Value Based Payment Models - a cure-all?

Challenges providers may face when introducing value based payment models

US health care is not “broken”, it sets the wrong incentives. A great example is the fee-for-service payment model, i.e. a doctor gets payed for each service performed, e.g. for each ultrasound exam. The common agreement is that fee for service sets incentives for doctors to prioritize quantity of care over actual outcomes.

In addition to promoting overutilization, fee-for-service is a bureaucratic nightmare. To get reimbursed, a doctor needs to document every single step of their procedure, a medical coder has to translate it into CTP & ICD-10 codes and submits them as a claim to the payer. To curb overutilization, the payers are setting more and more documentation requirements for the doctors, which means doctors have to spend more time on their computers vs helping their patients. But also the medical side is responding, with more sophisticated documentation tools (i.e. EHR boiler plates/ checklist that are optimized for billing) & smarter revenue cycle software to submit and appeal claims. In the end it is a zero-sum game that is causing both sides to throw more and more admin resources against each other. The middlemen like clearing houses and revenue cycle software & consulting providers are the winners.

An trendy solution to this are value based payment models. The idea is to set the right incentives by making payments that are tied to specific outcomes, rather than the quantity of service provided. Over the last week I've been looking a bit more carefully under the hood of a few value based payment models and here I will summarize some of the challenges I found with this approach.

1) Many value based payment models don't reduce paper(war), they add to it!

So far I found two popular value based payment models:

• Shared Savings: The provider is measured against a cost benchmark - if the cost of care is below that benchmark, the provider can keep a part of the savings (given it meets the quality performance metrics)

• Bundled Payment: A fixed payment is made for a certain episode of care (like a stroke or a sepsis) - this is already very common for inpatient care settings.

Unfortunately these payment models don't reduce the administrative burden for the providers. Under the shared savings models, the costs of care are still determined through the fee-for-service billing process. The bundled payment approach models may relieve providers of some of the admin problems with fee-for-service billing, but I will need to dig a bit further into this to really understand the effect on administrative burden.

In addition to the general models above, value based payment models come in a variety of different flavors and incentives structure. In general, they require providers to report certain quality of care metrics and meet the required quality standards. But these metrics can be very diverse and are depending on the specific value based payment contract. While fee-for-service billing is burdensome, at least there are well established industry standards - these usually don't exist for value based contracts.

Besides these reporting requirements, it also seems to be a challenge for providers is to figure out, how to coordinate between the different contracts they could and should take part in. Some contracts come with exclusivity clauses, some with non-standard metrics, some cover only certain episode of care, some require to be part of an accountable care organization (more below). It's a challenge to manage these contracts.

2) High upfront investment required, unclear long term benefits

Value based care models only become profitable for the provider, when cost savings are realized. To realize this, there is often significant upfront investment required, such as investment in better IT infrastructure and analytics capabilities and setting up new care models, such as remote patient monitoring or care coordination. This upfront investment might be especially difficult, after COVID-19 has left many providers in a dire financial situation. However, this is probably an opportunity for new "value based care first"-providers, who don't have to deal with legacy health care IT and can set up lean operations that are catered towards value based payments.

Even if the provider successfully makes these investments and savings are realized, the long-term profitability of value based payment models might not be guaranteed. When the provider has successfully lowered their cost, the benchmark will be readjusted and the provider will receive less of the shared savings. In general, the cost benchmark will be adapted to a new level every few years. That means that the provider will need to continuously realize savings to stay "ahead of the benchmark" and to pay off the investment.

3) Collaborate with other providers and get visibility into the patient journey across providers

As value based payments should incentivize holistic care, these programs are usually not designed for a single practice, but awarded to a network of providers that collectively take care of their patients. These provider "networks" are called Accountable Care Organizations (ACO), which are loose agreements between a group of providers to take care of their assigned patients. You can find an interesting piece on how these contracts are structured here.

