to the underlying structure of their relationships with other physician. We utilize a simplified framework for system—physician relationships to illustrate design principles from economics and psychology that emphasize nonfinancial elements of job design and contract terms, which can be used to complement financial incentives.

Aligning Physician Incentives With Organizational Models

Typically, 3 relationship structures prevail between physicians and a health system: employment-based with independent, self-governing medical groups and system-hired physicians, frequently part of large medical groups (employment-based); an integrated network of physicians, which may include both employed and independent physicians aligned through quality or clinical integration programs that extend beyond contracting (network-based); or contract-based between the health system and independent physicians, such as independent practice associations (IPAs) (contract-based).

In general, health systems possess more tools to influence care delivered by physicians in direct employment (employment-based) and less tools in contract-based relationships (contract-based). The relationship structure is important because it generally determines the system’s ability to influence care delivery. Exceptions exist: for example, several IPAs in California have been successful in risk-based contracting since the 1990s and function more like integrated networks because of investments in infrastructure and alignment. However, this framework enables a thematic understanding of the types of behavioral and financial incentives that may be most effective within 3 organizational environment archetypes.

In general, employment-based health systems benefit from a managerial relationship with employed physicians that enables extensive use of nonfinancial features in fostering alignment. These factors, which include job design, staffing, standardized processes, norms, and information sharing, become particularly important when organizations pay physicians salaries with little or no role for financial incentives related to productivity, quality, or cost control. Frequent interactions between physicians and leadership make these settings particularly suited to initiatives that create a culture of high-value care. For example, physician compacts can establish norms around mission, values, and organization-specific standards. Managers’ personal performance reviews with physicians provide direct accountability and shared plans for improvement on quality and cost metrics.

In addition, changes to system infrastructure, such as implementing evidence-based default care pathways, can be effective in avoiding unintended consequences of salary models (eg, underprovision). For example, The Permanente Medical Group (TPMG) ensures patient access via default scheduling practices to establish appointment lengths and offer more appointments per day than needed for average patient demand, encouraging practice efficiency. Another powerful application of defaults is use in EHR order entry, where standardized order sets and defaults to generic medications dramatically reduce errors, low-value care, and cost. Partners Healthcare, another employment-based system, effectively uses EHRs to track quality and link action directly with feedback by using unblinded dashboards that enable comparisons among physicians.

Network-based systems with programs and infrastructure that tie physicians together beyond contracts may rely more heavily on individual financial incentives because structural and cultural alignment is more challenging than in employment-based systems. Financial incentives are most effective when they are sizable, matched to the level of effort required to achieve desired results, and can be delivered through methods that enhance salience. They should also align with physician values to minimize the likelihood of displacing internal physician motivation.

 Group incentives aimed at interdisciplinary teams can be used effectively to supplement individual incentives and promote coordination as both TPMG and Advocate Physician Partners (APP) have done.

 Gain-sharing models, where shared savings or losses are distributed across all participants, work better within formal networks where cohesion among physicians overcomes the incentive to free-ride and administrative infrastructure lowers the costs of teamwork. APP, for example, utilizes a combination of financial incentives at the group and individual levels, including a gain-sharing component to fund the incentive pool.

 Limiting metrics to those with significant variation, and matched to gaps in care, avoids information overload in feedback.

Network-based systems may also use complementary non-financial strategies. For example, social norming, implemented through unblinded performance-based comparisons among groups of physicians and individual physicians within practices, can improve performance, particularly when financial incentives include a component based on group performance. Payments should track directly with unblinded rankings and employ multiple thresholds to engage lower-performing physicians. Selecting the group of physicians to include in comparisons and shared financial incentives should be deliberate; calibrating incentives and comparisons to peer groups with whom physicians readily identify maximizes the benefits of social competition. It also minimizes the risk of learned helplessness that could develop when comparing physicians with distant colleagues without a shared professional connection.

 Other program features may similarly intensify the effects of financial incentives. For example, APP delivers separate checks around tax day in a public ceremony to increase salience and reports unearned dollars to invoke loss framing.

In employment- and network-based systems, the ability to track and report practice patterns on a physician’s entire panel can be leveraged in incentive design. For example, availability of EHR data can enable the use of value-based metrics, including in-network emergency department visits, ambulatory-sensitive condition admissions, readmissions, specialist referrals by condition, and postacute care use. In particular, metrics of coordination and integration, such as referral of high-need patients to care management programs and timely postdischarge care, should be emphasized. These measures may be unavailable due to missing data from other providers or unreliable due to inadequate sample size in contract-based systems.

