From Volume to Value: 10 Essential Strategies for Navigating the Healthcare Shift

June 8, 2021

Article Summary

As the transition of healthcare payment models from volume to value takes longer than expected, healthcare organizations must balance fee for service (FFS) with value-based care (VBC). The transition to VBC will accelerate, but as FFS persists and still generates adequate margins, organizations must also continue to be successful under volume-based reimbursement.

Ten tools can help health systems balance VBC with FFS:

1. A member perspective.
2. Cautious investment in hard delivery assets.
3. Accelerated investment in digital infrastructure.
4. Innovative digital engagement solutions.
5. Pricing concessions.
6. Aligned incentives.

Value-based care

As a country, we are confronting many options and philosophies regarding accessible and affordable health insurance­—all of factor into healthcare’s shift to value-based care (VBC). Our choices include supporting state and national insurance exchanges, eliminating the individual mandate, repealing the Affordable Care Act, advancing Medicaid block grants, creating Medicare for All, modifying the Medicare program to enroll all who want it, and more.

As our communities debate the merits of these alternatives and the leaders who promote them, as a nation, we must eventually confront an issue not often broadly discussed in the mainstream: the significant challenge underlying all insurance options is an increasingly unaffordable healthcare services delivery system.

Amid these challenges, the healthcare industry is in limbo between value- and volume-based payment models, as unaffordability pushes a shift to value, but the current environment still supports volume. To survive economically, health systems must understand the factors driving and sustaining both payment models as well as strategies to balance value succeed as value replaces volume.

A Consistent Rise in the Cost of Care Delivery

The consistent rise in cost of care delivery is well documented. For many years, the annual cost of healthcare services has increased at a rate greater than that of general inflation and of the U.S. economy. As a result, healthcare expenditures as a percent of GDP now approach 18 percent—more than doubling from 8 percent of the 1980s when health insurance was far less of an issue.

Many factors contribute to the consistent rise in cost, but a few elements are critical drivers:

  • Demographic trends (e.g., aging, obesity, the resultant diabetic epidemic, prevalence of chronic conditions, etc.).
  • End of life—the understandable emotional realities and many healthcare services that neither materially extend life nor sustain its quality but sooth emotions.
  • Care variation and a stubborn presence of non-standard, suboptimal care.
  • The prolific introduction of new unproven technologies (e.g., pharmacological, diagnostic, or surgical solutions, tools, and devices) without substantive, independent, empirical evidence demonstrating better or equal outcomes accompanied by equal or lower cost.
  • A frequent failure to match healthcare service setting and healthcare teams (e.g., hospital emergency or imaging departments) with disease severity and incident acuity to ensure consistent and reliable delivery of the most effective and efficient care.
  • A care system whose component parts do not reliably and efficiently share information.
  • Perhaps most importantly, a care system that does not effectively engage the individual in maintaining or improving their health status.

With the social factors and healthcare services environment described above persisting for decades, healthcare service capitalism has thrived under service payment systems incenting more care—known as fee for service (FFS). But as a designed byproduct, the FFS model drives more service, more fees, higher costs, and more GDP consumption.

Stemming the Rising Tide of Cost: Alternative Payment Models and Value-Based Care

To stem this rising tide of cost, the largest purchasers of health services, the federal and state governments, have for years constrained FFS payment increases at rates below those of other purchasers. Other large purchasers (e.g., large employers and commercial insurers) have become increasingly frustrated with the pricing gap between fees paid by the governments and those they, and everyone else, pay. These other purchasers are in turn demanding lower rates.

Yet, despite these payment rate pressures, healthcare costs have continued to rise, implying more healthcare services at suppressed rates. In any event, healthcare organizations have experienced significant margin pressures in recent years despite total healthcare costs continuing to rise. Provider margin pressures under FFS will likely continue to intensify as fee increases continue to trail expense inflation for the foreseeable future. Alternative payment mechanisms will gradually become more attractive to providers.

Alternate payment mechanisms including VBC payment models have been introduced. They are not new—CMS began emphasizing VBC in about 2008. The VBC adoption rate, however, has been slow. Provider success rates have been slower. But to effectively address the total cost challenge, a mechanism that deemphasizes care volume through alternative, outcomes-based models seems imperative. Furthermore, providing an alternative path for viable provider margins seems not only likely but critically necessary. Providers have the training, skills, and experience to effectively address most of the critical cost drivers outlined above. They should be rewarded for doing so.

