Providers Don’t Take Enough Risk to Bend the Cost Curve


Back in 2015, 20 major health systems and payers pledged to convert 75% of their business to value-based arrangements by 2020. Today, more than two-thirds of payments from U.S. commercial health insurers are tied to some kind of value-based model. By 2021, the health plans expect three-quarters of their payments will be value-based.

However, a recent analysis of Change Healthcare data by Modern Healthcare found that the percentage of value-based revenue tied up in upside/downside risk contracts was in the single digits. Among the types of two-sided risk contracts that provider organizations had were capitation or global payment (7.3%), pay for performance (6.5%), prospective bundled payment (5%), population-based payment (5.8%), and retrospective bundled payment (4.1%).

An AMGA survey picked up signs of a recession in risk contracting in 2016. A year earlier, survey respondents—mostly large groups–had predicted their organizations would get 9 percent of revenue from capitated products. In 2016, the actual figure was 5 percent, according to a Health Affairs post by the AMGA’s Chet Speed and the late Donald Fisher.

The authors cited a number of obstacles to the spread of risk contracting, including “limited commercial value-based or risk-based products in their local markets; the inability to access administrative claims data from all payers; the massive administrative burden of submitting data in different formats to different payers; lack of access to investment capital; and inadequate infrastructure.”

Fast forward a few years, and most of the same ingredients for risk-contract aversion remain. In researching my new book in progress, for example, I discovered that ACOs were having a hard time getting claims data from commercial payers. That made it more difficult for them to manage population health and to measure physician performance, which is critical to improvement and to the selection of high-value specialists. The insurers apparently did not want to reveal what they were paying providers, despite the value of ACOs to their bottom line.

Even if plans are willing to meet providers halfway, they still find a high resistance to risk. Hospitals don’t want to empty their beds, and they employ physicians, at least in part, to keep them filled. While they talk a good game about value-based care, they’re not necessarily committed to reducing costs if it hurts their bottom line.

Not surprisingly, a study found last year that “the growth of population-based payments has not been associated with a decrease in market-level cost growth.” The population-based arrangements that the study authors looked at included shared savings, two-sided risk, and global budgets. Their conclusion: providers were still not taking enough risk to make a dent in spending growth.

“The current level of population-based VBP penetration may be insufficient to move the needle on health care spending. Increased participation in VBP models that include downside risk may be needed for these models to lead to reductions in overall health care spending,” they wrote.

Because of the low volume of patients in these models, they also noted, many providers have continued to focus on maximizing fee for service revenues. “Without significantly more volume of payments flowing through APMs [alternative payment models], providers cannot make the business case to abandon fee for service.”

So what does this all add up to? In short, little progress has been made in the past five years to move U.S. healthcare from pay for volume to pay for value. As a consequence, not many providers have yet made the crucial switch to a model in which they can be financially rewarded for saving money and improving outcomes.

Until that begins to happen, costs will continue to rise at current or higher rates, and U.S. healthcare will remain dysfunctional and will fail to serve the needs of all patients. It is past time for physicians to wake up and realize they can make money by reducing waste, and for hospitals to get out of the way.

Ken Terry is a veteran healthcare journalist and the author of Rx for Health Care Reform (Vanderbilt University Press, 2007). This article is adapted from a forthcoming book.

7 replies »

  1. Appreciate this discussion and totally agree on physicians and health systems needing to take downside risk. It is very complicated though and I bristle at the constant drumbeat of commercial insurance is 200%+ of Medicare. As Nate Kaufman points out (routinely) there needs to be a discussion on the blended rate, to include Medicaid reimbursement below Medicare, self-pay and charity care. Let’s not forget, we have a system that is required to see everyone walking in the door. 20% of your business (Commercial) is paying at 240% of Medicare, 13% (Medicaid) pays at 80% of Medicare and 7% (Self-Pay) at 50% of Medicare and then 38% is 100% of Medicare. So, there’s a weighted average reimbursement that needs to be accounted for but the sensationalists like to callout the 200%+ and cry foul on health systems and providers. It lacks a full picture.

    I counter this with health systems who contribute to the problem in terms of waste and bad acting. They consolidated lower reimbursement primary care practices for years and put their volume through their higher reimbursement contracts to milk the payers and steer patients to their system. They are grossly inefficient organizations with a significant amount of overhead that serve very little to improve outcomes and more to improve fee-for-service.

