Value-Based Services (VBS) in Healthcare: Revolutionizing Payment Models for Better Outcomes and Cost Control

This is a thing that many people in the White House oppose but many others strongly support—“Value-Based Services” (VBS).

“Value-based payment services” is hardly a novel term in China. According to encyclopedic definitions, in the context of advertising, advertisers do not pay based on ad placement duration, but rather according to the actual outcomes generated—such as the number of actual users or quantified potential leads. The most typical example is Baidu’s paid search ranking, where payment is calculated based on click-through volume. However, in the realm of healthcare services, this concept remains exceedingly fresh and unfamiliar.

If one must draw a connection, it is impossible not to mention the Affordable Care Act (ACA), signed into law by President Obama in 2010. One of its key provisions was to reform payment models, replacing the traditional fee-for-service approach—which reimburses based on the volume and variety of services provided—with value-based care. This very issue sparked intense political battles between the Democratic White House and the Republican Party. Since then, the concept of “value-based care” has gained significant prominence, firmly entering the radar of industry professionals, particularly hospital administrators.

Why Has the New Payment Model of “Value-Based Care” Emerged?

Let us first review the current healthcare security system.

This system primarily involves four key stakeholders: the government, healthcare providers, insurers, and patients. The most prevalent relationship among them is one of interdependent cooperation. For instance, patients seek medical care at healthcare institutions, insurers provide reimbursement, and the government offers subsidies to healthcare providers. All these processes are initiated by patients’ demand for medical services.

Among these, the most prevalent and impactful payment method within the healthcare security system is Fee-for-Service (FFS). Under this model, healthcare payers (including the government, insurance companies, and individuals) reimburse costs based on itemized bills for the medical services received by patients at hospitals. The amount paid is determined by the prices of individual service items and the volume of services provided.

In layman's terms, it is similar to piece-rate wages: the more "work" you do, the more you get paid.

However, under long-term market validation, various negative impacts have inevitably arisen, such as incentivizing healthcare institutions to provide excessive services, increasing management costs for all parties, and prompting healthcare institutions to compete in acquiring high-end diagnostic and treatment equipment. These costs strictly adhere to the principle that “the wool comes from the sheep,” meaning they are ultimately passed on to patients, making medical care increasingly expensive.

To address this issue, the healthcare security system has implemented payment method reforms, introducing capitation, case-based fixed payments, per-service-unit fixed payments, global budgeting, and Diagnosis-Related Groups (DRG)-based prospective payment, as well as mixed payment models dominated by per-service-unit fixed payments and those dominated by global budgeting.

As can be seen from the figure above, the reformed payment methods each have their own advantages and disadvantages in terms of cost control, service quality, and service efficiency. However, they fall far short of achieving a patient-centered collaborative mindset; issues such as induced hospitalizations, fragmentation of care, and shirking of critically ill patients remain highly prevalent.

Moreover, the most objective reason lies in the continuous rise of medical costs driven by a confluence of various factors.

These factors have driven the advent of “Value-Based Services” (VBS), which evaluate outcomes based on improvements in patients’ health following treatment.

The traditional interpretation is to establish a hospital value-based purchasing program that rewards hospitals delivering high-quality medical services while reducing payments to underperforming institutions. For Medicare Advantage plans administered by insurance companies, the introduction of “Star Ratings” encourages insurers to better focus on the health status of enrollees, emphasizing prevention and service quality. The government provides additional bonuses to highly rated insurance plans.

In layman's terms, it means making it easier for patients to seek medical care.Access better services, achieve superior outcomes, and incur lower costs.

In the "value-based care" model, the income of doctors and hospitals is determined by the outcomes of patient treatment rather than the volume of services provided.

Can this nearly obsessive ideal payment model successfully transform from the traditional “fee-for-service and fee-for-volume” approach?

Transitioning from FFS to VBS is a long-term endeavor.

Frankly speaking, this is truly a matter that takes years of persistent effort.

Moreover, this transition will cause significant harm in the short term. To achieve value-based goals, hospitals will have to reduce staff utilization, cut back on corresponding diagnostic and therapeutic services, and decrease revenue, among other measures. The following simple chart illustrates this trend.

*Note that there is no specific time unit to denote the transition period from FFS to VBS, as it remains uncertain how long this process will take.

Note that there is no specific timeframe to mark the transition from fee-for-service (FFS) to value-based services (VBS); no one knows how long this process will take. What we do know is that there will be a transitional period during which total revenue may decline, as the pressure on hospitals’ FFS-derived income will outpace the revenue generated through value-based payment models.

Certainly, before the complete transformation is successful, it is a continuous attempt to replace the traditional model.

The Four Most Common Approaches in the VBS Model

Currently, the four types of organizations that most frequently use “VBS” to replace traditional fee-for-service payment models are: Accountable Care Organizations (ACOs), Patient-Centered Medical Homes (PCMHs), Pay-for-Performance (P4P), and Bundled Payments.

