Pulling Back the Curtain on Value-based Care

MHE Publication, MHE April 2022, Volume 32, Issue 4

Although health systems say they deliver better health outcomes and lower costs, research on how physicians are compensated suggest otherwise.

New research shows a wide gap between what health systems say is value-based care and how physicians are compensated. The research is significant because the Affordable Care Act (ACA) and dozens of other programs and policies in both the public and private sector are supposed to be ushering in a new era in U.S. healthcare that relegates fee for service, which incentivizes provision of services, to the past and replaces it with payment arrangements that reward outcomes and lower costs.

This study is also important because the researchers noted they could not find any earlier study that specifically focused on the compensation and financial incentives health systems use when paying physicians. However, research findings published on Jan. 28, 2022, in JAMA Health Forum show that the physician compensation arrangements at the 22 health systems included in the study still center on increasing the number of healthcare services that physicians deliver.

Researchers at RAND Corporation analyzed the payment practices that 31 physician organizations affiliated with 22 health systems in California, Minnesota, Wisconsin and Washington used with their frontline physicians. They found the payment methods were designed to maximize health system revenue by incentivizing doctors to deliver more services. Specifically, the volume-based compensation was the most common component of the primary care physicians’ (PCPs) base compensation in 26 physician organizations, representing an average of 68.2% of total compensation for PCPs. In 29 physician groups, volume-based compensation represented an average of 73.7% of total compensation for specialists, the researchers reported.

In recent years, many health systems have acquired physician organizations in an effort to control referrals to their hospitals and other facilities. Therefore, compensation and financial incentives are a lever for health systems to affect how physicians deliver care, the researchers noted. Health systems have also started to adopt alternative payment models (APMs) — just as health plans and CMS have have done. “Given increased exposure of health systems to APMs, it is important to understand the degree to which health system compensation and incentives for physicians reflect the same value-based incentives provided by payers,” the researchers wrote.

Although financial incentives for delivering high-quality clinical care, lowering costs and improving patients’ experience with access to care were commonly included in compensation for PCPs and specialty physicians, those payments represented only a small fraction of total compensation. As a result, those payments were likely to only slightly affect physician behavior, the researchers noted. The research shows that just over two-thirds (70%) of the leaders of physician organizations that the researchers interviewed said increasing the volume of services delivered was the main way for physicians to boost their income.

Dennis P. Scanlon, Ph.D., a health policy professor at Pennsylvania State University in State College, says health systems are still largely using discounted fee-for-service reimbursement methods. Since even before the ACA was passed in 2010, health systems have developed various alternative payment mechanisms, such as capitation for accountable care organizations, episode-based contracts and bundled payments for care, he explains. Scanlon says value-based payment schemes may sound great in marketing programs, “but at the end of the day, we still see rising healthcare costs in part because of the incentives to increase volume.”

The American Academy of Family Physicians defines value-based payments as systems in which health insurers and government and employer purchasers of healthcare hold physicians, hospitals and other providers accountable for both the quality of care they deliver and the cost of that care. Health policy experts at Dell Medical School of The University of Texas at Austin have a more detailed definition.

“Value in healthcare is the measured improvement in a person’s health outcomes for the cost of achieving that improvement,” Elizabeth Teisberg, Ph.D., and colleagues wrote in an article that was published in Academic Medicine in 2020. Some descriptions of value-based care conflate it with cost reduction, quality improvement or patient satisfaction, Teisberg and colleagues wrote. Such efforts are important, but they are not the same as delivering value. Improved patient outcomes will result in reduced costs, they added.

Teisberg is the executive director of the Value Institute for Health and Care at Dell Medical School, and she co-authored “Redefining Health Care: Creating Value-based Competition on Results,” with Michael E. Porter. That book, which was published in 2006, popularized some of the underlying ideas of value-based care.

Mark Bethke, an actuary and leader of Deloitte Consulting’s value-based care practice, says most health systems are reluctant to invest sufficient funds in value-based care payment models to provide enough of an incentive for physicians to improve patients’ health outcomes. Bethke has worked with Deloitte’s health system clients on value-based care programs since 1999. “What I learned over those years is that most value-based payment models fail without making other significant changes to the care delivery model,” he says. For example, health systems do not put enough payment at risk because they fear investing too much in value-based care will cannibalize their fee-for-service revenue, he explains.

Most health systems put only about 5% of total revenue at risk in value-based contracts with physicians, he says. “Then after two or three years, they’ll say it didn’t work because patient outcomes didn’t improve and costs didn’t go down,” Bethke says. “It’s foolish to invest just 5% of your overall revenue in value-based care.” The ideal level is more like 40%, which he calls the tipping point, where value-based contracts represent enough of a commitment so the payment eventually results in a return on the investment in terms of improved outcomes and lower costs.

Putting only 5% into value-based contracts does not provide enough of a financial incentive for physicians and other providers to manage the total cost of care, Bethke explains. Without a more robust investment of 40%, health systems disconnect their goals of delivering value-based care from the way physicians deliver care.

Rachel O. Reid, M.D., M.S., the lead author on the JAMA Health Forum article, agreed and says health systems and provider organizations will need to evolve the way they pay physicians who treat patients to align with value-based care delivery models. Otherwise, the nation’s health system may not realize the potential of value-based payment reform to deliver better value for patients. Reid is a physician policy researcher at RAND and a practicing internal medicine PCP at Brigham and Women’s Hospital in Boston.

“It’s important to acknowledge and be aware of the disconnect that exists at the interface between a payer or insurer and a provider organization, and then between the provider organization and the frontline physicians,” she says. “Some of the rhetoric about value-based care might not match what’s happening among frontline doctors, where the rubber hits the road.”

Joseph Burns is an independent journalist in Brewster, Massachusetts, who covers healthcare and healthcare insurance.