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By Monica E. Oss

I had a recent discussion with a community hospital chief executive officer (CEO) who said that value-based reimbursement (VBR) isn’t working. At least, VBR isn’t working for her hospital. Her take—the administrative costs of managing the VBR arrangements cost more than the return for delivering “value.” But she felt the hospital had to participate in these arrangements to get the payer contracts they needed.

Is her take on the VBR system correct? Can paying for value work for provider organizations? In general, I think the answer is yes, assuming the VBR model is designed correctly. But the “correct design” is where the system breaks down for most organizations. I have four “rules of thumb” for successful VBR:

  • First, the definition of “value” needs to balance the perspectives of all three constituents—payers, provider organizations, and consumers.
  • Second, the model needs to have a large enough scale to be successful—meaning a large enough population size, coupled with substantial financial risk/reward for the participating provider organization. This scale enables them to invest in delivery system changes, such as technology, talent, and re-engineered processes.
  • Third, data transparency between the payer and the provider organization is key—both during the rate development process and on an on-going basis. Health plans need to be willing to share data and provider organizations need the capabilities to analyze the data and use it to drive outcomes.
  • Fourth, the parties must view this as a long-term partnership (rather than a short-term vendor relationship) that involves shared goals and shared systems. Payers must be willing to commit to long-term contracts so that provider organizations can commit to building infrastructure. Partnerships will take time to become efficient, and to give payers and provider organizations a return on investment.

Given the current state of VBR, this is a tall order for both payers and provider organizations. Health plans are limited (both by payers and by their own systems) in what they can propose for VBR. Provider organizations lack the competencies—technological, clinical, and human—to manage “substantial” financial risk. (And acquiring that infrastructure favors larger provider organizations over smaller.)

Unfortunately, my CEO friend’s view of VBR is more common than not. Work done recently by Leavitt Partners found that only 22% of clinical professionals think that accountable care organizations (ACOs) would lower spending, and only 21% of them support bundled payments (see The State Of Health Care Today: How Physicians, Consumers, And Employers View Health Care Costs, Outcomes, And Reform Efforts).

There are many reasons for these views, but primarily, it comes down to provider organization readiness to manage VBR arrangements. A McKesson report, Journey To Value: The State Of Value-Based Reimbursement In 2016, found that only 50% of payers and 40% of provider organizations are ready to implement VBR. And, for hospitals in VBR arrangements, only 22% have managed to reduce administrative costs; only 26% are lowering health care costs; only 30% are coordinating care; and only 40% are improving outcomes. Another study published in The BMJ (see Impact Of Financial Incentives On Early And Late Adopters Among US Hospitals: Observational Study) concluded that there was no evidence that hospitals using pay-for-performance programs for more than a decade had better process scores or lower mortality than those hospitals that hadn’t used pay-for-performance. But, until VBR represents a substantial proportion of payments with a sufficient financial to provide an ROI for large-scale system change, these are likely outcomes.

This premise is borne out by both my experience in the field – and research results. For example, in one of the initial evaluations by CMS of Medicare bundled payment rates, the only model that resulted in net savings to CMS was the model with substantial financial risk and reward — see Are Bundled Payments Working? An Evaluation Of The Medicare Bundled Payments For Care Improvement (BPCI) Initiative.

On one point though, my CEO friend was absolutely correct: The use of VBR is on the increase – if only because cost-based reimbursement and fee-for-service reimbursements do not provide payers or provider organizations with a range of options for reinventing service delivery (see The 2017 OPEN MINDS Performance Management Executive Survey: Where Are We On The Road To Value? and Value-Based Payment Hits The Tipping Point). And, we know that this period of transition in reimbursement is fraught with strategic and financial challenges for health and human service organizations. The strategy question for many provider organizations is whether to get in front of the change in reimbursement and lead the market–or develop these systems as payers push them (i.e., “adapting to copy versus adapting to win”).

Ken Carr

As my colleague OPEN MINDS Senior Associate Ken Carr put it:

I often think of the innovation cycle when looking at the current VBR environment. It is risky and challenging to create new models, but the potential reward it high for the innovators – they can learn early in the cycle, negotiate better prices, build infrastructure and create competitive advantage. Those who come along later in the model development (imitating the successes of the model) will incur less risk, but will also realize less financial reward as more competition enters the new market model.

Provider organization executives need to determine where they are going to be in the innovation cycle – what will create the greatest opportunity to position their organization for the future, and what will provide the greatest service for consumers. Not every initiative will have a high degree of success, but many will if payers and provider organizations work together around the four concepts above.

My friend the hospital CEO needs to make a decision about her strategic options. She needs to remember the words of Mark Twain, “The best thing you can do is the right thing; the next best thing you can do is the wrong thing; the worst thing you can do is nothing.”

For more from the OPEN MINDS Industry Library, check out these resources focused on the expanding use of value-based reimbursements:

  1. The Race For Value-Based Reimbursement Continues
  2. The Push For Value-Based Reimbursement From State Medicaid Plans
  3. Looking Ahead To The Era Of Configured Networks
  4. Alternate Payment Models – Strategy Implications Of The CMS Roadmap
  5. Where Are We On The Path To Value-Based Reimbursement?
  6. Value-Based Payment Hits The Tipping Point
  7. Getting Past The Bumps In The Road To Value-Based Reimbursement
  8. The Strategic Challenges On The Road To Value-Based Reimbursement
  9. What Are Health Homes Measuring?
  10. Payer, Provider, Partner

For more, join OPEN MINDS Senior Associate Ken Carr and Paul Duck, Vice President, Strategy & Development, Beacon Health Options, on June 5 at The 2018 OPEN MINDS Strategy & Innovation Institute, for their session, “How To Develop A Case Rate: A Guide To Bundled Payments.”

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