Detractors say no, but at maturity VBC/VBP offers hope in concert with other reforms
A recent Health Affairs Forefront Blog challenged popular wisdom on the potential of value-based care (VBC) and value-based payments (VBP). According to the authors of the January 23 blog, value-based payments (VBP) and managed care will not solve the ongoing affordability crisis in healthcare. While some of the authors’ points are not wrong (including other root causes to high costs), I feel like they failed to consider the transformational journey we are on.
So, let’s dig into the topic.
What is VBC/VBP?
VBC payments are meant to move from the fee-for-service (FFS) transactional payment system to one driven by efficiency and quality. What do I mean by transaction payments? For the past many decades, most payments in our healthcare system were made as a fee for each service transacted in the healthcare system. That can be the case when we go to the primary care physician (PCP), where he or she will be paid a fee by the insurer for the visit as well as other services provided. Similarly, a specialist may be paid a fee to see a patient as well as other fees for additional services rendered. A surgeon would be paid a fee for performing an operation in a hospital or free-standing ambulatory center. A lab or imaging facility similarly receives such payments for services. A hospital receives a fee for each inpatient and outpatient stay or encounter. In some cases, a hospital could get paid for each line item of service provided during a stay.
The issue with transaction payments
Transactional payments by their nature result in a few things. First, they tend to drive utilization, often when it is not necessary. Why? Because the more a provider furnishes added services, the more he or she is paid. Second, such a system can also be inflationary, as providers up their transaction prices each year to earn more. Third, these payments are not linked to efficiency or quality outcomes. Once the service is done, that is it. There are no long-term considerations other than the potential compassion and commitment of usually overwhelmed doctors.
We will never escape transactional payments entirely. They have a place in the system and creating alternative payment structures for certain services would be difficult if not impossible. But, more and more, insurers and government programs are seeking to move from FFS transactions to VBC/VBP payments. VBC reforms are being driven by the Centers for Medicare and Medicaid Services (CMS) in the traditional fee-for-service (FFS) Medicare and Medicaid programs and by Medicare Advantage (MA), Medicaid managed care, and commercial payers. VBC payments change the paradigm from getting paid for each service to focusing on achieving revenue via cost-effectiveness and quality outcomes.
VBC payments linked to services or groups of services
In this case, VBC payment schemes revolve around savings and sometimes quality outcomes centered on a given service or group of services. A good example is some CMS programs and private insurers are paying a set amount for a given service or episode around a group of services. Let’s think about knee replacement surgery. In this case, a hospital and other providers would be paid a set global fee for all aspects of surgery and follow-up for knee replacement. This would include the hospital/ambulatory surgery center, surgeon, and providers that perform rehabilitation and other follow-up care. Usually, these VBC global payments work best for providers related to each other, such as a hospital or health system that owns all aspects of the surgery and follow-up care. The global payment is meant to ensure the providers collaborate and ensure the most cost-effective and quality care. In the traditional system, individual payments are made with each provider focusing just on his or her area, with no overall consideration for the outcomes of the patient’s episode or coordination of care.
How about drugs for cancer treatment? While nascent, a drug company could be paid a VBC payment tied to the outcome of taking the drug. It also might include providers that participate in such care. In this case, the drug maker or drug maker and providers are paid more if the cancer is controlled. They get less if the outcome is less certain. In this way, cost enters the picture, too. While the drug may be expensive, a good outcome has the chance of reducing future costs.
Comprehensive VBC arrangements between insurers/government and providers
There can be various approaches in a more comprehensive framework.
A hospital or group of providers could be held to cost-savings and quality outcomes and be at risk or additional reward for FFS payments or upfront payments if they do not hit these goals. A good example of this is certain pay-for-performance programs (which are more narrow) and the Accountable Care Organization (ACO) pilots in Medicare FFS (which is broad).
In the health plan world and sometimes with government programs, the following types of arrangements are taking hold:
Capitation arrangements – these are usually with primary care physicians (PCPs). PCPs are given an upfront capitation (per member per month (PMPM) fee per assigned member). For that global amount, the PCP takes care of all the primary care needs of the member, including most in-office simple testing. Sometimes, additional transactional pay-for-performance payments are made for quality achievement or overall outcomes.
