The Case for Value-Based Care
What is VBC and why is it's our best option
In recent days, there has been a lot of recent criticism of value-based care, but these troughs and their subsequent peaks are nothing new. The first health plans in the US were “value-based,” or were providers who took on financial risk for their patient’s health, acting as an insurance company. This payment methodology encouraged them to focus on keeping patients healthy since they would pay for poor outcomes or unnecessary treatments. Dr. Shadid in Oklahoma City, Drs. Ross and Loos in LA all started these plans in 1929 and were all barred from their local medical societies. In the 1990s, there was significant public backlash (and a spicy Times covers) against HMOs. Despite this backlash, VBC has curbed health spending by lowering prices and reducing utilization. This decrease in spending should not have an effect on health outcomes, as differences in medical spending generally show do not show a statistically significant impact on health outcomes. And what does this reduction in health spending get us? Better education for children, fewer food deserts, and more food stamps. At the end of the day, Americans are way too sick, and we are spending way too much on healthcare. It’s not more healthcare that’s going to save us, it’s a healthier lifestyle - one that everyone should have the liberty to choose.
“Good health doesn’t start in hospitals and clinics; it starts in our homes and neighborhoods, in the food we eat, the air we breathe, and the safety of our streets.” - Body Economic
Defining VBC
Feel free to skip with if you’re familiar
There’s lots of hullabaloo on the definition of VBC (aka APMs, managed care, accountable care, etc.), so let’s start from the beginning. In the US healthcare system, there are 4 primary payment methodologies. While folks in Category 2 like to say they’re doing VBC, in reality, Categories 3 and 4 are the real deal and together make up 41.3% of all payments. The Biden administration has set the goal to move all Medicare beneficiaries into accountable care arrangements by 2030.
Category 1: Fee-for-Service (FFS) with no link to quality & value
In the FFS model, healthcare providers are reimbursed for each service, test, or procedure they deliver. Each item is assigned a specific fee.
Category 2: Fee-for-service with a link to quality and value
Fee-for-service with a link to quality and value is a hybrid reimbursement model combining traditional fee-for-service with value-based elements. Providers receive payments based on service volume while also earning incentives for meeting specific quality and performance metrics, promoting a balance between care provision and improved health outcomes.
Foundational Payments for Infrastructure & Operations (e.g., care coordination fees and payments for HIT investments)
Pay for Reporting (e.g., bonuses for for reporting data or penalties for not reporting data)
Pay-for-Performance (e.g., bonuses for quality performance)
Category 3: Shared Savings Models
In a shared saving model, the provider organization and the payer establish a prearranged cost benchmark for treating a particular population. If the providers succeed in delivering care below this benchmark, the resulting cost savings are shared between the provider and payer.
Shared savings models with upside risk are reimbursement models where providers share in the savings generated but do not face penalties for failing to meet cost or quality benchmarks, limiting their financial risk.
Shared savings models with upside and downside risk are reimbursement models that reward healthcare providers for delivering high-quality, cost-effective care (upside risk) and penalize them for underperformance (downside risk).
Category 4: Population-based payments (aka capitated payments)
Population-based payments are reimbursement models where healthcare providers receive a fixed amount for managing care for a defined patient population, hence taking on the risk and the associated cost of care.
Condition-specific population-based payments are reimbursement models where healthcare providers receive a fixed amount for managing the health of a patient population with specific medical conditions (e.g., per member per month payments, payments for specialty services, such as oncology or mental health).
Comprehensive population-based payments are reimbursement models where healthcare providers receive a fixed amount for managing the overall health of a defined patient population, covering all healthcare services and conditions (e.g., global budgets or full/percent of premium payments).
Integrated finance and delivery systems (IFDS) (a.k.a. payviders) are healthcare models that combine both the financing and provision of healthcare services within a single organization (e.g., global budgets or full/percent of premium payments in integrated systems).
VBC criticism is nothing new
In the late 1920s, Dr. Michael Shadid in Oklahoma and Drs. Paul Ross and Don Loos in Los Angeles pioneered early healthcare models that challenged the traditional fee-for-service system. Dr. Shadid got rural farmers to pool resources together, build a hospital, and receive prepaid medical care. Meanwhile, Ross and Loos founded the Ross-Loos Medical Group in Los Angeles, providing prepaid healthcare to employees of the Los Angeles Department of Water and Power. Both efforts faced significant backlash from the medical establishment, particularly the American Medical Association (AMA) and local medical societies, who feared these prepaid models would reduce doctors' incomes, undermine physician autonomy, and lower the quality of care.
The rise of HMOs in the 1970s-90s was fueled by growing concerns over skyrocketing healthcare costs. The HMO Act of 1973, championed by the Nixon administration, provided federal support to expand the HMO model. As HMOs grew in prominence, they encountered backlash similar to that faced by early pioneers like Dr. Shadid and Ross-Loos. Physicians feared that HMOs prioritized cost savings over patient care, restricting their autonomy with rigid regulations, referrals, and prior authorizations. Patients also criticized HMOs for limited provider networks and denial of certain treatments, leading to a public perception that profit-driven motives compromised the quality of care.
