In February 2009, Michael Zucker told a group of high-paid surgeons something they did not want to hear: The way they earned a salary was about to change.

Zucker is the chief development officer at Baptist Health System, a five-hospital network in San Antonio. For 37 common surgeries, such as hip replacements and pacemaker implants, it would soon collect “bundled” Medicare payments. Traditionally, hospitals and doctors had collected separate fees for each step of such procedures; now they would get a lump sum for treating everything related to the patient’s condition.

View Photo Gallery: The Affordable Care Act is mostly known for its mandate to expand health insurance to 30 million more Americans within a decade. But much of the law’s 905 pages are dedicated to an effort that’s arguably more ambitious: the overhaul of the U.S. business model for medicine. These charts look at how we pay for health care now, how that's gone wrong and what the health-care law attempts to change about that.

If a hospital delivered care for less than the bundled rate, while hitting certain quality metrics, it would keep the difference as profit. But if costs were high and quality was too low, Baptist would lose money. For the first time in their careers, the doctors’ paychecks depended on the quality of the care they provided.

Four surgeons quit in protest.

“I’d describe the reception as lukewarm at best,” Zucker says. “There was a lot of: ‘How could you do this?’ and ‘I’m not going to participate.’ ”

The program launched in June 2009 with a checklist of quality metrics. To earn a bonus, surgeons would, among other things, need to ensure that antibiotics were administered an hour before surgery and halted 24 hours after, reducing the chances of costly complications.

Only three doctors hit the metrics that first month, but their bonuses caught the attention of others. “There was a lot of, ‘Why are those doctors getting more, and I’m not?” Zucker says. Eight doctors got bonus payments in July; two dozen got them in August. Compliance with certain quality metrics steadily climbed from 89 percent to 98 percent in three months.

Two-and-a-half years later, Baptists’ surgeons have earned more than $950,000 in bonuses. Medicare, meanwhile, has netted savings: Its bundled rate is about 5 percent lower than all the fees it used to pay out for the same services. “It wasn’t a home-run,” says Zucker, noting the start-up costs in administering the program — not to mention a handful of lost employees. “But I’d call it a solid triple.”

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The Affordable Care Act is mostly known for its mandate to expand health insurance to 30 million more Americans within a decade. That’s the side of the legislation Democrats touted last week, when the law hit its two-year anniversary. It’s also the point that has roused the most ire from opponents. Insurance expansion is at the heart of legal challenges the Supreme Court will take up on Monday, which argue that forcing people to buy insurance coverage is unconstitutional.

But much of the law’s 905 pages are dedicated to an effort that’s arguably more ambitious: an overhaul of America’s business model for medicine. It includes 45 changes to how doctors deliver health care — and how patients pay for it. These reforms, if successful, will move the country’s health system away from one that pays for volume and toward one that pays for value. The White House wants to see providers behave more like Baptist Health Systems, rewarding health care that is both less costly and more effective.

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The health-care industry was moving toward value-based payments even before health reform passed. But the Affordable Care Act has played an important role, economists say, by signalling that America’s biggest health-care spender — the federal government — is also headed in that direction.

“The Affordable Care Act is like two laws in one,” former Medicare administrator Don Berwick said. “There’s the coverage piece, and I think that’s proceeding well. On the other side, there’s health-care delivery reform.”

Value versus volume

Even as Congress was debating the Affordable Care Act, economic and demographic trends were steering the industry’s business model off a cliff. As costs ticked higher, Americans were losing insurance coverage. They were making fewer trips to the doctor, which meant less revenue. Baby Boomers landed in Medicare, which pays less than private insurance, further shrinking health-care providers’ income. Health systems reevaluated their volume-dependent bottom lines.

“There was a patient mix shift happening that, unless hospitals changed, they were going to be losing money in about five years,” says Chas Roades, chief research officer at consulting firm the Advisory Board Co.

In Washington, the Obama administration was facing a different problem: Medicare was eating up a growing share of the federal budget. The program’s costs had more than doubled in a decade, from $212 billion in 1999 to $499 billion in 2009. Since it started in 1965, the program has paid providers based on volume. Most private insurance works this way, too: In 2008, 78 percent of health plans paid for coverage on a fee-for-service basis. That system, economists argued, was driving up costs: It pushed doctors to provide as much care as possible, regardless of whether it was effective.

Across the country, however, a few health-care systems had made high-profile moves in another direction. Places like Kaiser Permanente in California and the Mayo Clinic in Minnesota were setting strict budgets for their patients and demonstrating, in study after study, that they could deliver higher quality outcomes at a lower cost than other hospitals and doctors.

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What these systems had in common was a model called integrated care, where doctors, hospitals and insurers work together to deliver the most cost-effective treatments. In integrated care systems, doctors are often paid a flat salary, rather than charging for each procedure they perform. They often receive incentive payments for hitting certain quality metrics.

Alongside a handful of success stories, there were dozens of cautionary tales. Health-care costs did decrease in the mid-1990s, when Health Maintenance Organizations limited patients’ access to more costly, speciality providers, but patients left such payment plans in droves, which encouraged providers to stick with a volume-driven system.

For the Obama administration, this represented an opportunity. Insurance premiums had grown by 131 percent between 1999 and 2009. If Congress was going to extend insurance to millions more Americans, it wanted a guarantee that those benefits would be affordable. The integrated-care model, they hoped, could control those costs even as it improved the quality of care. No “rationing” needed.

Payment reforms became “massively and unstoppably important,” says Bob Kocher, a former White House health-care adviser. “There was a sentiment among the Democrats that the problem is spending, and a real desire to finance the coverage expansion, as much as possible, from delivery system reforms.”

