Updated: Jun 22
Since its inception, the concept of value-based care (VBC) has been touted as a seismic shift for the healthcare industry. This framing was born from the belief that, because of the way fee-for-service (FFS) incentives had shaped it, the very structure of this industry was so fundamentally at odds with the goal of improving outcomes and reducing cost that achieving those aims would require major transformation. Specifically:
Replacing the reimbursement model: Fundamentally, many believed the industry was on a 'road' or 'journey' toward replacing FFS incentives with risk-based VBC. FFS was the start point; VBC was the destination.
Remaking plan and provider business models along the way: Evolving the payment model would force existing providers to fundamentally shift their business and operational models in order to survive. As for plans, shifting risk onto providers would, at least to a certain extent, undercut or minimize their overall role as the risk-bearing entities within the industry.
Displacing legacy players that couldn't evolve quickly enough: Changing the rules of the game would create a space for disruptive innovators and new competitors to enter the industry and crowd out legacy ones that couldn't evolve quickly enough.
So where do things stand, more than 10 years into the journey? Few casual observers would say that VBC has gotten very far toward achieving its aims, mostly because progress on step 1 has been slow. The vast majority of payments are still FFS, even if many of them have modest value-based components. Quality gains are spotty and total spend reduction goals have yet to be achieved.
But I don’t think that a 'slow or no progress toward the end goal' judgement tells the whole story. The more interesting truth is that legacy plans, legacy providers, and new entrants alike have embraced VBC, but they have done so selectively, in ways that largely sustain historical business models and roles within the ecosystem. In other words, far from displacing FFS and legacy models and players, VBC has ended up living alongside them, enabling both old and new players to continue expanding their roles and for the industry as a whole to continue expanding its pie (for example, as a percentage of GDP).
So let's take a closer look at each of the original VBC future forecasts, in turn: here are three observations on the state of value-based care as of 2023.
Observation #1: Risk-based payment is growing steadily—but it has not replaced FFS by a long shot.
Let’s start with the obvious. Risk-based payment has not replaced fee-for-service as the preeminent form of reimbursement in the U.S. healthcare system.
Precision of terminology is important here. When I say “risk-based payment,” I’m referring specifically to reimbursement models that require a provider to accept some level of downside financial risk. Keep in mind that this could still mean that reimbursement is delivered on a fee-for-service chassis like a shared risk model. If defined purely as a true alternative to FFS, such as population-based payments, penetration would be even lower than the graphic below indicates.
Observation #2: MA economics have enabled providers to manage risk and FFS contracts with business and operational models that work under both simultaneously—and rather than being sidelined, plans have added new services, enabling them to thrive and take a more central role in the industry.
The numbers above underscore just how variable penetration is across different lines of business, with MA far and away the leader. This has been true for so long now that it’s easy to gloss over. But it’s worth considering why this is the case, especially given that the preeminent driving force behind VBC has been the federal government, which has used the traditional Medicare program as its primary channel for pushing value-based payment and care delivery models.
MA has raced to the front of the pack because risk in MA presents several different compelling business opportunities. For example, MA's senior population is older and sicker than the general population (such as the employer-sponsored population), meaning that there’s plenty of opportunity to improve health outcomes in ways that also reduce cost. And, compared to traditional Medicare, the MA contract negotiation process gives plans and providers flexibility to customize care and payment models in a way that a large-scale national program like the Medicare Shared Savings Program simply does not.
The overall high level of funding, combined with the severity adjustment aspect of MA reimbursement, has also created aligned incentives between plans and providers. The two can not only partner to boost care coordination and reduce avoidable hospitalizations and emergency department use, but also to ensure thorough documentation of patient conditions—the key to increasing MA payments. It's worth highlighting this dynamic because it's somewhat unique in the healthcare ecosystem, in which plans and providers are traditionally positioned as adversaries. But under the MA flavor of VBC, plans and providers have been able to achieve "win-win" economics.
