What is Alternative Payment Model (APM)? Definition, Formula, and Benchmark

An Alternative Payment Model (APM) is a reimbursement arrangement that departs from volume-based fee-for-service. Under an APM, a provider or provider group takes on responsibility for total cost of care, episode cost, or population quality and is paid according to performance rather than service volume. APMs exist along a risk continuum: upside-only shared-savings models at the low end, two-sided risk models in the middle, and full-risk capitation at the high end.

CMS APMs are formally authorized by the Center for Medicare & Medicaid Innovation (CMMI), created by the ACA to test and scale innovative payment approaches. Notable active and sunsetting CMS APMs include the Medicare Shared Savings Program (MSSP) in its various tracks, ACO REACH (the successor to Next Generation ACO and Direct Contracting), Oncology Care Model and its successor Enhancing Oncology Model, Comprehensive Primary Care Plus and its successor Primary Care First, Bundled Payments for Care Improvement Advanced, Comprehensive Care for Joint Replacement, and state-based models like Maryland Total Cost of Care.

The distinction between an APM and an Advanced APM is critical for QPP participation. An APM is any CMMI-authorized or CMS-recognized alternative payment arrangement. An Advanced APM meets three additional statutory criteria: participation requires use of Certified EHR Technology (CEHRT), payment is based on quality measures comparable to MIPS Quality, and the arrangement bears financial risk meeting specific thresholds — generally, potential downside loss at or above the lesser of 8% of APM-scope revenue or 3% of total Medicare Part B revenue. Only Advanced APM participation exempts a clinician from MIPS reporting.

For operational RCM, APM participation has profound implications. Revenue streams shift from claim-by-claim reimbursement to capitation payments, per-beneficiary-per-month management fees, and retrospective shared-savings reconciliations. Financial reporting becomes more complex: accruals must account for the likelihood and timing of shared-savings distributions, risk-sharing reserves must be estimated, and the accounts-receivable composition shifts. Attributed-member tracking — knowing precisely which beneficiaries are attributed to the APM entity and when attribution changes — becomes a core operational competency. Quality and cost reporting become tightly coupled to revenue.

Strategically, the major question facing most provider organizations is risk pacing. Moving from upside-only shared savings to two-sided risk too quickly, without the data infrastructure and care management capabilities to manage total cost of care, has produced significant losses for many early ACOs. Moving too slowly forfeits the Advanced APM incentive and leaves the organization subject to MIPS. Most successful APM entities progress deliberately: two to three years of upside-only participation to build capability, then graduated transition to two-sided risk. ACO REACH, MSSP ENHANCED, and Kidney Care Choices represent the higher-risk tiers where Advanced APM qualification is reliably achieved.