A team of physicians, finance experts, and measurement scientists worked to develop a contract model that would give hospitals and physicians meaningful incentives to improve the quality of care while conserving health care resources. BCBSMA tested the concept with key hospital and physician leaders, local and national policy experts, employers, and other health care purchasers throughout the development process, and used that feedback and input to finalize the model.

What resulted is the Alternative Quality Contract, an innovative global payment model that uses a budget based methodology, which combines a fixed per-patient payment (adjusted annually for health status and inflation) with substantial performance incentive payments (tied to the latest nationally accepted measures of quality, effectiveness, and patient experience). The goal of this restructured model is to enable the delivery system to give the patient the best result from the most appropriate treatment (e.g. based on the best medical evidence), by the right kind of provider (e.g. specialist, family doctor, nurse), at the right time (when intervention is most appropriate), and in the most appropriate setting (e.g. hospital, physician office, independent laboratory, home).

The AQC was offered to provider organizations on an optional basis, with the first contracts effective January 2009, and is a key element of BCBSMA's overall strategy to align payment methods, performance measurement, and provider and member incentives, while increasing transparency of cost and quality information. With this new model contract in place, BCBSMA continues working toward the goals of improving the quality AND affordability of health care for members, providers, and employers.

The goal of AQC is to reduce the medical expense trend of participating organizations by half over a five- year contract term, as illustrated below.

• Employers realize lower trend increases over time as the rate of increase in provider revenue slows
• Overall, the impact of the AQC is expected to reduce the otherwise anticipated trend by half

The Alternative Quality Contract includes several key components that are dependent on each other to create the necessary alignment of incentives:

Financial Structure

Global Budget
BCBSMA establishes a global budget for AQC provider organizations to cover all services and costs. The contract model is designed to include inpatient, outpatient, pharmacy, behavioral health, and other costs and services associated with each of their BCBSMA patients. The initial global budget is based on historical health care cost expenditure levels. It is adjusted each year for inflation, and the health status of the provider's specific BCBSMA patients. Providers retain the margins derived from the reduction of inefficiencies.

This arrangement empowers physicians and hospitals to provide the care they believe is needed to improve the health of their patients. They are liberated from many of the constraints of traditional payment models giving them the flexibility to, for example, have e-mail exchanges with patients (e-visits), offer group visits for patients who share a common chronic illness, or provide follow-up home visits for patients after hospitalizations. This independence from many of the limitations associated with traditional payment models is the foundation of the AQC.

Performance Incentives
In addition to the global budget, BCBSMA also offers providers performance incentives with the potential to increase the total payment by up to 10 percent. It is a key feature of the AQC, designed to promote quality, safety, and patient-centered care. These incentives apply to both physician and hospital services, and are intended to support providers in achieving the highest levels of safe, affordable, effective, patient-centered care. The incentives are linked to clinical performance measures related to process, outcomes, and patient care experience, and include inpatient and ambulatory care. Bonus payments for performance on quality measures serve as disincentive for underuse, which was a key criticism of capitation in the 1990s.

Performance Measures
Performance incentives are linked to an equally important component of the AQC—performance measures, which are meant to collectively make care safe, timely, effective, affordable, and patient-centered. These measures are:

• Drawn from nationally accepted measure sets
• Recognized as clinically important
• Grounded in empirical evidence that demonstrates the measure provides stable and reliable information at the level at which they are reported (for example, by individual physician, group practice, or institution).

A detailed list of measures included in the AQC is available below.

The performance incentives are based on absolute performance rather than the network average to provide stable targets and reward improvement. There is also added weighting for clinical outcome measures, such as keeping blood pressure under control, reflecting the importance of improving the actual health of the patients. Performance measures are established at the beginning of the contract and do not change during its term.

An additional feature of the AQC performance incentive model is that it encourages provider organizations to work with us on what we call "developmental measures." This component of AQC represents a unique collaboration between BCBSMA and provider organizations, offering the opportunity to further develop and test new performance measures that can become important to ensuring safe and effective care.

Sustained Partnership
The AQC arrangement is a five-year agreement that encourages providers to invest in long-term, lasting improvement initiatives. It also establishes a new kind of partnership between the health plan and the organization that moves away from the sometimes adversarial relationship, which is focused on ongoing contract negotiations, and toward a more collegial partnership, which is focused on and committed to each other's success. Throughout the five years, providers are expected to focus on and carefully manage both the quality and cost of services their BCBSMA patients require, and to coordinate the integration of their patients' care across the full continuum of health care services.

Integration Across the Continuum of Care
The very essence of the AQC is the important role of the primary care physician (PCP) as the center of a patient's care. By giving PCPs significantly increased flexibility and rewarding them for improved health outcomes, the AQC underscores that principle and encourages the integration and coordination of care for both acute care episodes and for chronic conditions.

AQC Savings Opportunities
The AQC creates new incentives for providers to drive waste out of the system and focus resources on achieving the highest level of clinical outcomes for their patients by allowing providers to retain savings from the global budget to re-invest in system improvements. Opportunities to achieve savings under the AQC include reduction in duplicative services, use of more cost-effective services and providers, and the elimination of potentially preventable costly services, such as certain hospital complications and readmissions.

