Value-Based Care Economics

Changing the financial incentives of healthcare to meet outcomes

The current healthcare system is dominated by the Fee-for-service (FFS) payment model. Briefly, physicians and healthcare organizations are paid for each service they render to the patient. If the patient has symptoms for anemia, a physician might choose to prescribe lab work be conducted, and would get paid for the service. If a patient came in with no symptoms but blood work might reveal that for 1% of patients they are anemic, they might also prescribe blood work. The provider would get reimbursed for this procedure as well. The problem, as demonstrated above is that FFS incentivizes over use of healthcare services. As there is greater benefit for providers to risk over treatment (satisfied consumers, preventing malpractice negligence, financial payments) than under treatment, this can lead to overprescribing of treatments and inflation of healthcare costs.

Enter alternative payment models

Alternative payment models can be split into one-sided (only upside financial risk) or two-sided (includes both upside and downside financial risk. With upside financial risk, providers share in the savings generated by more efficient healthcare. In downside risk models, the provider is charged a penalty if the care they provide is over a benchmark price.

In capitation models, providers are paid a fixed amount per member per month. These members are usually stratified into several groups based on their health. Younger, healthier patients will have a lower benchmark payment rate than older, sicker patients.

Will VBP be able to reduce the administrative burden of FFS payments as an incentive for switching to this kind of payment model?

HCPLAN Alternative Payment Model Measurement Report

There are typically 2 types of value-based models:

1. Episode-based care (Category 3): Uses a flat fee per episode of care. CMS defines an episode as the set of services provided to treat a clinical condition or procedure, such as a heart bypass surgery or a hip replacement.
2. Population-based models (Category 4): prospectively creates a per-member per-month budget for the year. The organization responsible for a patient’s care coordinates the

The reality is that value-based care makes up a small fraction of the total payments made by payers. According to HCPLAN, a majority of payments are still FFS (Categories 1 and 2 above) for all major payers. Even more surprising, the largest groups of payers — commercial insurers and Medicaid — also have the highest rates of FFS payments. The National Scorecard of Payment Reform estimates that between 2012 and 2017, nearly 90% of all value-based payments were based on a FFS model.

Graph from Yoav Fisher

While 90% of healthcare executives agree that VBC contracts will increase in the coming years, the slow uptake of VBC so far underscores the major improvement that can be made for the industry to move toward true alternative payment models. So why have healthcare providers been so slow to adopt more VBC contracts?

Barriers to VBC adoption

• Extra administrative burden: Moving from an established fee-for-service program to one that reimburses for value, requires infrastructure and staffing that providers are not equipped to handle. This requires staffing, knowledge of how to implement, specific software, an investment of big ideas
• Lack of interoperability: Healthcare data is known for being siloed and inoperable. Coordinating patient outcomes requires sharing data across providers, making unstandardized data and integrations apparent.
• Regulations: There are regulations in place, such as the Stark law and anti-kickback laws, which can be effective in FFS models, but hinder adoption of APM
• Outcomes can be difficult to measure, occur over long time horizons: VBC is most effective when there are clear ways for providers to tie the decisions made to the quantitative measure of outcome. A CMS VBC that bundled knee and hip replacements into a single episode, has been successful, partially because the length of the program is relatively short — join replacement episodes are completed within 6–12 months. In contrast, and oncology regimen can persist for years. There may be no one-size fits all approach that can be leveraged depending on the diagnoses and clinical area.
• Long-term investment needed to see economic returns: There is significant investment required to operationalize APMs. Furthermore, the returns on this investment are uncertain. Even after a provider has adopted VBC, the initial savings they might see in the beginning of the adoption cycle, would disappear as they meet the benchmark. The benchmark is also likely to lower over time, meaning providers will need to keep up in order to see returns.
• Lack of analytical capabilities: FFS providers typically have the resources to schedule appointments and manage their revenue cycle, but a switch to VBC adds the analytical work of being able to analyze patient data to ensure they are meeting benchmarks. This can include segmenting their patient populations, identifying gaps in care, and coordinating and implementing programs for specific patient populations.
• Lack of financial incentive for hospitals: Hospitals can have high fixed costs, and rely on FFS activities like ER visits for a majority of their revenue. A switch to VBC models, would reduce their total revenues.
• Collaboration between providers: As patient care commonly spans multiple providers, most value-based payments holistically reward a network of providers (Accountable Care Organzations aka ACOs) who can coordinate care for a population of patients. However, for this kind of reward is to work, it is necessary for providers to coordinate their results to avoid unnecessary testing. This requires providers to have an integrated system where they can share patient data and communicate results and patient journey. However, if providers are on separate EHR systems, this can become complicated. Additionally, patients are able to “leak” out of the ACO network if they choose to see another provider of their choice, making coordinate nearly impossible without a universal standard sharing practice.

There are many barriers that have prohibit providers from adoption of APMs. New regulations, technologies, and business models can help to alleviate the friction providers feel in adopting these models and drive further VBC-based contracts.