What this all means for providers is that risk, the very model that many thought would usher in lean times, has actually helped shore up finances that are otherwise under major stress. 15 years ago, no one thought risk in any form would become a bright spot on the revenue side of providers' ledgers (of course, no one envisioned a future pandemic as the catalyst for a labor cost spike that would drive historically low provider margins).
Risk has proven to be a major business opportunity for plans; insurers have excelled at risk adjustment capture, and also invested heavily in diversified services that are further contributing to their success under MA. In fact, MA, the most risk-dominated among all insurer business lines, is also now their most profitable.
So if we compare what has actually happened to what was predicted to happen, neither providers' or plans' business models have been upended by VBC. In fact both have been sustained. Drastic restructuring has not happened; instead, additional services and investments have come in.
Observation #3: Legacy players have not been displaced by disruptive innovators; MA-supported VBC has created an ecosystem in which new players largely coexist alongside old ones (and in fact, often support them directly).
The convenient collision of incentives encouraging value-based care uptake in the Medicare Advantage space has prompted additional investment and created an entire sub-sector of technology, care delivery, and consulting firms looking to both serve MA patients directly and to facilitate and execute on plan-provider value-based partnerships.
Again, the theme of risk's impact on the industry has been not to shrink the pie—with leaner, disruptive new entrants forcing out legacy players—but to grow it. Outside investors and industry members themselves have proven willing to spend considerably to compete in this space. And while some of the players above are positioning themselves as alternatives to traditional provider and health plan models, to date they largely exist alongside them, as opposed to replacing them. In many cases, the biggest investors in (and, increasingly, buyers of) new, innovative models are long-standing industry heavyweights.
In sum: we would argue that to-date, value-based care has largely been deployed to enable existing business models and legacy players, not so much to displace them. Which leaves us with...
An open question: Can an MA-fueled, enablement-focused approach to VBC sustain itself?
Let me start by saying that an enablement-driven approach to VBC isn’t inherently bad. If the industry can manage to deliver on the goals of improved outcomes and lower spending without completely upending itself, all the better: less pain and disruption for everyone. But there are plenty of caveats to this positive plot twist in the unfolding story of VBC for providers and plans.
For one thing, a persistent "mixed risk and FFS" environment dominated by MA has not drastically improved quality for patients. Though the story there is a nuanced one (see a detailed discussion on this from our Chief Education Officer, Amanda Berra, here).
And, the mixed contract status quo has definitely not reduced total spending at an aggregate level. "Growing the pie" of provider and plan revenue is not necessarily a win for the federal government (depending on one's views). If value-based care is truly going to control spending, it cannot, by definition, go on being a win-win for everyone forever. Someone, somewhere in the value chain, needs to take a hit for the math to work. And because the current arrangement benefits nearly all industry participants, things might have to start looking truly desperate for the ultimate payers (government, employers, and patients) before more draconian measures become politically possible.
From this viewpoint, perhaps MA is on the road to becoming a victim of its own success. This year, MA will attract more enrollees than Traditional Medicare. The fact that it is becoming so large is pushing it to a reckoning point. MA has already started to draw increasing scrutiny from regulators and legislators alike, on both spending generally, and on the profitability of MA plans specifically.
What would it mean for the overall story of risk adoption in healthcare, if MA persists in its current form, with its still-attractive economics, despite the recent screw-tightening on reimbursement? Alternatively, if the political will to reduce overall MA profitability were to be found, what would that mean for the long-term trajectory of the industry's adoption of risk-based contracts? Would it finally force major, pervasive operational changes among both providers and plans, to succeed at quality objectives while also materially reducing costs? Or, would it derail the overall risk experiment, sparking a return to FFS? These next chapters have yet to be written.
What do you think?
We’d love to hear your perspective on this topic. The future of VBC typically elicits strong opinions from healthcare insiders. If you’d like to learn more about our research on this topic, or about membership with Union, please don’t hesitate to reach out to us at email@example.com.