What is Value-Based Care?

Federal government policies are now pushing health care providers away from fee for service reimbursement toward a new model that rewards higher quality care at a lower cost.  Many health care economists believe this new paradigm will serve to improve the physical well-being of patients while simultaneously improving the fiscal health of the United States.   

For the industry, however, this shift may be challenging. Value-based care promises to be the most radical change in US health care reimbursement in the past 50 years, one that will have far-reaching effects on the sector’s drivers of profitability and overall structure. In this three-part series, we will look first at how reimbursement systems have evolved and why value-based care is the next step in said evolution. Then, we will review the nuts and bolts of value-based care. Finally, we will hear from health care experts about the early-stage transition to value-based care, and what lessons have been learned.

Part 1: The Evolution of Health Care Compensation

In the mid-19^th century, families in some small town America paid their doctor by the year, as opposed to the visit. Mark Twain, in his autobiography, looked back on the arrangement with nostalgia: “Consider what a safeguard it was, for both the physician’s livelihood and self-respect, and the family’s health. The physician had a regular and assured income, and that was an advantage to him; the family were safe from his invasions when nothing was the matter, and goodness knows that was an advantage to the family.” But the business model of the frontier physician doesn’t seem to have scaled. As the country and its population grew, different reimbursement models emerged during the last century – cost plus and fee-for-service. Who paid the bill did change, however. During World War II, a wartime wage freeze led companies to compete for workers with benefits, including health insurance. In the late forties, when President Harry Truman’s bid to create a national health care system failed, that temporary benefit evolved into a permanent system. Fast forward to 1965, to fill gaps in coverage, President Lyndon Johnson introduced a government insurance program: Medicare, for people over the age of 65, and Medicaid, for low-income and disabled people and their children. From the late 1960s through the 1990s, health care providers serving these patients were paid on a cost-plus model: a fixed reimbursement for a service set by the government, plus an allowable “profit” usually stated as a percentage of costs.

One obvious disadvantage of this model was providers could increase their absolute dollar profit by simply increasing their cost base. In the late 1990s and early 2000s, in an attempt to contain rising costs, the Centers for Medicare and Medicaid Services (“CMS”) moved from the cost-plus model to a fee-for-service reimbursement structure in which providers were paid a set amount determined by Medicare for a particular service or procedure. Moving to a fee-for-service payment structure, however, had a perverse impact on overall utilization and service volumes: it incentivized health care providers to recommend more, often medically unnecessary, services, as they were paid by the number of procedures performed.

While the trend toward over-utilization kept providers’ incomes stable or rising, fee-for-service reimbursement didn’t encourage exceptional care, as basic care paid the same as better care. Further exacerbating the over-utilization was the simultaneous expansion of services covered and dramatic rise in the volume of patients. The number of beneficiaries has ballooned, as millions of Baby Boomers pass their 65^th birthdays. All told, according to World Bank Data, total US health care expenditures continued to rise as a share of GDP, from 13.1% in 1995 to 17.1% in 2014, the worlds highest and roughly 40% above the global average. At the same time, however, it’s clear that U.S. patients are getting low value for the ever increasing spend being funded by the American taxpayer. The U.S. is now ranked 31^st for life expectancy with the Greeks, Cypriots, Slovenes, and Chileans all living longer than Americans.   In a variety of metrics, one of the richest countries in the world, home to some of the most advanced health systems, is falling behind.

Better Care at a Better Price 

The solution lies partially in bringing back a variation of the old rules: pay health care providers not to make you well but to keep you well. As part of a larger plan to create a more productive and cost-effective system, the Affordable Care Act of 2010 gave CMS the mandate to contain health care costs by shifting fee-for-service reimbursement to alternative payment methodologies such as bundled payments, capitation, and other risk-sharing models while promoting the creation of accountable care organizations (ACOs). Under this reimbursement model, physician, hospital, and other health care providers are incentivized to provide more efficient services, better coordinate care, improve care quality and reduce utilization. At the same time, by linking outcome measurements and keeping the cost connected to delivering a particular service, the hope is that providers avoid the temptation associated with a per-head (capitation) model to under-serve. Beginning with pilot programs in 2011, numerous new value-based reimbursements models have launched and expanded rapidly. So far, the experiment has gone well. In 2013, Medicare officials launched a voluntary test program to see if bundled payment reimbursement could work as forecast. So far, this program has found that certain bundles, such as reimbursements for lower extremity joint replacements, can reduce cost through better care coordination.  By 2014, Medicare had achieved 20% of reimbursements paid via alternative payment methodologies. By 2016, 30% of reimbursement was completed by alternative payments (ahead of schedule). This year, Medicare hopes to make 50% of all reimbursements via alternative payment methodologies. If the results stay positive, as expected, value-based care will transform fee-for-service reimbursement to give providers an incentive to provide better care at lower costs by making hospitals and physicians responsible not just for patient health but population health and lowering overall healthcare expenses.

But Will it Work?

So far, all signs point to yes. The largely positive historical experience of the Mayo Clinic, the Cleveland Clinic, UPMC, and Heritage – four vertically integrated health care organizations that follow variations of the value-based care model — indicate the same kind of vertical integration of services can improve outcomes and encourage efforts to rein in health spending. Transforming the national health payment system can be complicated and take time. However, as more health care providers trend to value-based care initiatives, health care economists see an unprecedented level of consolidation ahead in the health care sector. Reimbursement innovation always occurs at CMS as opposed to commercial payors. Who will take CMS’ lead down the path toward alternative payments? Self-insured employers, to their credit are also waking up to the need to control costs and improve care quality. With Medicare and Medicaid now paying 37 cents of every health care dollar, few players will be able to ignore the government’s preferences.

Learn even more from industry experts at our Value-Based Care panel in Chicago on April 17th, 2018. https://livingstonevaluebasedcarepanel.eventbrite.com