Value-Based Care Economics Are More Compatible With Fee-for-Service Models Than You Realize

Many health care delivery organizations believe fee-for-service (FFS) and value-based care (VBC) economic models are at odds with each other.

Many analogies highlight this divergence—with perhaps the most popular being the illustration of an individual with one foot grounded on the dock and the other foot on a boat slowly pulling away. While this visual is powerful, it overstates the necessity for an either-or approach.

The tensions between the two models can make organizations very uncomfortable. FFS has been the backbone of the domestic health care delivery system for decades and offers relatively stable and predictable economics. On the other hand, VBC payment aligns with total spend and outcomes, which offers less near-term predictability.

Adding to the discomfort are legitimate concerns around actually being punished for success in VBC, often termed “the race to the bottom.” This line of thinking calls attention to the idea that organizations successful in VBC will lose FFS revenues through lower utilization and spending targets could be reduced based on lower total cost of care performance, which limits the longer-term opportunities for success in VBC.

Savvy organizations recognize there are strategic options for incorporating VBC infrastructure that can complement and even support the FFS model.

As a straight-forward example, in contracts that reward total cost of care performance (eg, shared savings), providers have been successful in reducing utilization and spending in pharmacy (eg, higher generic prescribing) and post-acute care (eg, reduced utilization of skilled nursing). For many systems, these have not been historical operating margin drivers, so there is minimal cannibalization.

VBC structures also enable additional second-order alignment opportunities. High-performing networks focus on shared clinical value-based goals, EHR interoperability and overall network performance. These networks have stronger network integrity (eg, in-network utilization), which can build and fortify patient access channels.

Additionally, inpatient utilization reductions from VBC are usually most notable through more effective chronic disease management, and these patients often represent lower margin medical admissions. For staffing- or capacity-constrained hospitals, this can create capacity, particularly for higher-margin services.

VBC contracts can provide a strategic hedge to FFS. Due to the instability of the past few years, provider organizations are reevaluating their revenue and margin portfolios to look for new opportunities and financial stability. Given the aforementioned differences in FFS and VBC economic models, there is an inherent hedge in many of the arrangements. This was especially pronounced early in the pandemic when health systems with owned health plans demonstrated significantly greater financial stability.

Total cost of care VBC arrangements have disproportionately favorable contracting levers when compared to FFS. It is challenging to contract for FFS rate increases that cover cost growth in the current inflationary environment, as many providers are experiencing. VBC terms, on the other hand, often have flexibility around shared savings rates and methodologies for calculating trend and risk score. Increasing a shared savings rate by 10% (or 25% in the case of moving from Medicare Shared Savings Track E to the Enhanced track) could translate to significantly higher margin contribution for an attributed population.

A VBC lens enables organizations to revisit the capital deployment strategy. One of the growing challenges for the FFS model is the high fixed-cost infrastructure. In the current economic headwinds, provider organizations have even less capital to invest in very expensive assets, including building renovations, new construction and expensive clinical technologies (particularly where the comparative effectiveness may be unproven). VBC does require infrastructural resources and investments, most notably technology and workforce. However, when looking further down the road at evolving economic models, organizational leaders have an opportunity to step back and revisit the capital deployment strategy.

Key takeaways if your organization is seeking to effectively integrate VBC into its existing care delivery paradigm and economic portfolio:

  • Embrace the inherent tension between FFS and VBC and recognize this does not necessitate an either-or approach (similar to how addressing care shifts from inpatient to outpatient does not require either-or strategies)
  • Realize that components of a VBC infrastructure can be accretive to existing clinical and economic models
  • Remember that high-performing networks and Systems of CARE are well positioned to navigate the continued evolution toward VBC
  • Revisit the organizational view on VBC contracting, as there are strong opportunities for organizations that act strategically; in particular, avoid the instinct to immediately turn away from downside risk (after all, most provider organizations have contracts and services today that are guaranteed to lose money)
  • Reevaluate the strategic role of your organization’s balance sheet to ensure long-term assets and investments align with the evolving business model

As shown below, a successful VBC strategy must align the financial, operating and care delivery models in the context of market forces.
Traditional vs value-based business model comparison and explanation

APM = alternative payment model

No matter where your organization stands today on its journey to value-based care, our value-based care experts are equipped to provide your organization with unique insights and impactful recommendations in 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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