The Case for Value-Based Care
What is VBC and why it's our best option
Recently, there has been some skepticism around value-based care, but these troughs and their subsequent peaks are nothing new. The first health plans in the US were “value-based,” in that providers took on financial risk for their patient’s health, acting as a mini-insurer. Dr. Shadid in OKC, Drs. Ross and Loos in LA all started these types of plans in 1929 and were all barred from their local medical societies. In the 1990s, there was significant public backlash against HMOs. Despite this pushback, VBC has curbed health spending by lowering prices, reducing utilization, and incentivizing preventative care. This decrease in spending should not have an effect on overall health, as differences in medical spending generally 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 funding for social safety net programs. 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 access.
“Higher-life-expectancy places didn’t enjoy a greater quantity or quality of medical care, or higher rates of health insurance coverage. Rather, higher-life-expectancy places had populations that smoked less, exercised more, and were less likely to be obese.” - We’ve Got you Covered
Defining VBC
Feel free to skip if you’re familiar
There’s lots of hullabaloo on the definition of VBC (aka Alternative Payment Models (APMs), managed care, accountable care, etc.), so let’s start with the basics. 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. CMS is hoping to increase this percentage and have 100% of Traditional Medicare beneficiaries in categories 3 and 4 (aka accountable care relationships) by 2030.
Category 1, fee-for-service (FFS): 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: A hybrid reimbursement model combining traditional fee-for-service with value-based elements. Providers receive payments based on service volume while also earning more for meeting specific quality and performance metrics. For example, providers can get paid for reducing A1C levels (pay for performance), simply reporting A1C levels (pay for reporting), or adopting an Electronic Health Record (EHR) (foundational payments for infrastructure and operations).
Category 3, shared savings models: The provider organization and the payer establish a prearranged cost benchmark for treating a particular population. If the provider succeeds in delivering care that costs less than this benchmark, the resulting savings are shared between the provider and payer. These payments are often “gated” by quality measures. This methodology is common for Accountable Care Organizations (ACOs) in Traditional Medicare.
Shared savings models with upside potential only 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 also penalize providers for not meeting cost and quality benchmarks.
Category 4, capitated payments (aka population-based payments): Population-based payments give providers a fixed dollar amount for managing the care of a defined patient population; hence, these providers take on the all of the financial risk for this population. Quality metrics often enhance these payments. Early health plans were aligned to this payment methodology.
Condition-specific population-based payments: Providers receive a fixed amount for managing the health of a patient population with specific medical conditions.
Comprehensive population-based payments: Providers receive a fixed amount for managing the overall health of a defined patient population, covering all healthcare services and conditions.
Integrated finance and delivery systems (IFDSs) (aka payvidors, vertically integrated systems, Kaiser Permanente): Combine both the financing and provision of healthcare services within a single organization.
VBC criticism is nothing new
In the late 1920s, Dr. Michael Shadid in Oklahoma City and Drs. Paul Ross and Don Loos in Los Angeles pioneered early healthcare payments models that pooled patient resources for prepaid medical care. Dr. Shadid raised money from rural farmers in order to build a hospital and deliver discounted care to invested patients. Meanwhile, the Ross-Loos Medical Group in Los Angeles provided prepaid healthcare to employees of the Los Angeles Department of Water and Power, focusing on prevention and health maintenance. At a time of need (the Great Depression), these efforts stabilized physician income by ensuring a standardized rate, all while aligning incentives toward prevention, as they would pay for poor outcomes and unnecessary treatments. As with many innovations, these efforts faced significant backlash from the medical establishment, particularly the American Medical Association (AMA) and local medical societies, who felt these prepaid models threatened physicians' income and autonomy by introducing fixed payments and administrative oversight. For these reasons, Drs. Shadid, Ross, and Loos were all kicked out of their local medical societies, although Dr. Shadid got redemption in an antisuit suit some 20 years later.
