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Blue Cross Blue Shield’s Alternative Quality Contract could cut medical costs

Blue Cross Blue Shield’s decision last week to vastly expand its Alternative Quality Contract — which rewards doctors for how well they care for patients, not just how many procedures they perform — is good news for an industry plagued by rapidly increasing costs. Experts have long contended that global payment systems such as the Alternative Quality Contract are the best way for health insurers to cut costs and deliver higher quality care. Blue Cross Blue Shield’s experiment will show whether that theory works on a large scale. If it does, other insurance companies should follow.

Traditionally, health insurers have paid doctors a set amount for each procedure they perform. But this fee-for-service model provides physicians with a financial incentive to prescribe more treatments than might be necessary, driving up to cost of care for the patient. Global payment systems such as the Alternative Quality Contract turn this model on its head. Instead of waiting to be billed by a doctor, insurers offer a lump sum to cover the cost of care for a certain population. If health care providers can keep these patients healthy for less, they receive a bonus, but if they come in over budget, they receive a penalty. The idea is to get doctors to cut costs without compromising quality by providing them with an incentive to perform procedures in lower-cost settings like community hospitals, and to focus on primary care and preventative medicine.

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Global payment programs aren't a new idea — Blue Cross Blue Shield debuted its Alternative Quality Contract as a pilot program in 2009, and both Tufts Health Plan and Harvard Pilgrim Health Care have similar options. What is changing is the scale. The expansion will allow more than 1 million people to take advantage of Alternative Quality Contracts, possibly making it the largest global payment program in the country.

Research suggests that, at least with small-scale plans, global payment programs can be quite effective at controlling costs and improving outcomes for patients. But it is still an open question whether hospital systems designed to take advantage of fee-for-service will be able to adapt to this new business model if global payments are widely adopted. The expansion of the Alternative Quality Contract will provide much-needed clarity; Blue Cross Blue Shield, with its 40 percent share of the Massachusetts commercial insurance market, is big enough to pressure hospitals for rapid change.

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Insurers and hospitals should watch the Alternative Quality Contract closely. If it proves to be a success, then Blue Cross Blue Shield's competitors should ramp up their own experiments with global payment systems, and hospitals should ready themselves for what could be a total transformation of the health care market.