An Overview of Alternative Payment Models (APMs)

August 9, 2019

The Centers for Medicare and Medicaid Services (CMS) projects that by 2022, U.S. healthcare spending will reach approximately $5 trillion, amounting to 19.9 percent of the nation’s GDP (1). As the most common payment model among public and private sector payers, the traditional fee-for-service (FFS) model can create incentives for providers to increase the volume and cost of care, rather than focusing on the value of care provided to patients. As national healthcare spending continues to grow, public and private health care payers, providers, and other stakeholders are looking to find more innovative and less expensive ways to provide quality care. Alternative payment models (APMs), the most common of which are accountable care organizations and bundled payments, are gaining quite a lot of traction in the health care sector.

Accountable care organizations (ACOs) are networks of doctors, hospitals, and other healthcare providers that share responsibility for coordinating care and meeting health care quality and cost metrics for a defined patient population (1). There are quite a few benefits associated with ACOs. One benefit is increased care coordination and communication. If a patient needs the results of a test performed by a specialist, a primary care physician can obtain this information, without much of a hassle (2). ACOs also provide better quality care at a lower cost, as reimbursement is based upon quality as opposed to quantity. Under ACOs, only necessary tests are run. Additionally, providers can easily check to see what tests/services have previously been performed. This avoids duplication and makes strides toward reducing costs for both unnecessary and duplicate services (2). On the other hand, there are also some obstacles to successfully implementing ACOs. In theory, the ACO model is superior to the traditional fee-for-service model. However, in practice, it is easier to generate more volume and immediately increase revenue than it is to redesign the health care delivery process. For many providers, the thought of moving toward an evidence-based reimbursement system is frightening. Delivering more effective and efficient care may decrease total revenue in the short-term; fixed costs and high overhead may not allow physicians to sustain an income reduction for long (3). Another obstacle is the issue of having an oversized medical staff. The typical community hospital has doctors from all specialties on staff, with somewhat random staffing numbers. The day a hospital excludes unnecessary specialists under a newly formed ACO is the day those specialists take their patients to another hospital. The sudden loss of patients and revenue would offset any cost savings from improvements in operational efficiency (3). As a result, hospital-based ACOs tend to keep their entire medical staff, failing to improve efficiency.

Under bundled payments, a single payment is made for all of the services associated with an episode of care, such as a hip or knee replacement or cardiac surgery. Services might include all inpatient, outpatient, and rehabilitation care associated with the procedure (4). There are advantages to this payment model. One benefit is that bundled payments give providers strong incentives to keep their costs down, including avoiding complications (4). Bundles target the work of specialists, who are generally less likely than primary care physicians to participate in value-based payment arrangements. Another advantage of this model of payment is that a bundle of care constitutes a clinically and intuitively meaningful “product”. Defining clear products in health care helps create markets in which providers directly compete on quality and price. One barrier to effective health care markets has been that prices, when available, tend to relate to inputs into clinical care — such as pills, bandages, bed days, or X-rays — that are not meaningful to consumers of care and that don’t necessarily predict the total costs of care (4). Bundles bring all these inputs together into a single price for a single basket of services. However, there are some drawbacks to bundled payments. First, it can be complicated to define and track the type of care that should be included in the bundled payments for which a given provider is at risk (4). When patients have multiple chronic conditions that interact with each other, it becomes less clear whether the bundle should include the costs of caring for all those problems. Monitoring the fairness of these interactions could become burdensome and increase administrative costs. Furthermore, bundled payments could encourage competition for patients with profitable bundles (4). For example, the otherwise healthy patient needing a knee replacement may prove more profitable than a knee replacement patient with complicating problems such as heart, lung, or kidney disease. While risk adjustment could somewhat compensate for cherry-picking, such adjustments have not proven foolproof in the past. Monitoring the work of multiple risk adjusters and possible gaming by providers could become yet one more administrative expense.

Physicians, payers (both private and public), and patient groups are continuously working to develop health care payment models that are designed to improve patient and lower costs (1). The rapid growth in Medicare APM programs indicates that there is a long-term interest in the APM framework. In order for APMs to be successfully implemented, there must be increased data sharing to enable tracking patients across multiple care sites (5).


  1. A Closer Look at Alternative Payment Models. (n.d.). Retrieved from
  2. Ringquist, L. (2014, April 24). Benefits of ACOs to Both Patients and Providers. Retrieved from
  3. Pearl, R. (2014, August 14). The 4 Biggest Obstacles ACOs Face. Retrieved from
  4. Blumenthal, D., & Squires, D. (2016, September 7). The Promise and Pitfalls of Bundled Payments. Retrieved from
  5. Cizek, J. (2019, April 12). The End of Islands: The future of bundled payments. Retrieved from