In contract-based systems, financial incentives will have limited effect if they apply only to a small portion of a provider’s patient panel, and nonfinancial incentives are difficult to implement due to fragmentation. Thus, providing robust quality profiling may be the only way to empower financial incentives to work and prevent crowd-out of intrinsic and reputational motivation. Quality metric feedback, at the smallest reliable unit (eg, practice site)—including information on patient-reported experiences, access to care, and use of low-value care&mdash;should be routinely provided to the extent possible. These groups may benefit from maximizing overlap in pay-for-performance incentives across payers and limit the number of metrics to optimize economic value and salience. Gain-sharing models and total cost of care incentives, while being tested at some IPAs participating in ACO programs, are less likely to succeed because of the high likelihood of free riding without existing robust infrastructure, which is characteristic of some exceptional IPAs. In general, the emphasis should be on providing rich, timely information on value-based care performance and facilitating practice transformation.

As FFS payment alternatives grow, it is imperative that the “micro incentives” provided to physicians in their daily work are tailored to organizational structure and align consistently with value-based care. Many organizations have not yet taken this step.

 Regardless of setting, high-quality feedback on value-based performance can facilitate the effectiveness of financial incentives in improving care. The combination of recent advances in health information technology, analytics, digital technology, and quality measurement make this robust individual feedback possible. Although traditional and behavioral incentive design techniques cannot fix perverse incentives, thoughtful application to financial and nonfinancial incentives can greatly improve the effectiveness of new payment models in achieving organizational objectives and value-based care.

 Department of Medical Ethics and Health Policy (ASN, EJE, KGV) and Department of Medicine (ASN, KGV), Perelman School of Medicine, University of Pennsylvania, Philadelphia, PA; Leonard Davis Institute Center for Health Incentives and Behavioral Economics (ASN, APS, EJE, KGV), Philadelphia, PA; Center for Health Equity Research & Promotion, Philadelphia Veterans Affairs Medical Center (ASN, KGV), Philadelphia, PA; Department of Health Care Management, The Wharton School (APS, EJE, KGV), University of Pennsylvania, Philadelphia, PA; Department of Health Policy and Management, Harvard School of Public Health (MBR), Boston, MA; The Permanente Medical Group (RMP), Oakland, CA; Fuqua Business School (PAU) and Sanford School of Public Policy (PAU), Duke University, Durham, NC.

 This work has been partially supported by a grant from the Commonwealth Fund. The funding source reviewed the manuscript but did not make any fundamental alterations.

 Dr Emanuel is an investment partner at Oak HC/FT, owns stock in Nuna, and is represented by the Leigh Bureau for paid speaking engagements. Dr Navathe is an economics consultant for Navvis, Navigant, Indegene, Sutherland; he has and has previously received grant support from the Hawaii Medical Service Association. Dr Volpp was a behavioral economics consultant for VAL Health, which he also has stock ownership in; he has previously received grant support from the Hawaii Medical Service Association. The remaining authors report no relationship or financial interest with any entity that would pose a conflict of interest with the subject matter of this article.

 Concept and design (EJE, ASN, RMP, MBR, APS, PAU, KGV); acquisition of data (RMP, EJE, ASN, APS, KGV); analysis and interpretation of data (ASN, EJE, RMP, MBR, PAU, KGV); drafting of the manuscript (EJE, ASN, RMP, APS); critical revision of the manuscript for important intellectual content (ASN, RMP, APS, PAU, KGV); statistical analysis (MBR); provision of patients or study materials (RMP); obtaining funding (EJE, ASN, KGV); and supervision (EJE, KGV).

 Amol S. Navathe, MD, PhD, Assistant Professor of Health Policy and Medicine, University of Pennsylvania, Department of Medical Ethics and Health Policy,  1108 Blockley Hall, University of Pennsylvania, Philadelphia, PA 19104. E-mail: amol@wharton.upenn.edu.

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2. Frandsen B, Rebitzer JB. Structuring incentives within organizations: the case of accountable care organizations. National Bureau of Economic Research website. http://www.nber.org/papers/w20034. Published April 2014. Accessed May 18, 2016.

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4. Roland M, Campbell S. Successes and failures of pay for performance in the United Kingdom. 

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5. Powers BW, Navathe AS, Chaguturu SK, Ferris TG, Torchiana DF. Aligning incentives for value: the internal performance framework at Partners HealthCare [published online May 18, 2016]. 

6. Marcottea L, Hodlofskib A, Bondc A, Pateld P, Sacksd L, Navathe AS. Into practice: how Advocate Health System uses behavioral economics to motivate physicians in its incentive program [published online May 25, 2016]. 

7. Testa M, Major B. The impact of social comparisons after failure: the moderating effects of perceived control. 

8. Colla CH, Lewis VA, Shortell SM, Fisher ES. First national survey of ACOs finds that physicians are playing strong leadership and ownership roles. 

. 2014;33(6):964-971. doi: 10.1377/hlthaff.2013.1463

This article details strategies based on principles from psychology and economics that health systems may use to align with physicians.

New Strategies for Aligning Physicians With Health System Incentives

America has a healthcare cost problem, and that means we have a fee-for-service problem. Fee-for-service incentivizes physicians to order more tests and treatments—many of which are unnecessary. According to the Institute of Medicine, unnecessary tests and interventions add approximately $210 billion of waste to the US healthcare system.

