With the US spending significantly more per capita on health care than other wealthy nations, state policymakers are interested in promoting the adoption of alternative payment models (APMs) by health care providers. Research has shown that APMs can help reduce costs and improve quality.

While there is no universal definition of the term, all types of APMs generally transition financial incentives away from rewarding volume of services and toward rewarding patient-centered, high-quality, and cost-efficient care. A commonly used framework of APMs is maintained by the Health Care Payment Learning and Action Network (HCP-LAN), a group of health care leaders that provides thought leadership and strategic direction to facilitate adoption of APMs.

Use of Adoption Targets by States

Most health care industry observers agree adoption has been slow, and HCP-LAN concluded as recently as 2018 that fee-for-service remained the dominant model of health care reimbursement. Many state governments have explored adoption targets as a way to encourage greater uptake of APMs. A state can act as a convener to bring together stakeholders and pursue unified goals for payment reform. For example, through the State Innovation Models (SIM) initiative, the US Center for Medicare & Medicaid Innovation asked states to partner with payers and work toward a system where at least 80% of care is financed through value-based payment.

States can also use purchasing power to set contract requirements for APM adoption goals in publicly financed programs like Medicaid. Nearly half of the states currently require Medicaid managed care plans to provide a certain percentage of care through an APM.

The Public Hospital Redesign and Incentives in Medi-Cal (PRIME) program, a part of California’s expiring “Medi-Cal 2020” waiver, requires that 60% of managed care enrollees assigned to public hospitals receive care under an APM by this year. Covered California requires plans to report data about their adoption of APMs (PDF) and encourages them to use APMs that feature positive and strong incentives for managing cost and quality. With Medi-Cal and Covered California both preparing for recontracting and procurement, the state has opportunities to adjust purchasing and regulatory strategies to drive APM adoption.

In January 2020, California signaled a commitment to APMs when Governor Gavin Newsom proposed the establishment of the Office of Health Care Affordability, modeled after organizations in other states such as Massachusetts. The office would be a state entity charged with developing a comprehensive strategy for addressing rising health costs, including advancing APMs. In the spring budget, the Newsom administration deferred the establishment of the proposed office and may revisit it later.

The APM Adoption Targets California Should Consider

Here are important elements to analyze as California contemplates promoting APM adoption:

Define Market Segments and Goals

Each state must decide whether to set adoption targets for specific segments of the market — for example, Medi-Cal managed care plans, Federally Qualified Health Centers, county mental health plans — or the entire market. The multipayer approach, in which a state sets targets for public and private entities, can promote alignment among payers that encourages provider investments in creating infrastructure for APMs. However, a multipayer approach also poses significant challenges, because states have less direct control of contracting between private payers and providers. This has frequently resulted in forms of voluntary participation that limit the state’s ability to involve entities less willing to embrace APMs. Thus, many states focus their goals more narrowly on settings where they wield the strongest regulatory levers and power as purchasers, such as Medicaid. While the target is narrower in scope, it can build a foundation for more widespread reform.

States pursuing a multipayer approach should consider a suite of goals instead of just one. A single goal applied to all payers may fail to account for such differences as baseline levels of APM adoption. For example, by 2021, the state of Washington’s Value-Based Purchasing Roadmap calls for 90% of spending in Medicaid and public employee benefit programs to flow through certain types of APMs (PDF) compared to only 50% of spending in the commercial market.

Establish Clear Ways to Measure APM Adoption

States typically use the HCP-LAN framework to define which payment models count toward reaching an APM target. The framework allows stakeholders to speak a common language, align strategies, and compare progress across payer type and geography. Still, some states like New York and New Mexico have customized APM definitions to preserve flexibility and to meet specific needs.

Beyond establishing what types of models would qualify as an APM adoption target, states must decide how to track progress. States typically measure a proportion of expenditures, practices, or the eligible member or patient population. New York sets its goals as a proportion of total contractor payment dollars (PDF), while Rhode Island tracks expenditures and covered lives (PDF). A state interested in using payment models to encourage uptake of care coordination interventions may measure success by the number of residents reached as opposed to the dollars flowing through the payment model.

Data collection processes can vary. Massachusetts requires public and private payers to report data about APM adoption. Washington requires Medicaid managed care organizations to report in an annual survey and encourages providers to participate in the survey.

Learn the Local APM Landscape and Tailor Targets

A well-calibrated adoption target results from understanding the prevalence of APMs in given areas. California has an urgent need to understand current APM adoption across all health care markets.

Several states drill down to regional or county levels to understand progress in APM adoption level. Rural providers can be less experienced in managing financial risk, implementing health information technology, and participating in accountable care organizations than their urban counterparts. Differences in uptake between urban and rural regions may require policymakers to tailor adoption targets to geographic regions or to provide additional resources for regions with extra challenges in achieving value-based care.

Consider State-Sponsored APMs

States can directly sponsor specific APMs that invite or require payer and provider participation. State-led APMs in Medicaid, such as Tennessee’s, are common due to a state’s regulatory and purchasing power over public programs. Some states have sponsored APMs that are open to commercial participants or have pursued collaboration with the Center for Medicare & Medicaid Innovation to develop state-led, multipayer models.

Set a Quality Policy and Align on Measurement

Beyond cost savings, state APM initiatives often prioritize ways to help clinicians provide high-quality care. States such as Massachusetts and Minnesota have had an aligned measure set for about a decade. In California, the Integrated Healthcare Association has administered an APM program with aligned measures for nearly two decades. Facilitating agreement on a common measure set across payers is a potent way for states to advance policies supporting greater APM adoption.

Potential to Rein in Health Costs

An APM adoption target can enable states to reduce the growth of health care costs while encouraging high-quality care. However, states must ensure APM adoption is tied to metrics that consumers and policymakers care most about: affordability, timely access to care, and quality. While APM adoption targets are no silver bullet, they demonstrate that a state-led approach could create greater accountability for high-quality care, improved outcomes, and cost efficiency.

This article does not represent the views and opinions of the California Health and Human Services Agency. All views expressed are solely those of the author.

Justin Yoo

Justin Yoo was a policy intern with the California Health and Human Services Agency, where he produced research and recommendations for the state on health reform topics such as value-based purchasing and health plan contracting. He previously worked to develop and implement health policy in positions at the US Center for Medicare & Medicaid Innovation and the San Francisco Department of Public Health. Read More