VBC models can be challenging, and success requires an understanding of the reimbursement model, significant investment in infrastructure and possible changes in the way medicine is practiced.
Medicare, Medicaid and private insurance are increasingly encouraging health care practices to participate in value-based care models such as Managed Care Organizations, Accountable Care Organizations and Medicare Advantage. The industry's perspective is that paying some providers prospectively based on outcomes – rather than retrospectively based on each service provided – tends to better support patient health and reduce overall excess spend for insurers.
That's one reason why the global value-based health care market, worth $12.2 billion in 2023, is predicted to grow to $43.4 billion by 2031 – compound annual growth of 14.6%, according to a report by market research firm Coherent Market Insights. Another report from McKinsey says that companies engaged in value-based care created around $500 billion in enterprise value in 2022, and that could rise to $1 trillion by 2027.
Predictions aside, value-based care models have already seen a 25% increase in health care provider participation from 2023 to 2024, based on data from the Centers for Medicare & Medicaid Services.
However, these models can be challenging for health care practices, and success (i.e., operating at a profit while providing quality care to patients) requires an understanding of the reimbursement model, significant investment in infrastructure and expertise, and possible changes in the way medicine is practiced.
The basics of value-based health care
Value-based care models aim to find the right balance of health care utilization (frequency of medical services): enough to address health conditions and reduce long-term costs without creating excess spend in the system.
In successful value-based care models, a patient's primary care provider and specialist physicians work together for the best possible patient outcome. This requires buy-in from the care providers, the insurer and the patient. Why? Because communication leads to more cost effective and timely solutions for providing adequate care to patients.
As of now, the initial adopters of the value-based health care model are primary care providers, with nephrology and oncology groups close behind.
Medicare Advantage plans are the most prominent examples of value-based care. In fact, nearly 70% of Medicare Advantage enrollees opted for value-based care providers in 2022.
Understand risk adjustment
In value-based health care, a provider is paid a certain amount per patient, per month. That payment is based on a benchmark payment rate for the county the patient resides in, which is adjusted up or down for each patient's risk score. The risk score is how the predicted cost of treating that patient for the year compares to that county's average patient. It is based on the patient's health condition and characteristics such as age, gender, disability status, and more. Providers are paid more for patients whose care is likely to be costlier.
The information payers use to calculate each patient's risk score comes from the provider. Risk adjustment calculations use the patient's diagnoses from the previous year to calculate the current year's monthly payments.
As the largest value-based payer, Medicare Advantage plans hold a strong influence over the industry. Since 2010, Congress has required regular across-the-board cuts to Medicare Advantage risk scores. That translates into lower per-patient payments when patient health conditions remain the same.
From a business perspective, both providers and organizations considering acquiring providers use risk adjustment information in revenue forecasting to make budget decisions.
Payment models in value-based care
To improve health outcomes while reducing or steadying costs, value-based care organizations use a variety of payment models:
- Shared risk: Providers share financial risk with payers based on predefined quality and cost targets, and are responsible for surpluses and losses related to medical care – this model typically comes with the highest financial risk and upside potential.
- Shared savings: Providers receive a share of cost savings achieved by delivering high-quality care at a lower cost.
- Global capitation: Providers receive a fixed payment per patient, per period, regardless of the services delivered.
Choosing the right payment model depends on the provider's current membership performance; when discussing with a partner (health plan, IPA, or MSO), a provider should request and review data to align on what level of risk makes sense for them. It helps to work with a qualified industry-focused consultant who has experience with this type of data, as many times it's more important to understand what's missing from the data rather than what's included.
Success in a value-based care model requires investment
Health care providers that succeed in a value-based care model usually make an upfront investment in technology and employees. These investments can ultimately help providers strengthen their risk-adjustment and forecasting abilities, redesign care delivery and implement strategies for reducing costs.
Technology investments may include platforms to:
- Accurately record and code patient risk factors, such as diagnoses, that will be used to calculate risk scores
- Identify each population's accurate risk score and assess whether the payer's calculation matches
- Track patient utilization data and costs, including touchpoints both inside and outside the office
- Improve financial tracking and forecasting
Investment in employees may include:
- A population health manager, who uses patient data to better understand and predict risk-adjustment scores
- A patient care navigator or care coordinator, who coordinates both medical and nonmedical care from other providers and helps patients efficiently navigate the healthcare system
- Case managers to stay connected with patients outside the office, including trying to increase the likelihood that they will make their required appointments and take their medications properly, as well as monitoring other lifestyle factors such as exercise and nutrition
- A dietitian or other professional to provide individualized nutrition and exercise counseling
Providers may also purchase stop-loss insurance, which limits their financial responsibility if total or individual patient costs are significantly higher than expected.
Value-based care is becoming both more widespread and more challenging for providers
Much uncertainty remains about provider profitability with value-based care. Medicare is moving to decrease the upward payment adjustments for many patient diagnoses and conditions, leading to lower per-patient funding in many cases. CMS is phasing in a new Medicare Advantage Plan risk adjustment model over the next three years in order to comply with a mandated move from Medicare Risk Adjustment Model V24 to Model V28. This year, the new model is expected to decrease Medicare Advantage patient risk scores by an average of 3.56%.
Due to Medicare's adjustments, many in the industry predict provider groups operating within value-based care models could be less profitable in the coming years. This uncertainty, especially around how the V28 model will play out, has also begun driving down deal multiples in some acquisitions of value-based care practices.
Despite the ambiguity around how providers can work profitably within value-based care models, Medicare is increasingly pushing providers and patients toward them. The Center for Medicare and Medicaid Innovation has said it wants all Medicare beneficiaries to be in "accountable relationships" – of which value-based care is one type – by 2030. Several states have value-based Medicaid and Exchange, with more moving toward it. Private insurers are also interested in this model.
Value-based care is likely to play a growing role in the health care industry, making it a model that providers cannot ignore. As such, health care providers should consider reaching out to a qualified industry-focused consultant who can help them navigate these changes and the potential impact on their business.
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