1) Accountable Care Organizations (ACOs)

Accountable Care Organizations (ACOs) are voluntarily formed by multiple physicians, hospitals, and other healthcare providers in collaboration with managing entities (including but not limited to payers) to deliver comprehensive healthcare services to a designated population. This population is assigned by the Centers for Medicare & Medicaid Services (CMS) based on a variety of factors, such as Medicare beneficiaries’ residence and their history of visits to specific physicians and hospitals; however, patients retain the right to freely choose where they receive care. While meeting established quality-of-care standards, if medical expenditures remain below budget, the ACO receives greater shared savings incentives proportional to the amount saved.

According to the latest data released by CMS (April 2015), there were over 400 ACOs nationwide, covering nearly 8 million people. Although some ACOs have withdrawn in recent years, the overall number of ACOs continues to grow rapidly.

2) Patient-Centered Medical Home (PCMH)

This is an advanced healthcare model that relies heavily on information systems, in which primary care physician-led teams provide patients with comprehensive healthcare services, including prevention, diagnosis and treatment, chronic disease management, and mental health services.

Although the Patient-Centered Medical Home (PCMH) is based on the primary health care model, it differs from the general practitioner “gatekeeper” system; specifically, patients are not subject to restrictions on medical expense reimbursement even if their choices do not follow physicians’ recommendations. It is reported that PCMH is currently being implemented in nearly 50 programs across 30 U.S. states.

3) Pay for Performance (P4P)

Pay-for-Performance (P4P) links payment methods to factors such as healthcare quality, service efficiency, and patient satisfaction. Currently, in the income structure of general practitioners in the United Kingdom, 20% is derived from performance-based incentives tied to service quality and outcomes, 75% comes from capitation payments, and the remaining 5% is attributed to other special services.

4) Bundled Payments

This is a payment method that falls between fee-for-service and capitation. Unlike traditional fee-for-service, the core of bundled payment lies in linking health insurance reimbursement to the final outcomes of medical treatment, i.e., the quality of care.

Comparative Analysis of Several Payment Methods

The four models described above are currently the most prevalent VBS payment methods. It is worth noting, however, that apart from sharing a common objective, there is no uniform standard; a payment method is considered “correct” as long as it is suitable for all applicable scenarios.

Experience in transitioning to Value-Based Services (VBS) suggests that the process is akin to a journey, with multiple routes available to reach the destination. Determining the optimal “route and mode of transport” for the VBS model presents numerous challenges. To operate effectively within payment models, healthcare institutions should leverage their market position and core competencies. This endeavor directly impacts patient interests, physician motivation, and hospital costs and revenues.

To this end, healthcare institutions can invest in the following areas to rebuild the VBS model:

Information Technology Innovation Driven by the VBS Model

According to a survey by McKesson, an electronic medical records and healthcare IT vendor, most payers and providers expected value-based service models to surpass fee-for-service and volume-based payment models by 2020. However, healthcare organizations lack the clinical analytics and business intelligence tools needed to keep pace with this rapid transformation. Although 81% of healthcare institutions already derive part of their revenue from value-based services, the absence of data standards and outdated health information have made it extremely difficult for up to one-fifth of these institutions to transition to Value-Based Services (VBS). There is an urgent need for next-generation healthcare IT solutions to successfully facilitate the shift toward value-based care models.

Therefore, advancing information technology infrastructure is one of the essential prerequisites for reforming payment systems. Healthcare institutions must have a relatively comprehensive hospital information system (HIS) as support, particularly systems closely related to medical fee payment methods, such as electronic medical records (EMR), cost accounting, charge management, and outpatient and clinical physician workstations.

Fig. Innovative IT Applications in Hospitals

Objectively speaking, while the value-based payment model may appear to be an obstacle on healthcare institutions’ path to revenue growth, it actually serves as a powerful driver for enhancing medical quality, improving clinical outcomes, and achieving efficient and rational cost control.

You will see that healthcare providers who pioneered the VBS model have gained an early advantage. As the market shifts further toward value-based care, those unprepared risk being phased out, while those already on this path stand to gain a competitive edge. Therefore, understanding how the model works is the first step; how to embark on this journey depends on the path chosen by each stakeholder.

[References]
Cai Jiangnan. On the Reform of Medical Payment Methods [J]. China Social Security, 2011(12).
Wu Xing. Value-Based Payment: An Ideal Healthcare Payment System? [J]. Global Medical News. October 2015
Zhang Hehua, Zhao Yuhong. Medical Home and Its Implications for Health Management in China [J]. Chinese Primary Health Care. November 2013
Zhang Baochang. Analysis of the Impact of Medical Expense Payment Methods on Medical Costs [J]. Hospital Management Forum. 2013
Bobbi Brown,Jared Crapo.The Key to Transitioning from Fee-for-Service to Value-Based Reimbursement
JulietM.Spector,BrianStudebaker,EthanJ. Menges.research-2015-10-provider-payment-report

Author | Mo Renying (Researcher at VCBeat. WeChat ID: moluo1111)