Value-based care has never lifted up the physician’s profession. Managed care decreases physician authority by imposing guidelines, cost controls, and requiring approval for certain treatments. Physicians have fought for this authority for centuries and only recently established it in the early 20th century, and their desire to protect this authority is only natural, especially if you’re coming out of school with ~200k in debt. In this way, the physician profession relies on the value that incremental healthcare provides, but, as a society, do we want more healthcare or more health? We want health.
Does more healthcare make people healthier? While many treatments work, medicine on the margin - particularly extra medical spending - often produces little to no additional health benefits. The RAND Health Insurance Experiment, conducted in the 1970s, randomly assigned over 7,000 people to different levels of health insurance coverage, ranging from free care to high cost-sharing. The study found that while those with free care consumed about 30-40% more medical services, there were no significant differences in overall health outcomes between the groups. Even when medicine does lead to poorer outcomes, VBC (in present terms) protects patients by penalizing provider organizations.
The upside of VBC is significant
Not only does VBC and its vertical integration between payers and providers decrease utilization of healthcare services, but also decrease the unit prices of these services. These prices are at the root of what makes our system so expensive. Since the same organization is responsible for paying for and delivering care, it benefits from setting lower prices for treatments. This alignment fosters cost efficiency, bargaining power with suppliers, and streamlined administrative processes, contributing to overall savings. For example, in the 1990s, HMOs curbed the growth of healthcare costs by leveraging their bargaining power to secure more favorable prices. Between 1993 and 1999, the average annual increase in personal healthcare prices was 2.5%, marking a significant deceleration from the 5.7% yearly growth observed during the 1983-1992 period. However, the potential for market consolidation could limit competition and drive prices up if not carefully managed. Thus, VBC can lower costs, but its success depends on balancing efficiency, competition, and care quality.
In this iteration of VBC, we’ve already seen the cost curve bend. Optimists (like myself and Zeke) would say that ACOs (created by the ACA) led to the Medicare spending slowdown we are seeing. These spending patterns have spilled over into private insurance: "CMS projections made between 2010 and 2020 indicate it was expected that by 2022 private insurance spending would account for between 6.0 percent and 6.5 percent of total US GDP; however, our data suggest that it was only 4.9 percent in 2022" - Health Affairs. Recent data from the CMS NHE 2023 report has backed up this claim. Pessimists would say that this slowdown is due to decreased provider supply, reduced access, the pandemic, greater patient cost sharing, and boomers aging into Medicare creating a healthier population pool. Nevertheless, individual programs and companies have been successful across cost and quality, such as the Medicare Shared Savings Program (MSSP) saving $1.8B to CMS in 2022, producing savings for CMS in the aggregate, and Astrana Health proving profitability while reducing ED admits by 61%.
“Funny how the massive savings coincidentally coincide with implementation of Obamacare with cost-cutting measures and large portions of the population finally accessing health care prior to enrollment in Medicare. Such a head scratcher.” — Stephen from Columbus, Ohio
Additionally, the downsides of VBC (underutilization) are easier to regulate than those of FFS (over-utilization) because VBC focuses on measurable quality metrics, making it clearer when care is being rationed. In contrast, FFS incentivizes over-utilization, which is harder to regulate due to the subjective nature of determining whether services are necessary. While both models have challenges, VBC's reliance on data-driven oversight makes it easier to monitor and enforce care standards, minimizing risks of rationing.
The downsides can be solved for
As touched on above, VBC does not come without its downsides, and many of these . Many others have touched on this subject from mainstream publications to the Out-of-Pocket Newsletter and the PCP Lens, but I would break the negative externalities into rationing care, administrative complexity, and risks of monopolization.
One of the primary criticisms of VBC is the risk of rationing care. As providers are incentivized to reduce costs and improve outcomes, they may be tempted to withhold necessary but costly treatments, leading to inadequate care for some patients. As I detailed above, these challenges can be regulated away by quality measures but lead to administrative complexity.
VBC models require significant administrative oversight, particularly in tracking patient outcomes, managing data reporting, and coordinating care across multiple providers. This data increases administrative burden and can result in inefficiencies and additional cost, especially as providers shift from the more straightforward fee-for-service model. Ideally, health policy focuses quality measure more on outcomes that track with the patient’s health with minimal reporting burden (like quality-adjusted life years rather than medication adherence). Additionally, as technology becomes more advanced and adopted more seamlessly, this administrative complexity will decrease.
VBC models encourage integration and coordination across payers and providers, which can drive consolidation. Larger healthcare systems may have more resources to meet the administrative and financial demands of VBC, potentially pushing smaller, independent practices out of the market. This trend toward consolidation could reduce competition, limit patient choice, and increase market power for large conglomerates, which might ultimately lead to higher costs and poorer quality. Regulators and innovators must promote competition by enforcing anti-trust laws, building new companies, and enabling independent physicians to take on risk.
Would you rather a world of over-utilization or under-utilization?
I would rather one with under-utilization, where our money is spent services that have a higher ROI, like education and healthy foods. There is a limited pot of money out there, and we need to be careful about how we spend it.