Sometimes value-based care isn’t very valuable

Over the past decade, “value-based care” and its corresponding contracts have become extremely popular in the managed care industry. These arrangements are a large and growing area of focus for a variety of health care stakeholders: networks, providers, governments, and employers. There are many examples of major payers adding more value-based care models and Optum is stating that value-based care is “vital for survival.” Perhaps it is not surprising, then, that a study by the Catalyst for Payment Reform found that the percentage of commercial payments tied to value-based arrangements grew at least 500% since 2012, and that today most health care payments are tied to value or quality of care.

There is no doubting value-based care’s popularity, but the more important question is, does value-based care deliver value? The answer is not always straightforward.

Defining value-based care

The term “value-based care” has multiple manifestations in contracts and arrangements between payers and providers. Broadly, all value-based arrangements revolve around incentives (often referred to as “risk”) for 1) following preventative and interventional best practices, 2) using resources efficiently, and 3) avoiding adverse outcomes.

Common value-based contracts include mechanisms like:

• Capitated payments – payment per member per time-period, the idea being that providers are incentivized to manage patient health over the relevant period (i.e., preventative care instead of procedural).
• Bundled payments – payment per health episode; covers care related to a specific procedure (e.g., joint replacement) or condition (e.g., congestive heart failure) during a set time period (e.g., 30 days before and 90 days after a procedure). Providers are paid a lump sum regardless of resources used for the specific treatment or condition. The goal is to incentivize providers to be efficient, follow best practices, and avoid excessive utilization such as unnecessary imaging or post-discharge rehab admissions.
• Payment for adhering to certain practices – providers get a bonus payment for completing certain screenings and other activities in accordance with evidence-based guidelines (e.g., the Centers for Medicare and Medicaid Services MIPS program).
• Risk-adjusted payments – payers try to tie the payment to the expected utilization and complication of the patient. This feature is involved in most value-based payment structures – the sicker the patient is recorded as being, the greater the payment.

The academic literature on the efficacy of “value-based care” arrangements and related activities is varied; some programs, like bundled payments, have shown mixed-to-positive impacts on cost. Others, like health care “hot-spotting” — attempting to proactively intervene with high utilizers and provide them preventive services — show no impact on reducing costs.

Value-based contracts stand in contrast to the traditional “fee-for-service” arrangements. In fee-for-service, as the name suggests, compensation is based on negotiated fees for the services rendered, without the same attempts at performance incentives. Many proponents of value-based care characterize fee-for-service as being purely “transactional” and argue that value-based arrangements are necessary for reducing costs and improving quality. However, those arguments do not always bare out when we look at many value-base arrangements against a meaningful definition of “value”.

Value equation

Now that we have defined value-based care, let us define what that first word — value — means:

Value = Quality / Cost

Health care cost is a function of price, efficiency, and utilization. Quality is a function of outcomes, good practice, and patient experience. But simply put, value is a function of quality and cost. It follows, then, that the lower the cost of a service at the same level of quality, the higher the value of that service.

When “value-based” is less valuable

Based on that value equation, we see cases where “value-based care,” despite its name, does not result in more valuable care. Below is a scenario for a joint replacement based on real world examples we have seen in the marketplace.

(Cases and arrangements apply to patients of equivalent risk levels)

Option 1 (value-based care): A hospital system has a bundled payment arrangement with a payer for a total joint replacement. The hospital receives $40,000 for a 90-day period, which covers the cost of the following services, all performed at that hospital’s facilities:

• Pre-operative (diagnostic imaging)
• Peri-operative (surgery)
• Post-operative care (physical therapy)

The hospital’s outcomes are as follows:

• 2.1% readmissions rate
• 1.0% Infection rate

Option 2 (fee-for-service): Under a fee-for-service arrangement, the same set of procedures and services could have been performed for just under $20,000 total at the following facilities:

• Pre-operative (image) at a non-hospital facility for $500
• Peri-operative (surgery) at an ambulatory surgical center for $18,000
• Post-operative care (physical therapy) at a non-hospital office-based facility for $1,000

The outcomes for this combination of facilities:

• 1.4% readmissions rate
• 0.7% Infection Rate

The fee-for-service arrangement (option 2) is half the price of the value-based arrangement, while offering a higher level of quality in outcomes. In any coherent definition of “value,” option 2 is more valuable. While this is just one example, this type of situation happens quite frequently, where care under a “value-based arrangement” is objectively less valuable.

