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Achieving Financial Sustainability with Value-Based Care-The HSB Blog 10/7/22

Our Take:

The American healthcare industry is rapidly changing as the traditional fee-for-service payment method, where care providers were incentivized to perform as many procedures as possible, is gradually being replaced by the move to value-based care. While early VBC programs date back as far as the late 1960’s it was not really until the passage of the Affordable Care Act (ACA) in 2013 and the creation of the Center for Medicare and Medicaid Innovation (CMMI) and its mandate to develop and test new payment methodologies that VBC really began to take hold. Beginning with the passage of the Medicare Access and CHIP Reauthorization Act of 2015 or MACRA, CMMI began the process of incentivizing physicians for improved outcomes and quality and designing Alternative Payment Models (APMs).

VBC models are designed to incentivize the quality of health outcomes and care as well as patient satisfaction. However, due to the changes in reimbursement and the need to ultimately reduce costs, VBC can exacerbate the already tenuous financial positions of some providers given their high fixed cost structures, dependence on inpatient and elective procedures, and inclination towards FFS procedures. In order to achieve financial sustainability while using value-based payments as a provider network’s primary reimbursement method, providers must properly assess the trends and needs of the healthcare industry, invest in the proper resources and services that allow effective continuity of care & care management, and raise additional revenue by offering outpatient and preventative care thereby taking a proactive instead of reactive approach to care.

Key Takeaways:

  • In 2018, the U.S. spent over $11K per capita on healthcare compared to Switzerland, the second-highest spender at $8K per capita.

  • VBC has rapidly gained popularity, with United and Aetna paying out ½ of all reimbursements through VBC models and Anthem paying out 60% of all reimbursements in 2017.

  • The Center for Medicare & Medicaid Innovation (CMMI) is now aiming for all traditional Medicare beneficiaries and the “vast majority” of Medicaid beneficiaries to be treated by a provider in a VBC model by 2030.

  • According to HCP-LAN, less than 40% of total healthcare spending was linked to VBC in 2018.

The Problem:

The American healthcare system is still largely based on fee-for-service reimbursement. For example, according to Revenue Cycle Intelligence, 48 percent of survey respondents to their Value-Based Care Assessment Report, note that over three-quarters of their organization’s revenue comes from fee-for-service reimbursement, while just over one-half (57%) report using value-based reimbursement models. This continues to lead to waste, inconsistency, and overutilization of healthcare services. As noted in the journal Heart Failure Clinics in 2018, the U.S. spent over $11K per capita on healthcare compared with $8K in Switzerland, the second-highest spender, yet Americans still experience worse health outcomes compared to Switzerland and their counterparts in similarly developed countries. While there are numerous causes, the U.S. has been quick to adopt and order expensive, high-tech medical treatments for patients that often end up raising both hospital operating costs and the financial burden to the patient. In addition, other factors such as defensive medicine, demographics, and increased administrative burden have led to approximately 25 cents of every dollar spent on healthcare in America being wasted as noted in an article published in the American Journal of Medical Quality. While transitioning healthcare to VBC will likely be more incremental than sudden, if providers don’t take the necessary steps to prepare, many could fall short of their financial goals and experience sustainability concerns.

As the popularity of VBC rises and reimbursement becomes increasingly linked to value rather than volume, healthcare providers must make the proper organizational changes and pursue investments that improve the quality, efficiency, and effectiveness of their care. As demonstrated during the pandemic, determining which digital technologies to use to modernize the delivery of care and proactively manage patient risk is essential. In addition, providers and clinicians need to look at ways to tap into underutilized revenue streams like annual wellness visits, remote patient monitoring, and risk sharing to replace lost revenues and support long-term sustainability.

The Backdrop:

Providers are now increasingly pivoting to VBC and its associated APMs in order to prioritize patient health and achieve financial sustainability while taking on different levels of risk in the process. Since the passage of the Affordable Care Act in 2010 which accelerated the development of new APMs value-based care has increased in popularity. For example, according to Benefits Magazine, Anthem paid out 60% of all reimbursements through some type of VBC arrangement while United Healthcare and Aetna now pay out one-half of all reimbursements through similar arrangements, Nevertheless, according to HCP-LAN, less than 40% of total healthcare spending was linked to VBC in 2018 (latest available).

One area that holds great potential is digital technology and its ability to connect doctors and patients, facilitate communication and exchange of information, and allow transitions of care/care coordination much more easily than before. Thanks to tools like improved telehealth, interoperability, and data standardization, care providers can now personalize care for larger populations, stratify patient groups for population health or risk analytics, and much more. Moreover by focusing on data and efficiency providers can reduce administrative costs, help eliminate unnecessary overutilization of care and potentially prevent disease in the first place. Moreover, while companies like the Mayo Clinic, Geisinger Intermountain Healthcare, and Kaiser Permanente were among the first to deploy artificial intelligence tools to improve efficiency, predict health outcomes, and leverage machine learning methods to inform clinical decision-making the growth in heatlhtech firms has enabled the use of much of this technology by firms who simply could not have accessed it before.

In addition investments in data and information technology can have uses far beyond population health and predictive analytics. Providers must also invest in information technology services to enable improved care coordination, help empower care management and protocol standardization between physicians such that patient care, treatment plans, and outcomes are the same regardless of the physical or virtual delivery mechanism. Over time investments like these will support the delivery of personalized, cost-effective care for every patient served. Finally while providers will increasingly have to share more risk, currently less than 10% of providers are taking full risk, we expect it may take longer for providers to become truly integrated. For example, two of the most successful providers who have health insurance operations, Geisinger and Intermountain Healthcare, have both been involved in that aspect of the business for over 30 years each.


Driven by CMS’s efforts to increase the use of VBC in Medicare, VBC will increasingly take hold as the primary payment system for providers. Despite the fact that this transition is going to be more gradual than first believed, those that realistically look at ways to drive revenue and reduce costs will be best positioned for the future. With the implementation of new rules around data sharing and interoperability and these rules being more strongly enforced, data gleaned from electronic medical records will improve consistency of care and inform decision-making and health outcomes across the board. For example, according to a report from Conversys, performance-related bonus payments have led to large payouts for care providers and significant savings (ex: the average total spending on readmission and ER visits per pacemaker episode can be as high as $3,000 to $4,000).

Over time hospitals will have to find ways to accept increased risk to earn larger payouts but they need to ensure they have the proper risk management skills to do so. While providers stand to gain large revenues from providing skilled, quality care at a good value with risk sharing, they need to make sure their information systems will be such that they support such efforts. Given that some will likely not have the size or ability to gain such expertise this could lead to numerous interesting types of partnerships between providers and insurers and others, including alternative sources of capital (private equity and venture capital) that can assist in managing such risk for a fee.

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