Getting What We Pay For: Innovations Lacking in Provider Payment Reform for Chronic Disease Care

Originally published as HSC Research Brief No. 6 by the Center for Studying Health System Change (HSC), June 2008. Authors: Ann Tynan, Debra A. Draper. HSC was a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation. This study was commissioned by the California HealthCare Foundation.

Getting What We Pay For: Innovations Lacking in Provider Payment Reform for Chronic Disease Care

Despite broad recognition that the way physicians and hospitals are paid does little to promote high-quality, efficient care for people with chronic conditions, meaningful innovation in provider payment was scarce, according to a 2008 study by the Center for Studying Health System Change commissioned by the California HealthCare Foundation. This finding was especially troubling given the growing prevalence of chronic disease in the United States and the escalating costs and diminished quality of life that accompanied it. Most efforts to improve chronic care had focused either on hiring disease management vendors to intervene with patients or on redesigning clinical delivery without changing the underlying payment structure that rewarded volume over value.

While discussion and anticipation of payment reform ran high, actual implementation was limited almost entirely to experimental pilots and small-scale programs. Fundamental restructuring of how providers were paid for chronic care was virtually nonexistent. The dominant fee-for-service model encouraged a piecemeal, episode-based approach to treatment rather than the coordinated, continuous care that chronic disease patients need. Four significant barriers stood in the way of reform: fragmented care delivery across multiple providers and settings, the absence of payment for non-physician services that support chronic disease management, the threat of revenue losses for some providers under reformed payment models, and the lack of any organization with both the motivation and the leverage to champion payment change.

The Scale of the Chronic Disease Problem

By 2005, an estimated 133 million Americans lived with at least one chronic condition, a figure projected to reach 171 million by 2030. These patients accounted for a hugely disproportionate share of national health spending. The Centers for Disease Control and Prevention reported that chronic diseases caused 70 percent of all deaths in the United States and consumed 75 percent of the nation's $2 trillion annual medical bill. More than 25 million people -- one in every ten Americans -- faced major activity limitations because of chronic conditions. The economic impact extended to the workplace: the American Hospital Association estimated in 2007 that asthma, diabetes, and high blood pressure alone produced 164 million days of employee absenteeism each year, costing employers $30 billion.

People with chronic diseases, particularly those managing multiple conditions, typically see numerous providers and take several prescription medications. This creates elevated risks for duplicated tests and services, preventable hospitalizations, and harmful drug interactions. The best chronic disease care involves coordinated, continuous treatment by a team of health professionals. A diabetes patient with severe congestive heart failure, for example, benefits when the primary care physician and nursing staff communicate regularly with the patient's cardiologist about disease status and medications, when a nurse or peer educator provides diabetes self-management training, and when the patient is connected to community resources addressing social, behavioral, mental health, and home health needs.

Why Fee-for-Service Falls Short

The prevailing health care delivery and payment systems were built to diagnose and treat acute, episodic illness -- not to manage ongoing conditions. Fee-for-service payment rewarded providers for the volume of services delivered, not for outcomes achieved or care coordinated. Physicians were not paid for phone calls, emails, or time spent coordinating with other providers. Hospitals were paid per admission, creating no financial incentive to keep chronically ill patients out of the emergency department. Nurse practitioners, social workers, and patient educators who play central roles in chronic disease management often could not bill for their services under existing payment rules.

The Chronic Care Model, developed by the Group Health MacColl Institute for Healthcare Innovation, laid out the essential elements of a system designed for high-quality chronic disease care: an organizational culture that prioritized quality, clearly defined staff roles and follow-up procedures, decision support grounded in evidence-based guidelines, clinical information systems to track patient progress, patient self-management support, and links to community resources. None of these elements were naturally supported by fee-for-service payment.

Experimental Payment Pilots

The study identified several categories of payment experiments. Pay-for-performance programs, the most common approach, offered bonuses to providers who met quality benchmarks for chronic disease care. While these programs raised awareness, their financial incentives were typically too small to drive fundamental practice changes. Some Medicare demonstrations tested per-patient monthly payments to physician practices for care coordination, while a handful of private payers experimented with bundled payments covering an episode of care across multiple providers. A few integrated delivery systems, such as Geisinger Health System in Pennsylvania, were testing global payment models that put providers at risk for total costs while rewarding quality. But these remained isolated experiments rather than system-wide reforms.

Barriers to Meaningful Reform

Four major barriers blocked progress on payment reform for chronic disease care. First, care delivery itself was deeply fragmented -- patients saw multiple unaffiliated providers across different settings, making it difficult to design payment systems that rewarded coordination among parties who did not share financial relationships or information systems. Second, payment rules generally did not cover the non-physician services most important to chronic disease management, such as patient education, care coordination by nurses, and linkages to community support services. Third, many providers stood to lose revenue under reformed payment models, since fee-for-service income from office visits, tests, and procedures would decline if chronic disease care became more efficient. Fourth, no single stakeholder had both the incentive and the power to drive reform -- insurers lacked sufficient market share in most areas, employers were fragmented, providers were resistant, and government programs moved slowly.

Implications for Policymakers and Payers

Without fundamental changes in how providers are paid for caring for chronically ill patients, the study concluded, efforts to improve quality and reduce costs would remain limited in their impact. The report called for payers and policymakers to move beyond small pilot programs and begin testing payment models at a scale large enough to affect provider behavior. Medicare, as the largest single payer and one with substantial chronic disease expenditures, was positioned to lead. Private payers could amplify the effect by aligning their payment reforms with Medicare's direction. The report also emphasized the need for better data infrastructure to support quality measurement and accountability, and for regulatory changes to allow non-physician providers to bill for chronic care management services.

Sources and Further Reading

This Research Brief was commissioned by the California HealthCare Foundation and conducted by Ann Tynan and Debra A. Draper of the Center for Studying Health System Change. Data on chronic disease prevalence came from the Centers for Disease Control and Prevention; workforce impact estimates were from a 2007 American Hospital Association report. The Chronic Care Model was developed by the Group Health MacColl Institute for Healthcare Innovation. The study drew on interviews with health plan executives, provider organizations, employer groups, and policy experts.