Understanding Value-Based Care Models

Healthcare providers in the United States are under pressure to move to value-based care models, whereby their compensation is tied to their patients’ health status rather than the number of services delivered.

The financial reasons are clear: Value-based care models motivate providers to reduce unnecessary costs and enable them to earn bonus incentives for providing high-quality, efficient care, paid either by government programs such as Medicare and Medicaid or by private insurers. For value-based care models to work effectively, however, accurate, up-to-date data will be crucial. This article delves into the different models for value-based care as well its benefits and challenges.

What Is Value-Based Care?

Value-based care describes healthcare delivery models that are focused on improving patient outcomes while containing healthcare costs. In a value-based care model, providers are reimbursed based on outcomes rather than the number of procedures and treatments they perform, motivating them to focus on care quality, performance, and patient satisfaction.

Value-based care is relevant to both patients whose healthcare comes via government programs, such as Medicaid, Medicare, and Veteran Health Administration facilities, and those who receive care privately. Given its extensive experience in creating and guiding value-based care programs, the Centers for Medicare & Medicaid Services (CMS) is well situated to take the lead in articulating a clear vision for value-based care that applies to the entire health ecosystem, as well as encouraging slow-moving providers to get on board. To speed up adoption, it may be necessary to make value-based care programs mandatory, not optional.

Key Takeaways

• The volume-driven, fee-for-service model that rewards more visits, more procedures, and more tests is giving way to value-based care models that reward providers for improving care quality and patient health outcomes.
• The US Centers for Medicare & Medicaid Services has set the goal of enrolling all Medicare beneficiaries and most Medicaid beneficiaries in value-based programs by 2030.
• Healthcare providers will need to accurately measure quality and costs. Without a clear understanding of the costs associated with a particular category of patient or the treatment of a particular disease, providers may enter into a contract to accept a per-patient sum that doesn’t cover the real cost of treatment.

Value-Based Care Models Explained

Value-based care models include simple “capitated” payment models, whereby providers receive a predictable amount of money up front to cover the expected cost of a set of healthcare services for an individual patient, and pay-for-performance models, whereby the payer calculates patient health scores based on diagnoses, treatments, and services rendered and provides financial incentives to providers for patients who score above the benchmark. Some care models are also punitive, levying fines or reimbursement reductions when healthcare providers fail to meet benchmarks.

Healthcare providers will need to demonstrate that fewer procedures and tests don’t impair patient outcomes. To do this, they’ll need to shift their focus to preventive care—for example, by offering prevention programs to patients susceptible to heart disease, diabetes, and other chronic diseases. They’ll need to invest in technology that collects, aggregates, and analyzes data so they can provide payers—either government programs or private insurers—with data on the impact of care changes on the patient experience and health outcomes. Hospitals, for instance, can measure care quality by tracking readmissions and preventive screenings and by surveying patients to determine how satisfied they are with their care.

CMS is the laboratory in which different value-based models are coming to life in the United States. Through a mix of voluntary and mandatory programs, CMS is also gathering data to determine the optimal way to reach its goal of enrolling all Medicare beneficiaries and most Medicaid beneficiaries in value-based programs by 2030. CMS has experimented with different value-based models, with a mix of mandatory and voluntary programs aimed at hospitals, clinics, health plans, and other parts of the health system.

CMS has also released the Hierarchical Condition Categories risk-adjustment model, which categorizes patients with either expensive chronic conditions or certain acute conditions, such as pulmonary disease, depression, bipolar disorders, and congestive heart failure. The model calculates the estimated cost of a patient’s care based on the severity of the condition and demographics, then determines payment rates for Medicare Advantage plans.

The Medicare Shared Savings Program is a voluntary program wherein providers form groups called accountable care organizations (ACOs). These Shared Savings Program ACOs take responsibility for a defined group of beneficiaries to improve the care they receive, largely through better service coordination. One example is the ACO Realizing Equity, Access, and Community Health (REACH) model, under which providers are tasked with developing plans to reach underserved communities and are rewarded for providing well-coordinated, high-quality care.