Partial and global risk funds – these can be with PCPs but also with multi-specialty groups and even with hospitals and other health systems via physician-hospital organizations (PHOs). Under both state and federal rules, insurers can enter into arrangements with providers whereby providers take on some or all of the risk of the costs of the member’s care annually. Insurers negotiate a percentage of premium with the providers for assigned members for in-scope services and this serves as the amount at risk. Doing better than the amount at risk means the provider gets all or a portion of the remaining dollars. Doing worse than the amount at risk means the provider pays all or a portion of the dollars needed for the care.
The rules and laws provide for safeguards that the insurer must follow, including only entering into such arrangements with a provider, group, or PHO that is large enough to handle such financial risk. Oftentimes, the provider itself or the insurer purchases stop-loss insurance for the provider’s potential exposure. As an alternative, the plan limits overall risk.
These arrangements can have numerous flavors. The provider may be at-risk only for certain services. As an example, inpatient care and drugs could be outside of the risk fund. In other cases, the provider may benefit from the upside (savings against a target) and not the downside (paying for missing a target). The provider may also pay only a portion of a downside. In some arrangements, the provider is big enough to be at risk for 100% of the downside and retains 100% of any upside.
Quality achievement usually plays a role in these arrangements, whereby providers are penalized for missing targets or receive added revenue in the fund if quality goals are achieved.
How big is VBC/VBP?
As the Health Affairs blog authors note, the government and many academics love VBC/VBP and think it is the answer. We will definitely see both VBP payments for given services/episodes of care and master provider-insurer VBC arrangements continue to grow. They are very mature in certain markets and will become the majority of transactions over time and displace most FFS payments.
But truth be told, we are still in the early stages of VBC and VBP despite all the hype. VBC is widespread in healthcare, but it’s also uneven and not yet fully mature. Knowing exactly how penetrated VBC/VBP is hard to estimate. Literature suggests anywhere from one third to one half of healthcare payments today (very likely 35% to 45%) are some form of value-based models. And most importantly, true risk-based or risk-bearing payment models still represent a much smaller share – perhaps 20% of transactions.
VBC penetration is also very dependent on the line of business, size of a provider, type of provider, and region. Medicare Advantage is highly penetrated in terms of VBP/VBC, approaching 50% of all transactions. Medicare FFS penetration is rising as well (see below). VBC is growing but less so in Medicaid and commercial. Large health systems, integrated delivery systems, and bigger providers tend to have more VBC/VBP arrangements. Primary care providers tend to have more of these arrangements, while specialists have less. Urban centers have more VBC/VBP, while rural areas have much less and are very dependent on FFS payments.
CMS has a goal of having 100% of payments in traditional Medicare FFS being VBC/VBP in some form by 2030. Right now, traditional Medicare has about 44% to 50% (depending on how you count) of its population in some form of VBC/VBP, some of them limited.
CMS issued a fact sheet last week regarding the latest statistics around Medicare Accountable Care Organizations (ACOs), the biggest VBC/VBP Medicare experiment. As of January 2026, 14.3 million Medicare beneficiaries are estimated to receive care coordinated by ACOs, up from 13.7 million in 2025 or a 4.4% increase. This includes those in Medicare Shared Savings Program ACOs and entities participating in innovation center accountable care and other models.
The total number of ACOs participating in the Shared Savings Program for Performance Year 2026 is 511, up from 476 ACOs participating in 2025. The organizations had more than 700,000 healthcare providers and organizations and will serve 12.6 million people a 12.3% increase from 2025.
The ACO REACH Model has 74 ACOs with 125,909 healthcare providers and organizations providing care to an estimated 1.7 million people with traditional Medicare. This model has 614 Federally Qualified Health Centers (FQHCs), Rural Health Clinics, and Critical Access Hospitals participating in 2026. The new ACO LEAD model will replace ACO REACH as of 2027.
In Performance Year 2024, the most recently reconciled performance year, Shared Savings Program ACOs earned shared savings totaling $4.1 billion and saved Medicare $2.5 billion. Critics say such a sum is somewhat paltry (but read on for my views).
The Comprehensive Care for Joint Replacement (CJR) model became ten and had a small subset of hospitals in the pilot. Its successor –the Transforming Episode Accountability Model (TEAM) — is now live in hospitals across the country. After a decade, studies show mixed results on the CJR program. The CJR required hospitals in 67 randomly selected metro areas to take financial accountability for the full 90-day episode of hip and knee replacements, putting post-acute care, surgeon behavior, implant costs, and readmissions into a single performance frame.