In the 1970-90s, the rise of Health Maintenance Organizations (HMOs) re-introduced a version of prepaid medical groups with federal support. After the introduction of Medicare and Medicaid in 1965, skyrocketing health costs became unsustainable, and the government had to step in. 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 the early pioneers. Physicians felt 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 denials for certain treatments, leading to a public perception that profit-driven motives compromised the quality of care. In our current iteration of VBC, we have seen quality measures combat the rationing of care and consumer choice promote open networks.
Disclaimer: I got lots of love for all doctors. I don’t mean to be accusatory - just want to acknowledge you all as rational actors in a financial system.
Value-based care doesn’t necessarily give physicians the most autonomy. 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 1900s, and their desire to protect it is natural. In the historical FFS world, the physician profession relies on the value that incremental healthcare provides, but, as a society, do we want more healthcare or more health? We should prioritize the health that VBC aligns incentives toward and ask if more healthcare makes people healthier. While, of course, many treatments are life saving and promote health, 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. Thus, we should not adopt a system that promotes more healthcare, especially given the high costs of that care.
In summary, FFS guides the invisible hand toward more volume, often driving up prices and providing more security to physicians, while VBC aligns incentives toward lower costs, allowing us to spend on services with higher ROI.
“Every healthcare expenditure is someone else's income” - David Epstein
The upside of VBC is significant
VBC and its increased collaboration between payers and providers decrease not only utilization of healthcare services, but also 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 threat of horizontal market consolidation can limit competition and drive prices up. In this way, VBC lowers costs, but its success depends on promoting competition and antitrust enforcement.
In this version of VBC, we’ve already seen the cost curve bend. Optimists (like myself and Zeke) would say that Accountable Care Organizations (ACOs) contributed to the Medicare spending slowdown that we are seeing. These spending patterns have spilled over into private insurance with the commercial healthcare spending share of GPD coming in 1% lower than expected in 2022. Recent data from the CMS NHE 2023 report have backed up this claim. Skeptics would say that this slowdown is due to reduced access, the pandemic, and greater patient cost sharing. Nevertheless, individual programs and companies have been successful across cost and quality without benefiting from these factors. The Medicare Shared Savings Program (MSSP) and Maryland Total Cost of Care Model have delivered net savings while maintaining outcomes. On the private side, companies such as Astrana Health have proven 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
Currently, we spend approximately 17% of our GDP on healthcare, a full 8% above the average of other G7 countries. And it’s not like this spending is delivering incredible health outcomes. Reducing healthcare spending requires the reduction of healthcare prices, which VBC incentives.
The downsides can be solved for
As touched on above, VBC does not come without its downsides, and many others have thoughtfully touched on this subject from mainstream publications to the Out-of-Pocket Newsletter and the PCP Lens. These negative externalities are broken down into rationing care, administrative complexity, and risks of monopolization, all of which can be solved for.
One of the primary criticisms of VBC is the risk of restricting access to care. As providers are incentivized to reduce costs, they may be tempted to withhold necessary but costly treatments, leading to inadequate care for some patients. This downside of VBC (underutilization) is easier to regulate than those of FFS (overutilization) because VBC focuses on measurable quality metrics, making it clear when care is being rationed. In contrast, FFS incentivizes overutilization, which is harder to regulate due to the subjective nature of determining necessary services. 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. This oversight, however, does lead to administrative complexity.
VBC models require significant non-clinical resources, particularly in coding patients and tracking outcomes. This burden can result in inefficiencies and additional cost, especially as providers shift from the more straightforward fee-for-service model. Many VBC organizations simply make money from upcoding (or diagnosing patients with more conditions to get paid more), but this trend will hopefully be curbed by a new coding methodology. On the quality quality measure side, there is a growing consensus among policy experts that Medicare should move toward a streamlined set of quality measures that minimize arduous paperwork. Additionally, as technology becomes more advanced and seamlessly adopted, this administrative complexity will decrease.
VBC models require large amounts of upfront capital and encourage integration and coordination across payers and providers, which can drive monopolization. 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 will ultimately lead to higher costs and lower quality. Regulators and innovators must promote competition by enforcing anti-trust laws, building 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 thoughtful about how we spend it.