Health care costs in the United States have spiraled out of control while providing citizens with some of the poorest outcomes in the developed world. According to the World Health Organization, the per-capita total expenditure on health care by U.S. citizens in 2012 was $8,895. By comparison, using a country roughly the same size, on the same continent and in the same hemisphere, Canadian citizens spent $4,676 and were significantly less likely to die between the ages of 15 and 60 (83 men and 52 women per 1,000 in Canada compared with 130 men and 77 women per 1,000 in the United States).

Everyone who has anything to do with the U.S. health care industry is aware of numbers like these thrown around when describing the crisis that faces this country. Critics of the fee-for-service model of paying providers argue fee-for-service payments force providers to increase the volume of procedures or visits in a day, and as a result, the value each patient receives is diluted.

“The concern has been that health care costs in the United States continue to rise at an alarming rate,” says Mark Bogen, senior vice president of finance and chief financial officer at South Nassau Communities Hospital. “When you overlay that increase in cost year-to-year, you see that not only is it taking up a greater portion of the gross national product, but when economists and health care gurus and policy wonks compare the results of all that spending against other industrialized countries in terms of various benchmarks and indicators for quality of health care, we lag far behind. So generally speaking, the only way to get providers' attention to deal with that problem is to impact the way all health care providers—hospitals, nursing homes, post-acute care settings as well as physicians—“get paid.”

So payers—from the Centers to Medicare & Medicaid Services to all of the major commercial health insurance carriers—have been looking at value-based payment models as a solution to this crisis. When health care reform is discussed in the future, it's increasingly likely to be synonymous with “value-based payment.”

Navigating the tide

The concept behind value-based payment is simple: Instead of being paid for each service, health care providers will instead be paid based on patient outcomes. Like any seemingly simple solution to a health care problem, it's surrounded by a massive cloud of argument and disagreement.

Although fee-for-service remains the overwhelmingly popular payment methodology, CMS has established various value-based payment models, such as bundled payment programs, accountable care organizations and shared-savings programs, plus many more examples, and other payers also have jumped into the value-based payment pool with abandon. Right now, the industry is in a state of wild experimentation; it's a living laboratory, and one phrase emerges over and over: “throwing spaghetti at the wall to see what sticks.”

“There are many different types of value-based programs in the market,” explains Carl Rathjen, manager of network strategy and program development at Horizon Blue Cross Blue Shield of New Jersey. “Some are focused on improving overall population health management, which is a core goal of the patient-centered medical homes and accountable care organizations. At a high level, population-based programs are focused on improving care coordination, targeting our most at-risk members, and working with primary care providers to engage and empower those patients. We also have additional initiatives that focus on specific procedures, like a hip or knee replacement, which is an episode-of-care program.”

“The models we see today aren't the models we'll see nine months from now—or 12, or 18 months from now,” says Ray Desrochers, executive vice president at HealthEdge. “There's a tremendous amount of turmoil and chaos in this space. Demonstrated success from both payers and providers using these new models likely will lead to even more changes and new approaches.”

“There was a similar flurry of activity in the industry when the Clintons were trying to enact health care reform,” explains David Nace, MD, vice president of clinical development and medical director at McKesson Health Solutions. “But the model was different then, and the timing wasn't right. We didn't have the experience that we would need in pilot programs or the technology to be able to carry those programs out. We needed data, and we needed to be able to connect people. Now a lot of time has passed, and we're at it again because the cost of care is unsustainable.”

McKesson's benchmark study, “The State of Value-Based Reimbursement and the Transition from Volume to Value in 2014,” was released in June, and Nace notes that although high-value care is less costly to deliver, coordination is vital to achieve that value.

“We know so clearly that higher-value care—more preventive care, more evidence-based care, more patient-centered care where the patient is engaged—is usually dramatically cheaper to deliver,” he says. “Changing the way health care is paid for is inextricably tied to the way care is delivered, and we saw that in the study. Payers expect care to be delivered differently: more coordinated, more evidence-based, more collaborative and more patient-centered. And the expectation of the provider is that if they change the way they deliver care, they will be paid differently, and to their advantage.”