    Payers do not get a pass either. They created the mess and failed to invest in their partner’s success (physicians/providers/health systems). Payers could have easily invested in systems to improve outcomes, funding HIE’s, CIN’s and tools/services to improve outcomes. They did not. They make money where the higher the fees, the more they make. It is a great model. Increase premiums 8% per year and pass along 2-3% increases and pocket the delta. Unfortunately, this has reached its end, only exacerbated by the obscene profits major payers are posting. They’re also held largely unaccountable to employers, where they create “preferred networks” called “PPO’s” and then use this middle-man tactic against both employers and physicians/providers/health systems. It represents the worst of our capitalism society.

    Add in lawyers, who drive up costs and defensive medicine. Without Tort Reform, we will have difficulty defending clinical decisions not to treat, only increasing price.

    PBM’s and pharma should be more accountable to FMV in terms of pricing local and abroad. There needs to be some measure of pricing control on pharma other than a GoodRx option.

    Last, we need patients to be accountable at the individual level. Those with modifiable diseases need to be held accountable to basic health habits they can achieve such as walking, not smoking, etc.

    The government is not helping with continued incremental programs like MSSP and ACO’s who are showing signs of success in pockets but collectively not moving the needle against a $350b+ loss for Medicare last year and continued projection of being bankrupt in 2026. These incremental programs paint the illusion of doing something but will not move the needle. They create a lot of waste, friction and frustration.

    What is interesting and back to the point of taking risk, providers who do so successfully are having a major impact. We would be better off amplifying these successes and helping usher in risk programs for physicians and providers to transition from FFS to value. Aligning incentives is what is needed. Building programs that protect physicians and providers to transition is what we need.

    Sorry for the ramble but I hope this dialogue can continue. We cannot and should not bankrupt our country and the middle class for corporate profits and leave our children with a burden for our own greed.

  2. The New York Times Elizabeth Rosenthal piece published September 1 is excellent! Here is a bit “It would be unseemly for these nonprofit medical centers to make barrels of money. So when their operations generate huge surpluses — as many big medical centers do — they plow the money back into the system. They build another cancer clinic, increase C.E.O. pay, buy the newest scanner (whether it is needed or not) or install spas and Zen gardens.”. Who doesn’t love a Zen garden!

  3. Thanks for reference to Rosenthal piece…and for the doubling of support of my proposals!

  4. A couple of days ago, journalist and former emergency medicine doctor, Elisabeth Rosenthal, wrote a very good article in the New York Times about price gouging by hospitals, especially well known hospitals that most insurers want in their network and certain rural hospitals that may be the only hospital for many miles around. This issue receives scant publicity because hospitals are located in every congressional district, and they are often the largest employer in the area. Also, the American Hospital Association is a powerful lobbying group. Even large cities including Cleveland and Pittsburgh that were once manufacturing powerhouses now have hospitals (and universities) as their major industries and employers. Meanwhile drug companies are pilloried for charging much more than they charge in other countries for brand name and specialty drugs and insurers are roundly criticized for high executive compensation and excessive administrative costs. Hospitals now account for more than 40% of medical claims and have pushed up prices much faster than physician fees and clinical services over the past five years.

    There are loads of ways for non-profit hospitals to hide profits from building a new cancer clinic to buying the latest MRI machine whether it’s needed or not to decorating their walls with art. As the late Uwe Reinhardt told us, if you want to save money, you have to pay less. To move in that direction, I support all three of Paul’s suggestions above.

  5. I am surprised the May 2019 Rand study hasn’t gotten more attention….thank you for focusing on it. I agree the non profit and for profit health/hospital systems with protection from anti trust laws, secret (and surprise) prices/billing are the problem. …usually with protection…even collusion with big insurance companies (often the major domo a non profit).

    Rand shockingly showed New York hospital charges were only 170% of Medicare vs the national average (as you point out) were 240: strongly indicating the massive hospital/heath system in near monopoly/oligarchs geographies. [More competition in New York].

    But I think there are more effective and simpler solutions.
    1. Force transparency in pricing…this is building momentum via executive orders…May need legislation.
    2. Eliminate certificate of need (State and federal legislation).
    3. Eliminate anti trust laws waivers.

    As these happen, we have the necessary critical mass of motivated employer and employees (with health savings accounts and high deductible plans) to pounce, driving a search for better value thereby inducing a focus on increased efficiency/value in the hospital/health systems.

  6. The author replies:

    Dr. Holm asks, “Why should doctors take risk, and why should hospitals get out of the way?” Simple—it’s the only way to make our health system sustainable while giving everyone access to high-quality care.

    Hospitals and health systems are the main obstacle to progress, because they have no incentive to prevent admissions. Instead of trying to maintain or improve population health, hospitals are busy merging with each other and jacking up prices. Commercial insurers paid hospitals an average of 241% of Medicare rates in 2019, according to a RAND study. And in markets dominated by one or two large health systems, admissions cost about $2,000 more, on average, than admissions elsewhere.

