What you should know about outcome funding

The costs of care are growing faster than the economy, the quality of care is inadequate in a number of areas and practice variation indicates scope for increasing the efficiency of care. This is the current state of affairs in the Netherlands. Anything but an ideal situation, which calls for some basic changes. Outcome costing – paying for quality rather than volume of care – is one of them. The term is often used, but hardly anyone knows exactly what it means. We want to change that with this blog. We also want to show what the consequences of outcome costing will be for healthcare providers and health insurers.

Market forces without results

In order to get a grip on the rising costs of care, the model of regulated market forces was introduced in 2006. The idea is that regulated market forces increase the quality of care and reduce costs. However, the desired effect was not achieved. Why? Because first- and second-line care providers are not contracted in full. A capital mistake. In addition, we have continued to steer mainly on the basis of budgetary frameworks and there is still hardly any reward on the basis of ‘added value’. This method of funding perpetuates fragmentation, impedes proper coordination and effective substitution of care, discourages prevention and innovation, promotes over- or underproduction, and has little effect on quality and health outcomes. The result is inefficiency, high costs and ever-rising health care premiums.

What is outcome-based funding?

Broadly speaking, there are four methods of funding: payment per transaction, payment per bundle of care, shared savings and outcome funding. To get a good idea of what outcome funding is, we will explain all four methods.

Payment per transaction

Payment by operation is exactly what the term says: health care providers are paid for each operation they perform. In this situation, the care provider runs relatively little risk compared to the health insurer. This method of financing stimulates high productivity and therefore leads to many transactions and consultations. In other words: what you pay for, you get a lot of. At the same time, it does not invite caregivers to work together. The aim is to carry out as many transactions as possible in order to fill up our own coffers as much as possible.

Payment per care bundle

These include DBCs, care severity packages and integrated care contracts. In the case of payment per bundle of care, a healthcare provider or group of healthcare providers receives an amount for providing the care for a group of similar patients. The health insurer sets certain quality requirements for the care provided. The aim is to encourage cooperation between care providers and improve the efficiency of care. In this model, the health insurers still bear the greatest financial risk. But because the health insurer sets certain performance requirements, the healthcare providers run a greater performance risk than when they are paid per transaction.

Shared savings & risks

In this model, healthcare providers and the healthcare insurer from a specific region work together to achieve cost savings. They share the proceeds among themselves. In practice, this works as follows: an estimate is made of the expected healthcare costs for a group of patients or insured persons. If the care costs are lower in practice, then part of the amount saved is paid to the cooperation partners as a bonus. In this way, healthcare providers and healthcare insurers share the financial risk, but also share in the savings. If the costs of care turn out to be higher, this means that the care provider and the health insurers will also go down together, in other words, there is a shared risk!

Outcome costing

In outcome-based funding, the performance of healthcare providers in terms of quality, costs, coordination and prevention form the basis of the funding. The better a performance – for example, a reduction in the number of chronic conditions in a region through better prevention – the higher the reward. This encourages healthcare providers to achieve the best possible outcomes. Because the central steering principle is to encourage efficient and high quality care, healthcare providers run the greatest financial risk. And the insurance risk suddenly falls on the healthcare providers. In practice, outcome funding often consists of a mix of the funding methods described above.

From care provider to regional health insurer

The figure below shows the risks for each funding method and at a glance it is clear how they shift. If outcome costing is implemented correctly and the insurance risk largely lies with the care provider, you as a care provider will be forced to think harder about the organisation of your care. Simply put, every patient who walks into your clinic for treatment costs you money, so the healthier your patient population is, the more positive your business case. Healthcare providers will therefore focus much more on prevention and will opt for efficiency and effectiveness to reduce costs. If you don’t, you run the risk of going bankrupt. However, there is a but. This way of working is only possible if a regional population approach is used with sufficient scale, whereby the various parties work together: health insurers and care providers in the first and second line, and whereby these parties share responsibility for the health and cost outcomes. And this from a single legal entity in order to properly manage and control the clinical and financial risks. Health Maintenance Organizations (HMO) in the United States, such as Kaiser Permanente, show that the method can only be successful if the function of the health insurer and the health care provider can legally coincide. And that is exactly what is prohibited by law in the Netherlands. Less extreme or integrated organizational models where the function of health insurer and providers do not coincide in one entity, such as an Accountable Care Organization, are achievable in the Netherlands. Best practices show that these intermediate forms also deliver added value in terms of quality and cost savings. Figure_outcome funding

Figure 1: On the road to outcome-based funding

Outcome costing in practice

The message is clear: in order to turn around the rising costs of care and the lagging behind of the quality of care, we need a change of system. We achieve this through more and better regional cooperation between healthcare providers, and between healthcare insurers and healthcare providers. Delivering high-quality care together, tailored to the population, across the chains, and taking joint responsibility for it. And all this on the basis of an adequate, integrated funding system and full transparency in terms of quality and costs. Real entrepreneurship, in which all parties involved, by working together, have their rewards in hand.

Many will wonder whether we in the Netherlands are ready for this. That question is actually irrelevant, because we will have to. Outcome costing is the basis of value-driven care in practice. And value-driven care – properly implemented – is really the only way to regain control of the situation we find ourselves in. Before that happens, it will probably take 5 to 10 years. Healthcare providers can use this time to prepare for the transition, for example by investing in data access. Good preparation and investment in data management will enable healthcare providers to better manage the increased financial risk that outcome costing entails for them. The ball is now in the court of care providers and health insurers and the government must move with them by adapting the regulations so that collaboration across the network of prevention, care and welfare is actually possible and rewarded.

Download the free e-Book to learn what other conditions and steps are needed to put outcome funding into practice.

Pim Valentijn

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