The seven characteristics of successful alternative payment models

To aid APM (re)design and support providers and payers in their value-based contracting strategy, this paper highlights seven characteristics that distinguish well-performing APMs from poorly performing models.

Alternative payment models (APMs) are central to the efforts to reduce the growth in healthcare costs and improve outcomes for patients. Yet some stakeholders remain skeptical of their potential. This is understandable, because APMs have shown mixed results. We have identified seven characteristics of well-designed models that yield meaningful savings for payers, improve margins for high-value providers, and improve patient outcomes.

1. Density and scale

For an APM to succeed, the proportion of the provider’s book of business included in the model must be sufficiently large (high density) to motivate providers to change, justify investments, and adopt dedicated clinical-operational workflows. When the proportion is small (low density), the incentive to change is weak. Worse, the provider’s economics may be adversely affected if changes spill over to fee-for-service (FFS) patients.

The absolute scale of the entity contracting the APM (APM contractor1 ) also matters. Providers with high volumes of patients in APMs can better afford the necessary investments and target operational changes for the APM patients. Scale also reduces the impact of chance on the contractor’s measured performance. Medicare Shared Savings Program (MSSP) accountable care organization (ACO) results suggest that even with 20,000 members, ACOs can routinely save or lose based on random variation alone.

APM design can influence density and scale in multiple ways, including minimum thresholds for participation; concentration of patient volume in APM providers; smart caps on outliers (that do not meaningfully reduce savings opportunities); and alignment with other payers on incentives, measures, and operational requirements. Allowing virtual contracting entities also increases scale, but these may be difficult to successfully migrate to risk.

2. Strategic leverage

The leverage available to APM contractors varies considerably. Physician-led APMs can realize savings by reducing admissions, rationalizing diagnostic pathways, and referring patients to lower-cost hospitals—all without incurring revenue loss. With relatively small operating budgets (compared with the total costs of care), savings can have substantial impact on revenue and margins.

For hospitals, these “savings” would be realized largely at the expense of their own revenues, which may explain the more modest savings seen in hospital-led APMs (even those that are well designed):

  • Hospital-led ACOs: 1–2%
  • Physician-led ACOs: 3–5%
  • Hospital-led bundled payment: 3–5%
  • Physician-led bundled payment: 5–8%

Yet many opportunities for hospitals exist. Some hospitals can reduce post-acute costs without impacting their revenue, for example, or they can focus on “best-in-class” areas of expertise to increase efficiency and market share. They can also increase margins by replacing the avoided (re)admissions with other patients, based on improved physician alignment, thus receiving both shared savings and additional revenue. This approach combines a more traditional revenue-growth strategy with savings realized per patient or episode.

3. Skin in the game

Successful APMs tend to include financial risk. Financial accountability for losses ensures providers’ organizational commitment. Models that share both savings and losses with providers allow payers to offer higher shared savings percentages—up to 100%—which helps providers justify needed investments.

Successful APMs also include accountability for outcomes and costs for both low-risk and high-risk patients. Less experienced APM contractors may push to exclude high-risk patients or care outside their direct sphere of influence, which reduces the percentage of savings payers can share. Also, the proposed exclusions (e.g., high-risk patients) are often where the largest possible savings are. Here, a seemingly safe approach can leave both payer and provider with empty hands.

4. Focus on the forest rather than the trees

Rewarding value is possible only when costs can be juxtaposed with quality of care that meaningfully reflects the patient’s journey. Most quality measures used for APMs, however, focus on processes that reflect only fragments of the journey. Two innovative metrics move us closer to measuring outcomes. Surveys of patient-reported outcomes (PROs) assess patients’ symptoms and functional improvements in ways claims data cannot capture. For many conditions, PROs are the measure that matters most. In addition, the rate of potentially avoidable exacerbations and complications (PECs) is a powerful claims-based metric that captures another core outcome of care: the extent to which the care provided helps to reduce a condition’s potential complications or exacerbations.

5. Calibration of risks and rewards

Successful APMs are built upon design choices that balance the payer’s interest in reducing medical costs and the provider’s interest in minimizing risk and maximizing retained savings. Successful APMs drive predictable savings for payers but remain sufficiently attractive to providers to optimize participation in voluntary models and avoid demotivation and resistance in mandatory ones. Although these goals might not seem compatible, making the right combination of design choices allows APMs to meet both needs. Risk adjustment, benchmarking, and attribution methods can make or break success.

6. The right mix of incentives, motivation, and feasibility

Successful APMs combine financial incentives with two other key behavioral modification drivers: professional motivation and feasible targets. Restoring the link between provider economics and the professional motivation to deliver patient-centered, high-quality care creates a powerful drive. In addition, successful APMs show a feasible path for providers to deliver higher-value care. The clearer it is to providers how to achieve high-value performance, the more they are likely to succeed. This makes general ACOs a natural anchor point for primary care physicians (PCPs), and episodes of care or specialized ACOs attractive to specialty care providers.

7. Accounting for consumer behavior

Misalignment of the contractor’s incentives with consumer incentives can threaten an APM’s success. APM contractors can identify and target specific value “leaks” and introduce initiatives to improve consumer behaviors, treatment adherence, and referrals to high-value providers. Payers can also encourage behaviors through well-designed benefits and value-based insurance products.

While these principles appear intuitive in hindsight, most are not yet commonly and consistently applied. Were payers and providers to do so consistently, APMs may achieve consistently greater impact and following from that, broader adoption.

About the author(s)

Marc Berg is a partner and David Nuzum is a senior partner in McKinsey’s Washington, DC, office. Seema Parmar is a senior expert in the Calgary office.