The Shift from Fee for Service to Value-Based Care: Slow but Inevitable

CMS has been a strong advocate for VBC—importantly, through both Republican and Democrat administrations. Since the latter 20th century, CMS changes in payment methods have driven health services industry payment changes. For example, cost reimbursement, prospective payment, fee schedules, and resource-based relative value system were all original designs of CMS the industry later adopted.

While it’s increasingly hard to imagine VBC payments not becoming the more prevalent means of provider compensation, adoption remains slow. FFS mechanisms will not go away quickly and remain materially important to provider financial success today. A fifth of the world’s largest economy is built based on FFS models. Change of this scale takes time. Recognition, creation, and adoption of new key capabilities and competencies will have fits and starts for sure. Expect it. But success under VBC systems will be achieved. And increased rates of VBC adoption will follow.\

Ten Strategies for Balancing Value with Volume

As healthcare makes its shift towards VBC, organizations must carefully navigate a balance of FFS and VBC payment. Ten strategies will be critical to that balance:

  1. A member perspective: Increasingly measure market share in new members, not patients. As health systems are more and more paid for managing populations, it becomes less productive to count patients. Recruiting and retaining members into care systems and products will be important as well as the cultural shift towards population health it implies.
  2. Cautious investment in hard delivery assets: Carefully examine investment that builds delivery capacity in general. Think telemedicine and digital engagement versus patient facilities and exam rooms.
  3. Accelerated investment in digital infrastructure: Invest in a cloud-based analytics platform (e.g., the Health Catalyst® Data Operating System [DOS™]) that can provide and/or support the following:
    • Real time or near-real time data on member and provider activity.
    • Data-driven care redesign.
    • Predictive modeling—intervene to guide members away from acute care episodes to more effective and timely preventative primary care.
    • Disciplined unit cost management—model and benchmark operational efficiency in all care and support settings.
    • Quality measurement tools and outcomes reporting.
  4. Innovative digital engagement solutions: Leverage technology and integrate care team redesign to strengthen member relationships, engagement, and health system brand.
  5. Pricing concessions: Establish competitive pricing to position health system services with engaged, savvy consumers expecting and demanding transparency and a total value proposition.
  6. Aligned incentives: Align physician, management, and team member compensation incentives to reward value and advance the drivers of success under VBC.
  7. Network management: Build an effective and efficient care system network and then keep member care in the network. A care system truly providing optimal value will be well integrated in both process and information. Members will benefit, clinically and financially, from being cared for in the care network.
  8. Payer-provider trust and collaboration: Build payer-provider collaboration. The resultant trust will benefit all parties and is critical to increase the adoption rate of VBC. Equitable, transparent, and fair payer contracts are foundationally necessary. Providers must perform on the value metrics and absorb the financial pain when they don’t. Payer partners must share information on a timely basis and acknowledge the economic benefits of VBC to the health plan extend beyond the members of a particular contract.
  9. Clinician and administrative alignment: Develop a governance structure to bring clinicians (employed and independent) and administrative leadership together to design strategy and build VBC management infrastructure. Both leadership and clinicians work together to design incentive pools to create the right risk/reward for their networks. Vigorously monitor performance against benchmarks by reporting on opportunities, outcomes, and results, with a dedication to driving transformation by rewarding great performers and incentivizing those who can do better.
  10. Physician leadership and accountability: Identify and develop physician leaders. Vigorously monitor system and individual physician performance against benchmarks by reporting on opportunities, outcomes, and results, with a dedication and resolve to driving transformation. Reward great performers and leaders and incentivize those who can do better.

Strategy, Partnerships, and Data Build Stability Amid Economic Uncertainty and the Shift to Value-Based Care

Healthcare payment models will continue the inevitable march to value. Persistent affordability challenges and population trends will ensure a continuously evolving and increasingly challenging landscape. A capitalistic economy, in which rules change for everyone, creates a market opportunity. Organizations who develop the competencies for success under the new rules most quickly will hold a competitive advantage over those who don’t.

While health systems can’t prudently commit wholesale to VBC, those who cling too long to FFS place at risk their long-term viability. As a result, organizations must build strategies to increase their clinical, operational, and financial agility and promote sustained investment in competencies critical under VBC while continuing to balance value and volume.

Additional Reading

Would you like to learn more about this topic? Here are some articles we suggest:

  1. The Medicare Shared Savings Program: Four Tools for Better Profit Margins and High-Quality Care
  2. Resetting Payer-Provider Arrangements for COVID-19 and the Evolving Improvement Journey
  3. Six Steps Towards Meaningful, Ongoing Healthcare Performance Improvement
  4. Value-Based Purchasing 2020: A 10-Year Progress Report
  5. Expanding AI in Healthcare: Introducing the New Healthcare.AI™ by Health Catalyst

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