Most health economists would agree with the truism that about 5 percent of patients in a given populations account for about 50 percent of costs. There are a number of variations on this hyperbolic Pareto principle scenario, but they all point to the fact that a small minority of patients is driving excess costs in healthcare. In the long run, everyone will benefit if these costs are contained.

The primary driver of these costs is the care of the chronically ill, and in the short run, as an accident of coincidence, our fee-for-service reimbursement model encourages increased costs. It is human nature that individuals who are paid on volume will generate more volume. Not only that, but we have been in a fee-for-service environment for at least the last 50 years, so every employee in a healthcare setting has had his or her workflow maximized to generate income in a fee for service market.

To bring healthcare costs under control, payment reform is needed, and payment models that do not encourage volume will be required. A variety of new payment structures are in discussion and testing. The most prevalent, although still unusual, is pay for performance, where physicians are paid bonuses for reaching quality targets. Other examples of payment reform include case rates, where physicians – and hospitals too, usually – are reimbursed a flat amount for care of patients with a given condition (this is most commonly used for certain procedures). The granddaddy of payment reform methodologies is full capitation, where doctors are paid a flat rate for a year’s worth of care for certain individuals.

The common thread holding all of these together is that physicians and healthcare institutions are paid more when a population of patients reaches a certain quality metric. Policy makers and payers alike hold out great hope that achieving quality targets will result in lower costs as inefficiencies are wrung out of the system.

The biggest challenge to moving from fee for service to any kind of population health payment model is changing healthcare employees’ workflow – remember their workflow is now maximized for a fee-for-service environment.