Value-based care is the future of health care, but we need leadership to get there

The annual government “strategy” to contain the cost of health care by cutting rates misses the cause of the problem: the fee-for-service (FFS) reimbursement model and its disconnect from outcomes that matter. By paying providers based on the number of services they deliver to each patient – tests, examinations, images, etc. – FFS incentivizes providers to deliver more services. It effectively guarantees increasing costs unrelated to outcomes. This broken model, in combination with CMS’ efforts to contain costs, promises to cripple our health care delivery system unless providers transition to a value-based care model – and soon.

Between 2001 and 2023, inflation-adjusted Medicare physician payments declined 26%, even as the cost of providing services nearly doubled. Physicians are opting out of Medicare with increasing frequency because of the financial loss associated with treating Medicare patients. Beyond this, the complex FFS billing system has forced physicians to spend almost half of their day filling out electronic health records and other paperwork, with only 27% of their time going to direct patient interactions. The harsh realities of working as a physician in this environment have forced many to forgo independent practice in favor of joining hospitals, where 74% of physicians currently work.

While hospitals offer some temporary financial shelter for physicians, they too are struggling with reimbursements that not only haven’t kept up with inflation but have declined in real terms. Hospitals receive just 82 cents for every dollar they spend caring for Medicare patients. With more than 36% of the U.S. population insured by Medicare or Medicaid, hospitals were underpaid by $99.2 billion in 2022 alone. The 2024 reimbursement change is expected to increase payments by $2.2 billion, but estimates show Medicare margins continuing to shrink. The resulting erosion of hospitals’ financial base is a key driver of the provider consolidation that has been going on for over a decade.

That consolidation demonstrates how hospitals have turned to mergers as a way to increase their market power so they can push back on the reimbursement rates offered by big payers. According to Department of Justice and Federal Trade Commission standards, 80% of markets are “highly concentrated” when it comes to providers. The increased reimbursements extracted from payers by providers based on their market power helps to offset the losses sustained from government contracts, and it also raises the cost of commercial insurance coverage. Consolidation dulls competition and raises the cost of commercial insurance coverage without any corresponding increase in the quality or availability of care. One thing seems certain: The biggest loser in the ongoing battle between big health care corporations and big insurance companies is the consumer.

As I warned in my last book, Bringing Value to Healthcare, the industry is headed to a breaking point. The logical conclusion of the current situation will be an oligopoly in which a small set of health care corporations provides care to the majority of consumers and face off against a similar oligopoly of payers. In fact, it is even possible that these provider organizations will reach a point where they become so large that they can dictate to CMS what they will be paid, rather than the other way around. As for the consumer, the prospects of a more responsive health care system that actually works to keep people healthy just fades away in the sunset.

Fortunately, there is a way out of the current quagmire – but it requires a broader perspective than playing whack-a-mole with every new symptom of a broken model. It’s time to shift the way we think about health care delivery. A value-based care model is the future of a successful industry.

A value-based approach focuses on providing the right interventions for patients at the earliest, and generally least costly point in the care continuum. Rather than incentivizing hospitals to fight for more dollars and leverage, it provides incentives to keep people healthy – not just treat them when they are injured or sick. A value-based model ties payment to outcomes and prudent utilization, and measures success based on patient outcomes rather than relying on a “test more, treat more” payment model. Rather than perpetuating a system that clogs doctors’ schedules with unnecessary paperwork and drives up medical bills without transparency, the value-based model allows doctors to focus on providing patients with the best outcomes at the lowest price.

CMS’ laissez-faire approach to fixing the payment paradigm has contributed to the slow-motion train wreck that is U.S. health care. Inertia from CMS and the resistance of provider conglomerates has effectively kept FFS payment models in place. The Numerof Population Health Survey findings illustrate this point dramatically – the median percent of revenue earned by provider organizations through contracts tied to outcomes and prudent utilization has remained flat for 7 years at 10-15%. For years, CMS has stumbled through one indecisive experiment after another, looking for a reimbursement approach that would make providers accountable for costs and outcomes yet would not be seen as threatening. Currently, CMS seems paralyzed, unable to even conceptualize a plan to avert what appears to be an impending crash. Until CMS is willing to demonstrate decisive leadership and disrupt this status quo, little is likely to change.

CMS must take the lead in pushing health care organizations toward alternative routes. Value-based care offers a path out of the health care system’s current morass. By putting the consumer first, hospitals and payers can create an environment where health and profitability can go hand-in-hand. We can only hope that that such leadership emerges before the failure of the current system becomes impossible to ignore.

Michael Abrams is a managing partner at Numerof & Associates, a leading strategy and implementation consultancy focused on industries in transition. Numerof has served as a consultant to Fortune 50 corporations, major pharmaceutical and medical device companies, healthcare delivery institutions, the financial services industry, and government agencies for over 25 years. Numerof released The State of Population Health: Eighth Annual Numerof Survey Report, which provides the industry’s most comprehensive look at the progress of U.S. health care delivery organizations in integrating value-based health principles into routine operations. For more information, visit Numerof’s website.