As the transition of healthcare payment models from volume to value takes longer than expected, healthcare organizations must balance fee for service (FFS) with value-based care (VBC). The transition to VBC will accelerate, but as FFS persists and still generates adequate margins, organizations must also continue to be successful under volume-based reimbursement.
Ten tools can help health systems balance VBC with FFS:
1. A member perspective.
2. Cautious investment in hard delivery assets.
3. Accelerated investment in digital infrastructure.
4. Innovative digital engagement solutions.
5. Pricing concessions.
6. Aligned incentives.
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As a country, we are confronting many options and philosophies regarding accessible and affordable health insurance—all of factor into healthcare’s shift to value-based care (VBC). Our choices include supporting state and national insurance exchanges, eliminating the individual mandate, repealing the Affordable Care Act, advancing Medicaid block grants, creating Medicare for All, modifying the Medicare program to enroll all who want it, and more.
As our communities debate the merits of these alternatives and the leaders who promote them, as a nation, we must eventually confront an issue not often broadly discussed in the mainstream: the significant challenge underlying all insurance options is an increasingly unaffordable healthcare services delivery system.
Amid these challenges, the healthcare industry is in limbo between value- and volume-based payment models, as unaffordability pushes a shift to value, but the current environment still supports volume. To survive economically, health systems must understand the factors driving and sustaining both payment models as well as strategies to balance value succeed as value replaces volume.
The consistent rise in cost of care delivery is well documented. For many years, the annual cost of healthcare services has increased at a rate greater than that of general inflation and of the U.S. economy. As a result, healthcare expenditures as a percent of GDP now approach 18 percent—more than doubling from 8 percent of the 1980s when health insurance was far less of an issue.
Many factors contribute to the consistent rise in cost, but a few elements are critical drivers:
With the social factors and healthcare services environment described above persisting for decades, healthcare service capitalism has thrived under service payment systems incenting more care—known as fee for service (FFS). But as a designed byproduct, the FFS model drives more service, more fees, higher costs, and more GDP consumption.
To stem this rising tide of cost, the largest purchasers of health services, the federal and state governments, have for years constrained FFS payment increases at rates below those of other purchasers. Other large purchasers (e.g., large employers and commercial insurers) have become increasingly frustrated with the pricing gap between fees paid by the governments and those they, and everyone else, pay. These other purchasers are in turn demanding lower rates.
Yet, despite these payment rate pressures, healthcare costs have continued to rise, implying more healthcare services at suppressed rates. In any event, healthcare organizations have experienced significant margin pressures in recent years despite total healthcare costs continuing to rise. Provider margin pressures under FFS will likely continue to intensify as fee increases continue to trail expense inflation for the foreseeable future. Alternative payment mechanisms will gradually become more attractive to providers.
Alternate payment mechanisms including VBC payment models have been introduced. They are not new—CMS began emphasizing VBC in about 2008. The VBC adoption rate, however, has been slow. Provider success rates have been slower. But to effectively address the total cost challenge, a mechanism that deemphasizes care volume through alternative, outcomes-based models seems imperative. Furthermore, providing an alternative path for viable provider margins seems not only likely but critically necessary. Providers have the training, skills, and experience to effectively address most of the critical cost drivers outlined above. They should be rewarded for doing so.
CMS has been a strong advocate for VBC—importantly, through both Republican and Democrat administrations. Since the latter 20th century, CMS changes in payment methods have driven health services industry payment changes. For example, cost reimbursement, prospective payment, fee schedules, and resource-based relative value system were all original designs of CMS the industry later adopted.
While it’s increasingly hard to imagine VBC payments not becoming the more prevalent means of provider compensation, adoption remains slow. FFS mechanisms will not go away quickly and remain materially important to provider financial success today. A fifth of the world’s largest economy is built based on FFS models. Change of this scale takes time. Recognition, creation, and adoption of new key capabilities and competencies will have fits and starts for sure. Expect it. But success under VBC systems will be achieved. And increased rates of VBC adoption will follow.\
As healthcare makes its shift towards VBC, organizations must carefully navigate a balance of FFS and VBC payment. Ten strategies will be critical to that balance:
Healthcare payment models will continue the inevitable march to value. Persistent affordability challenges and population trends will ensure a continuously evolving and increasingly challenging landscape. A capitalistic economy, in which rules change for everyone, creates a market opportunity. Organizations who develop the competencies for success under the new rules most quickly will hold a competitive advantage over those who don’t.
While health systems can’t prudently commit wholesale to VBC, those who cling too long to FFS place at risk their long-term viability. As a result, organizations must build strategies to increase their clinical, operational, and financial agility and promote sustained investment in competencies critical under VBC while continuing to balance value and volume.
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