What you need to know about value based payment models

What you need to know about value based payment models

Healthcare costs are rising faster than the economy is growing, the quality of care falls short in a number of areas and practice variation indicates that there is room for increasing the efficiency of healthcare. This is the present situation in many high-income countries. Anything but an ideal situation. One that requires a number of basic changes. Value based payment models – paying for quality instead of the volume of care – is one of them. The term is often mentioned, but hardly anyone knows exactly what it means. With this blog, we want to change that. We furthermore want to demonstrate what the consequences of value based payment models will be for healthcare providers, health insurers and governments.

Market system with no results

To control the rising healthcare costs, several countries are experimenting with new payment models. For example, in the Netherlands the regulated market model was introduced in 2006 – the idea is that a regulated market system improves the quality of care and reduces costs. However, the desired effect has not been realized. Why? Because primary and secondary healthcare providers are not integrated into one payment model. A major mistake. As a result, the government continues to focus mainly on budgetary frameworks and we still hardly reward based on ‘added value’. This way of funding maintains fragmentation, impedes good 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 consequently, ever-increasing healthcare premiums.

What is value based funding?

Roughly speaking, there are four funding methods: Fee-for-service, bundled payments, shared savings and (full risk) capitation based funding. To get a good impression of what value based funding is, we’ll dive into all four methods.

Fee-for-service

Fee-for-service is exactly what the term implies: care providers are paid for each service they provide. With this method, the healthcare provider runs relatively little risk compared to the health insurer. This way of financing stimulates high productivity and thus leads to many transactions and consultations. In other words: what you pay for is what you get. At the same time, it does not stimulate caregivers to cooperate. After all, the goal is to complete as many transactions as possible to get the most out of it financially.

Bundled payments

With bundled payments (e.g. disease management contracts), a care provider or group of care providers receives an amount to provide care to a group of similar patients. The payer (e.g. health insurer or government agency) sets certain quality requirements for the care. It’s an attempt to stimulate cooperation between care providers and to improve the efficiency of care. Payers (e.g. health insurer or government agency) still bear the greatest financial risk in this model, but because the payer imposes certain performance requirements, healthcare providers run a higher performance risk than when they are paid per transaction.

Shared savings & risks

In this model, healthcare providers and the payer (e.g. health insurer or government agency) in a specific region cooperate in order to achieve cost savings. The financial benefits are shared. In practice, this works as follows: an estimate is made of the expected healthcare costs for a group of patients or insured population. If in reality the healthcare costs are lower, part of the saved amount is released to the cooperating partners as a bonus. In this way, healthcare providers and payers share the financial risk as well as the savings. If healthcare costs are higher, the healthcare provider and payers (e.g. health insurer or government agency) jointly bear the financial risk. In other words, the clinical and financial risks are shared!

Full risk capitation based funding

With capitation based funding, the performance of healthcare providers in terms of quality, costs, coordination and prevention forms the basis for the funding. The better the performance – e.g. a reduction in the number of chronic conditions in a region through better prevention – the higher the reward. This encourages health care providers to achieve the best possible outcomes. Because stimulating effective and high quality care is the central guiding principle, healthcare providers run the greatest financial risk, and the insurance risk suddenly lies with them. In practice, capitation based funding is often a combination of the funding methods described above.

From healthcare provider to regional health insurer

The figure below shows the risks of each funding method and instantly demonstrates how these risks shift. If a full risk capitation model is implemented correctly and the insurance risk lies largely with you as a healthcare provider, you’ll have no other option but to pay more attention to the efficient organization of care services. Put simply, every patient entering your clinic for treatment will cost you money, so the healthier your patient population, the more positive your business case. Healthcare providers will therefore focus much more on prevention and opt for efficiency and effectiveness to reduce costs. Don’t do this and you’ll run the risk of going bankrupt. However, this way of working is only possible if a regional population management approach is used with sufficient scale, in which collaboration between the various parties – payers (e.g. health insurer or government agency) and primary and secondary care providers – exists and in which these parties have joint responsibility for the health and cost outcomes. All of this in one legal entity, to be able to manage and control the clinical and financial risks properly. Health Maintenance Organizations (HMO) in the United States, such as Kaiser Permanente, show that this method can only be successful if the function of the health insurer and the healthcare provider can coincide legally. For example, in the Netherlands this is a problem because such a merger is forbidden by law. However, less extremely implemented or integrated organizational models where the function of the health insurer and the function of the providers do not coincide in one entity, such as an Accountable Care Organization, are feasible in the Netherlands. Best practices show that these intermediate forms also create added value in terms of quality and cost savings.

Figure 1: Moving to value based funding

Value based payment brought to practice

The message is clear: to reverse the rise of healthcare costs and the lack of quality of care, we must experiment with new value based payment models. We can achieve this through more and better regional cooperation between healthcare providers, and between health insurers and healthcare providers. This means providing high-quality and population based care together and jointly bearing the responsibility. All of this based on an adequate, integrated funding system and complete transparency in terms of quality and costs data. In other words, real entrepreneurship in which all parties involved control their reward by working together.

Many will wonder if we are ready for this. However, this question is irrelevant, because we’ll have to. Value-based payment models form the basis of value based care in practice. And value based care – if implemented correctly- is actually the only way to regain control over the current situation. Reaching that stage will probably take 5 to 10 years. Care providers can use that time to prepare for the transition, e.g. by investing in unlocking data. Proper preparation and investment in data management means that healthcare providers are better able to manage the increased financial risk that value based funding will entail for them. It’s now up to healthcare providers and health insurers, and the government must go along with the changes by altering the regulations to allow for and reward coordination of care across the continuum of prevention, care and welfare.

Download the whitepaper to learn which conditions and steps are needed to implement value-based payment models in practice.