According to the American Hospital Association, about 60% of healthcare payments in the US are tied to value and quality. Although that number is continuing to grow, the complexity of some of the value-based care models and providers’ comfort with the conventional fee-for-service model have slowed adoption rates.

Value-Based Care Models vs. Fee-for-Service Models

Source: Centers for Medicare & Medicaid Services and other sources

Fee-for-service care models create financial incentives for the quantity of care provided, since reimbursements are tied to the types and number of treatments and tests a patient receives, which potentially drive up the cost for payers, facilities, and patients. For example, healthcare providers are incentivized to recommend one more test or a short hospital stay for observation. Value-based care models aim to make care delivery more efficient and less expensive, so providers are compensated for the quality of the care they provide.

For example, a large rural healthcare provider in the US uses AI to identify the most frequent users of health services and connects those people with members of its health guides team to coordinate care.

Goals for Medicare Value-Based Payment Programs

Source: Centers for Medicare & Medicaid Services

The main goal for Medicare value-based payment programs is to help resolve one of the biggest problems with US healthcare—the fact that even though spending is higher than in many other countries, the US isn’t getting the best results. There are four broad types of value-based care payment programs: hospital inpatient care; ambulatory care; health plan programs; and post-acute care.

Why Is Value-Based Care Important?

Value-based care is important because, at least in theory, it improves the quality of patient care and helps reduce its cost, thus putting care providers, most of which run on razor-thin profit margins, on more stable financial ground. The World Economic Forum reports that rising healthcare costs now account for more than 10% of the global economy.

How Does Value-Based Care Work?

In a value-based care system, providers focus on delivering the highest-quality care and the best patient experience. In doing so, they use data analytics tools and AI algorithms to analyze patient and population data to help identify care gaps and the potential for negative patient outcomes. They can also use AI to help review all payer contracts in order to benchmark their cost and utilization metrics against those of their peers.

A key to providing value-based care is for primary care physicians, specialists, and care coordination teams to work together and share data to manage each individual’s overall health.

Variants in Value-Based Care Models

Value-based care models include performance-based payment models, whereby providers receive both fee-for-service payments and bonus payments for achieving specific benchmarks or taking specific actions, and capitation models, whereby providers receive a fixed sum intended to pay for all of an individual’s care, regardless of how many individual services that patient receives. Here are some of the models CMS has developed to help providers transition to value-based care.

• Accountable Care Organizations
  Accountable care organizations (ACOs) are groups of providers that coordinate care to help patients receive the care they need without subjecting them to unnecessary tests and procedures. Medicare ACO participants receive payments linked to care improvements and cost reductions.
• Bundled Payments
  Bundled payment programs provide a single payment that covers all services provided to a patient, with one provider, the “awardee,” assuming responsibility for all the other providers involved in a single course of treatment. Under CMS’s Bundled Payments for Care Improvement initiative, providers agree to take financial and performance responsibility for a patient’s care. However, according to the American Hospital Association, “policymakers and providers have become increasingly concerned that this approach may result in fragmented care coordination across providers and healthcare settings.”
  
  In response, the CMS is due to launch CMS TEAM (Transforming Episode Accountability Model) in early 2026. TEAM is an alternative payment model that will require selected hospitals to assume responsibility for the cost and quality of Medicare patient care for some types of surgery through the first 30 days after the patient leaves the hospital. Hospitals would be responsible for all products and services provided during the episode of care, making it more likely, at least in theory, that care will be well coordinated and comprehensive.
• Patient-Centered Medical Homes
  The main goal of the patient-centered medical home (PCMH) model is to coordinate care across all providers and make services more accessible through shorter waiting times, expanded in-person hours, and 24/7 digital access to care team members, according to the US Agency for Healthcare Research and Quality. The word “home” doesn’t refer to at-home care. Rather, the PCMH model focuses on the primary care office experience, whereby a team of clinicians works together to coordinate care across different care delivery locations, including primary care and specialist offices.
• Capitated Payments
  Under capitated payment models, providers receive a set sum of money from the payer up front to cover the expected cost of an individual’s healthcare services over a specific period of time, regardless of whether that person seeks care. The contract between a payer and a provider can mix payment models. For example, a contract might require both monthly capitation payments and quarterly incentive payments.
• Performance-Based Payments
  Performance-based payment systems require providers to track performance metrics—such as patient health outcomes, mortality and readmission rates, care coordination efficiency, patient satisfaction, and safety—and report them to payers, both private insurance companies and government departments. Payers then measure that data against industry benchmarks.
• Shared Savings
  Under shared savings programs, providers join together as part of ACOs to coordinate care. They receive payments based on contractually agreed upon care quality and cost metrics. ACOs that can provide high-quality care at a lower cost can benefit from a steady, predictable revenue stream, but ACOs that are unable to lower costs can fail to earn enough to offset care expenditures.

