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 allow providers to reduce unnecessary costs and 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, accurate, up-to-date data will be crucial. Health organizations 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.

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 ensuring that all Medicare beneficiaries and most Medicaid beneficiaries are enrolled in value-based programs by 2030.
• Health organizations will need to accurately measure quality and costs. Without a clear understanding of the costs associated with a particular type of patient or the treatment of a particular disease, organizations may enter into a contract to accept a per-patient sum that doesn’t cover the real cost of treatment, let alone provide a measure of profit on top of that.

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 health organizations fail to meet benchmarks.

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.

The Medicare Shared Savings Program is a voluntary program wherein providers form groups called accountable care organizations (ACOs). These Medicare ACOs take responsibility for a defined group of beneficiaries to improve the care they receive, largely through better service coordination. One example is Medicare’s ACO Realizing Equity, Access, and Community Health 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. For example, health organizations 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, in the UK the RightCare program includes a toolkit that local health providers can use to speed up diagnosis and treatment and improve access to specialist care for patients with progressive neurological conditions.

Goals for Medicare Value-Based Payment Programs

Source: Centers for Medicare & Medicaid Services

The 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.

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 organizations 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 ensure that patients receive the care they need but aren’t subjected 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, organizations 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.”

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.

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 partners in their own care is one of the keys to reducing 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.

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 learn more about 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. Health organizations of all sizes will need to invest in data platform, analytics, and interoperability software or services, as well as the associated training, to perform those functions.
• Complexity of measuring quality and outcomes. Many health organizations 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 health organizations 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 organizations 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 Medicaid and some Medicare patients to be covered by value-based care initiatives. The CMS Interoperability & 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.

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Value-Based Care Model FAQs

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.