Flat Fee Plan Boosts Outcomes and Pay

Andrew Smith
Published: Wednesday, Oct 12, 2016
Larry Strieff, MD

Larry Strieff, MD

A flat-fee system of financing cancer care at two large oncology practices in Northern California has improved patient outcomes and increased doctor compensation while defying inflationary pressures and holding the line on treatment costs.

The payment model was instituted at Sierra Hematology Oncology in Sacramento and Epic Care in the San Francisco East Bay Area after many years of rapid cost escalation forced payers to make unsustainably large premium increases. Both practices are a part of the Hill Physicians group of 3,900 doctors, which functions as an intermediary between the practices and payers. Officials said the flat-fee system has also helped to ensure the survival of eight traditional health plans that finance the network.

The rising costs of oncology payments threatened to do serious damage to multiple businesses, officials explained. “Had things kept on that path, all the traditional health insurers in our region would have eventually gone out of business and the only insurer and provider left might have been Kaiser Permanente, which already controls more than half the market in Northern California,” said Larry Strieff, MD, who is both Hill’s specialty medical director and a practicing oncologist in the East Bay. “We had to adapt or die.”

Sierra Hematology Oncology and Epic Care provide more than half of the cancer care for Hill’s 300,000 patients. The experimental payment model, which has been in service for six years at these two practices, replaces fee-for-service with a payment structure that rewards doctors for saving money by lowering emergency department visits, hospitalizations, and drug expense.

Hill, which began operations in 1984, is what’s known in California as an independent practice association. Insurers pay flat monthly perpatient fees to Hill. Hill pays the practices and distributes any leftover profits to all shareholders.

For most Hill physicians in most specialties, payment remains fee-forservice. For physicians at the two oncology-hematology practices that have implemented the new model, payment is based on “case-rate reimbursement”: in essence, practices get paid for each patient they treat each month, but they do not receive a flat per-head fee. Each patient is assigned to one of nine cohorts based on tumor type and current procedural technology codes, and practices are paid according to whatever price is assigned to the cohort. Hill calculated the initial payment rates for each cohort by looking back at actual costs for patients in those cohorts in the last year of fee-for-service payments. It then set the first year’s per-patient payments slightly higher. Subsequent payment rates—they change each year—are based on chronological spend patterns for different patient types over the previous three years. To protect providers from losing money because of individual cases that prove unusually expensive, Hill’s payment structure has “stop loss protection,” which makes practices whole (and provides some profit) in cases where actual treatment costs exceed the standard payments.

A Financial Incentive Is Removed

Under the old model, physicians had a strong financial incentive to overspend on medication—both in terms of using a lot of medications and using expensive ones—because they were effectively buying drugs wholesale, marking them up, and then selling them. Hill’s expenditures on cancer drugs were rising 17% to 18% a year, and cancer drugs represented half of the organization’s total annual pharmaceutical expenditure. Under the current model, drug money is included in the per-patient monthly fee, and physicians cannot capitalize on markups. The changes in payment had the desired effect, practice officials said. “Significant changes in treatment patterns occurred over time, and many early positive changes were seen within six to 12 months of program implementation at both practices,” said Khanh Nguyen, PharmD, Hill’s director of clinical support. “We have seen continuous improvements since then, as physicians are incentivized to provide comprehensive treatment from survivorship, symptomatic management and costeffective chemotherapy, to end-of-life options, as is clinically appropriate.”

“For example, we have seen practices moving into better alignment with [NCCN and ASCO] guidelines and prescribing less chemotherapy in end-of-life situations, specifically within two weeks of death.” In addition, drug choices have become far more costeffective, she said. Oncologists have started prescribing more of the lower-cost version of leuprolide for prostate cancer. “There was also a wide range of positive changes with adjuvant therapy, such as shifting utilization of a highcost branded anti-emetic drug that costs more than $100 a dose to an equally effective generic anti-emetic that costs less than $1 a dose.”


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