Benefits of Value-Based Care Models

The intended benefits of value-based care models include improving patient health outcomes, helping providers apply their resources more efficiently, and improving providers’ financial status.

• Improved patient outcomes. To improve patient outcomes, providers of value-based care aim to change patient behaviors by educating them on how healthier diets and lifestyles can help prevent specific diseases and complications. Value-based care models generally require clinicians to develop personalized care plans for their patients.
• Enhanced patient satisfaction. Patient satisfaction can be directly linked not only to improved health outcomes, including reduced mortality and complication rates, but also to improved patient safety (for example, by avoiding medication errors and healthcare-associated infections) and reduced hospital readmission rates, according to the Agency for Healthcare Research and Quality.
• Reduced healthcare costs. Encouraging patients to become active participants in their own care is one of the keys to lowering healthcare costs, according to research published in the Robert Wood Johnson Foundation’s Health Affairs journal. A report from insurer Humana highlights a 23.2% savings for its Medicare Advantage value-based care plan compared with Original Medicare, representing US$8 billion in total health cost savings in 2022. For providers to be able to identify and measure clinical-improvement initiatives that lower costs, cost data must be combined with clinical quality data.
• Increased care coordination. With patient data connected across different care venues—including doctor’s offices, hospitals, rehab centers, and specialist facilities—a patient’s primary clinician can view potential next steps for a multitude of different conditions. A central repository where clinicians can track episodes or incidents in a patient’s care journey, no matter where the care is received, and share that access with other members of the care team can help reduce the likelihood of costly emergency visits and hospitalizations, particularly for patients with chronic conditions.
• Increased access to healthcare. Although it seems intuitive that reducing the quantity and cost of healthcare provided would reduce access, the opposite is true. When providers have a comprehensive view of a patient’s health history, they can recommend preventive care, coordinate care for chronic conditions, and use telehealth or remote patient monitoring to reduce the likelihood of additional hospital stays. When providers can make more informed choices about which tests and procedures are necessary, and are realistic about the impact of a particular therapy or medication, a more sustainable healthcare system becomes possible.
• Data-driven decision-making. Value-based care relies on the analysis of large amounts of accurate, real-time data to identify the best care path for a patient. Descriptive analytics can provide information on patients, such as survival rates, repeated treatments, and emergency room visits. Diagnostic analytics can help explain why certain medical events or outcomes may have occurred. (Note: “Diagnostic” in this case refers to the analytic process and not to medical diagnoses.) For example, diagnostic analytics can help clinicians understand why there has been an increase in hospitalization days for certain conditions. Prescriptive analytics can provide different care options that clinicians can recommend for patients based on specific characteristics—for example, their age, overall health status, and history of compliance with health directives.

Challenges and Barriers to Value-Based Care

As the health ecosystem moves toward a model whereby providers are compensated for the outcomes they achieve, the industry faces a number of challenges, including cost, complexity, regulatory hurdles, and plain old inertia. Read on to explore these challenges.

