The California Alternative Payment Methodology Pilot:

Real and Smart Reform

December 2014
Section 1902(bb) of the Social Security Act outlines payment to Federally Qualified Health Centers as
either the Prospective Payment System (PPS) or an Alternative Payment Methodology (APM) where a
health center is paid in an alternative manner to PPS but is still paid at least what it would have received
under PPS. The PPS floor has led some to reflect that an APM is not real reform. If reform can
broadly be defined as tangible change that advances the health system toward achievement of Triple
Aim goals through both changes in payment incentives and changes in the delivery of care, then the
APM being crafted by the State, California Primary Care Association, the California Association of Public
Hospitals and Health Systems and health plans is indeed real, and we would insert smart, reform as it
transitions away from the PPS volume-based model to a more flexible and risk-based payment
methodology that provides the flexibility and incentives for FQHCs to deliver value over volume while
maintaining a strong primary care network for the approximately 11 million Medi-Cal beneficiaries.
Californias APM pilot is an opportunity to demonstrate how flexibility in primary care payment can
result in progress toward the Triple Aim. We expect FQHC efforts in the pilot to deliver better care and a
better patient experience that will result in decreased utilization of high-cost services, the potential for
greater efficiencies in care delivery, and expanded primary care capacity. The value of the APM
demonstration will be demonstrated through a robust external evaluation.
The APM pilot is real and smart reform for all of the following reasons:
1. Health centers will bear financial risk under the pilot APM. Under the proposed APM pilot,
health centers will bear all the financial risk associated with transformed care, exactly the type
of care that is anticipated to increase under a payment model with increased flexibility. The
APM only technically ensures that FQHCs are paid at least what they would have received under
PPS for PPS-billable visits, precisely the visits that FQHCs will be challenged to transform
wherever it clinically makes sense. Many of the transformations in care (i.e. behavioral health

and primary care visits on the same day, group visits, email and phone visits) are not currently
billable under PPS and thus would not be paid for, even in a reconciliation.
Some have asked if the financial risks associated with transforming care represents real risk.
Examples from both outside and inside the FQHC world reveal that the financial risk is not just
real but significant. A review of six years of experience at Kaiser Permanente in Northern
California as the health system opened the options of virtual visits (phone and email visits) to
members reveals that with relatively constant membership, transformation of primary care
increased access but did not appreciatively decrease office visits. Additionally, some large FQHCs
have made sizeable investments in patient portals that allow secure email communication with
patients, among other functionality. While there are few FQHCs that have been able to make
such investments, these vanguard organizations can attest to the significant financial risk
associated with such transformations.

Finally, an option for reconciliation is only designed to protect health centers if traditional faceto-face utilization exceeds what was projected in rate setting, a scenario that is expected to be a
rare occurrence.

2. The APM helps shift the financial incentives for health centers in a coordinated manner, rather
than relying on piecemeal approaches by individual health centers and plans. Health centers
and plans have collaborated for years on pay-for-quality and risk-sharing arrangements through
initiatives like SNPs, PACE programs and pay-for-performance (P4P). However, these efforts
have not changed the underlying payment structure for health centers. While California FQHCs
have some P4P and risk-sharing arrangements in place with health plans, the payments tend to
be relatively small as a percent of total revenue and thus insufficient to financially stabilize a
health center moving into a greater risk-bearing arrangement. The pilot is an effort to align
payment strategies across various counties, laying the groundwork for movement towards a
new statewide system in the future. The nation is also watching California closely as a vanguard
state in FQHC payment reform.
California FQHCs believe that the APM would optimally be paired with P4P and/or risk-sharing
arrangements with health plans as a strategy for paring flexibility with incentive to meet Triple
Aim goals. Pilot participants have also articulated that the flexibility of the APM would facilitate
performance on Triple Aim metrics.
3. The APM pairs flexibility to transform with financial protection as a platform for health
centers to change care delivery to meet the Triple Aim. The APM demonstration affords FQHCs
an opportunity to improve the delivery of care to patients. By creating more flexibility, the APM
will enable health centers to further invest in team-based care and alternative delivery models
that offer the most appropriate and cost-effective care. It is important that health centers make
these changes in care delivery before taking on greater financial risk. Payment reform that
forces financial risk and/or receipt of value-based payments immediately risks financially
undermining the provider practice, thus risking achieving the true goal of improving patient
health and outcomes. This is especially true for providers caring for low-income, vulnerable
populations. These lessons have been learned in other states and CMS Innovation Center
programs, driving many states to focus their first payment reforms on investing more in primary
care through PCMH supplemental payments and upside performance-based pay (including
shared savings). The following key considerations influenced the design of the California APM
demonstration:

Most payment reform initiatives are taking incremental steps toward introducing
financial risk in both Medicare and Medicaid. One of the most widely adopted
payment reform models in the Medicare ACO program is the Medicare Shared Savings
program. It is upside risk (shared savings) in the first two years and only moves toward
shared risk in later years.[1] While Pioneer ACOs are required to accept immediate
financial risk, it is important to note that the organizations participating in the full-risk
bearing Pioneer ACO program are subset of the most advanced, well-resourced health
systems in the country serving Medicare beneficiaries. Due to the lack of
transformation capital recognized as necessary for payment reform, health system
3

analysts have advised that an incremental approach is especially important for Medicaid
ACOs. Researchers in a recent April 2014 Commonwealth blog commented:
Medicaid ACOs may not be able to assume risk immediately. newly formed
Medicaid ACOs may not be able to do so because of their lack of experience in
managing risk and significant start-up costs. Medicaid ACO programs in
Minnesota, Maine, and Vermont phase in risk in a manner similar to the MSSP. If
the Pioneer model is adapted to Medicaid, policymakers should consider using a
phased risk approach for Medicaid ACOs. [2]
While the FQHC APM is not a full ACO, it represents the critical phased approach to
accepting financial risk that is being espoused for other safety-net providers.

Risk adjustment for behavioral health, environmental and socioeconomic conditions is

necessary before moving to a risk-based system for Medicaid populations. Safety net
researchers have noted that risk-bearing and value-based payment methodologies need
to take into account the underlying risk of patient populations in order to not
disadvantage the safety net providers who care for a disproportionate share of the
vulnerable populations in their communities. A 2011 Qualis Health Issue Brief explains:
The potential payment gap that safety net practices could experience under
payment systems that do not adequately account for social, behavioral, and
environmental factors, may, over time, discourage these practices from caring
for vulnerable populations as payment will be too low to cover their actual costs,
thus threatening their financial viability. This unintended consequence of
payment modeling could further limit patient access and, potentially, widen
health disparities.[3]
Current risk-adjustment systems hinge on rough demographic factors (age, sex,
disability aid code) and medical acuity (ACC score, diagnosis codes, prescriptions, etc.),
not social determinants. Yet, social determinants of health increase the intensity, type
of care, and necessary enabling services required to achieve health outcomes for the
low-income populations seen at FQHCs. Moving to value-based payment systems over
the long term must be predicated on being able to risk adjust payments for social
determinants of health in addition to medical severity. As part of the California pilot,
FQHCs will begin to collect data on social determinants of health (i.e. psychosocial and
socioeconomic factors such as homelessness, non-English speaking, concurrent
behavioral health conditions, etc.) that should be taken into account in the next
chapter of payment reform.

This is a time of massive change for Californias health care safety net, and the APM is
an opportunity to pursue incremental reform without creating instability at precisely
the moment when Medi-Cal rolls are expanding. For health plans, the State and FQHCs
4

alike, the Medi-Cal expansion, the Coordinated Care Initiative and the incorporation of
mild to moderate mental health into managed care, all on the heels of the expansion of
managed care to include Seniors and Persons with Disabilities and rural communities,
leaves many feeling dizzy with transformation overload. In spite of this, California
FQHCs are committed to pursuing payment reform in an incremental and thoughtful
fashion, while learning along the way.
As the one state that has moved some FQHCs to a primary care capitation APM, similar
to the one proposed here in California, it should be noted that Oregon consciously
pursued this incremental strategy because they saw the APM as a key first step before
moving toward value-based pay. In an April 2014 blog post in Health Affairs, the Oregon
team explains about their APM:
It is important to remember that this is not value-based pay. This is a bridge to
value-based pay. Its taking a fee-for-service system and converting it to a permember-per-month rate, based on a fee-for-service baselinewith a promise to
continue the movement toward value-based care. [4]
California FQHCs are similarly committed to an APM pilot, along with other reforms such
as health home, as a critical bridge to the next generation of payment reforms.
Conclusion
In summary, an APM is reform. It is incremental reform that provides flexibility with some risk for
safety-net providers. It creates enough incentive to encourage providers to experiment with new care
delivery models without risking financial instability that could result in reduced access to care for
vulnerable populations. While individual health centers have experimented with risk individually, the
APM represents a framework for moving the whole safety-net down the path of delivery system and
payment reform. Finally, as an incremental reform toward more risk-bearing arrangements, we believe
it is a necessary step in a learning process that will allow health centers to succeed under such future
payment reforms.

[1] Medicare ACO Program final rules. Available at: http://www.cms.gov/Medicare/Medicare-Fee-forService-Payment/ACO/ and http://www.gpo.gov/fdsys/pkg/FR-2011-11-02/pdf/2011-27461.pdf. Accessed
6/26/2014.
[2] R. Houston and T. McGinnis, "Aligning Approaches to Accountable Care Across Medicare and
Medicaid," The Commonwealth Fund Blog,June 18, 2014.
[3] Long A, Phillips K, Hoyer D. Payment Models to Support Patient-Centered Medical Home
Transformation: Addressing Social, Behavioral, and Environmental Factors. 1st ed. Phillips K, ed. Seattle,
WA: Qualis Health; August 2011.
5

[4] Health Affairs Blog Origins In Oregon: The Alternative Payment Methodology Project. Craig Hostetler,
Laura Sisulak, Erika Cottrell, Jill Arkind, and Sonja Likumahuwa April 14th, 2014.