It was unclear how quickly the federal government could move. Medicare’s whole infrastructure, from its billing software to its reimbursement levels, is built around paying doctors a fee for each service. Kocher remembers suggesting that the law should require that 20 percent of Medicare’s payments be bundled by 2015. A senior Medicare official, he recalls, nearly had an “allergic reaction” to that timeline.

The Affordable Care Act ultimately included 45 delivery system reforms. Fifteen of those change how Medicare doctors and hospitals are paid, according to an analysis by Sen. Sheldon Whitehouse (D-R.I.). The six that have rolled out thus far are largely voluntary, allowing those who think they can deliver more cost-efficient care to opt-in to new payment models.

But the remaining changes will be mandatory. Beginning in October, hospitals stand to lose 1 percent of their Medicare revenue if they can’t hit key metrics on “preventable readmissions” — patients who turn up at the hospital with a complication from an earlier procedure. That’s a big change from the current, volume-based system in which those readmissions generate additional revenue for a hospital.

‘Breathtaking change’

Although it’s not fully implemented, some say the Affordable Care Act has already significantly catalyzedthe health-care system. Leaders know where Medicare wants to go, even if they didn’t chart an especially aggressive path for how it would get there. “Forever and a day, everybody had been saying we had to change the way we paid for health care,” Roades says. “Now, we have a sense of direction of where the country’s biggest payer is headed. And that provides cover for everybody else to move in that direction.”

Roades calls the past two years ones of “breathtaking change.” When the Advisory Board Co. surveyed 69 hospital executives in November, just 16 percent said they had bundled payments in place. But of those who didn’t, 75 percent expected to within two years. Two-thirds expected they would have such payment arrangements with Medicare.

The health-care system has become increasingly integrated, with hospitals and insurance plans buying up doctors’ offices. Consulting firm Irving Levin Associates saw health-care merger activity shoot up 11 percent, from $205 billion in 2010 to $227 billion. Their analyst, Stanford Steever, attributed that largely to the Affordable Care Act.

Others, however, point out that it’s too early to see any data on health-care outcomes, as only a handful of the payment reforms have come online. And there are signs that the industry may not be ready to leave the payment model it’s depended on for decades.

The Obama administration stumbled in launching its most sweeping effort, the Accountable Care Organization program. The hope was to get health-care providers to band together and accept a flat fee for all the care provided to a set population of Medicare patients. That way, different providers would have an incentive to coordinate the care a given patient was getting by different specialists. Currently, individual patients can be treated by many different doctors who aren’t full aware of what the others are doing, much less working in close cooperation with them.

“Initially, there was a lot of euphoria about the ACO concept,” says Anders Gilberg, senior vice president of government affairs at the Medical Group Management Association.

‘Unknown reward’

When draft regulations came out, providers balked, contending in thousands of comment letters that it was too much of a gamble. If patients’ care costs didn’t decrease, health systems would find themselves in the red.

“There’s a lot of risk, and it’s frankly for an unknown reward,” Gilberg says.“So I’d question, as this is structured, whether it will fundamentally change our health-care system.”

The White House revised the rule, and eventually attracted 32 health systems to kick off the program, as so-called ACO Pioneers. But those systems, so far, report little change in how they deliver care: The ones who felt confident enough to participate were already delivering integrated care and, with the start up costs of administering the program, are not certain they’ll see significant savings.

“We’re not projecting this to be a windfall,” says Mark Eustis, president of Fairview Health System in Minnesota, an ACO site. “We’re hopeful we’ll cover the revenue lost that we would have received in a fee-for-service plan. We’re not expecting big increases in what we’re actually paid.”

Other providers who like the idea of more value-based reimbursement also question its limits. Baptist Health Systems managed to net $8 million in savings when it started accepting flat fees. But most of that came from negotiating lower prices on the medical devices it used. Only about 10 percent of savings came from making the hospital’s care model more efficient. “What we got first was the low-hanging fruit,” Zucker says.

Value-based reimbursement comes with a bevy of logistical challenges. A health-care system must figure out what counts as quality care, the metrics by which it ought to judge its doctors and hospitals. It also has to decide who gets what share of the savings. At Baptist, surgeons have questioned how the hospital divvies up its own savings (which is, in some ways, constrained by the terms Medicare set).

“The hospital got $8 million, and the surgeons got $1 million,” says Ty Goletz, a orthopedic surgeon at Baptist. “That’s not necessarily looked on favorably by physicians.”

The obstacles likely explain why, for its part, Medicare does not expect volume-driven medicine to disappear overnight. “For the time being and the future, we’re going to have a large proportion of Medicare who are paid through fee-for-service,” Medicare’s deputy administrator Jonathan Blum said.

But the system, he says, is shifting away from it. “The goal, quite simply, is to improve our quality metrics and bring down per-capita costs,” Blum continued. “That’s going to be the ultimate success.”

When Baptist Health Systems started down this path in 2008, it had little idea where it would lead or whether the doctors would revolt. Now that 78 percent of his doctors have received bonus checks, Zucker is more confident.

“It’s created a different relationship between us and our physicians,” he says. “For a long time, we’ve kept each other at arm’s length. And this really changed how we looked at physicians.”

Baptist Health System recently applied for the Affordable Care Act’s new bundled-payment program, which will shift more procedures to flat fees. That program will also expand the amount of cost savings that doctors are allowed to receive. It’s another step in the right direction, says Goletz, who has operated at Baptist for three decades.

“The way I look at it, Medicare used to pay a bunch of money into a bunch of little buckets, and some were ours, and some were theirs,” he says. “We decided that rather than paying into those little buckets, we should pay into one big bucket. We cleaned up the waste, saved money and lowered our costs.”

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