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How to choose the right Alternative Payment Model


This article was originally published in December 2021 and was updated in April 2024

The Centers for Medicare & Medicaid Services (CMS) has Alternative Payment Models. But, they can be very confusing, especially for a new independent physician. Essentially, the Quality Payment Program (QPP) serves as the foundation for the models, financially rewarding quality over quantity.

In this blog, we’ll review Alternative Payment Models (APMs). We'll cover the most common types of APMs and the pros and cons of each. We'll also cover how you can choose the best APM to practice depending on your needs and goals.

What are Alternative Payment Models?

Alternative payment models in healthcare reward physicians for the quality of care. This is unlike the traditional fee-for-service model, emphasizing the volume of patient services. These Alternative Payment Models are part of a move toward value-based payment. This has become a growing priority for private payers as well as for CMS.

Before establishing the QPP, the Sustainable Growth Rate (SGR) law set the payment increases for Medicare services. The SGR capped spending increases. It did so according to the growth of the Medicare population, with a modest allowance for inflation. CMS did away with the SGRs Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) and initiated QPP.

The QPP rewards high-value Medicare providers by increasing their pay. It also cuts payments to doctors who don't meet its standards. The QPP has two tracks for healthcare providers. They can choose based on their practice's size, location, specialty, or patient population:

  • Merit-based Incentive Payment System (MIPS)
  • Advanced Alternative Payment Models

What are Advanced Alternative Payment Models?

The QPP has advanced Alternative Payment Models in healthcare. They let providers earn more rewards. But, they have to take on risks linked to delivering high-quality, cost-efficient care. Providers participating in the QPP can also choose to take part in MIPS.

The objectives of the QPP include:

  • Improving population health.
  • Improving the care received by Medicare patients.
  • Lowering the costs to the Medicare program by improving care and health outcomes.
  • Advancing the use of healthcare information between allied physicians and patients.
  • Educating, engaging, and empowering patients as members of their care team.
  • Providing accurate, timely, and actionable performance data to healthcare providers and their patients, as well as to other stakeholders.

The Alternative Payment Models are part of a new approach. They focus on paying for care that holds providers accountable for achieving quality performance goals efficiently. Group practices participating in an APM received added incentive payments to be able to achieve their goals. 

How are Alternative Payment Models in healthcare different from fee-for-service reimbursement models?

The APM payment method is different from fee-for-service reimbursements. But, an APM may also keep elements of fee-for-service payments in its reimbursement structure.

High-quality and cost-efficient care are the primary goals of APMs. The Advanced APM track of the QPP offers a 5% incentive for achieving threshold levels of patients or payments. Providers who meet these thresholds do not have to meet the MIPS reporting requirements. They are also excluded from payment adjustment.

The types of Alternative Payment Models, explained

APMs offer a range of strategies designed to improve healthcare delivery and efficiency. Let’s explore alternative payment model examples in more detail to understand their unique characteristics and applications.


Capitation is an alternative payment model example that offers a set fee per patient per period of time, regardless of the number of services provided. This model shifts the financial risk from the payer to the healthcare providers.

For instance, a primary care practice might get $500 per patient monthly under a capitated contract. The practice earns the same whether a patient needs many services or none.

In the end, this pay structure encourages a focus on prevention. It also reduces unnecessary procedures.

Pros of Capitation

  • Encourages Preventive Care: Providers are incentivized to keep patients healthy, reducing the need for expensive treatments.

  • Simplified Billing: Fixed payments simplify the financial administration for providers.

  • Predictable Revenue Stream: Providers have a stable, predictable income based on patient enrollment.

Cons of Capitation

  • ​​Risk of Under-Service: Care providers may minimize care to save costs, posing a potential risk.

  • Financial Risk: Providers bear more financial risk, especially if the care costs exceed the capitated payment.

  • Patient Selection Risk: There’s a temptation to select healthier patients over those requiring more care.

Pay for Performance (P4P)

Pay for Performance is another alternative payment model example. It ties provider payments to quality and efficiency performance measures. Unlike fee-for-service models, P4P incentives are based on the effectiveness and efficiency of the care they deliver. For example, providers may be rewarded for keeping their patients' vaccination rates high.

Pros of Pay for Performance 

  • Quality Improvement: Directly incentivizes providers to improve care quality and patient outcomes.

  • Transparency: Encourages transparency in healthcare providers' performance.

  • Enhanced Patient Care: Focuses on evidence-based interventions to improve patient health.

