Are You Ready for the Shift to Value-Based Payment Models? – Part 2

Are You Ready for the Shift to Value-Based Payment Models? – Part 2

During the last decade or so, various health care stakeholders – such as the Centers for Medicare and Medicaid Services (CMS), hospitals, policy makers, payers, and physician groups – have been exploring opportunities to control costs while simultaneously delivering more effective and efficient care to consumers. These explorations have generally favored Value-Based Care (VBC) Reimbursement models as an alternative to the currently predominant fee-for-service (FFS) model. Examining our current delivery system, which we reviewed in Part I of this series, reveals a number of common themes and ultimately, the fundamental tenets that Value-Based Care initiatives are based on and the problems they aim to fix. Briefly, how does our current health care system function? We already know that it is not organized around providing value for patients. Instead it “rewards those who shift costs, bargain away or capture someone else’s revenues, and bill for more services, not those who deliver the most value.”[1] Knowing this, it becomes clear just how closely proposed payment reforms trace the fault lines of our current system, aiming to overturn perverse incentives and adjust other incentives toward providing high-value care.[2]

So what exactly do we mean when we say VBC? Perhaps you have heard talk of Pay for Performance (P4P), Accountable Care Organizations (ACOs), or Episode-Based Bundled Payments? These are all programs aimed at shifting health care away from an acute care paradigm focused on volume and intensity, to one aimed at providing holistic, coordinated care with value at its core. Many of these programs also aim to shift or share risk between providers, payers, and consumers. The hope is to curb rising health care costs and simultaneously improve health, health outcomes, and the delivery of care, whether it be by emphasizing preventive care to avoid costly inpatient admissions down the road, or by delivering only the most effective and appropriate care. Let’s take a look at the shape some of these reforms are taking, the benefits they offer, and the challenges they face as of right now.

Pay for Performance

Pay for Performance is an approach to increasing efficiency in health care that has grown in popularity not just in the United States, but in other countries as well (e.g. the United Kingdom, Canada, New Zealand, Taiwan, Israel, and Germany).[3] P4P is based on the idea that payment to health care providers should be dependent on the quality of services provided, patient safety, and the effectiveness of care delivered, as opposed to being reimbursed based on volume alone. Or more simply said, a proportion of physician payment is contingent on the quality of care delivered.  Generally the way this model works (emphasis on the “generally”), is that bonus payments are made for performing at a relatively high level or when quality benchmarks are achieved. There is no one-size-fits-all P4P model – the variety of components and specificity with which this model can be implemented are so wide-ranging that many have described P4P as an art form. Here is a short excerpt from Christianson et al. that helps illustrate this point:4

However, the effectiveness of any financial incentive scheme in eliciting changes in provider behavior depends not only on the amount and type of payment but also on the context in which the payment arrangements are implemented, including the characteristics of the providers receiving payments (e.g. whether incentives are directed at large physician groups or small practices). The same payment structure, employed in different contexts, could yield quite different results relating to quality of care.[4]

This is where the challenge comes in – the breadth of factors that must be considered is enormous! When it comes to P4P, “provider(s)” can mean a physician practicing in a solo setting, as part of a group, or even small and large hospitals as a whole. What amount of reward dollars should be paid and how much of a provider’s revenue should it constitute? If the reward is too small, providers may decide that it makes little sense to invest in the reforms needed to reach program benchmarks. Providers and payers also need to establish what disease-specific quality measure or measures to focus on. Should you employ process of care measures (e.g. guidelines, standards of care, or practice parameters) or outcome measures (the health state of a patient resulting from health care) to evaluate performance? Then comes the question of how to quantify performance on these measures and the types of data used. Will you use claims data? Self-reported performance data? One must also consider that it is highly unlikely patients would be randomly distributed across providers with respect to severity of health conditions. Providers that incur a large number of difficult cases could grade out poorly on certain metrics and therefore be put at an unfair disadvantage. This is why risk adjustment is necessary, although it is not always entirely successful. The list goes on – have I scared you away yet?

I hope not, because the power of this payment reform model is immense. The display of complexity we just walked through is also indicative of the infinite settings to which P4P can be applied and the high level of customization available. Luckily there is plenty of research already out there to help guide decision making if P4P is the route your organization chooses to pursue.

