Three ways to correct value-based payments

July 15, 2024

What should physicians think about when recommending a medical procedure: insurance reimbursement or the patient’s health? In a fee-for-service healthcare organization, reimbursement might be a consideration. In contrast, a value-based payment (VBP) system focuses on cost management, high-quality care, and healthy patients.

The fee-based payment model reimburses physicians and health systems for the cost of each visit, test, and treatment. This model increases costs because it leads to overuse. It can be harmful to patients when unnecessary medications cause side effects or unnecessary invasive procedures result in complications.

To bring the focus back to patients, the Centers for Medicare and Medicaid Services (CMS) has been working for a decade to transition the U.S. healthcare system to a VBP system through initiatives such as the Medicare Shared Savings Program. Doctors and hospitals in this program form Accountable Care Organizations (ACOs) that are financially rewarded when they meet quality and cost-saving goals, such as cancer screening, diabetes control, and patient satisfaction. In 2022, the program saved Medicare $1.8 billion and improved patient care quality metrics.

CMS wants all traditional Medicare beneficiaries to receive value-based care by 2030, but progress is slow. A Viewpoint commentary for JAMA Internal Medicine by LDI Senior Fellows Amol Navathe and Ezekiel Emanuel, along with Daniel Shenfeld of the Perelman School of Medicine, lists critical challenges—with solutions—to achieving VBP goals.

Healthcare organizations must be able to reduce their costs without reducing their revenues. ACOs with large numbers of primary care physicians perform well in the Shared Savings Program, achieving high Medicare savings and physician premiums. One of their strategies is to use outpatient rather than inpatient care when appropriate. However, these cost reductions may come at the expense of revenues from short-term acute care hospitals and nursing homes. These types of organizations may struggle to reduce costs without affecting revenues due to fixed costs such as equipment, beds and space.

In the Viewpoint commentary and two Health matters In articles on VBP design and implementation, Shenfeld, Navathe, and Emanuel say CMS must develop ways for health care organizations to save costs without cannibalizing their revenue. One model with proven success is the CMS Comprehensive Care for Joint Replacement program, which reduces patient length of stay in postoperative facilities after hip and knee replacements without compromising patient outcomes. A key feature of the program is bundling payments for all care for a procedure rather than requiring reimbursement for each individual service. This encourages hospitals to refer patients only to necessary services. Patients who don’t use postoperative facilities because they don’t need that level of care save Medicare money without affecting the hospital’s bottom line.

CMS should revise risk adjustment to eliminate “ghost savings.” VBP reimbursements are risk-adjusted, with higher payments being made to patients who are predicted to need more treatment based on diagnostic codes in their medical records. For patients, risk adjustment creates a level playing field so practices don’t turn away people who need expensive treatment because of their poor overall health.

Risk adjustment encourages physicians to code intensively to capture every condition that contributes to risk scores in order to maximize income. One result is that Medicare patients appear sicker under VBP than under fee-for-service care, creating opportunities for “ghost savings” achieved through coding that exist only on paper. Shenfeld, Navathe, and Ezekiel argue that CMS should require VBP participants to achieve real monetary savings. New risk adjustment methods could shift financial incentives away from documentation and toward improving patient outcomes.

CMS should support the VBP transition with technical assistance. Under the fee-for-service system, healthcare organizations determine their revenue by counting patient visits and treatments. Under the VBP system, organizations are partially compensated by meeting quality and cost targets. This makes financial forecasting difficult because organizations must estimate their revenue based on events that do not occur because they avoid unnecessary treatments and costs.

Healthcare organizations need help with this transition. CMS must provide them with forecasting tools and software to predict and track finances under the VBP. These forecasting tools require current, standardized, and reliable data—and expert support—to interpret and apply the results. Currently, these resources are expensive, so CMS must make them affordable or free.

Navathe says VBP shows promise: The Shared Savings Program and joint replacement programs show that VBP can work for patients, physicians and taxpayers. However, only about a third of traditional Medicare enrollees are currently in ACOs. Still, Navathe is confident that if we can solve the challenges discovered over the past decade, we can create the necessary stepping stones for VBP’s future success.

The article “The Promise and Challenge of Value-Based Payment” was published on May 20, 2024 in JAMA Internal Medicine. Authors include Daniel K. Shenfeld, Amol S. Navathe, and Ezekiel J. Emanuel.

Ongoing work by Navathe and colleagues, including Adjunct Senior Fellow Joshua Liao, includes examining the impact of value-based payment on health disparities, including in surgical care.