    In a truly value-based system, hospitals would be regarded as cost centers. They would be paid government-set, all-payer prices and would lose their market power. They would also not be allowed to employ physicians. Doctors would form their own groups and would learn how to manage population health within a budget. Given the incentive to earn more money—not less—by cutting waste out of the system, many physicians would rise to the occasion, and their patients would have better outcomes as a result.

    Dr. Holm notes that value-based purchasing arrangements have failed to control costs. That’s true, as the Leavitt Partners study pointed out. But there are several different forms of value-based reimbursement included under that umbrella. Pay for performance is definitely a failure; shared savings (upside only) has proved moderately successful for some groups and ACOs; and some organizations have been successful with upside/downside risk contracts.

    Physicians should take financial risk because 1) the healthcare industry is slowly but definitely moving away from fee for service; 2) it’s their best shot at earning more or at least maintaining their incomes; and 3) it’s the right thing to do for their patients. By forming groups capable of taking risk, they can provide better care, because they don’t have to worry about billing for each service. For example, groups can hire care managers to care for high-risk patients between visits and can address their social determinants of health. They can make sure that transitions of care go smoothly and that recently discharged patients make appointments with their doctors. They can do anything they want if it improves care and lowers costs.

    Population health management does require a substantial infrastructure, and it doesn’t come cheap. The CEO of a large physician-led ACO in the Southwest told me that it had earned about $30 million from shared savings and full-risk capitation in the past six years but may have spent that much on infrastructure. That’s ok, and the ACO and its parent group will probably do fine in the future if the country keeps moving in a value-based direction. But I also know of a 21-doctor ACO in Texas that this year netted $6.8 million from the Medicare Shared Savings Program (MSSP). This small, primary care ACO had achieved that feat using a much smaller infrastructure than that of the bigger ACO. It had hired six care managers and bought some population health software that pulled the necessary data from its members’ EHRs.

    While Dr. Holm is correct that some things are not under physicians’ control, there is much they do control (at least, if they’re not employed by a hospital). For example, although they can’t force a health plan to offer a risk contract or give them claims data, they can build an infrastructure for population health management if enough of them band together. They can even obtain venture capital as more private equity firms invest in primary care and specialty management companies.

    As for the good doctor’s question about why physicians should take financial risk for patients who don’t care for themselves, he’s right that doctors can’t tell patients how to live. But doctors can join organizations that have an incentive to provide the right kind of support to patients who have an array of human problems. By educating, counseling and coaching these patients, risk-bearing groups can persuade many of them to improve their self-management. As for the others, their unnecessary use of healthcare will be balanced out by many other patients who take good care of their health and use healthcare judiciously.

    Ultimately, if physicians can break free from the shackles of hospitals, they can choose the kind of system in which they want to provide care. Direct primary care works best for some doctors and patients. Other physicians prefer a system that can create optimal outcomes at a reasonable cost, while allowing them to profit by eliminating waste.

  7. Your system will remain as it is until you stop blaming Providers for things they have no control over. No one knows what “value” is anyway. Depends who you ask. And I don’t know how you expect hospitals to “get out of the way” when they employ everyone, negotiate all the contracts, set up the payment schemes, etc.

    “Not surprisingly, a study found last year that “the growth of population-based payments has not been associated with a decrease in market-level cost growth.”

    No surprise, and it has nothing to do with risk assumption. VBP is a failure at controlling cost. Period, the end. That is the conclusion of the study. It is a failed model with inappropriate focus on things that do not work in reality. And of course, the VBP fanatics will contort themselves into a pretzel looking for excuses as to why their failed system is not working.

    And why should Providers take on additional risk? About 80% of someones health is dependent on choices they make and social determinants. Should you not get paid for what you do because this article fails to convince any readers? Should I not get paid because a diabetic continues to eat like a slob and not take their medication so they can afford their smokes?

    “The authors cited a number of obstacles to the spread of risk contracting, including “limited commercial value-based or risk-based products in their local markets; the inability to access administrative claims data from all payers; the massive administrative burden of submitting data in different formats to different payers; lack of access to investment capital; and inadequate infrastructure.”

    There is not a single thing listed above that Providers have any control over. But it is Physicians who need to wake up?

    For those Physicians who got “woke”, they go into direct pay care. And what is the first thing they do? They set up a VBP system for their patients. How strange. And even stranger, all the payers, who carp about VBP will not contribute anything to a direct pay practice. Now who needs to wake up?