System Redesign Part II: Understanding Value-Based Reimbursement

Author: Megan MacDavey

This is the second in a multi-part blog series. Check out the last one here.

Water rushing over waterfallThe organizations we fund are essential to our work, and because of this, we are paying attention to the shift to Value Based Reimbursement (VBR) which we think will have a huge impact on many of our grantees. As a refresher, VBR rewards providers who are able to show value – better patient outcomes, better patient experience, and lower cost – rather than volume.

For example, in the past, a health care provider would be paid every time a patient, Mr. Smith, was admitted, for every surgery, every doctor’s appointment, etc. Well, what if, during that hospital stay, Mr. Smith expressed mental health concerns, but no one looked to see if he was connected with a behavioral health provider or took the time to do any assessments? As a result, Mr. Smith ended up in the Emergency Department a few days later in crisis and admitted back into the hospital. Under a value based reimbursement arrangement, insurers hold providers accountable for patient outcomes. So that hospital, would (hypothetically) be reimbursed/incentivized to do a better job of treating Mr. Smith the first time around, and not be financially rewarded for Mr. Smith’s “avoidable” readmission. In fact, they may even be penalized. Similarly, VBR should (key word, should) reward collaboration by incentivizing hospitals to work with community-based organizations, like behavioral health organizations, that play an important role in reducing costly readmissions to hospitals.

After decades of building and reinforcing a system of care that responds to and rewards acute care needs, there is a lot of work required to shift toward a system that is pro-active and focuses instead on population health and prevention. We think that many of the organizations we invest and believe in have a lot to offer in this new system of care. We also think many are ill-prepared for this transition.

So what does VBR look like? I am by no means an expert. So if you are interested in some resources on VBR, I would recommend this interactive infographic of healthcare value strategies from Altarum Healthcare Value Hub, and the VBP University resource from the New York Department of Health (relevant for those outside of New York too!). But for a simplified example, from my layperson perspective, read on. There are many degrees of VBR, but here are a couple of basic examples on either end of the spectrum:

Bundled payments:
Bundled payments are low-hanging fruit when it comes to VBR. With this kind of reimbursement, insurers can “bundle” all the payments for individuals with the same condition rather than paying for those services separately. So for example, Behavioral Health Organization X could receive a bundled payment of $1,000 for each of its patients with schizophrenia to manage their outpatient care following a hospitalization. Some patients may need $5,000 worth of services in that time, others may only need $500. The idea is that on average, providers are able to keep the costs of services to that subset of patients at or below $1,000.

There’s been some evidence of success with this model, showing that unnecessary services are generally reduced and quality of care improves with additional care coordination services. [Mini rant: Under FFS insurers never used to reimburse for care coordination even though EVERY PROVIDER I’VE EVER TALKED TO finds huge value in that service. So what happens when you give providers the financial flexibility to provide the services they think their clients need to get that patient healthy and keep them healthy? Yeah, they’re going to invest in care coordination.] However, there’s also a very real concern that providers could skimp on services in favor of higher profits.

Capitation is at the extreme end of the spectrum. A provider (typically a larger health system) is paid a fixed amount to serve its patients for the entirety of their care over a longer period of time, either alone or in a network of providers. Through this model, you can share the financial risks with the insurance company and/or the financial rewards. Scale and time are really important to be able to measure whether or not capitation is successful. To date, there is actually very little evidence of success through capitation, possibly due to lack of scale and time since the first pilots were launched.

In both of these examples successful organizations in the new reimbursement landscape will need to have a clear sense of what they do best, how they know they do it well, and how much it costs to do it. This sounds pretty simple, but the truth is each of those pieces of information requires extensive data collection and analysis to understand. Redesigning the system of care through VBR is a worthy gamble that will hopefully lead to improved outcomes for people and lower costs of care, but the pain points in getting to that vision are real. In my next post I will share some takeaways from an Open Minds conference I recently attended which focused on this very issue.