Although most experts agree that aiming for higher value in health care is a good thing, how value is defined, measured and paid for are topics of fierce debate in the industry. “You go to the hospital because you don't feel well and you want to feel better,” explains Scott Wallace, a visiting professor of family and community medicine at Dartmouth's Geisl School of Medicine. “So the question is, how much better do you get for the cost of making you better? That's the essential definition of value.”

Troubled waters

Wallace notes that not every program that's labeled “value-based” is actually shifting health care outcomes. “Somewhere along the road, someone decided that 'value' was a polite code word for 'cost-shifting,'” he says, “and these payers might be making more money because they're forcing consumers to pay more, or they're getting consumers to use less care. But there's no evidence that subscribers are in fact getting healthier because of the changes being made, and from a business standpoint, it's really important that your subscribers get healthier, because people who are healthier use fewer health care resources than people who are sick. Health is a really important strategic objective for health plans, but they're just now coming around to it.”

One strategy that Wallace has seen health plans use to increase earning reports is changing copays, charging more for access to care. “If you require people to pay more for care, then people use less care,” he says. “If they're no longer using care that was unnecessary in the first place, that's a good thing. But if they're not getting care that they needed and that was high-value, that's a bad thing.

“Some health plans over time aren't tracking these outcomes,” he adds. “They aren't looking at whether consumers are getting healthier; they're looking at how much they spent—and that's dangerous.”

Furthermore, some experts believe that the true foundational problem with our health care system isn't how providers are paid, it's how system resources are used. “Health care costs aren't escalating because of the fee-for-service problem,” says Minda Wilson, founder of Affordable Healthcare Review. “It's a different systemic problem than that. You have to look at data about how people use the health care system, when they use the health care system, and who's their point of contact when they come into the health care system.”

The lack of collaboration and alignment currently present in the system is a problem, and a huge frustration for providers, payers and consumers alike. But until recently, most providers weren't being incentivized to coordinate patient care—and if they weren't being paid to do it, then why do it? Payers are experimenting with ways to compensate providers for care coordination, and although innovative strides are being made in this area of health care, the necessary infrastructure to facilitate collaboration and alignment is woefully incomplete.

And care coordination oftentimes requires much more than managing a patient's health record. “What we're really talking about in many cases is a much broader web of socio-economic items that impact the health of a population, which heretofore have never been in the purview of health care providers,” Bogen explains. “Things like housing, jobs, transportation, diet—there is a whole host of variables that had historically been the purview of the public health sector, and the responsibility for managing those variables is being pushed onto hospitals and physicians who might not have the experience or the resources to be able to successfully handle them.

“There's a need for a tremendous investment in infrastructure,” he adds. “Care coordination, care management, information technology and other requirements—we call these types of things 'unfunded mandates,' because in order to get or keep revenue at the end of the game, you have to make significant dollar investments at the beginning, and you're at risk for most of that unless you can produce the results. And hospitals and providers in general are operating under such slim margins, so it's very difficult to find all this money to build the health care system of the future.”

Yet another problem with value-based purchasing is that in order to structure a value-based payment, payers must define and measure provider quality, so payers must collect data about contracted providers to ascertain whether the given provider is high-quality and therefore high-value for the consumer. Predictably, the metrics used to measure provider quality for Medicare are not the same metrics that commercial payers use—and each commercial payer has slightly different metrics. This is a dizzying conundrum for medical administrators, who find themselves keeping track of multiple data points across patient populations for each payer.

And agreeing on the metrics that define quality is one more layer of labyrinth to navigate. One popular method of quality measurement is defining “best practices” for a specific procedure, often a step-by-step checklist, and providers are evaluated based on their adherence to the outlined protocol.

“Quality is being defined as process compliance,” Wallace explains. “So payers are measuring the quality of provider organizations based on audits they do to see, for example, whether all of the clinicians are washing their hands. And that's the quality measure—the percentage of clinicians who wash their hands before touching a patient is a measure of quality. And that sounds great. But beyond the aesthetic, what we should care about is, did the patient get sick? Did the patient get an infection from the doctor?”

