Reimbursement Shifts: Value-based Care vs. Fee-For-Service

In January 2018, Amazon, Berkshire Hathaway and JPMorgan announced that they planned to jointly launch a new, healthcare-focused company with the goal of improving their U.S. employees’ satisfaction with their healthcare and reducing the cost of that care.

While few details about the joint venture have been released since it was first announced, surgeon, professor and author Atul Gawande, MD, was recently named CEO. In a press release announcing Dr. Gawande’s appointment, he shared his hopes to improve healthcare delivery and outcomes and eliminate wasteful spending.

“The system is broken, and better is possible,” Dr. Gawande said.

The sentiment that the U.S. healthcare delivery system is broken is one that healthcare leaders, politicians and patients across the nation share.

According to National Health Expenditure data, other economically comparable countries spend about half as much per person annually on healthcare as the United States. Health spending in the U.S. has consistently grown faster than the economy, with 2016 data showing that health spending accounted for almost 18 percent of the nation’s Gross Domestic Product.

As health policy leaders and others consider the future of healthcare in the U.S., controlling costs while improving quality is a top priority. There is widespread recognition that our nation’s current healthcare expenditure is not only undesirable, it’s unsustainable.

Fee-for-Service Reimbursement

Historically, providers and healthcare organizations have been compensated for care provided based on fee-for-service reimbursement models. When a provider is reimbursed based on a fee-for-service model, they are compensated for each procedure, test, treatment, etc. they perform, regardless of whether that procedure, test or treatment results in a better outcome for the patient.

Essentially, with the fee-for-service model, providers are financially rewarded for quantity over quality. With this payment model, it’s easy to see how patients can sometimes undergo unnecessary tests or treatments when perhaps less invasive, lower cost, and just-as-effective options are available.  

In his article, “Healthcare’s Dangerous Fee-For-Service Addiction,” Robert Pearl, MD, argues that providers and healthcare organizations that have grown accustomed to the fee-for-service reimbursement model have “grown dependent on providing more and more healthcare services, regardless of whether the additional care adds value.”

Dr. Pearl cautions that as long as providers are paid for doing more, that’s what they’ll continue to do.

In summary, fee-for-service reimbursement models:

  • Compensate for quantity, rather than quality
  • Don’t take patient outcomes into account when determining reimbursement amounts
  • Can lead to unnecessary tests and treatments when less-invasive, less-expensive options may be available and more desirable

Value-Based Care Reimbursement

Increasingly, insurers and health systems are shifting to a value-based reimbursement methodology.  

In contrast to fee-for-service, value-based reimbursement models compensate providers not for the quantity of procedures performed, but rather for the quality of the care they provide, measured by patient health outcomes. In a value-based reimbursement model, providers are rewarded for effectively managing the health of individuals and populations.

Value-based care requires providers to take a more team-oriented approach to patient care, coordinating care across the continuum and collaborating with a patient’s other care providers to deliver the best health outcomes possible.

As value-based reimbursement models become more common, so do care delivery models like patient-centered medical homes and accountable care organizations. These care delivery models promote preventative, holistic care and reward clinical integration – defined by the American Hospital Association as the facilitation of “coordination of patient care across conditions, providers, settings, and time in order to achieve care that is safe, timely, effective, efficient, equitable and patient-focused.”

So, what does a value-based reimbursement model actually look like? Centers for Medicare and Medicaid Services (CMS) offers several value-based reimbursement programs; the Hospital Readmission Reduction Program is one example. This value-based program lowers payments to Inpatient Prospective Payment System hospitals that have too many readmissions. Hospitals are incentivized, therefore, to better coordinate post-discharge care and determine how to best prevent readmissions.

In a previous Continuum post, we shared that Blue Cross Blue Shield Association’s (BCBSA) accountable care organizations and patient-centered medical homes are the American healthcare industry’s largest network of value-based care programs. BCBA’s value-based care programs have achieved some impressive outcomes, including a 10 percent reduction in emergency room visits and a five percent reduction in medication adherence among patients with heart disease.

While the shift from a fee-for-service to a value-based system will take time, it has been widely accepted as necessary in order to achieve the Institute for Healthcare Improvement’s Triple Aim: 1) To improve the patient experience of care, 2) To improve the health of populations and 3) To reduce the per capita cost of healthcare.

In summary, value-based reimbursement models:

  • Compensate for quality, rather than quantity
  • Incentivize providers  to collaborate with care providers across the continuum of a patient’s care to achieve the best possible health outcomes
  • Value preventative, holistic, patient-centered care
  • Are widely believed to be key to achieving the Institute of Healthcare Improvement’s Triple aim to improve the patient experience of care and the health of populations, and to reduce the per capita cost of healthcare


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