Transitioning from Volume to Value: A Story of Incentives
Nearly 10 years after the Affordable Care Act was signed into law and formed the Center for Medicare and Medicaid Innovation (CMMI), value-based care models have gained a strong foothold as a popular, successful, bipartisan method for improving the US healthcare system. In 2017, 34% of US healthcare payments flowed through alternative payment models, a figure only expected to increase in the future (source). Success in value-based care relies on realigning incentives to provide high quality care at low cost. Many strides have been made already, but modifying incentives is key to enabling a full transition from volume to value.
Why value-based care?
It is no secret that the US spends more on healthcare than any other country in the world. Two factors drive healthcare expenditures: price and utilization. In the US, poorly aligned incentives have driven high prices and unnecessary utilization of healthcare services. These misaligned incentives are far-reaching and deeply entrenched. Many arose as a result of the fee-for-service payment system. Value-based care aims to better align incentives to encourage the provision of high-value healthcare.
Realigning incentives for value-based care
Value-based care aims to provide high-value care, as defined by the value equation of reducing cost while maintaining or improving quality (see below). In value-based care models, financial and quality incentives align care with the value equation, encouraging the transition to value.
Financial: Financial incentives are a crucial driver in the transition to value-based care. To put it simply, value-based care models utilize financial incentives through “pay for performance,” by providing bonuses to high performers and assessing penalties on poor performers. Thus, reimbursement is aligned with the cost factor of the value equation. The possibility of a financial bonus incentivizes providers to not only participate in value-based care programs, but also rewards them for providing high-value care. Financial incentives can be as simple as increasing reimbursement for a particular service, or as significant as capitated payments—proactively paying providers for the care of an entire patient population.
Quality: Due to the importance of maintaining or improving quality of care, value-based care programs typically include performance adjustments for quality. If a provider does not meet certain quality criteria, he or she will face financial consequences. As such, value-based care models incentivize better quality of care, aligning with the quality component of the value equation. Quality measures encompass a broad swath of different types of measurements, typically measuring either a specific outcome or part of a process. Examples of quality measures include: lowering readmission rates, documenting advanced care planning discussions, and using certified electronic health records. CMMI assesses performance on these metrics through analyzing claims data and self-reported data from the participating providers.
When alignment causes misalignment
Aligning incentives to create value is no easy task. Changing incentives can create misalignment in other areas. These misalignments can create pitfalls in the transition from volume to value.
Ratchet effect—when cost bottoms out
Financial incentives have driven the transition to value but are not without flaws. One pitfall is the reliance in many value-based care models on using benchmarking to assess financial performance. Providers are compared to their historical performance and/or one another’s performance in order to assess whether they will receive a bonus or penalty. This can lead to the “ratchet effect” where providers continue to decrease costs and lower the benchmark to the point where the high performers can no longer receive a financial benefit because incremental improvement becomes all but unattainable.
This is a factor in the Bundled Payments for Care Improvement Advanced Initiative (BPCI-A), among other programs. Since the majority of value-based care programs are voluntary, participants who no longer stand to benefit financially can simply decide not to participate or drop out of the program. It is likely that the cost of care for these participants will go back up once they have dropped from a program.
In order to have continued success in value-based care, benchmarking methodology must change or be replaced with another way to assess performance goals. Programs must be designed to reward maintaining low costs. Population-based capitated payment is a step towards improvement, but participation in these initiatives remains limited. Only 3.8% of payments flow through population-based payment approaches (see below).
Gaming the system—when financial incentives undermine ethics
A dangerous pitfall in value-based care is “gaming the system.” Since providers have financial incentives on the line, the temptation to game the system may arise. This includes gaming quality metrics reporting, such as up-coding patients to make them seem more medically complex or cherry-picking patients to inflate metrics.
One example is the Hospital Readmissions Reduction Program, which has faced criticism for hospitals’ reported reductions in readmission rates being either artificially inflated through up-coding patients, or resulting from withholding patient care (source). The Value-Based Purchasing Program has also come under scrutiny due to hospitals gaming quality metrics (source). However, gaming is not limited to quality metrics. There are myriad ways to game the system in value-based care models, ranging from intentionally coding incorrectly to violating anti-kickback statutes, which not only undermines the transition to value but can be dangerous for patients.
Future value-based care models must closely consider the risk of gaming. Methods to reduce this risk include audits and penalties for gaming, utilizing advanced analytics to easily identify gaming, limiting the financial benefits for quality metrics, and ensuring that loopholes in value-based care programs are closed.
Emerging trends show promise for the future
In order to continue a successful transition from volume to value, it is important to continue reworking the alignment of incentives in order to provide high-value healthcare.
Looking to the future, the following trends indicate progress towards improved alignment:
Increase in the number of mandatory models: New models such as the ESRD Treatment Choices Model, combined with the anticipated expansion of the Comprehensive Care for Joint Replacement Model show a renewed commitment by CMMI towards programs that include mandatory participation by select healthcare providers in value-based care models. These will reduce the impacts of the ratchet effect and the potential risk of participants deciding not to participate or dropping from the program.
Direct Contracting Model: The newly announced Direct Contracting Model, which is expected to start in 2021, will aim to move towards population-based payments, allow non-traditional healthcare entities to bear risk, increase transparency about the program to patients, and reduce the number of quality measures required for reporting. It is clear that CMMI recognizes the issues of ratchet effect and gaming and is attempting to reduce these in this new model.
The Walmart Factor—new entrants: Walmart has shown tremendous success in providing high-value care to its employees through direct contracting approaches and destination medical care. Walmart has announced plans to create its own value-based care programs (source). Walmart’s success will drive other new, non-traditional entrants. As more models are developed and piloted, the kinks in existing incentives will be smoothed out through trial and tribulation.
Key takeaways
Looking back on the past decade since CMMI was formed, tremendous strides have been made towards the transition from volume to value. Value-based care has begun to realign incentives but has work to be done to resolve any secondary misalignment that this caused. The road to value-based care has been filled with gaming the system potholes and ratchet effect dead ends. However, improved methodology, new models, and new entrants into value-based care will work to repair the road to incrementally approach a full value-based care US healthcare system.
For those of us in the healthcare industry, we each have a role to play towards that incremental improvement to reach the ultimate goal of a high-quality, low-cost healthcare system.
For more information, be sure to check out the 2020 Kellogg Business of Healthcare Conference, be sure to check out Dr. Farzad Mostashari’s keynote address on “Aligning Incentives”.
About the Author:
Catherine Vanacore
Catherine is a student in Kellogg’s Evening and Weekend MBA Program, where she is the President of the Evening and Weekend Healthcare Club. Catherine works at Sg2, where she focuses on helping health systems with strategic planning and decision-making. Before Sg2, Catherine worked in various roles at Stryker where she gained expertise in bundled payment consulting, performance improvement analytics, and clinical research.