 In addition, inefficiently administered interventions and unnecessarily high healthcare prices for items such as implants and imaging studies add an additional $130 billion and $105 billion, respectively, to the already bloated healthcare bill. Reducing waste by removing incentives to order excessive and unnecessarily costly tests and treatments is critical to reducing healthcare spending.

Accountable care organizations (ACOs) are one solution that have been touted since the enactment of the Affordable Care Act. Currently, there are 19 ACOs participating in CMS’ Pioneer ACO Model Program; however, there are not a whole lot of programs, and the amount saved is not very impressive. In the past 2 years, these ACOs reportedly saved only $384 million, further confirming that we desperately need additional cost control solutions.

Another alternative to fee-for-service is bundled payments. This July, CMS announced it would require hospitals in 75 metropolitan statistical areas (MSAs) to participate in a test of bundled payments for hip and knee replacements.

 Each hospital in those regions will receive a fixed payment for the hip and need replacement, and they will be accountable for the quality and costs of the entire 90-day episode of care. This will incentivize hospitals to negotiate and reduce the price they pay for implants, and it will also act to incentivize them to be efficient in terms of avoiding costly canceled operations, surgical site infections, and in-hospital rehabilitations, thereby saving Medicare money and improving the patient experience. Hip and knee bundles are currently included in Medicare’s voluntary initiative around bundled payments, but making the bundles mandatory in 75 MSAs, rather than a voluntary demonstration project, shows that the Obama administration is serious about moving the US healthcare system away from fee-for-service and more toward bundled payment.

This is a welcomed development. We need to make it clear to providers that the future is not fee-for-service. If they have not already, providers can begin developing bundles for hip and knee replacements, as well as for other procedures like back and bowel surgery and vascular procedures, and even for nonsurgical care services such as cancer chemotherapy, radiation therapy, and asthma exacerbations. With the knowledge that the bundled payment model is here to stay, providers can begin to commit to working to develop the infrastructure they need to handle this developing model.

However, if Medicare and private insurers are going to get costs under control, more work needs to be done. The main reason to shift away from fee-for-service is to change incentives, and the key to changing incentives is the sharing of risk. In most cases, physicians are the decision makers: they choose which knee replacement part to use for their patient; if physicians themselves do not share the risk of the knee replacement bundle, they have little incentive to switch from the expensive part they have always used to an equally effective, cheaper part. Hospitals cannot be the only ones that hold the risk for episodes of care. In order for bundled payments to really work, hospitals and providers must move some risk to the physicians involved.

Furthermore, physicians are the individuals who ultimately decide whether to admit a patient with an asthma or congestive heart failure exacerbation or, rather, to invest in having more intensive care at home instead of in an institution to try to forestall exacerbations. When physicians are sharing the risk for both quality and cost, they will consider the best and most cost-effective way to care for a patient. Additionally, with incentives to provide high-quality care, such as 90-day guarantees and re-admission penalties, physicians will not focus solely on the bottom line.

If physicians share risk, they are also more likely to go along with reforms designed to lower cost or increase quality, as instituted by the hospital. They may show more enthusiasm for reforms such as using the less expensive knee-replacement parts or out-patient rehabilitations services and hospital at home programs than they would have if they did not experience risk for cost and quality.

Despite the importance of risk sharing, there are few true—and scalable&mdash;success stories about how to best share financial risk with physicians. No hospital or provider has figured out the perfect formula yet&mdash;that is the big challenge facing the healthcare system. With CMS announcing mandatory hip and knee bundles, and with more bundling and other alternative payment methodologies to come, the next step for transitioning away from fee-for-service is for hospitals and providers to find ways to share risks with physicians. Only with risk sharing will it be possible to truly bend the cost curve.

University of Pennsylvania (KC, EJE), Philadelphia PA; Center for American Progress (EJE), Washington, DC.

The authors report no relationship or financial interest with any entity that would pose a conflict of interest with the subject matter of this article.

Concept and design (KC, EJE); acquisition of data (KC); drafting of the manuscript (KC, EJE); critical revision of the manuscript for important intellectual content (EJE).

Katherine Chockley, BA, University of Pennsylvania, 3401 Market St, Ste 320, Philadelphia, PA 19104. E-mail: kchock@upenn.edu.

Best Care at Lower Cost: The Path to Continuously Learning Health Care in America

. Washington, DC: The National Academies Press; 2013.

2. Affordable Care Act payment model saves more than $384 million in two years, meets criteria for first-ever expansion [press release]. Washington, DC: HHS; May 4, 2015. http://www.hhs.gov/news/press/2015pres/05/20150504a.html. Accessed September 14, 2015.

3. CMS proposes major initiative for hip and knee replacements [press release]. Washington, DC: HHS; July 9, 2015. http://www.hhs.gov/news/press/2015pres/07/20150709.html. Accessed September 14, 2015.&ensp;

The American healthcare system is finally moving away from fee-for-service toward bundled payments, but this transition will only be successful if we shift risk to the physicians.

Ezekiel J. Emanuel, MD, PhD

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