Industry transition to value-based care & reimbursement (VBC/R) is happening. In fact, it’s happening faster than many comfortably predicted just 24 months ago. But in our work helping providers and payers plan and begin implementing various VBC/R strategies over the last 18 months, we have encountered a significant amount of confusion and misunderstanding around some of the basic concepts.

Here is some experience-based practical advice on implementing value-based care and reimbursement:

1. Don’t Just Move Risk to Increase Value

The driving concept of value-based care and reimbursement is that financial risk for performance shifts to the provider from the payer. And “performance” is defined as achieving “value” – a balance of cost and health quality or outcomes.

Bundling, shared savings, and capitation are a few common VBC/R approaches that shift financial risk to providers or entities that coordinate providers. Bundles, for example, are dutifully defined and priced – often resulting in a sort of discounted services package similar to what you see in software sales or buying bagels by the dozen. Shared savings and capitation have similar arrangements. Once the price is set, providers immediately look for various ways to cut costs so that contribution margins are maintained as high as possible.

This is fine as far as it goes – it addresses the “cost” half of the value objective. Surprisingly though, many organizations stop there. What about improving the quality or health outcomes of patients? After all, that is ultimately what the payer is purchasing.

One line of reasoning we’ve heard about how VBC/R approaches improve health outcomes suggests that quality results from reduction of redundant and potentially dangerous services. Another is that providers will attempt to cut costs by striving to keep people healthy to lower utilization. There are probably several grains of truth in this sort of thinking. But count us dubious as to how effectively the “quality” half of the value objective will be addressed if it is not an explicit component of the arrangement.

Bottom line…. Just moving risk doesn’t increase value. Directly incentivizing quality and good outcomes must happen at the same time.

2. Follow The Money

When setting up value based care & reimbursement programs there is a lot of initial discussion about the importance of achieving healthcare quality and good outcomes at the “best possible” cost. However, we have seen time after time in multiple industry segments that, when push comes to shove, it’s cost reduction that seems to get the priority. It’s rare to find an organization whose goal is “optimal quality at best possible cost.” A much more common goal – almost never written down or stated publicly – is “marginally acceptable quality at lowest possible cost”.

So cost reduction per some imaginary “patient quality unit” is key. To state the obvious, there are two ways to cut costs for a defined population.

  • You can cut the price per unit service.
  • You can cut the volume of services.

Most entities implementing VBC/R try to do both. But to do either very effectively requires a good handle on cost data for each service and service component. The ideal situation is having a fully implemented activity based costing (ABC) system. Unfortunately, this is very rare as these systems are costly to implement and maintain. In fact, even basic cost accounting is a challenge for many provider organizations.

The other major financial issue, of course, is the ability to capture all possible revenue. In most VBC/R arrangements this means that providers must have the ability to accurately measure and report both cost and quality metrics by population segment according to your VBC/R contracts. For most provider organizations this is a new need which requires new investment.

3. Accept that The Old Business Model is

This is both intentional and somewhat obvious. But we are often surprised that our clients don’t initially appreciate the implications.

Think about it: If the model works to cut utilization and/or revenue per service as intended, providers lose. If lucky, they will get back some portion of what is saved over some baseline projection as “shared savings”. But only a portion. Then the goal posts get moved for the next contract period.

You get lower contribution margin per unit of covered population (per person). So the only way to maintain or grow revenue is to add volume – more patients for which you are paid. This is, in fact, the major driving force behind the advent of narrow networks. They are an attempt to steer more volume to fewer providers in exchange for discounted pricing.

So how does a provider organization increase patient volume? Some common approaches include:

  • Medical Travel Programs – attracts out of area patients
  • Get and maintain in-network status with payers – requires demonstrable outstanding performance
  • Direct to Employer Contracting – again, requires demonstrable outstanding
  • Vertical Integration – Own more of the healthcare value chain to control more sources of revenue. Requires active healthcare M&A and collaboration activity.

4. Population Health Yes! Wellness…Meh…

This is one of the more controversial topics we run into. What is the role of wellness in population health, and how important are either to VBC/R planning and transition?

First, we counsel clients to define population health broadly as including the entire continuum from wellness to primary care, chronic disease management, acute care, recovery care, and long term care. Obviously, the sickest people cost the most. And appropriate intervention for those most likely to be expensive can therefore create significant cost savings. The challenge is to know with whom and when to intervene which requires powerful predictive analytic capability combined with good data access to be effective.

So broadly speaking, full scope integrated population health management is a critical component to operating effectively in a VBC/R environment. It supports focusing resources where they can most effectively optimize both cost and quality management.

So how much should be invested in wellness programs as part of the pop health continuum? The jury is still out on the ROI for such programs, but so far it doesn’t look promising. Between the investment to implement and operate such programs, employee or member turnover before attributable results can be achieved, and employee/member engagement challenges, most employers are not impressed and many are dropping the more comprehensive programs after a couple of years. The program components that help the chronically ill to stay as healthy as possible do seem to produce measurable results. Buy those aimed at keeping the healthy well don’t seem to make financial sense.

Finally, it should be recognized that population health aims to keep individuals as healthy as possible. The focus is on optimizing the health of individuals. And in the right circumstances, this can make business sense as well as ethical sense. But if you really want to impact the quality and cost of care for a population, your investments may go farther by leveraging improvements to your provider network. After all, one provider sees many patients. If you can leverage your top providers in a network to consistently deliver high value care across many patients, obviously you are more likely to achieve your VBC/R objectives.

5. Don’t be the Monkey in the Middle

If you are the accountable care entity in a VBC/R arrangement, you sit between the payer and the providers. You are at financial risk. It is a constant surprise how often ACO’s of all types that we work with accept this risk but then don’t also push it down in any form to their provider network. Certainly, there are market specific situations where an ACO has little bargaining power with particular providers who may be trying to ride the old fee for service model into the sunset. But whenever feasible, it is very helpful to align everyone’s incentives by creating performance based arrangements with providers across the network. Push accountability – risk/reward – down.

There is a lot of experimentation going on across the industry as to how to best implement the principles of value based care & reimbursement. And various organizations are at very different points in this process, so mistakes are going to be made and lessons learned. Sharing this sometimes painfully gained experience is helpful to everyone.

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