Accountable Care Organizations

As defined by the Centers for Medicare and Medicaid Services, an Accountable Care Organization is a “group of doctors, hospitals, and other health care providers, who come together voluntarily to give coordinated high quality care to their [Medicare] patients.”[5] The point of this model, as you can guess, is to constrain health care costs and improve the quality of care received by patients. However, the ACO model goes about achieving this goal in a manner slightly different from P4P alone. An ACO seeks to incentivize efficiency through accountability or shared risk, it aims to reduce costs by dissociating providers’ incomes from the volume and intensity of services they provide, and finally it attempts to raise quality by improving care coordination and minimizing the duplication of health care services.[6] As with P4P, the payment models for ACOs can vary but one of the more common examples is Two-Sided Shared Savings. Without delving into the technical details too much, the fundamental component of this model is to offer providers an opportunity to share in the savings that result from delivering higher-value care while simultaneously sharing the risk of incurring losses if the ACO’s expenditures exceed the risk-adjusted, per beneficiary spending levels. In addition to sharing in the risk of losses, by offering a joint payment that is split amongst all providers involved in the delivery of care, the ACO model fosters accountability for care and costs.

Many of the most egregious deficiencies facing our health care system as a whole are the same ones ACOs seek to address, and for this reason they are the most challenging to overcome. For example, the ACO model attempts to reduce fragmentation of care, but unfortunately not all hospitals and medical groups have the strong organizational structures necessary to foster coordination between health care providers or to hold their physicians accountable. Likewise, there is the ever-present question of how to establish quality benchmarks in order to hold providers accountable. These and many other challenges will need to be addressed in order for ACOs to succeed.

Bundled Payments for Care Improvement

“The essence of this new approach does not rest in how we get paid for the product but rather in how we define the product for which we expect to get paid.”7

The final payment reform model that will be discussed in this blog is Episode-Based Bundled Payments. Bundled payments are considered to be a middle ground between the FFS model and global capitation, and are similar to ACOs in that they “align the financial incentives of hospitals and surgeons around the common goal of coordinating care and improving quality and cost-efficiency.”[7] The Episode-Based Bundled Payment model accomplishes this by aggregating the reimbursement for a complete episode of care, in turn creating an incentive for providers to coordinate their services. This means that a bundled payment for a total knee arthroplasty would “cover” the cost of the inpatient stay and outpatient services. These costs could include, for example, post-acute care costs, surgeon fees, rehabilitation costs, and other ancillary fees – the entire spectrum of care required for a total knee arthroplasty bundled into one, single payment. The payment for the episode is of course risk-adjusted to reflect the clinical complexity of a given patient. If the group of providers receiving the bundled payment can deliver high quality care efficiently enough so that the cost of the procedure is less than the price of the bundled payment, then they can share in the profits.[8] Hence the impetus for these providers to closely coordinate care and monitor patients’ post-operative progress.

What’s the hold up? Why don’t we see more organizations taking on bundled payment contracts? As always, there are barriers to be overcome. For one, implementing a bundled payment program demands that each stakeholder be able to accurately define the direct costs of providing their services, otherwise they may end up negotiating for a contract that does not offer much room for savings or profit. Organizations will also need to have the expertise and resources to assess quality and performance measures. For bundled payments, quality and performance measures can include 30, 60, and 90-day readmission and complication rates, length of hospital stay, and the regularity with which patients are typically discharged to home versus an extended care facility.[9] Other factors to consider are whether or not an organization possesses the capabilities to design care plans, coordinate and execute those care plans with all appropriate entities, track patient progress throughout recovery, and finally determine if recovery is actually on schedule.

Extant research and experience indicates that uniting stakeholders behind a common goal and developing the necessary administrative and IT infrastructure are key to making the switch to bundled payments a successful one. The results have been very promising thus far, with organizations that have implemented this model demonstrating substantial value creation.

Where do we go from here?

This all sounds great in theory, but what steps can organizations take to ensure a successful switch to a VBC model? Each of the aforementioned models show promise for improving our health care system, but each also comes with a set of challenges needing to be overcome. What tools are out there to help coordinate care and monitor patients closely to ensure that they remain on track with their recovery? The third and final installment in this series will discuss the products and services Galen offers that can help guide clients through making the switch to VBC contracts.



[1] Porter ME. A Strategy for Health Care Reform – Toward a Value-Based System. N Engl J Med. 2009:361(2):109-112.

[2] Rosenthal MB. Beyond Pay for Performance – Emerging Models of Provider-Payment Reform. N Engl J Med. 2008:359(12): 1197-1200.

[3] Eijkenaar F. Pay for performance in health care: an international overview of initiatives. Medical Care Research and Review. 2012;69(3):251–76.

[4] Christianson JB et al. Lessons from Evaluations of Purchaser Pay-for-Performance Programs: A Review of the Evidence. Medical Care Research and Review. 2008: 65(6): 5S-35S.


[6] Fisher et al. Fostering Accountable Health Care: Moving Forward in Medicare. Health Affairs. 2009: 28(2): 219-231.

[7] Froimson et al. Bundled Payments for Care Improvement Initiative: The Next Evolution of Payment Formulations. The J Arthroplasty. 2013: 28(1): 157-165.


[9] Schutzer SF. Bundled Payment Programs. J Arthroplasty. 2015:

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