Incentive-based contracts thriving in commercial insurance market

Health plans that cover two-thirds of commercially insured Americans used incentives this year to motivate hospitals and doctors to improve quality and manage costs, according to a survey. Those contracts were responsible for 40% of insurers' medical spending.

The survey is the second by Catalyst for Payment Reform, a health policy not-for-profit founded and funded by employers, and the results offer a snapshot of how some of the nation's largest insurers use the promise of financial gain or loss to influence the way providers deliver care and run their businesses.

Four of the five largest U.S. insurers were among 39 health plans that responded to the survey, and together they cover 101 million lives, Catalyst said. About 15% of the enrollees had providers with incentive-based contracts, the survey found.

Employers welcome the greater use of incentives, Catalyst said, and the survey suggests they are proliferating quickly. The 40% of health spending tied to incentives this year is a dramatic increase from 10.9% in 2013 (although the comparison is imperfect because different plans responded to the survey each year).

But with use of new incentives comes questions about which incentives are most effective, something that employers confront as insurers market health plans that employ incentives differently. “We are in an amazing era of experimentation,” said Suzanne Delbanco, executive director of Catalyst for Payment Reform. “We have a lot to learn about what the right balance of incentives are.”

The organization is launching an effort to develop a standard method for employers to evaluate which health payment reforms are most effective, said Andrea Caballero, a program director for Catalyst. “They're being bombarded,” as health plans market new payment models.

Delbanco said the effort will seek to identify measures that reveal the greatest areas of variation in quality and cost.

The survey showed limited use of accountable care, a payment model that gained significant visibility and traction when it was introduced in Medicare under the Patient Protection and Affordable Care Act. Roughly 3% of private health plan spending this year is under accountable care contracts, the survey found.

Notably, the most common incentive in the survey was capitation, or lump sum payments to cover patients' monthly medical bills. Capitation is the riskiest incentive for providers, who must absorb losses when medical bills exceed the lump sum payments. Capitation contracts accounted for 15% of health plans' health spending. A limited form of capitation accounted for another 1.6%.

Dr. Robert Berenson, a Catalyst board member and a senior fellow with the Urban Institute, said he was favorably impressed by the limited use of accountable care and the greater use of capitation. Accountable care typically offers providers a small and delayed financial incentive to change wasteful behavior, he said, whereas capitation creates a significant risk of loss for providers.