3 Keys to Value-Based Care Financial Success


Adapt successfully to value-based care by focusing on three key competencies

The delivery of care driven by value requires health systems to adapt new business strategies and develop new competencies. While there are many keys to financial success in these new models, three important areas of focus are:

  1. Measuring value the right way
  2. Understanding and managing the risk being accepted
  3. Retaining a focus on traditional volume and seepage considerations

First, health systems need to be measuring value the right way. Every element of care delivery needs to demonstrate the value it provides, from individual physicians to the overall integrated delivery network. The days of “any willing provider” are ending.  If one hospital system delivers better value than another, an employer or insurance company should and will contract accordingly. If an orthopedic surgeon is managing an episode of care, they should direct their patient to the outpatient rehabilitation provider with the best value; if the surgeon does not believe that outpatient rehab will provide value, they should not be used at all.

In a value-based world, value is relative to the agent making a choice. This critical truth is not esoteric economics theory; rather, each agent in healthcare must first understand

  • Who selects their services (who is the buyer)?
  • What are the alternatives to their service?
  • How are they measured for value?

There will be winners and losers in a payment reform world driven by value.  Providers who do not deliver value will lose patients and eventually fail or be acquired.

A clinically-minded physician or administrator might balk at the complex delivery of healthcare being reduced to such pecuniary considerations, but I would argue this is nothing new in healthcare. In the past, for too many buyers, value was simply measured by contract rates for payment, translated into network participation to steer patients. But the future healthcare industry does not want to pay the same for a bad or unnecessary surgery as it does for a good and appropriate one.

Buyers might be an employer or an insurance company at one level and a patient (consumer) at another level. In many cases, the buyer is another healthcare provider, as much of healthcare utilization is driven through referral from within healthcare. Here is the point: you must measure your value through their eyes. Each of these buyers have different capabilities and perspectives in measuring value. Alternatives are also critical, as the buyer may be choosing between different doctors or weighing different treatment options through their own lens on value.

How to Measure Value

This sets the context for this key for value-based care: How do you measure and articulate your value? Billboards screaming a hospital is in someone’s “top 100” may or may not be the basis for value. Lower contract rates may or may not be the basis for value. You buyers may value you for having the best quality measures in oncology, or a 0.05% better readmission rate than the health system across the street, or better parking, or nicer people answering the phone: all of these may represent value, or may not.

Healthcare professionals need to move beyond the simplistic view that value = quality / cost.  It is time to focus on measurements that matter and to create a competency in measuring such measures and verbalizing this value to the buyers. While I believe that the best performance measurements are functional outcomes and patient experience, they are only part of the answer.

If you are a dermatologist who gets 90% of your business from a group of primary care physicians, you need to learn to see yourself as they see you and understand why they send you patients, rather than sending patients elsewhere or not sending them at all.  A key factor driving the value calculus for the primary care doctors may be in the financial risk they now bear for patient care.

Understand and Manage Risk

Providers must excel at understanding and managing the risk they are accepting. Payment reform is driving new payment models to implement value-based care, asking providers to share in the incident and/or the technical risk of the patient. Incident risk applies to a population: given a population of patients, how many will become sick or sicker? How can this be prevented or managed? In contrast, incident risk is specific to the acuity and intensity of a single patient: given this one person who is already sick, what services are needed to address their condition? Each type of risk is measured and managed differently. Insurance companies have both of these risks and manage them extremely well, despite what many providers may think.

My message to providers accepting risk-based contracts is this: you are now a payer.  If you accepted risk just to gain volume, with no plan or ability to manage it, it is likely that you will fail.

The first step in managing risk is the ability to measure it. Organizations need to utilize multiple data sources, especially sources from outside the organization, and use sophisticated modeling tools to measure and identify their risk. The focus must be on a small portion of the population where interventions are practical and impactful of the overall risk. Simply running a list of the biggest spenders or bigger ER utilizers is not sufficient, as these patients may not be actionable. Once this is done, an organization must have effective and scalable interventions that actually reduce costs to the organization in measurable ways.

It is also necessary to manage ongoing utilization against waste. This can be done though altering workflows and care pathways, through better utilization choices of implantables or formulary, or through internal utilization review processes. This requires care interventions, which are quite difficult. But the lesson here is simple: if you never say “no” to something, you cannot claim to be managing it, a principal common to both healthcare and teenagers.

Retain a Focus on Volume and Seepage

Do I really expect health systems executives to reduce the utilization of their expensive diagnostic equipment? Perhaps I do. But the final key to value-based care discussed here is retaining a focus on traditional volume and seepage. This key is important for two different reasons.

First, volume does not disappear under value-based care. Indeed, the change occurring is a move from volume only to volume plus value. Every payment metric used in the future starts with some volume measure, such as the size of the panel or the number of episodes or the fee-for-service cost that occurred. In the future, a physician offering perfect care to a single patient still makes far less than a physician treating five patients badly (until that physician loses their practice).

Hear me clearly: financial success requires an organization to be successful in both the fee-for-volume and the fee-for-value models simultaneously. While the proportion between the two may change over time, I see neither model displacing the other.

Volume still matters. But also living with value makes it more complicated. Consider the cost calculus of the future:

An ACO gets a 50% gainshare on total cost of care. Their hospital receives $1,000 fee-for-service for each MRI done in the hospital, of which $200 is profit. Across the street is a stand-alone facility not owned by the ACO, but their rate is $500. The ACO earns 50% of the difference when using the community based MRI, or $250 of profit against the $200 profit for keeping the volume.

Such decisions are never even this simple, as the networks, rates and gainsharing rules of multiple payers all vary, as do the clinical considerations.  Furthermore, simple profit calculations are never simple when weighing variable against fixed costs; what is the actual marginal value to the facility for the $50 saved when losing the utilization? Finally, even real changes in variable cost can be difficult to monetize: try writing a check the savings from reducing 50% of a nurse’s time.

Consider this: one nationally known IDN that contains every area of care lost money in a shared savings ACO. While there were many reasons, they were shocked to learn that 40% of their spend was lost in seepage outside the IDN. That 40% of spend represented valuable fee-for-service volume that hits the top line of every organization under both fee-for-service and fee-for-value programs.

This is also the second reason why volume and steerage matter under value-based care. How can this IDN manage the care of the patient (second key listed above) when so much of the care is not even nominally coordinated? How can a community-based physician with no financial incentive to manage costs, no access to the information you have about the patient, and no knowledge of your plan for care management deliver value-based care? But, when they don’t, you are the one who pays. A primary reason for every organization to focus on their utilization and steerage practices is to enable the care coordination needed to manage costs.

It should also be noted an organization who can manage seepage and coordinate care may considered quite valuable by the payer (the first key listed above). As with any viable financial strategy, the keys to success in a value-based world are interdependent. Health systems who adapt to the new world of value-based care, understanding the whole financial strategy involved, can expect success in both value-based and volume-based programs.


About Author

Jay Sultan
Jay Sultan

Jay Sultan is a principal strategy advisor at Edifecs with extensive experience across healthcare enterprises and payment systems and a long track record using technology to catalyze breakthrough innovations. As a nationally recognized expert in payment reform, Sultan began work on implementing episodes for payment over 15 years ago and has authored two patents in payment bundling.