However, for effective collaboration to work, a lot of effort is required. The first challenge is to avoid "patient leakage", i.e. that patients seek care outside of a member of the ACO. This is especially difficult, because ACOs are not "insurance networks" and by regulation patients are free to choose a provider within their ACO or can seek care outside the ACO. Depending on the contract, the costs incurred by a patient that gets care outside the ACO might be attributed to the ACOs cost performance.

Furthermore, effectively coordinating care between the ACO providers as well as providing preventative care, requires effective information exchange to avoid duplicate testing and treatment, coherent medication plans and to follow through with care protocols that span multiple providers (i.e. post-acute care or chronic disease treatment). ACOs that are using a single EMR system are often able to exchange data, but if there are more than one system present, the often still rely on good old telephone and fax machines.

4) New Analytical Capabilities Required & Implementation of effective programs

Even if ACOs have access to all their attributed members' medical records and data sharing is setup, they will need to build up analytics capabilities to effectively reduce costs and make value based care programs viable for them.

Understand their population and identify what their members need.

A first step is to get a deeper understanding of the conditions the members have, tracking their patient journeys and potentially enrich the patient information with other data sources, like socioeconomic data, recreational and medical device data and behavioral data. This will be the basis for segmenting the medical needs, setup alerts before an acute episode arises and inform which programs should be implemented first.

Design, Select & Evaluate the right "coordinated care" initiatives

After analyzing the population, the right initiative needs to be designed and tested. There are several "out-of-the-box" digital solutions available from vendors for a variety of different conditions, like remote patient monitoring, diabetes coaching applications or psychiatric telehealth applications.

But which of these myriad initiatives should be chosen? Also a program that works in one population might not work in another. Selecting the right programs and bringing in the right value based care "vendors" and continuously evaluating their effectiveness seems to be key.

5) Hospitals and certain specialists not incentivized to take part in value based payment models

Value based care has the potential to realize savings, but not if you loose more revenue than you will recoup in shared savings. This is especially true for organizations with high fix costs and low variable costs. Unfortunately this is the case for many specialists and hospitals who rely on fee-for-service/ their emergency department revenues. Reducing the number of acute episodes and emergency room visits will not reduce the uptake costs of the hospital, but reduce the revenue generated.

This knock-on effect is feared by some providers, and it could be the reason why hospital led ACOs in many cases don't lead to any cost savings. This does not mean that they could benefit long term from a shared-savings program, as they could "right-size" their capacity, i.e. reduce the number of beds/ staff, but this is often difficult in the short term and threatens their viability.

I think a key part to make a value based care models interesting for a specialist/ hospital is, if a switch helps them to reduce their variable operating costs. I.e. if value based payments actually help them to get rid of the administrative burden of medical billing and results in faster payments.

Conclusion & Your Help

Value based care is promising in aligning the incentives of the providers, payers and patients, but there are quite a few challenges that need to be overcome. I want to dig a bit deeper into the different challenges I mentioned above in the following weeks.

My ask to you!

Most of my thoughts above were very "hearsay" driven - I read a bunch of papers & articles, but would love to learn more what value based care looks like in practice. Maybe you could help me with the following:

• I would love to hear from a provider about the experience of working with an ACO: What is working what is not working?

• I would love to talk to an ACO how they are thinking about their IT investments: Where do they see the biggest needs?

Last but not Least: Featured Conversations

I want to give a shout out to some great people I met over the last week and the great conversations I had with them:

• Gaurang Choski - CEO at Violet: "Distribution in health care is key - a lot of health care startups are successful because of their sales team and their brand" & many more great thoughts around diversity & equity in health care.

• Andrew Pajela - Commercial Strategy at Trusted Health, Ex-Cedar: We've talked about the challenges software vendors have with integrating with incumbent EHR systems. Several solutions are under way (Zeus, etc.), but it's still a major challenge...

• Patrick Haig - Company builder: we chatted about a patient facing billing idea - think FlightRight for medical bills and what - I will probably write more about this idea in my next newsletter - stay tuned!

As always, if you know someone I should talk to - don't hesitate to ping me!