Cons of Pay for Performance

  • Administrative Burden: Requires extensive documentation and reporting.

  • Potential to Neglect Non-incentivized Care Areas: May lead to focusing on incentivized measures, neglecting other areas.

  • Challenging for Under-resourced Settings: Smaller practices may find it harder to compete for incentives.

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Bundled Payments

Bundled payments encompass all services related to a specific treatment or condition over a period of time. It is a single payment that covers the costs of all healthcare providers involved in a patient's care for a specific episode or condition.

For example, it would include the costs of all doctors, specialists, and hospitals needed for a hip replacement. It also includes any other needed healthcare services during treatment. The aim is for providers to collaborate more effectively and efficiently.

Pros of Bundled Payments

  • Cost Control: Encourages providers to reduce unnecessary services and coordinate care efficiently.

  • Enhanced Coordination: Promotes collaboration among providers across different specialties.

  • Predictable Costs: Patients and payers enjoy knowing the total cost of care upfront.

Cons of Bundled Payments

  • Complexity in Implementation: Determining payment amounts and distributing payments among providers can be complex.

  • Risk of Cost Overruns: Providers may be tempted to cut corners to stay within budget, reducing the potential for care quality.

Shared Savings

Providers in Shared Savings models must deliver care below a set cost while meeting quality standards. If they do so, they receive a part of the savings generated as a bonus.

For example, an ACO (Accountable Care Organization) is expected to spend $100 million on patient care. But, it cut costs to $90 million through better care coordination and prevention, saving $10 million. If the ACO meets quality standards, it could get a big share of these savings from Medicare.

This encourages providers to practice cost-effective care. It makes them focus on preventing problems and collaboration, lowering the total cost of care.

Pros of Shared Savings

  • Financial Incentives for Cost Reduction: Providers share in the savings generated from efficient care delivery.

  • Focus on Quality: Maintains or improves care quality through stringent performance measures.

  • Promotes Innovation: Encourages the development of new care models and efficiencies.

Cons of Shared Savings

  • Financial Risk: Providers may face financial penalties if they do not achieve savings.

  • Complexity of Measurement: Determining actual savings and quality improvements can be complicated.

  • Potential for Gaming: Providers might select healthier patients or avoid high-risk ones.

The benefits of Alternative Payment Models for physicians

Shifting from a focus on quantity to a focus on quality in care delivery creates opportunities for physicians. Focusing on patient outcomes and quality of care lets providers focus more on prevention and patient wellness. This leads to better health.

APMs also encourage innovation. APMs offer financial incentives tied to the quality of care and efficiency. This encourages providers to explore innovative solutions and technologies.

And, using new healthcare technologies will improve patient outcomes. It will also improve care coordination and operational efficiency.

Ultimately, APMs can foster a more coordinated and efficient healthcare system.

How to choose the right Alternative Payment Model

Selecting the appropriate APM for a practice involves several considerations. Physicians should evaluate their patients' needs, practice size, and available resources. They should also consider the financial effects and fit with the clinical capabilities of each model.

It's also important to gauge the practice's comfort with assuming financial risk, as some models require risk-sharing. In the end, the decision should support the practice's aims in patient care quality, efficiency, and financial stability.

Succeed in Alternative Payment Models with Elation

Exploring the world of APMs requires strong support and advanced technology. Elation Health offers a complete EHR platform that helps doctors thrive in value-based healthcare settings.

Our EHR puts clinical needs first. It includes comprehensive practice management solutions that enable seamless care coordination, improved patient involvement, and increased efficiency. With Elation’s technology, practices can surpass the quality and efficiency required by these models.

We invite you to download our Value Based Care Playbook to see how Elation can help you succeed in value-based care and ensure your practice's future in the changing healthcare field.


What’s the difference between Alternative Payment Models and value based care?

Alternative payment models are specific payment strategies. They are part of the value-based care framework. This type of care pays providers based on the quality and outcomes of the care they deliver, not the quantity of services.

Is Medicare Advantage an alternative payment model?

Medicare Advantage can be part of the shift to value-based care. These plans often use their own APMs to manage care and control costs while meeting Medicare's quality standards. But, APMs are specific payment models that reward physicians for their quality of care.

How do Alternative Payment Models work?

APMs incentivize healthcare providers to focus on the quality and efficiency of care. They often involve financial rewards or risk-sharing arrangements. And, meeting certain performance measures, such as improved patient outcomes and reduced healthcare costs, serves as their basis.