Mis-aligned incentives

Value-based care, in theory, is meant to correct the excesses of the fee-for-service structure by removing the incentive to perform more services that do not affect measured outcomes, and instead perform different, often lower-cost services that do positively impact outcomes. In practice, value-based care instead offers different misaligned incentives. Those problematic incentives are most evident in the practice of risk adjustment.

Most value-based contracts include some sort of payment adjustment based on the patient’s level of sickness. The more — and more severe — co-morbid conditions that the patient has, the greater the payment is, as in theory they will require a greater amount of care. As a result, much of the infrastructure (both data analysis and administrative work) in the value-based care domain is dedicated to ensuring that comorbidities of the patient are well-documented and submitted to the payer to secure additional payment.

Practices around risk-adjustment are not always directly related to providing more efficient, higher quality, and lower cost health care. In fact, these risk-adjustment practices can lead to less valuable care as providers are incentivized to make patients look sicker than they are. Risk adjustment practices have become so pervasive that the Department of Justice has begun investigating Medicare payments and believes that there has been about $9 billion in fraud related to gaming risk adjustment.

Redefining value-based care

Essentially, value-based care is a method of payment that is not inherently good or bad; the value within these arrangements is determined almost entirely by its implementation and results. If we want to base our care on value, we need to focus our energy on defining and measuring health care value along the lines of price, efficiency, and quality — regardless of the contracting method being used. We need to move patient volume towards more valuable care or change provider behaviors to be more in line with a meaningful definition of value.

In the case of the joint replacement episode, more important than the contracting structure is that the procedures happen at the most efficient possible location at a fair price. For the surgery, that means appropriate use of outpatient or ambulatory locations. For the imaging or physical therapy, that means — when appropriate — using a cost-effective location like the office or independent facility rather than a high-priced hospital. High-value decisions, like choosing an efficient and fairly-priced location for care, is what we need to focus on, evaluate performance based on, and incentivize directly.

The managed care industry and its participants need to make sure value-based care lives up to its name and provides real value. Otherwise, it is simply allowing people to give the appearance of making progress without having to undertake any of the necessary sacrifices to make health care more valuable. It’s easy for a hospital and payer to say they engaged in value-based care without addressing the fact that their procedures cost 100% more per unit than the market while not having meaningfully better quality. The industry needs to make the underlying changes necessary to orient a health care system towards more efficient care at lower costs.

What do those underlying changes look like for the market? For providers, that means rearranging capital and labor to produce more efficient, better-priced care; for payers, that means having good network contracts, UM policies, and networks that reward providers who have better prices and quality; for employers and their consultants, that means purchasing and monitoring networks and implementing policies that steer members to higher-value care. If we want to increase value in health care, not purchasing (or offering) low-value care is a far more direct way of doing that than working through value-based contracts.

If we do not keep a sound understanding of value, we can get distracted by less important details and lose sight of what truly matters. We will spend a lot of money to administer programs that don’t address the core issues currently plaguing our health care system. For our health care system to achieve greater value, we must work to understand, track, and manage care by the true definition of value: the price, efficiency, and quality of the care delivered from the service unit to the care pathway. Only then can we ensure that all health care decisions can be based on real value, and not just in name only.

David Gaines is the Founder and CEO of Careignition, Inc., a platform that makes sense of the mess that is health care data. The company takes in fractured and messy data, reforms it into standardized units, and uses that information to give a clear picture of health plan performance.