Value-based Reimbursement Strategies

Discover how employers can work with their partners to move away from fee-for-service payment to a model that aligns reimbursement with improved health.

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November 29, 2022

This guide details multiple value-based purchasing strategies, along with considerations for employers as they consider implementation.

Note: This resource is intended to be useful both as a standalone document, as well as the second part of Business Group on Health’s Value-Based Purchasing Guide. Click the link to access additional parts related to other elements of employer value-based purchasing strategy.

Value-based payments for health care services generally transfer a portion of financial risk to health care providers based on the health outcomes and quality of service that they deliver. This way, the financial burden created by low- quality and unnecessary services is shared by the people who can perform or prescribe them, rather than being borne entirely by self-insured employers and their plan members. Such financial arrangements aim to address the perverse incentives created by the fee-for-service model, where more services, necessary or not, drive more costs to employers and their employees.

There are many ways that value-based purchasing can be done, all of which transfer different levels of responsibility for the value of care delivered to groups of providers (e.g., primary care practices, accountable care organizations, centers of excellence, health systems and pharmaceutical manufacturers.) The models vary in the level of risk sharing.

In any of these value-based payment arrangements, quality requirements are necessary, so providers are not able to keep direct medical costs low by denying necessary care. A lack of quality measures was a criticism of the Health Maintenance Organization (HMO) model in the 1990s and is not how value-based purchasing is done now, nor how HMOs continue to operate.

Shared- Savings Arrangements

In a shared- savings arrangement, providers receive a portion of the “savings” that come from their ability to manage the cost of care of their attributed patient population under a target budget. This budget is agreed to in advance by the provider organization and health plan or employer. Providers are reimbursed under a fee-for-service (FFS) model, but they have the incentive of the shared- savings payment to counteract the inflationary incentives of traditional FFS. Providers must achieve quality and outcomes targets to receive their shared- savings payment. There is no financial risk to providers if they miss budget targets.

Shared- Risk Arrangements

Shared- risk arrangements also afford providers the ability to gain shared- savings payments at the end of the year, and they are built on the FFS reimbursement model. The difference is that providers must pay a penalty back to the health plan or employer at the end of the year if the total cost of care for their attributed population runs too far over the target. Fewer providers are willing to take on shared risk because it requires financial and cash flow stability to absorb the potential losses. Health plans and employers are generally willing to offer a greater percentage of the savings payments to the providers if things go well when risk is shared. This is arrangement is often referred to as “upside/downside risk.”

Per Member-Per Month Payments and Provider Investments

It would be easy to think that value-based payments that shift financial risk to providers may create a “punishment” for poor performance. On the contrary, value-based arrangements enable providers to invest in practice infrastructure (e.g., high-quality electronic health records or virtual care capabilities,) staffing and care that would normally not be reimbursed in the FFS system. Funds to invest in better care generally come in two forms for providers: shared- savings payments at the end of the year and per-member per-month (PMPM) payments made throughout the year. Shared- savings payments are difficult to use as investment because they naturally come at the end of the plan year and are not guaranteed. PMPM payments are generally a required part of a value-based arrangement to give providers an opportunity to transform the way they practice so that they can achieve targeted quality, outcomes and financial goals. These PMPM payments generally show up in employer claims reports as a separate line item. Employers should ask health plans and providers they work with how they are using PMPM payments to invest in their systems to achieve their contracted targets.

Capitation

Entirely eshewing the FFS model, capitated payments go to providers upfront at the beginning of the contracted period. Capitation requires physicians to perform a range of services during an agreed- upon unit of time and maintain certain quality standards, essentially putting the provider totally at risk for the services in scope. Providers within this model have a strong incentive to keep their patients healthy and reduce costs at the same time. This can make it easier for them to care for a broad population of patients creatively, because they are not beholden to what is reimbursed under FFS to remain financially viable. Furthermore, this approach has the potential to make providers more amenable to changing care delivery patters, such as switching to virtual services when appropriate

Capitation is a less common reimbursement strategy because it requires provider groups to take on significant financial risk. Direct primary care (DPC) practices are one example of how this payment approach can enable providers to increase access to care for their attributed patients, reach out to address health conditions proactively and provide services that are rare to find in purely-FFS practices (e.g., connecting patients to social services in their communities.) because they don’t receive payments for them.

Bundled Payments (aka, “bundles”)

The payment models listed above are generally used for providers that take on a population of patients that they care for over an extended period of time. A bundled payment is generally used for individual cases or services and the care that’s associated with discrete clinical episodes. The bundled payment covers the “bundle” of services before, during and after a major event (e.g., a surgery or birth) that is paid in one lump sum. Under a traditional FFS reimbursement, a patient undergoing surgery and their employer might receive bills from several specialists and facilities, as well as for follow-up care. A bundled payment rewards providers who deliver higher quality care and are efficient.

Let’s Keep it Appropriate

A perfectly executed surgery that shouldn’t have happened in the first place is certainly not what we’d consider to be “valuable.” Whether a surgery is appropriate for a patient’s condition – or even whether the condition is properly diagnosed in the first place – is incredibly important across the health care system, but especially so in bundled payment arrangements. Bundled payments “fix” one aspect of FFS payments by incentivizing team-based, coordinated care among specialists, primary care and nursing. However, bundled payments still run the risk of inflating spending because providers are paid more for doing more services, including those that are unnecessary. Employers and their partners using bundled payments for surgical episodes should use a second- opinion provider, whether through a third-party vendor, a Center of Excellence (COE) partner or health plan, to assess whether a surgical procedure within specialties prone to waste, such as joint replacements, is appropriate before paying for it through either a bundled payment or FFS.