• Global budget to cover all health care services
• Performance incentives based on quality and safety metrics
  • Up to 10% above global budget
  • Protection against withholding of needed care
• Savings opportunities by addressing underuse, misuse, and overuse within global budget level
• Inflation factor derived from CPI
  • At controlled and predictable level

Provider Criteria. BCBSMA does not require a specific organizational structure for provider organizations to participate in the AQC. Some AQC contracts are solely with physician groups (PCPs and specialists), while others are with delivery systems that include both physician and hospitals. The AQC provider organization is responsible for the cost and quality of services rendered across a member's entire continuum of care, including services provided in the hospital setting, regardless of whether or not a hospital is part of the AQC arrangement. The provider groups can retain savings if costs go down, and are responsible if costs increase, putting the focus on accountability and potential reward for improvement with the AQC group. In those instances when hospitals and physicians are collectively included in the AQC contract, hospitals and physician groups share accountability. The level of risk can vary by provider group, but within a group, the up-side risk (potential savings) is always equal to the downside risk (potential costs.)

Baseline criteria includes that the participating group must have PCPs who care for at least 5,000 to 10,000 BCBSMA HMO members, depending on the level of risk assumed by the group.

Member Criteria. Currently, the AQC applies only to members with HMO coverage, because the HMO requirement to select a primary care provider allows us to direct payments to the AQC group with which each member's primary care provider is affiliated. We are exploring ways to expand AQC membership criteria to include PPO members by applying a sound methodology for "attributing" a PCP to each member.

Payment Process. Throughout the term of the AQC, all member claims are reimbursed on a fee-for-service basis. At the end of each year, all of the services and costs, including inpatient, outpatient, pharmacy, behavioral health, and others that are associated with the AQC provider organizations' BCBSMA patients, are then charged against the AQC global budget. This determines the provider organizations' performance relative to the global budget.

Mindful of the criticisms of capitation, BCBSMA designed the AQC to address and incorporate the lessons learned, advancing global budgets past the pitfalls of the 1990s:

Concern: Capitation failed to adequately fund care.
AQC Solution. In the AQC, the global budget is based on actual historical costs for a patient and is adjusted for health status so that payments adequately reflect the relative morbidity of patients. The budget is also adjusted annually, in line with inflation. In addition, the contract is intended for providers with a sufficient number of BCBSMA members to support an adequate distribution of risk.

Concern: Capitation fostered underuse of health care services.
AQC Solution. Since the AQC includes a global budget for all services received by a BCBSMA member, and provides incentives for quality outcomes, the contract model rewards doctors for providing appropriate and efficient care.

Concern: Capitation failed to address quality, focusing exclusively on cost of care.
AQC Solution. The global budget is coupled with a set of nationally accepted performance measures so that BCBSMA and providers can ensure that patients are receiving safe, appropriate, and effective care. This pairing of payment with performance measures safeguards patients from undertreatment by documenting and holding providers accountable for both the delivery of appropriate services and the health outcomes associated with those services. Public reporting of physician and hospital performance, which is in development in Massachusetts, will further strengthen that level of accountability.

Concern: Capitation created incentives that encouraged physicians to avoid sick patients.
AQC Solution. By adjusting the global budget for health status, the model adequately considers changes in patient morbidity, eliminating any incentive to avoid sick patients.

Concern: Capitation shifted all risk to the provider organization rather than just utilization risks associated with providing health care.
AQC Solution. The AQC is designed to have an appropriate level of risk sharing between BCBSMA and the provider organization. BCBSMA offers differing levels of risk sharing arrangements with AQC provider organizations, depending on the size of the group, the degree of integration, and the ability to assume risk for utilization and variations in care. In addition to risk sharing, the AQC includes tools to protect providers from unforeseen financial impact, including adjusting for health status, risk limits (typically BCBSMA is responsible for large losses on individual claims or across populations), and stop-loss (or reinsurance.)

As of April 2010, BCBSMA has entered into new partnerships with nine provider groups, who represent about 25 percent of our network's primary care physicians, about 23 percent of our network's specialists, and about 31 percent of our HMO membership.

BCBSMA is in the process of discussing AQC arrangements with additional provider organizations for 2010 participation, and anticipates that the number of providers who sign an AQC will continue to increase over the next several years.

There are early indications among participating AQC physician groups and hospitals that their efforts are having the desired effect, aligning the incentives of patients, physicians, hospitals, employers, and health plans to advance high-quality, high-value health care.

Validating Progress
The Commonwealth Fund has commissioned a study led by Michael Chernew, M.D., Ph.D., from Harvard Medical School, and Robert Mechanic, Senior Fellow, from the Heller School for Social Policy and Management, Brandeis University, to evaluate the AQC. The study will incorporate claims data from calendar years 2005 through 2010. By analyzing sufficient pre- and post-AQC adoption data, the study will provide a valuable lens to measure success. The study will also provide key insights for physician groups, health systems, payers, and public policy leaders about success factors and challenges associated with the AQC and will help inform future policy development related to health care payment reform.