• Initial costs and investment in technology and training. Providers of value-based care are required to report on performance to payers and governments. To do that, they must collect, combine, and analyze large volumes of data, such as mortality and readmission rates, costs of procedures, and patient satisfaction scores. Healthcare providers of all sizes will need to invest in data platforms, analytics, and interoperability software or services, as well as the associated training, to perform those functions.
• Complexity of measuring quality and outcomes. Many healthcare providers are still struggling with siloed data and manual processes. Sharing patient and other data, securely storing it, and making it accessible are precursors to gauging performance against internal and industry benchmarks, identifying areas for improvement, and analyzing value-based care initiatives.
  
  The Institute of Medicine (now the National Academy of Medicine) developed a framework that defines quality healthcare as effective, efficient, equitable, patient-centered, safe, and timely. Providers need to define performance metrics for each area and use specific processes and tools to track them. While metrics for safety and effectiveness are well established, ones for efficiency and equity haven’t been as big a focus.
• Resistance to change among providers. Beset by talent shortages and high employee turnover rates, some healthcare providers are reluctant to disrupt existing organizational structures for fear of alienating staffers resistant to change. The reality is that a shift to value-based care will require providers to retrain clinicians on spending more time on preventive care and less time on chronic disease care.
• Regulatory and policy hurdles. CMS has introduced dozens of value-based care pilot programs, which are at various stages. Healthcare providers must keep track of these programs and their deadlines, and that’s time consuming. CMS is using a carrot-and-stick model, simultaneously offering bonus payments to providers that can show, with data, that they’re improving health outcomes and containing costs and also mandating compliance. The biggest deadline is the 2030 one that requires all Medicare and most Medicaid patients to be covered by value-based care initiatives. The CMS Interoperability and Prior Authorization Final Rule of 2024, which requires payers and providers to improve data-sharing capabilities with the goal of improving patient care and reducing administrative costs, originally required payers to meet certain technical requirements by January 1, 2026, but that deadline is now “at least” January 1, 2027.

Exploring the Spectrum of Value-Based Care

CMS has experimented with dozens of health payment and service delivery models. These models focus on different health conditions, such as cancer, heart disease, and organ transplant access, and different populations, such as those underserved by conventional healthcare models. Here are some examples.

• End-Stage Renal Disease Quality Incentive Program (ESRD QIP). CMS spends about US$153 billion, more than 24% of its annual spending, on patients with end-stage renal disease, or kidney failure, according to the National Kidney Foundation. CMS created the End-Stage Renal Disease Quality Incentive Program to improve the quality of patient care in dialysis facilities. The program changes the way dialysis facilities receive CMS payments for patient treatment by linking payments to quality-of-care performance measurements. CMS reduces payments to clinics that don’t meet quality benchmarks.
• Hospital Value-Based Purchasing (VBP) Program. CMS’s Hospital Value-Based Purchasing Program makes incentive payments to acute care hospitals that improve inpatient care in areas such as mortality, complications, safety, patient experience, and infection rates. Hospitals are also judged on efficiency and cost reduction. The program is paid for with a 2% withholding of Medicare reimbursements; hospitals that meet performance measurements can earn back the withheld amount or more. In 2026, CMS will institute a “health equity adjustment” so hospitals considered “safety net” facilities, serving high rates of dual Medicaid and Medicare patients and disadvantaged populations, will receive additional points.
• Hospital Readmission Reduction Program (HRRP). With the goal of reducing avoidable readmissions, CMS’s Hospital Readmission Reduction Program encourages better communication and care coordination to ensure that discharge plans are comprehensive and easy to follow. The program reduces Medicare fee-for-service payments to hospitals that have elevated levels of readmission over the course of 30 days. It focuses on performance related to conditions such as heart failure, pneumonia, acute myocardial infarction, and chronic obstructive pulmonary disease.
• Quality Payment Program (QPP). Improving care quality and lowering costs are two of the objectives of CMS’s Quality Payment Program, which allows CMS to increase payments to Medicare clinicians providing high-quality patient care and decrease payments to clinicians who fail to meet performance benchmarks. The program has two payment models: merit-based incentive payments, which replaced the Physician Value-Based Modifier program in 2019, and advanced alternative payment models, which focus on care for specific conditions or populations. Current alternative payment models include an oncology model, a joint-replacement care model, and a model focused on AI innovations in care delivery and payment management.
• Hospital-Acquired Condition (HAC) Reduction Program. CMS’s Hospital-Acquired Condition Reduction Program lowers Medicare reimbursements for hospitals that rank in the lowest quartile of all hospitals in terms of reducing inpatient infection rates for a number of different conditions, including pressure ulcers, post-operative hemorrhages, and in-hospital falls that lead to hip fractures. CMS also posts hospitals’ HAC Reduction Program data on public web pages.
• Skilled Nursing Facility Value-Based Purchasing (SNFVBP) Program. The Hospital-Wide All-Cause Unplanned Readmission measure tracks whether a patient has had an unplanned hospital readmission within 30 days of discharge. It’s the sole metric used to determine whether skilled nursing facilities (SNFs) should receive incentive payments as part of Medicare Part A fee-for-service claims. The Skilled Nursing Facility Value-Based Purchasing Program, administered by CMS, is designed to encourage SNFs to improve care quality through better communication with area hospitals and by identifying and addressing the issues causing excessive hospital readmissions.
• Home Health Value-Based Purchasing (HHVBP) Model. The CMS Innovation Center developed and implemented the Home Health Value-Based Purchasing Model in 2016 with the goal of improving the quality of care and efficiency of Medicare-certified home health agencies. The model includes agency incentives, encourages the study of quality and efficiency measures appropriate for home healthcare delivery, and increases the visibility of agency metrics and grades. In 2022, the model was expanded to cover all 50 states and US territories.

