Health Policy

Slow Walking to Value Based Care: Why Fee for Service Still Rules


(This is the second in a series of excerpts from Terry’s new book, Physician-Led Healthcare Reform: a New Approach to Medicare for All, published by the American Association for Physician Leadership.)

In January 2015, then Health and Human Services Secretary Sylvia Burwell announced lofty goals for the government’s value-based payment program. By the end of 2016, she said, 85% of all payments in the traditional Medicare program would be tied to quality or value, and 90% would be value-based by the end of 2018.

The government planned to tie 30% of Medicare payments to alternative payment models by 2017, according to Burwell, and hoped to reach the 50% mark by 2018. In March 2016, HHS said it had reached the 30% goal a year ahead of schedule, mainly because of the Medicare Shared Savings Program (MSSP).

More recent data on the value-based-care movement comes from the Health Care Payment & Learning Action Network (LAN), a public-private partnership launched in 2015 by the Department of Health and Human Services. The LAN reported in October 2018 that public and private payers covering 226 million lives, or 77% of insured Americans, had tied 34% of their payments to value-based care. According to the organization, only 23% of total payments had been value-based in 2016.A deeper analysis of the LAN data, however, shows that the vast majority of value-based payments—both in Medicare and in the larger healthcare system—were still limited to pay for performance, upside-only shared savings, and care management fees paid to patient-centered medical homes.

More recently, the Catalyst for Payment Reform, a nonprofit firm funded by payers, found that 53% of commercial payments to hospitals and doctors in 2017 could be classified as value-oriented. However, the report said, 90% of value-oriented payments were built on fee for service and just 6% involved downside financial risk—about the same as in 2012.

Without downside risk, most observers agree, providers will not significantly cut costs.Evidence to support this viewpoint can be found in data from the MSSP. In 2016, for example, ACOs in two-sided risk models accounted for only 10% of the ACOs in the MSSP, but generated almost 30% of the total savings. “The average ACO in a one-sided risk model saved $1.3 million against its benchmark,” noted an article about this trend. “The average ACO in two-sided risk models saved $4.5 million—over three and a half times greater savings.”

Stuck on Fee for Service

What is the evidence that the healthcare industry is moving from fee for service to risk-based arrangements? David Blumenthal, MD, president of the Commonwealth Fund, replies, “As I listen to people in the healthcare sector talk about the future of payment, most accept the premise that value-based payment and risk sharing are going to grow in prevalence. But the evidence for risk sharing is not as strong as the evidence for pay for performance. So, I think it’s an open question.”

David Muhlestein, chief strategy and chief research officer for Leavitt Partners, has studied ACOs and the evolution of risk. He says there has been an increase in the number of providers who are taking downside risk, either through two-sided shared savings or capitated models. “But for the vast majority of providers, this is still a small minority of their total revenue. Even if you’re fully capitated for 5% of your revenue, and the other 95% is fee for service, you’re going to optimize [how you do business] around the fee-for-service component, not on that 5% capitation. And that’s what we’ve seen: very few organizations have sufficient revenue through any level of risk that justifies making changes that cannibalize or in some other way hurt their fee-for-service revenue, which dictates their profitability.”

Slow Walking to Value-Based Care

In the view of Grace Terrell, MD, the former CEO of Cornerstone Medical Group in North Carolina and a board member of the American Medical Group Association, hospitals and healthcare systems across the country are “slow walking” toward value-based care. “Some hospitals are very good at fee-for-service medicine,” she notes. “It’s really hard to do these changes, and the slower it goes, the easier it feels to them.”

She offers a startling example of how some hospitals have reacted to CMS’s Value-Based Purchasing program. A hospital chief medical officer privately told her that it was not financially worthwhile to reduce readmissions. “He said, ‘We’ll take the risk of the 30-day readmissions penalty [from Medicare], because we’ll make so much from our continuous churn [of inpatient beds] that it’s not worth bothering with.’”

Healthcare consultant Michael La Penna is not surprised by this story. Although such a sentiment would never be voiced in public or at a hospital board meeting, he says, hospitals’ financial decisions tend to be based on how a particular course of action affects their throughput and occupancy rate. If they have to make a choice between hiring two new ER doctors to increase admissions or hiring nurses to manage high-risk patients at home, for example, they’ll choose the ER physicians, he points out.

Hospitals are slow walking to value-based care, he says, because they need to fill beds, and the potential rewards from shared savings or risk contracts aren’t enough to make up the difference if they reduce their admissions.

Muhlestein agrees that hospitals are taking their time in transforming their business model. “There’s the view that the future belongs to these risk-based models, where you need to manage patients appropriately,” he explains. “Then there’s the present reality that fee for service dictates whether you keep the lights on. The health systems talk about better ways to manage high-cost, high-risk patients, but at the same time they continue to play the fee-for- service game they’re good at.”

Despite the pressure from some payers to assume risk, he adds, “It’s just a reality that lowering average length of stay while improving your daily census and negotiating better contracts with payers is what moves the needle in the short-term, and that’s where the focus is.”

Ken Terry is a journalist and author who has covered health care for more than 25 years.

2 replies »

  1. Excellent post on we all can make small slow changes but incrementally get to value based care.

  2. Some excellent comments you have made on why Fee for service is still so pervasive. It will take a lot sustained effort to breakthrough to move to a value based care. There is not other way around it and has to be done.