Value = (Quality + Outcomes) / Cost

The search is on for ways to pay for health care that make value more important than volume.

American health care is the most expensive health care in the world, gobbling up over 16% of GDP. It may also be the global leader in coining buzzwords and catchphrases. The current fav: value-based—as in value-based care, value-based payment, value-based reimbursement. It seems like everything good and wholesome in health care these days is value-based.

CMS has been leading the charge, with dozens of programs and pilot projects that involve valued-based care. In January of this year, HHS Secretary Sylvia Mathews Burwell announced that her department had set a goal of having 85% of traditional Medicare payments linked to quality or value by 2016 and 90% by 2018. Last month, CMS started to make good on that promise with a plan that would mean about a quarter of the 400,000 hip and knee replacements that Medicare beneficiaries receive each year would be paid for with bundled payments, which seem like this year’s go-to value-based payment.

At about the same time that federal health officials were trumpeting their goals—the Health Care Transformation Task Force, a provider, payment, and purchaser organization that includes heavyweights like Aetna and Partners Healthcare in Boston—said its members would shoot for having 75% of their business operating under value-based payment arrangements by 2020.

Is this all aspirational talk without any real-world walk? It doesn’t seem that way. UnitedHealthcare executives have boasted that $36 billion of the company’s spend last year involved some kind of value-based arrangement and that the amount will increase to over $43 billion this year. Anthem is in the same ballpark. The company’s CEO, Joe Swedish, told Wall Street analysts during an earnings report earlier this year that $38 billion of the company’s spend was done under value-based contracts.

Catalyst for Payment Reform, an employer group pushing for “a higher-value health care system” hasn’t yet come out with its 2015 report card. The 2014 version, based on answers from 39 health plans, showed that 40% of commercial in-network payments were “value-oriented,” which the group defines as payment tied to performance metrics or designed in some way to cut waste. That’s a big jump from the group’s 2013 report card, which showed just 11% of payments coming with value-base strings attached.

What’s Getting Traction

Methodologies used for value-oriented payments in 2013 and 2014, compiled by Catalyst for Payment Reform from a national sampling of plans.

Not all the signs point to so much value-based payment. When 146 financial officers at hospital-based provider systems were asked about value-based payment in a survey conducted earlier this year, they reported that a relatively measly 12% of the commercial insurance payments to their employers was value-based.

On the other hand, the financial officers said that they expected that proportion to grow to 50% in the next three years.

The value-based care ratio

What value means in value-based care varies, depending on who is using the term and for what purpose. But fundamentally, it’s a ratio, with quality and outcomes in the numerator and cost in the denominator.

If you want to be aphoristic about it, value-based care is really nothing more than getting the biggest health bang for the health care buck. The bang, or numerator, can include anything from HEDIS scores to mortality rates to results of patient experience surveys. How exactly the cost, or denominator, is calculated is unlimited. The ratio can be improved in 1 of 3 ways: Beef up that numerator by improving quality and outcomes, slim down that denominator by cutting costs, or, ideally, do both at the same time.

The payment mechanisms—how exactly the money flows—for achieving value-based care are now jockeying for position. Experts agree that we’re in a period of experimentation, sorting out how to deploy health care dollars to the maximum effect.

If you want certainty, there is this: Defenders of fee-for-service are few and far between.

Different payment mechanisms

Pay for performance goes back well over a decade and is so familiar that in payer and provider circles, it goes by a three-character moniker: P4P. Pay for performance’s virtue is also its shortcoming: It can be implemented without expensive IT or the hard work of care coordination and with relatively little change to the fee-for-service revenue cycle. The equation remains volume X intensity = more money for the provider, albeit with bonuses for meeting performance measures that are supposed to nudge the care toward better quality and outcomes.

With bundled payments, providers get paid a set amount for all the services related to a specific condition or procedure. If care is delivered for less than the set amount, they keep the difference as reward for managing the surgery or condition in a cost-effective manner. If it costs more, and the contract includes downside risk, they pay a penalty. Bundled payments are widely seen as the pragmatic, user-friendly version of value-based payment. In fact, the retrospective version leaves fee-for-service payment pretty much intact with a reconciliation process afterward determining whether savings goals were met.

Conceptually, bundled payments are descendants of the diagnosis-related group (DRG) for hospital services, which were supposed to allow hospitals to manage care and costs by diagnosis instead of by each and every service. Some of the same problems inherent in DRGs may be lurking within bundled payments: For the individual provider, bundled payments may not alter the incentive to pursue volume and could, in fact, heighten it. But if the providers who chase volume are also those who have mastered cost-effective care under a bundled payment system, that could be good for value-based care and for the health care system as a whole.

There’s a general desire among health plan executives to go to capitation but to go slow because many providers aren’t ready to take on full risk, says Andrei Gonzales, MD, of McKesson Health Solutions.

Capitation is familiar to anyone who knows managed care’s 1990s origin stories. There’s a belief that other value-based payment mechanisms are simply warm-up acts for when capitation retakes the stage and full risk moves to providers. Andrei Gonzales, MD, director of value-based reimbursement for McKesson Health Solutions, says that judging from what commercial health plans executives are telling him and the signals coming out of CMS, there’s a general desire to go to capitation but to go slowly because many providers aren’t ready for the full risk.

For some, memories of the furious backlash against the ’90s version of capitation have lingered. This time around it will be different, say the proponents. Providers are both more ready and more willing because they’re more sophisticated about managing population health, have better financial systems, vastly improved IT, and terabytes of data at their disposal.

In the meantime, shared savings (and risk, if the contract includes the downside) is a kind of hedged capitation bet, with payers and providers agreeing to divvy up money saved by delivering care more efficiently and effectively and, in two-sided risk arrangements, agreeing to share the hit if the cost of care exceeds the expected amount.

CMS has been a prime mover in value-based care. If reliable, workable mechanisms of paying for it are to be developed, CMS will have to remain a major player.

Gonzales, whose company is in the business of selling IT and process engineering, says the next chapter of value-based payment will be automating and scaling up today’s systems. Currently, many of these value-based payment mechanisms are enormously labor-intensive efforts, involving multiple Excel spreadsheets and data scattered hither and yon. But the various payment mechanisms have common elements, such as performance metric recording and reporting, so they can be consolidated and automated, says Gonzales. Moreover, because value-based care has gone from “not if, but when” in many people’s opinion, organizations are more willing to spend money on these systems, he says.

The incentives have to be strong enough. UnitedHealthcare’s Premium Designation program rewards primary care physicians who refer patients to highly rated specialists and low-cost labs. Lisa McDonnel, a United senior vice president, says only primary care physicians who have at least 100 of the company’s beneficiaries in their panels are allowed to participate so the financial incentives—bonus payments based on PMPM cost savings—have some punch. “We are trying to make it a meaty enough carrot to get the behavior change,” she says.

Flexibility is another important feature. McDonnel says UnitedHealthcare’s philosophy is to meet providers “where they are. Even if I had the perfect payment scenario, it would still take a provider on the other side who is ready to manage the population in that way,” she says.

Finally, some experts believe that the Mr. Nice Guy-era of health care we’re in, during which many value-based payment arrangements have been limited to upside risk and bonuses, is wholly inadequate for pushing American health into value-based care. Two-sided risk and penalties are needed if the system is to leave its fee-for-service days behind and give up on its volume and intensity ways, they say.