It’s Time for Providers to Reevaluate Clinical and Economic Models for Value-Based Care

Environmental factors are adversely impacting provider financials and weakening providers’ positions in fee-for-service (FFS) contracting.

Providers have been working to regain financial stability after pandemic-driven volume swings that were quickly followed by workforce shortages—now the health care industry can add inflation to the list of considerable challenges. These pressures have quickly eroded already low operating margins and in most cases have been exacerbating losses for many providers and systems in 2022.

Broad inflation is the latest environmental force adversely impacting provider financials. Ordinarily, providers would seek offsetting rate increases in payer contracts. However, payers have been very reluctant to offer commensurate rate increases as traditional funders are unlikely to shoulder a further pricing spike. These funders, namely employers and government, have been pushing back on health care cost growth for decades.

Additionally, regulatory and legislative undercurrents are shifting traditional conversations. One very recent example is the payer price transparency requirements that went into effect in July 2022. With negotiated rates now publicly available, there is likely to be less room for providers to negotiate further rate increases. Another example is the No Surprises Act, which places more accountability on providers for removing unexpected bills to patients and places a greater onus on providers to be “in-network” in many cases.

Payers are prioritizing value in contracting conversations.

Payers are using this environment to pivot traditional contracting conversations and transparently push for a greater focus on value-based care in these negotiations. President and CEO of Elevance Health (formerly Anthem) Gail Boudreaux stated in the organization’s 2022 first quarter earnings call that Elevance is “taking the opportunity…to change this conversation and make it less a transactional conversation and move to value-based care, which has been the core part of our strategy with all of our providers.” This theme was echoed by CEO of Centene Corporation Sarah London, as she similarly stated that “it’s yet another reason why the move more aggressively to align with providers in value-based contracting is a major priority.”

Providers that prepare for value-based discussions can capture more value and position more strategically.

Providers that are ready for this value-based care dimension stand to capture more near-term revenue and margin opportunities, even if value-based care and contracting have not been a meaningful part of their historical focus. Conversely, organizations not ready to discuss value-based terms risk leaving “money on the table” both in value-based terms and in negotiating levers. Try not to think of it as “all-in” on value. Payers are much more open to FFS increases in the setting of value (ie, there is an agreed-upon path to value-based reimbursement) than strictly having a somewhat hostile conversation about FFS rates. Focus the conversation on timing, glide path and partnership to get to a mutually agreeable point.

Pushing value-based conversations off to another contracting cycle is usually not advised. There is a temptation to focus squarely on FFS terms in this environment—the need to obtain quick FFS increases to help with the challenges of workforce, inflation and recovery. The transition to value takes time and focus, which is why organizations should start taking those proactive steps in both the clinical and economic models today. Meaningful value creation and capture usually takes at least two to three years as an organization implements key infrastructural components. Near-term value-based contracting terms can often provide resources and funding to start making this transition, including care management funding, value-based infrastructure support, and an incentive program that positions providers for near-term and longer-term financial success in these models.

Near-term FFS gains may even create longer-term vulnerability in some markets. In the advanced primary care space, CEO of Oak Street Health Mike Pykosz highlighted that rising labor costs “will increase the cost of hospitalizations and therefore, increase the value of the hospitalizations we are reducing, increasing the savings we are capturing.”

It does not have to be an either-or approach as value-based care is a portfolio strategy for many providers. In recent years, the tension between FFS and value-based reimbursement has been difficult for organizations to reconcile on many fronts. Changing the clinical and economic models is already challenging, so layering in the timing component makes the shift even more so. At the same time, value-based care gives providers a new opportunity to establish a differentiated position in their markets.

Value-based care better aligns with the premium dollar. Value-based care and contracting can strengthen an organization’s business model by providing better alignment and longer-term durability when done strategically and thoughtfully. Organizations that are ready to think and act strategically stand to create and capture more value in these arrangements while carving out a more differentiated position in the health care delivery market.

Key takeaways for your upcoming payer contracting negotiations:

  • Understand that payers are pushing to better align provider contracts with the premium dollar through value-based terms
  • Create or refine your organization’s value-based care roadmap to enable a strategic and multiyear view in these conversations
  • Recognize that contracting related dollars may be available to your organization outside of the traditional FFS terms
  • Beware that pushing value-based contracting further into the future creates longer-term vulnerability to disruption from providers more economically aligned with high-value care

No matter where your organization stands today on its journey to value-based care, Sg2’s value-based care experts are well equipped to provide your organization with unique insights and impactful recommendations when it comes to prioritizing opportunities and positioning your organization for select value-based care undertakings. Please reach out to us for more information or to speak with an Sg2 value-based care expert.

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