Bundled payments can also incentivize providers who do not usually work closely together to better integrate their services and patient experience. Defining when bundles begin and end is one of the key challenges, especially when travel COEs are involved.

Value-Based Payments for Pharmaceuticals

Value-based payments for prescription drugs is similar in some ways to that for other medical services; financial risk is shifted to the provider, in this case, the drug manufacturer. Where it differs is that the higher-cost therapies that may be offered under value-based arrangements have few or no competitors, and their effectiveness may not be immediately measurable. However, value-based arrangements for individual pharmaceuticals that are new can provide a safety net for the payer if a drug does not achieve clinical targets. Other value-based strategies focus more on formulary placement based on appropriate prescribing. For more information on value-based drug purchasing for specific pharmaceuticals, see the Business Group’s Value-Based Drug Purchasing overview.

Handling Drug Costs in Value-Based Arrangements

There is an additional wrinkle to pharmaceuticals in value-based arrangements: not all value-based arrangements such as bundled payments or shared savings include spending on pharmaceuticals in their financial calculation. Given the outsized influence of drug manufacturers and pharmacy benefit managers (PBMs) on the cost of drugs, medical providers may be less likely to take on risk for cost of care related to drugs. However, retail and nonretail drug spending accounts for an estimated 13%-14% of U.S. health care expenditures, and it’s even greater for some specialties, including many cancers (for more information on value-based purchasing arrangements in cancer treatment, see the Business Group’s resource on Emerging Trends in Cancer Care.)4,5 Employers should consider the pros and cons of including drugs in their value-based payment arrangements.

Table 2.1: Should Pharmaceuticals Be Included in Value-Based Arrangements?

Pros Cons
Drugs are a significant cost driver for employers. Providers have little-to-no influence over the cost of drugs or formularies.
Drugs are reimbursed through FFS and face the same inflationary incentives through FFS as medical services do. Providers may be less likely to enter into value-based care arrangements if the cost of drugs is included in their financial performance.
The site of care where a drug on the medical benefit is delivered has a significant impact on the overall price of the treatment, making it possible to reduce spending even if the manufacturer’s price of the drug remains the same. If drug costs fluctuate during the course of the plan year due to price increases or a new blockbuster drug coming to market, financial baselines for provider performance will need to be modified.

Conclusion

Every value-based care reimbursement arrangement is in some way attempting to move away from the predominant FFS system toward a system where providers are incentivized and rewarded for high- quality care at a reasonable cost that improves health. These payment reforms should be considered just that – a payment strategy – that need to be tied to changes in how care is provided, with the goal of improving it.

A financial arrangement without a related transformation in how care is delivered is only scratching the surface of what value-based care can achieve. The following sections on value-based primary care, centers of excellence, accountable care organizations and high-performance networks will go into greater detail on what can be achieved in value-based care delivery, as well as what employers should look for to confirm that PMPM investment and bonus payments are achieving desired goals.

Employer Recommendations

  • 1 | Ask your health plan partners how and where they are using value-based reimbursement strategies to incentivize and reward providers for achieving quality, outcomes and financial goals. Ask your plan partners which reimbursement strategies have been most successful in incentivizing delivery system improvements and look for opportunities to direct employees to providers under those contracting arrangements.
  • 2 | Seek to understand the incentives for individual providers within the arrangements tied to value to make sure there are no unintended consequences in patient care delivery as a result of financial arrangements with provider groups and that proper incentives trickle down to the provider level.
  • 3 | Assess the main cost drivers in your population where you may want to seek out value-based arrangements to address these top priorities. If, for example, your main concern is high surgical costs, pursuing a COE strategy using bundled payments may be the best place to start, whereas a population-wide approach to diabetes management will likely benefit from strategies that reward provider groups for strong performance through shared-savings, shared-risk, and capitated payment approaches.
  • 4 | Keep in mind that newer virtual care delivery models that are partnering with employers directly as a plan option or as part of a broader health plan PPO can be reimbursed through value-based arrangements. Some of these vendors capitate their virtual services and then charge FFS when they have to refer to in-person care. Pure FFS reimbursement for virtual care can create duplication of costs for virtual care that requires in-person follow-up.
  • 5 | When considering value-based reimbursement, involve experts from finance and legal within your organization to ensure that payment arrangements requiring bonus payments back to providers at the end of plan year if targets are met is appropriate. FFS claims are predictable throughout the year, but shared-savings and shared-risk models require employers and health plans to reserve cash for potential payouts, which some employers may be uncomfortable doing given the uncertainty.

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TABLE OF CONTENTS

  1. Shared- Savings Arrangements
  2. Shared- Risk Arrangements
  3. Capitation
  4. Bundled Payments
  5. Value-Based Payments for Pharmaceuticals
  6. Handling Drug Costs in Value-Based Arrangements
  7. Conclusion
  8. Employer Recommendations