4 Programs That Support Value-Based Care

Beyond the payment and service delivery programs offered by the government, individual providers can develop and implement their own internal value-based care initiatives.

1. Chronic care management. Under care management programs, providers work together to coordinate care and educate patients with chronic diseases, with the goal of taking down barriers to care, reducing health risks and unnecessary treatments, and alleviating the stress and confusion associated with navigating the healthcare system. The ultimate goals are to improve health outcomes and cut costs. One care management program at a New England hospital system coordinates care among different clinicians, helps patients transition to rehab facilities or home, addresses prescription refill problems, and even helps with insurance paperwork.
2. Remote patient monitoring. Value-based care requires accurate and timely data collection, analysis, and sharing so different members of a patient’s care team can gain a holistic view of a patient’s progress. Remote patient monitoring allows providers to extend care outside the confines of a care facility and actively monitor vital health data so care teams are more likely to catch issues early, before symptoms worsen, and determine a patient’s health status in near real time.
3. Transitional care management. Transitional care management services focus on the process during which patients are transferred from inpatient facilities to the next location in their care journey—which could be a long-term care facility, rehab, or home. Issues that may arise during this type of transition include new diagnoses, a change in medication or treatment protocols, or a request from the patient or patient’s family that treatment be received in an environment other than a hospital.
4. Behavioral health integration. Data on behavioral health can come from myriad sources—inpatient stays, outpatient visits, residential stays, and community health clinics. When caregivers lack a single view of a patient’s diagnosis and treatment, they’re unable to initiate comprehensive treatment plans and share those with the entire care team. Value-based care, because it encourages a holistic approach to caregiving, helps clinicians and patients work together to create personalized plans and objectives.

6 Strategies to Promote Value-Based Care Models

The potential benefits of value-based care models, such as improved community and individual health care, are clear. But to establish a functional, profitable value-based care system, healthcare providers and payers will need to understand and embrace the following strategies.

