Moving medical payments from volume to value

Dr. James Holly

In 2014, more than 49.4 million were covered by Medicare, and 8 million of the beneficiaries are under age 65 and are on disability programs. 

July 30, 1965, seven days before my wife and I were married, President Lyndon Johnson signed into law Title XVIII of the Social Security Act that created Medicare. At that time, there was great controversy about Medicare and many physicians opposed it. In the first 25 years of Medicare, its cost was much higher than expected. The reason for that begins our discussion about how health insurance payments are changing.

Medicare payments to healthcare providers began as a “piecemeal” system. The provider did a lab test and was paid. The provider did a procedure and was paid. This is an unusual application of this term, “piece meal,” but it describes how each service, procedure or event provided in healthcare was paid for by Medicare apart from any consideration other than that the event had occurred. Healthcare providers, who had previously often treated patients without charge, quickly realized that the more services that were provided, the more revenue that was generated.

Medicare initially did not measure the quality of services, the appropriateness of services or the outcome of services. If a physician performed a thousand cardiac catherizations and only 50 were abnormal, no limitations were placed on that physician. Gradually, however, the medical community began to realize that some tests or procedures were being performed frequently but with little benefit to the patient or to health.

One of the earliest attempts to decrease the cost of care and the “overuse” of healthcare procedures, tests and services was spurred by the enactment of the Health Maintenance Organization Act of 1973. Instituted only eight years after Medicare’s inception, managed care techniques were pioneered by health maintenance organizations but are now used by a variety of private health benefit programs. Managed care is now nearly ubiquitous in the U.S. but has attracted controversy because it has had mixed results in its overall goal of controlling medical costs. Proponents and critics are also sharply divided on managed care’s overall impact on the quality of U.S. healthcare delivery.

Insurance companies promoted “managed care,” but healthcare providers often felt that control of health care delivery and particularly healthcare decisions had been assumed by those who were not trained in medical decision making.

By the early 1990s, Medicare health maintenance organizations had evolved into Medicare HMOs, which went through a series of name changes and are now named Medicare Advantage programs. The best of these programs provided a real collaboration between healthcare providers and health maintenance organizations. Healthcare providers began to understand and to accept “risk,” which means that they contracted with HMOs to assume some or all of the risk of providing healthcare services for a predetermined, contracted cost. In these relationships, providers began to measure the quality of services that were being provided and were sensitive to the cost of those services. The idea was to provide excellent care at a reduced cost. The healthcare industry began to accept the premise that excellent and expensive were not synonyms.

Healthcare providers began to be compensated for the measurable quality of the services they provided and not just for number, quantity or volume of those services. Organizations were formed to accredit healthcare groups who were committed to the process of moving from the volume of services to the value of services performed or expressed a different way, which were committed from moving from the quantity of services preformed to the quality of the outcomes produced.

Medical practices or groups of providers submitted their organizations for review and examination by the National Committee for Quality Assurance, Accreditation Association for Ambulatory Health Care, URAC and/or The Joint Commission. Such groups began to measure “quality metrics,” standards of performance associated with the performance of certain tasks, not procedures, and/or which demonstrated certain outcomes. Accreditation and quality metrics were the first steps in changing the goals and standards of healthcare delivery.

In April 2015, SETMA partner and chief medical officer Dr. Syed Anwar attended a conference in Las Vegas on reducing hospital readmissions. April 27, he sent a note with a quote from one of the presentations given by Dr. Wilde, Chief Medical Officer (CMO) of Centers for Medicare and Medicaid Services (CMS): “Fee for service is dead. If you have a business plan that is based on fee for service, then you need a different plan or start doing something else.”

The transformation of payment methods for healthcare is being referred to as “Revenue Cycle Management.” In May, I was asked to give an address in Austin to CFOs of healthcare organizations. I wrote an article about the Austin conference and am preparing a major, cover presentation for Health Leaders Media. The editor sent a response to the Austin presentation which can be read at After reviewing the answers to my questions and after a telephone interview, the editor said, “It is as I suspected, Dr. Holly: You and SETMA are ahead of the value-based payment model curve. Is there any area of healthcare reform you have left unexplored? You are an impressive reformist figure, with unique depth of experience. Eager to talk next week.”

The two lists of questions the editor sent and my answers can be reviewed at

This transition to value-based payments is well underway. It is as change always is: challenging but essential if we are to improve healthcare while making it affordable for all.


Dr. James L. Holly is CEO of Southeast Texas Medical Associates, LLP (SETMA) in Beaumont.