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Providers need to prepare for continued shift toward value-based care payments
Sep 28, 2022
Value-based care (VBC) models continue to mature, presenting an increasing opportunity to improve patient care while driving revenue growth and bottom-line results for providers – across hospitals, health systems, or group practices. The percentage of VBC payments reached nearly 36% in 2018, up from 34% in 2017, 29% in 2016, and 23% in 2015, according to the Health Care Payment Learning & Action Network. Meanwhile, more than half of all providers are now participating in at least one Accountable Care Organization (ACO) type, including Medicare, Medicaid, and Commercial programs, according to the AMA Policy Research Perspective Report.
Traditional Medicare and Medicare Advantage have led this trend, but the same is true across all payer segments, with partial-risk and full-risk models increasing from 36% to 41% of all payments from 2018 to 2020. Looking to the future, 87% of private, state, and national payers anticipate an increase in advanced payment model (APM) activity, according to HCP LAN.
As care continues to move from institutional to ambulatory, retail, home, and virtual settings, accelerated by COVID-19, some health systems that participated in more advanced VBC arrangements have been able to make the move in a more financially sustainable manner than those who have not. The financial flexibility and stability offered by prospective payments, and often possible under shared savings arrangements, allowed organizations to develop, implement, and be reimbursed for innovative care approaches and to implement strategies not directly linked to reimbursement, according to the Duke Margolis Center for Health Policy.
Despite this continued shift, many providers are largely unprepared to participate in more advanced VBC models. As more providers look to capitalize on this shift, they must assess, develop and refine key capabilities to understand and manage risk. Given the nature of these arrangements, providers must start with their financial and actuarial capabilities, enabling them to evaluate VBC arrangements, identify opportunities on a population level and then manage toward expected financial results.
Applying financial and actuarial capabilities to identify opportunities in VBC arrangements
In moving from Pay for Performance or upside-only VBC arrangements to upside-/downside-risk arrangements, providers need to model these advanced arrangements using past clinical and financial outcomes and the ability to forecast utilization of medical services. Modeling must be two-pronged, based on creating savings on the total cost of care (TCOC) while understanding what areas need to be back-filled and what potential fee-for-service (FFS) revenue losses may occur. With their added financial risk, providers cannot confidently enter VBC arrangements without the ability to analyze medical utilization. All of this must be done while maintaining or improving the quality of care without damaging the patient experience. This modeling gives providers the opportunity for improvement from a base, historical level. While the opportunity for a given population varies significantly, depending on the current level of health management, we often see providers with approximately 5-7% of total opportunity for improved value in The Medicare Shared Savings Programs (MSSP), with some seeing an opportunity above 7% (according to PwC analysis of ACO data). Understanding how to realize this value is the next key financial capability.
Providers need to develop a sophisticated level of actuarial and medical economics capabilities, which help organizations to understand the risk of potential outcomes in their population and then minimize that financial risk. For instance, the most efficient risk-taking providers have the lowest levels of facilities claims spending (both Inpatient and Outpatient) while generally maintaining or increasing non-facility spending (according to PwC analysis of the MSSP and NextGen ACO data). Managing that spending often comes through lowering readmissions and unplanned admissions as well as shifting from procedures to lower cost settings (Inpatient to Outpatient and from Outpatient to Professional). For independent physician groups, achieving that efficiency on total cost of care through managing facility spending has little to no opportunity cost. More integrated delivery systems, however, must assess those trade-offs and understand their ability to back-fill volumes and potentially adjust go-forward capital expenditure strategies.
Achieving these opportunities requires an understanding of the clinical and operational levers that lead to cost savings. To start, providers can benchmark these opportunities against their industry peers to understand an achievable level of improvement. From there, actuarial and medical economics teams must collaborate with clinical operations to refine financial analyses and execute on the identified opportunities.
With the total opportunity and the achievable opportunity in hand, providers can make informed decisions on entering advanced VBC arrangements. Once an arrangement is in place, similar financial and actuarial capabilities can be leveraged to update projections and actively manage towards financial goals. Across the industry, we see providers developing capabilities to improve coding accuracy, capture and refresh member stratification and targeting, and deploy real-time (or near-real-time) reporting in order to effectively manage performance in VBC arrangements.
Lastly, the financial opportunity for the provider organization should inform capital investments in VBC capabilities. Providers have several routes for developing and refining these (and other) capabilities to be successful in VBC.
Providers have viable routes in the near- and long-term to build key capabilities
Depending on the particular capability, the organizational risk appetite, and the provider’s operating philosophy, PwC sees three common routes providers are taking in the market: Outsourcing to experts in capabilities, developing capabilities in-house or partnering to collectively leverage key capabilities — all of which require a strategic focus and significant but different level of investment by the organization. PwC has helped providers to achieve success via each of these routes:
- Delegate capabilities to third-party experts: To expedite the continuing VBC shift and provide expertise within a fledgling field, vendors have developed solutions that can be quickly deployed and integrated into provider operations. This route is popular when there are multiple parties in a VBC arrangement with sensitive data and information, as well as for smaller VBC operations to manage costs. Additionally, VBC partners often benefit from a third-party settlement analysis to verify performance.
- Success in these partnerships depends on having a Service Level Agreement in which the vendor is measured on performance and service quality, not simply a vendor contract spelling out legal obligations.
- Create shared capabilities between providers and risk-bearing entities: Partnerships with other providers or with risk-bearing entities enable organizations to leverage complementary capabilities and collectively achieve success in VBC arrangements. These relationships often expand the cost savings targeting and realization. Success in these partnerships is always contingent on sharing the risk and reward between partners.
- Build technological tools and resources to perform in-house: Ultimately, providers who commit to a VBC future and shift the core of their business to these models may benefit from developing and managing the key capabilities that enable them to better understand their population and succeed in VBC arrangements. We see financial reporting as the most common in-house capability developed, while more mature organizations are investing in tailored capabilities with greater data granularity than can be achieved with vendors.
- This is not a short-term solution but a long-term investment that requires strategic planning and diligent execution to succeed in the market. These capabilities pay off even if the road to VBC remains long and winding. Better forecasting translates to greater operational efficiency/productivity/capacity utilization even under FFS.
The assessment and development of key financial and actuarial capabilities are central to realizing value and profitability under more mature VBC models. In this post, we discussed these capabilities, and routes provider organizations can take to develop these capabilities. In a future post, we plan to discuss technical and operational/clinical capability development.
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