Health insurance companies are coaxing doctors and hospitals away from fee-for-service medicine at an unprecedented pace to new accountable care models they hope will tame health costs, improve quality and boost earnings.
Under the traditional fee-for-service model, doctors and hospitals are paid on a per treatment or procedure basis that generates volume and higher costs. The fee-for-service approach isn't always good for patients either if they are victims of excessive or unnecessary treatment.
By comparison, accountable arrangements pay doctors and hospitals to keep patients healthy and out of more expensive inpatient settings. Providers also have to achieve certain quality measures and outcomes for their patients in order to get extra money or bonuses. In health industry parlance, executives call it a push to "value-based" care.
But what supporters hope the value-based approach does for health plans and their bottom lines is wrench more expensive and potentially unneeded care from the U.S. health care system.
Health plans like Wellpoint (NYSE:ANTM), Aetna (NYSE:AET), Humana (NYSE:HUM) and UnitedHealth Group (NYSE:UNH) are setting aggressive goals and being more vocal to the financial community about the percentage of contracts they have in value-based or "accountable" arrangements.
Many insurers are expected to update Wall Street analysts and investors on their progress moving away from fee-for-service to accountable care in their second quarter earnings reports, which begin next month and should be watched closely.
Value-based arrangements come in many forms including "bundled payments" to a group of providers to treat a population of patients or via "patient-centered medical homes" and accountable care organizations (ACOs), which are umbrella entities that group providers together, rewarding doctors and hospitals for working together to improve quality and rein in costs.
"Our drive toward value-based arrangements has become our 'new normal', and today includes more than 110,000 contracted physicians and over 100 ACO-type organizations, compared to less than 50 ACOs a year ago," said Doug Wenners, senior vice president who handles provider contracts for Wellpoint, parent of several Blue Cross and Blue Shield plans that operate under the Anthem brand, in a statement to The Motley Fool.
Wellpoint said its ACO with Healthcare Partners physician group in California saved nearly $5 million in just six months.
Insurers say the value-based approaches are moving beyond the experimental stages.
"We're not just piloting this effort by investing in ACOs and patient-centered medical homes, we're applying the principles more broadly by investing in a new type of relationship with providers that rewards quality-driven, cost-effective care," Wenners said. "We hope to have 75 percent of primary care physicians in our networks participating in this population health model by 2016."
The biggest dollar figure disclosed thus far came last year when UnitedHealth Group said it would double to more than $50 billion the value of contracts it has with doctors and hospitals that are in accountable care arrangements of some kind.
UnitedHealth now says it expects its "accountable care" contracts to total $65 billion by the end of 2018 from $30 billion today. They will come in many forms.
"Most physicians are enthusiastic about accountable care payment models and would rather be paid for delivering value and better outcomes, and rewarded for spending more time with patients," UnitedHealth said in a statement. "Another reason for increased interest is the fact that we offer a variety of accountable care contracts. This enables us to customize payment models with care providers and meet them where they are in terms of readiness to move from fee-for-service to value-based contracts."
Aetna, too, is making in-roads with more than 1.7 million of the company's health plan enrollees getting medical care through value-based networks that include "36 accountable care organization collaborations, 114 patient-centered medical homes, 134 Medicare Advantage collaborations and 81 high-performance networks acquired in the Coventry transaction."
"Looking forward, we project that 20% to 25% of our medical costs will run through some form of value-based network contract in 2014 and are committed to increasing that participation percentage to 45% by 2017," Aetna said in a statement.
The federal government is already seeing results through the Medicare Shared Savings Program. Almost half of the ACOs that contracted with Medicare in 2012 had lower medical expenses than projected. They exceeded their quality benchmarks and therefore 29 ACOs generated shared savings of more than $125 million, according to the Centers for Medicare & Medicaid Services.
There are now more than 5 million Medicare beneficiaries receiving care through an ACO model, and insurance companies see that as only growing.
Humana spokesman Alex Kepnes said the insurer's "goal is to have 50 percent of our individual Medicare Advantage members taken care of by primary care physicians involved in full-risk accountable care arrangements by 2017."
Though U.S. health care is still largely a fee-for-service world, insurers see every contract as an opportunity to curb health spending, thereby hopefully boosting profits (and ultimately share price).
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Bruce Japsen has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group and WellPoint. The Motley Fool owns shares of WellPoint. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.