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Value-Based Care Payments And Arrangements Explained

A few readers have written in and asked if I could explain the various value-based-care (VBC) payment and arrangement frameworks. Specifically, they asked about my references to global and partial risk funds for providers. 

Here is my best effort to explain what I see as the two overall types of VBC payments/arrangements we see in the marketplace today.


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 member of a health plan 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. The FFS transaction system is so grotesque that 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 a 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 services is done, that is it. There are no long-term considerations.

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. But, more and more, insurers and government programs are seeking to move from FFS transactions to VBC 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, Medicaid manage 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, 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.

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 outcomes has the chance of reducing future costs.

Comprehensive VBC arrangements between insurers and payers 

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 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, 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 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. 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 provider for each assigned member 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 or group 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.

What we may see in the market

We will definitely see both VBC 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.

At the same time, it is important to note that such arrangements can also have their downsides.  As an example, in times of major medical expense and utilization increases or when rate increases in programs are low, the impact of VBC is felt both by the insurer and downstream providers.  As an example, downstream provider partial and global risk funds essentially can dry up and the upside incentive is not there. We are seeing this today in MA given rate, utilization, and regulatory trends.

#managedcare #healthplans #providers #vbc

— Marc S. Ryan

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