Posted: 17 May 2022 8 min. read

Care delivery transformation (not risk) may be the secret sauce in VBC

By Mark Bethke, managing director, Deloitte Consulting LLP

When the Affordable Care Act was enacted in 2010, it seemed like the traditional fee-for-service (FFS) payment model would soon be on its way out the door. Some of us wanted to shout from rooftops that a new era had arrived. While multiple value-based care (VBC) pilots have been launched over the past 12 years, and significant changes have taken place in some markets, FFS remains the dominant health care payment model.

I lead Deloitte’s VBC practice and help co-lead our Population Health Innovation practice. When I talk about VBC, the default focus seems to be on the payment model, where financial risk is shifted onto physicians and health systems, which provides a financial incentive to manage patient lives more effectively. But focusing solely on the payment model could be a recipe for failure. Care-delivery transformation may be the secret sauce in VBC and the payment mechanism can’t work without it. This leads us to the crux of the issue: How can financial risk be effectively combined with superior care delivery?

Before considering the potential impact VBC could have on revenue streams, hospital and health system leaders should examine the structure of their current care-delivery model. Health system leaders often tell me that their current model was designed to boost care quality, improve health outcomes, generate high patient satisfaction, and lead to more efficiencies and lower costs. But has the health system been generating measurable positive outcomes in those areas? The answer is usually ‘no’. The FFS payment model doesn’t justify the investments needed to improve the care-delivery model, at least not when it’s the predominant payment mechanism for the hospital or health system.

Under a VBC model, by contrast, clinicians and health systems that keep people healthy and out of the hospital are rewarded with higher margins. (That’s the theory, of course, but the timing can be tricky.) As hospitals and health systems take on more at-risk contracts with health plans and government payers, they become financially responsible for the health of the communities they serve.

VBC may be the first step toward the Future of Health

I see VBC as one of the first major steps toward Deloitte’s vision for the Future of Health where science, data, and technology are used to prevent or cure disease, or identify and treat disease in the earliest stages. Under an FFS model, by contrast, improving population health could reduce patient volume for hospitals and health systems. That would translate to fewer services, which would have a negative impact on margins.

We suggest that provider organizations push to have at least 40% of their revenue managed under VBC contracts. But what will it take for VBC to gain traction? And why are health care providers still being paid based on volume rather than value? Those are questions that hospital and health system leaders should be asking.

It seems that some provider organizations are spending so much of their time on short-term challenges that they often don’t have the bandwidth to focus on longer-term solutions like VBC. While the transition away from FFS has been much slower than expected, it appears to be picking up steam. Over the past few years, hospitals and health systems have done more than just dip their toes in the VBC waters. It’s not unusual for a large health system to have 10 or more VBC contracts, which could be tied to a substantial amount of revenue. However, many of these contracts were signed before any strategy was developed to transform care delivery. It’s not surprising that such contracts rarely generate the desired results.

Five factors that could signal a VBC tipping point

The health care sector is undergoing substantial change and I am increasingly optimistic that true VBC could become a reality in the not-too-distant future. Here are five factors that might indicate VBC is nearing a tipping point:

  • COVID-19: During the pandemic, VBC contracts helped some health systems keep revenue flowing even when patients deferred non-emergency care. The pandemic also helped to demonstrate the value of virtual health and hospital at home. These non-traditional care delivery services could help keep people healthy and out of the hospital while reducing the cost of care—a key element of VBC.
  • Shrinking revenue streams: Prior to the pandemic, some hospitals and health systems had little incentive to abandon the FFS model, which had consistently generated reliable revenue. However, many provider organizations are becoming increasingly concerned about their revenue streams, referral patterns, and market share. There is a realization that they can no longer rely on rate increases from payers to guarantee their margins. Moreover, many health plans have stopped giving hospitals and health systems the rate increases and raises they had come to expect. This trend is beginning to chip away at their margins.
  • Consumer expectations: As consumers take on a bigger role in their own health, their expectations are changing. Consumers have become increasingly interested in high-quality care, convenience, and lower costs, according to Deloitte Center for Health Solution’s health care consumer survey.
  • Market pressure and competition: Hospitals and health systems often compete for a finite number of patients in a market, and early adopters of VBC could wind up with a bigger slice of the pie. Value-based networks such as Clinically Integrated Networks (CINs) or Accountable Care Organizations (ACOs) could help health systems and physician practices expand their patient population more cost-effectively than via direct alignment with independent practices. This allows for scale to develop and/or gain access to resources and capabilities that can help them more effectively manage population health. They could also benefit from shared savings for reducing care costs and ensuring better outcomes.
  • Regulators: Last fall, the Centers for Medicare and Medicaid Services’ Innovation Center (CMMI) launched a 10-year strategic refresh with the goal of achieving equitable outcomes through high-quality, affordable, person-centered care. Realizing Equity, Access, and Community Health (REACH) is one of the first new payment models to be introduced by the Biden administration, which has made health equity a specific goal. According to CMS, Medicare FFS beneficiaries who receive care through a REACH ACO will have access to enhanced care-coordination services, telehealth visits, post-discharge home health care services, and may receive assistance with copayments. This new ACO model is slated to go into effect on January 1, 2023. (My colleagues Jay Bhatt and Anne Phelps provide details about REACH in their blog, New Medicare ACO payment model targets health equity.)

VBC has been growing exponentially over the past few years, and health care providers appear to be focusing more on population health as a component. However, not all provider organizations have felt the same sense of urgency to move to VBC. Further, outcomes have varied thus far for the organizations that have embraced it. Hospitals and health systems that strive to reach the 40% VBC threshold I mentioned above, while building out their population health capabilities at the same time, will be well positioned to effectively combine financial risk with superior care delivery. Value-based care is a long-term play—typically a three-to-five-year journey. But VBC will almost certainly fail if the payment model is the only thing that changes.

For more information about growing VBC portfolios and motivating providers to embrace changes to the care-delivery model, visit our four-part series, The new reality of value-based care transformation.

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

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