1. Change financial processes. Value-based care models reward providers with bonuses for providing high-quality, collaborative care. Such care is measured by tracking data on factors such as mortality rates, hospital readmissions, and use of preventive care methods such as screenings and vaccines. This is a shift from traditional models, where compensation is based on the quantity of care provided, rather than its effectiveness. Healthcare providers need to consider the impact of this change throughout the organization, from the doctor’s office to labs and finance offices.
2. Recognize and promote intangible benefits. Value-based payment models require providers to ditch spreadsheets, manual payments, and customized software solutions and adopt new software systems that support the multitude of new payment models and compliance with healthcare industry regulations. These new systems are designed to improve the employee experience and remove tedious, manual tasks from staff at every level. Providers can also benefit from improved patient satisfaction, which can come from the better collaboration between clinicians and patients that is a fundamental goal of value-based care systems. In addition, the metrics that are a key part of assessing the success of value-based care can also help enhance an organization’s reputation within the community.
3. Measure impact. Providers can use data output from analytics tools to generate dashboards that provide information at a glance on healthcare utilization and quality levels, including data points such as patient mortality rates, bed occupation rates, hospital length of stay, hospital readmission rates, patient infection rates, and patient satisfaction scores.
4. Manage program accreditation. The CMS recognizes three accreditation organizations: the Accreditation Association for Ambulatory Health Care, the National Committee for Quality Assurance, and the Utilization Review Accreditation Commission. Qualified health plan (QHP) issuers have two different accreditation requirements, at the start of the second and fourth years of QHP certification, and should start the accreditation process as early as possible to meet CMS standards for issuers. Accreditation helps healthcare consumers gain trust that their provider has met specific quality standards designed to promote high-quality, safe care.
5. Adhere to government regulations. Government health departments can regulate the way value-based care services are provided by mandating certain care models for Medicare and Medicaid recipients. For example, the US Congress has proposed the Value in Health Care Act, which aims to encourage providers to participate in value-based care models by continuing incentive payments and adjusting financial risk so providers serving rural or underserved communities receive a share of the savings they uncover.
6. Communicate success metrics. Public reporting of the metrics around care provider success can provide invaluable information to patients and encourage providers to improve their performance on a number of different measures. CMS offers Medicare recipients tools that compare the rates, coverage, and benefits of various Medicare Advantage plans, and all US states and many territories have health insurance assistance programs that provide free Medicare counseling.

How to Measure Value-Based Care

ACOs will soon be required to report on measures for both Medicare and non-Medicare patients related to conditions such as hypertension, diabetes, and depression. Since value-based care focuses on quality of care rather than volume, the way providers measure their impact needs to change as well.

ACOs will need to adopt clinical quality measurement tools that simplify the process, enhance accuracy, and provide diagnostic insights based on EHR data. Those tools need to be connected to the EHR to help keep records up to date and accurate and allow data to be analyzed to help close care gaps and identify the next best step in a patient’s care journey.

Specifically, care providers need to develop key performance indicators (KPIs) that are best suited to their strategic goals. Some common KPIs are hospital readmission rates, patient mortality rates, improvements in life functions or pain levels, and the total cost of a patient’s care over time.

The Future of Value-Based Healthcare

The healthcare industry is moving to reimbursement models that focus on value, outcomes, and shared risk rather than a set fee for each service. Conventional reimbursement systems—spreadsheets, manual payments, and homegrown solutions—are increasingly no longer an option.

The future of value-based healthcare will be built on unified patient data that can be accessed by any member of a patient’s care team and, when anonymized, by medical researchers and scientists, thus supporting better patient outcomes, helping improve the use of healthcare resources, and providing more seamless connections among consumers, providers, life sciences researchers, and public health organizations.

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Value-Based Care Model FAQs

What is a value-based care model in healthcare?
The healthcare industry’s conventional fee-for-service model creates a financial incentive for providers to maximize the quantity of care they provide. In contrast, value-based payment models establish financial incentives to improve care quality, reimbursing providers based on patient health status and outcomes.

What are the primary goals of value-based care models?
The main goals of value-based care models are to improve patient outcomes and reduce provider costs.

How do these models aim to improve patient outcomes?
Value-based care models improve patient outcomes by creating incentives for health providers to deliver quality care and measure outcomes—for example, by tracking mortality rates and hospital readmissions and even surveying patients to determine their levels of satisfaction with their care quality.

How do healthcare providers create a value-based care model?
Healthcare providers looking to create a value-based care model must develop the requisite technical and operational structures and invest in new hiring and retraining programs.