Is Value-Based Healthcare An Illusion?
The healthcare system is transforming. For the past several years, industry insiders have been abuzz about the movement from fee-for-service (FFS) to value-based payments (VBP). But how real is this transformation? Are we in the era of Value-Based Healthcare? Maybe technically, but it’s not (yet) the paradigm shift many people are expecting. In this post, I’ll lay out the facts for value-based payments and then discuss where the opportunities are for investment or new company creation.
Briefly: value-based healthcare refers to the idea that payments should be tied to health outcomes, not activities. Clinicians are thus incented to get the patient healthy as cost-effectively as possible. Contrast that with fee-for-service where clinicians are paid per activity. Under that system, they are financially incentivized to maximize the number of visits and treatments per patient, regardless of outcome. On the spectrum of healthcare payments, fee-for-service is at one end and full capitation is at the other.
The value-based healthcare revolution was led by government plans — Managed Medicaid and Medicare Advantage. Under both programs, the government (state and federal, respectively) pays a capitated (risk-based) rate per beneficiary to a health plan, who manages the healthcare costs of the member and is at risk if the patient’s medical costs exceed the fixed rate. Conversely, they also profit if medical expenses are less than the capitated rate.
The value-based payment movement got a consequential boost in 2015 as the Centers for Medicare and Medicaid (CMS) laid out the evolution of their payments from FFS to VBP. CMS articulated the goal of 30% of Medicare payments tied to quality or value through Alternative Payment Models (APMs) in 2016, rising to 50% by 2018 (category 3 and 4 in the graphic below). Additionally, 85% of CMS payments should be tied to quality or value in 2016 and 90% by 2018 (categories 2–4 in the graphic below).
Importantly, category 1 and 2, comprising >90% of total Medicare spend in 2013, are NOT alternative payment models. They are FFS. For category 2, the average incentive tied to quality was less than 2% of hospital revenue. Thus, while technically “value-based payments,” it’s not yet the paradigm shift the industry has been discussing. Indeed, a recent Health Affairs study found that in 2013, 94.7% of all physician visits were FFS, up from 93.4% in 2007. KPMG is more bullish about our current state and found that 30% of hospital revenue is tied to any value-based payment arrangement, a number they expect to increase to 58% by 2020.
The Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) also consolidated the many quality incentive plans (PQRS, VBPM, Meaningful Use) into one Merit-Based Incentive Payment System (MIPS). The goal is also to increase the revenue at stake with these payments from <2% today to 9% by 2022, and include downside as well as upside participation from providers. This should move category 2 “FFS with a link of payment to quality” closer to the APMs (category 3 and 4) and closer to the promise of VBP.
ACOs as VBP arrangements
In the investment community, a lot of attention is paid to Accountable Care Organizations (ACOs). ACOs are groups of doctors, hospitals, and other health care providers, who come together voluntarily to contract for and provide coordinated high quality care to their patients. These relationships can be highly penetrant, meaning the stakeholders are tied together across all of their patients or could be looser, covering only a portion of all patients that each separate stakeholder treats (the latter being more common).
Like value-based payments, ACOs haven’t yet achieved their promise. In fact, many of the early Pioneer ACOs (a Medicare program) have dropped out, citing problems with the incentive calculations that make it difficult for high-performing institutions. According to KPMG and Deloitte, at the end of 2015, there were 700 ACOs in the United States, covering 23 million people (or <10% of US covered lives). Of these 700, 434 were focused on the Medicare Shared Savings Program (MSSP). While MSSP is moving towards VBP, 412 of these ACOs were track 1, meaning they took upside only and did not share any downside cost risk. While only 22 MSSP ACOs will accept downside as well as upside risk, that number is up from 3 in 2014, so there is major progress! In total, MSSP ACOs cover 180,000 healthcare professionals and 7.7 million medicare beneficiaries (approx 15% of total Medicare beneficiaries and 25% of Medicare FFS beneficiaries).
On the commercial side, more than 130 commercial insurers have entered ACO arrangements, with over 250 ACOs. These commercial plans cover approx. 15 million members, or 5% of US covered lives.
How are providers reacting to VBP?
All hospital leaders talk about VBP and admit it’s where US healthcare is going. But, most hospitals still haven’t adapted to this new world.
Currently, most value-based payments are built on a FFS infrastructure, with audits/true-ups at the end of the year, instead of real-time. This helps hospitals enormously as they can bill according to their current FFS practices. Yet, as hospitals begin to take more meaningful downside risk, these annual audits will not provide leaders timely enough information to run their operations responsibly. (The average profit margin for a hospital is 4%…and they’re heading towards 9% incentive payment/revenue reduction…meaning it could easily push them into the red!)
In the new world, hospitals need better analytics capable of accurate risk assessment and quality scoring. They are turning to companies like Elation and Moxe Health, which offer a better way to extract the quality and risk adjustment data from their EMRs, and can do so in close to real time. Large HIE companies like Health Catalyst will also do well in this world as their analytics are designed for these new challenges. For hospitals who have not yet spent millions on a new HIE, companies like Sansoro Health can create a coordination layer that offers many of the benefits of HIE, including the analytics necessary for VBP, without the cost or the data replication required with a traditional HIE implementation.
Where are the interesting businesses being formed?
We’re an infrastructure fund. With any paradigm shift, new infrastructural opportunities should be created. As you can see below, the capabilities required of the plan and of the provider are inverting. Providers will need to look more like plans. The infrastructure for plans will not change much as their systems can already evaluate shared savings, shared risk, and global capitation pretty well. Plans will have to develop capabilities around bundles, and companies like Aver should help. We believe this area is under-resourced and we are actively looking for more investment opportunities.
In contrast, providers will need to significantly upgrade their systems to be able to participate in the VBP world. Current billing systems are all based on FFS — they track each healthcare intervention for a patient, not health outcomes. They are built to encourage more care, not less. Most hospitals cannot perform activity-based costing and thus are unable to analyze their profitability on a case or patient level. They are unable to accurately price risk and evaluate value-based payments that are more sophisticated than shared-savings.
We believe that bundles and shared risk present better investment and company formation opportunities than global capitation. (Global capitation is essentially an actuarial calculation.) Particularly with bundles, we are interested in companies that calculate and administer the payments to each clinician/entity.
CMS is leading bundles today, and are doing it on the FFS infrastructure with year-end audits and true-ups. As a result, everyone involved in the bundle is paid based on FFS, and at the end of the year as the risk payments/penalties are calculated, participants in the bundle share according to pre-set algorithms (which differ by contracting entity). We expect this to change over time to near real-time bundles, as is the case with some commercial bundles today. Under that system, the contracting entity (usually a hospital) must be able to accurately calculate the amount each provider should receive, including risk incentive, by patient and disburse those payments to the relevant entity. Additionally, as described above, each hospital must be able to calculate what it costs to treat each individual patient! We are actively looking for companies in these two spaces as well.
While over the past few years the shift to VBP has been more talk than reality, that is changing. The infrastructure will lag as we slowly transition away from old FFS-based systems and processes. But, hospitals must be equipped to do business in this new world or they will either lose volume to those who do or mis-price their services and destroy their bottom line. We are looking to invest in companies that are building the new infrastructure, especially around bundle design, payment disbursement, and activity-based costing.