Using the previous example, although hand-washing is a good thing in and of itself, it isn't the be-all, end-all of clinical hygiene. A clinician who follows strict hand-washing procedures but doesn't launder a lab coat or tie for a week —or a clinician who's pulling out a germ-contaminated cell phone to use in between hand-washings—is still going to be an infection risk for a sick patient.

“The difference between a process measure and a health outcome is really, really important,” Wallace emphasizes.

“We don't have industry standards yet for many of these measures,” says Jennifer Searfoss, founder of Searfoss Consulting Group, “and especially not the outcome measures. That continues to be a problem.

“The question becomes, why is this hard?” she continues. “Trying to get any two physicians to agree on anything is like getting lawyers to agree. We have to actually move to evidence-based medicine, with peer-reviewed, accepted protocols for procedures.”

And although care standardization works well for many medical procedures, it's not always possible. “The problem is that some care can't really be standardized,” Wilson says. “In some ways, people are unique and have unique issues related to their health.”

Searfoss sees two more major issues with value-based payment models. “Another problem is data—because of interoperability issues, it's typically transmitted in an Excel spreadsheet. So you're getting stale data that's easily corruptible if somebody accidentally moves a column, for example. There are major problems with the data that makes it unusable. And the third thing is that doctors oftentimes will think they have a system that can track whatever they're trying to do, and they might not. You're only as savvy as your system, and there are certain systems that don't allow you to pull out near-time data in a usable format.”

“One of the worst-kept secrets in the industry is that many payers are running on old technology—systems that are 20, 25, 30 years old,” Desrochers says. “A lot of these organizations are having trouble getting these systems to administer value-based models. And providers are having the same issues, as the majority of the practice management systems that they are currently using weren't designed for any of this.”

“Another issue with figuring out the right quality metrics is that payers are trying to measure things like patient experience,” Wilson says. “And the things that go into a patient experience might not be related to the success of the patient's procedure or the quality of care the patient received, it might be related to whether or not a nurse had a bad day—or it might be a function of the patient's own inability to communicate. Maybe you have an articulate, communicative patient versus a withdrawn, non-communicative patient. And you can't fire the nurse for having a bad day.”

And as all of these shifts and changes are happening to the industry landscape, health care providers are still being compensated primarily through fee-for-service reimbursement, so they must also manage their business as usual in the midst of chaos.

“We're in a transition period,” notes Bogen, “so providers have one foot on the dock and one foot on a moving boat, so to speak—they have to keep one foot in the present system, which is still primarily a volume-based reimbursement system, and as the industry transitions, they'll have to move into the value-based payment systems. It's not easy from a provider standpoint.”

Safe harbor

Although no one yet knows where the sea change of value-based payment is headed, there's no doubt that this is a trend with longevity.

“I think there will continue to be an ongoing movement to reward care providers for maintaining health rather than treating sickness, and we'll find new and better ways to structure payments around keeping people healthy,” Wallace says.

Annette Dowdle, president of the employee benefits practice at Hub International, notes that brokers should know the ins and outs of value-based payments because it's going to impact clients. “Brokers need to understand how value-based payment works, what the potential savings and shortcomings of such an arrangement are to the client, and the incentive basis on which the providers are getting paid. There needs to be a philosophical alignment between the structure of the payment and the culture of the client,” she says. “And if an employer is looking at two possible insurance providers, one with a value-based contract and one without, the broker will need to be able to explain those two contracts to the client, in detail and with different cost scenarios.”

Joe Kuehn, a partner in the health care practice at KPMG, says that understanding how value-based payment work is key for brokers because value-based payments eventually affect everything from networks to premiums. “Brokers should understand how health plans are adjusting to this new normal and what behavioral incentives are being used in their benefit plans, designed to encourage compliance with care management and care coordination efforts and make us more responsible for our own health. And as these contracts take hold and savings are being generated, providers are benefiting because they're reducing costs, and health plans are benefiting because claims payments are being reduced, and potentially, premiums are not going up as quickly—or at all. And that should translate back to the employer or whomever is purchasing that insurance plan through that broker. It might also mean a change in commissions for the broker.”

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