CMS found that CJR generated an estimated $112.7 million in Medicare savings across performance years six and seven, or roughly $1,142 per episode. That beat the overall losses earlier. But CMS says the model “did not lead to changes in quality of care” on claims-based measures of readmissions, emergency department use, mortality, and complications. Other researchers say savings and impacts have been small — roughly $50 in savings per episode and 0.04 additional healthy days at home per patient. One issue, hospitals did not see reductions, which were largely on post-acute care, primarily skilled nursing facility use and inpatient rehabilitation.
In summary, the landscape looks a little like this:
- Transactional quality bonuses or pay-for-performance payments now are very common.
- Shared savings models (e.g., many ACOs in the past), are common.
- Two-sided risk (e.g., maturing ACOs and agreements between health plans and provider groups) are less common.
- Mature full risk arrangements remain limited.
- FFS payments still dominate clinical behavior and VBC/VBP adoption is slower than policymakers had hoped.
The Health Affairs Forefront blog
VBP is growing and has support, but the authors note that current pilots, including ACOs, are not the answer for a number of reasons:
- VBC/VBP pilots have poor savings track records and are not really bending the cost curve.
- VBP is encouraging consolidation and corporate intermediaries as well as diverting policy makers away from the true cost drivers.
- A closer look at spending patterns shows that reduced spending growth in the United States is not even correlated with—much less caused by—VBP adoption.
- High and misvalued unit prices (in both Medicare and commercial insurance), the diffusion of new technology, and high administrative costs drive unaffordability and VBP won’t change that.
- Long-term spending is fundamentally mediated by fee-for-service pricing and coverage policy. VBP may restrict some of this but does not displace it.
- VBP’s metrics may discriminate against primary care investments.
I myself have argued that while VBP may take some utilization and costs out of the system by beating cost trends, it cannot keep up with a broken price system that inflates from year to year no matter what and takes any savings from VBP away. Price reform is key.
But consider a Humana report on VBC success
A new Humana report tells a different story on VBC/VBP though. It says there was a 24.3% decrease in inpatient admissions, or a 229,000-stay dip, for Medicare Advantage (MA) members in value-based care arrangements versus those in traditional Medicare in 2024. MA members in value-based care arrangements also see 7.6% fewer inpatient admissions compared to those in non-value-based care MA arrangements. Humana estimates $12.8 billion in savings due to MA value-based arrangements.
Breaking all this down
To some degree, the authors are right – VBC/VBP will not alone transform healthcare, and we are still very early on the journey. The system needs a healthy dose of price reform, an injection of primary care and care management investment, and a more stable approach to affordable universal access to insurance.
But VBC/VBP intuitively works and should be part of the overall solution to healthcare reform. I have been somewhat critical of reform in Medicare FFS in the past, in particular that there are far too many reform pilots. This creates too much administrative overheard for the government and providers, a great deal of confusion around program models, and too many disparate quality metrics. The Biden administration and both Trump administrations seemingly endorsed the idea of consolidation of pilots and focus on key opportunities. But even more reform pilots have been announced of late by Trump 47. We literally have been introduced to even more acronyms in a world already obsessed wih them!
At the same time, I have also said that Medicare FFS is here to stay (likely destined to be at least a third if not more of enrollees over time with the growth of MA) and needs to be more cost-effective and quality focused. While savings have been limited overall, ACOs and a few other pilots have shown success in controlling costs to some degree and CMS is busy ratcheting up the models. That is a good thing and there is hope that the models do mature. It is also true that such pilots are working in a very challenging and high-utilization, transaction-based environment. We cannot likely expect more than small wins in the short term as CMS seeks to turn the aircraft carrier that is traditional Medicare around and change long-standing provider behaviors. In the end, I have concluded that the investments CMS is making are sound if the agency streamlines pilots and focuses more on incentivizing providers to reform and reward them as they deliver lower costs and better quality outcomes.
Despite the detractors of MA, numerous other studies point to a good track record of MA lowering costs and bettering outcomes compared to Medicare FFS. And perhaps here is where the secret lies. The Humana study and others do point to the success of VBC/VBP at a relatively mature state. It shows that strong alignment of health plan/funder and provider can exist to reduce costs and boost quality. Studies, too, show a positive MA-VBC “spillover effect” on provider behavior and costs in FFS. This will grow as MA VBC matures.
Yes, getting to VBC/VBP maturity will take time. But with other aspects of healthcare reform, VBC/VBP is vital to healthcare’s future. It is an indispensable cog. Healthcare will not be accountable otherwise.
#vbc #healthcare #healthcarereform
— Marc S. Ryan
