Value-Based Care as Integrated Care
Blue Cross announces value-based agreements in Michigan and we are skeptical
Modern Healthcare reported this week that a value-based care agreement is being created between Blue Cross Blue Shield of Michigan and several provider organizations in the state. We hear a lot about value-based care as a trend for healthcare payments, so it’s worth getting into the details about what’s happening here, and why it may or may not succeed in general.
What is value-based care?
It’s a way that insurers agree to compensate providers for their services, in which the provider takes on some financial risk, and receives some financial upside in return.
A simple value-based arrangement might look like this:
An insurer agrees at the beginning of the year to pay a fixed amount to a provider for all of its members
If the provider treats those members efficiently, at a low cost, it keeps all of the savings (i.e. the financial upside)
If the provider treats those members inefficiently, at high cost, it bears those costs and does not profit (this is the financial downside, or risk)
These arrangements differ from the more common ‘fee-for-service’ model, in which the insurer is billed for each service rendered by the provider. Under this arrangement, the insurer is the one bearing nearly all financial risk.
From an insurer’s perspective, a value-based system can be attractive, because under the fee-for-service model, they are responsible for the high costs, and don’t have any agency to control those costs. Moreover, the provider is actually incentivized to provide as many services as possible, even if some are unnecessary, because more services always results in more revenue. This setup hurts insurers, and it follows that insurers want to find a system that in which providers are incentivized to reduce costs. This is why what’s driving the shift to value-based contracts.
Complications
As with anything, there are some downsides to value-based care. First, because the financial risk is shifting from the insurer to the provider, the provider needs to be compensated for taking on that risk, meaning they might need to charge higher rates overall. Risk-bearing is a core strength for insurance companies; they’re good at measuring risk and mitigating it (that’s what all the actuaries are for!). However, it’s not necessarily something hospitals are comfortable with. That makes for an awkward fit.
Blue Cross knows this:
"If you're a provider, that's a scary concept to know I might have to pay something back," said Steve Carrier, Blue Cross' senior vice president of network management and provider partner innovation. "We have a rule of thumb and that rule of thumb is we want enough risk in the equation to make them pay attention. ... (but) not enough risk to put them out of business."
The second downside is that, because providers are now incentivized to provide care more cheaply, they may under-treat patients, or recommend against necessary treatments. Indeed, to take the argument to its limit, imagine a hospital that was guaranteed a fixed payment for the year, regardless of the treatment it provided. The optimal profit strategy in the short term is to simply close its doors and treat nobody, keeping variable costs at zero. Less extreme versions of this outcome are likely when the incentives dictate them: tests not ordered, recovery stays shortened, and so on.
Insurers need to be extremely careful in this case that health outcomes do not worsen, and the Modern Healthcare article linked above hints at some efforts on that front:
To receive shared savings payments, healthcare organizations also must meet all of more than a dozen agreed-upon quality metrics
[….]
For commercial patients, Blue Cross has 14 designated quality measurement targets that healthcare organizations must hit to receive shared savings. Medicare Advantage patients have 14 slightly different quality measurements. The measurements could change in the future based on Medicare or Blue Cross priorities.
But this is more of a patch than a solution to the underlying issue. Measuring healthcare quality is notoriously difficult, and it’s absolutely going to be possible for a provider to meet the contracted targets while skimping on care, if they wanted to. As a result, it also takes a certain degree of trust for an insurer to partner with a provider in this manner. The article notes that even the larger payers that have tried this approach have done it on a small scale, and that’s likely because not all providers are equipped to take on the risk, or can’t credibly commit to good health outcomes.
And finally, even the with the limited set of partners that Blue Cross is taking on here, Blue Cross has to invest in a lot of support, in the form of both management and labor (emphasis mine):
One of the challenges facing hospitals and doctors under the [value-based] system is understanding the health risks of their insured population and helping patients prevent serious and expensive medical problems, Carrier said. To help providers, Blue Cross has added about 20 additional medical directors and support staff to work with the contracted providers on understanding patient claims and outcome data.
Alignment
Taking the contract as a whole, we have Blue Cross and their contracted providers essentially sharing four big things:
Financial risks
Patient outcome risks
Data
Managerial oversight
That’s quite a lot of sharing! It’s becoming a theme on this site, but it starts to look like a mild case of…vertical integration. Indeed, in comparison to integrated payer-providers like Kaiser Permanente (KP) or Intermountain, the structural incentives for cost control and outcome control are very similar.
It begs the question of what the right level of integration is when it comes to providing medical care (leaving aside drug benefits for now). I’d argue that arrangements like the Blue Cross contract in Michigan are unlikely to perform as well as the fully integrated systems, with some minor exceptions.
First, the integrated systems (like KP) have a cleaner incentive for providing good care, even if that care needs to be relatively expensive. In the Blue Cross case, we noted that the provider hospitals are incentivized to provide as little care as possible in order to save money, and that Blue Cross must guard against this with an awkward oversight mechanism.
KP doesn’t have that problem, since the payer controls the provider directly through ownership. Of course, KP would still like to spend as little as possible to keep costs down, but it’s held in check by the need to attract members. Poor care would mean fewer members, and KP would feel that cost severely.
The second reason that integrated players are better-positioned is that their providers are already organized around this incentive system, while the providers in Michigan are not. That means the Michigan hospitals, for example, will have more trouble realizing the financial benefits of their contract than would a hospital owned by KP.
As a quick example of how this might work, imagine a hospital that is operated on a fee-for-service model. This hospital has learned to maximize profit by treating a high volume of patients, and keeping a large number of beds filled. Consequently, staffing is high and bed counts are high in order to maximize capacity. Significant spending is done on advertising to ensure that capacity is put to use. Doctors may be paid according to the patient volume they treat, and may have chosen their jobs specifically for the high opportunity to earn. And so on. Every managerial decision has been made with an eye toward maximizing patient volume.
Now take the same hospital, and flip the incentive to minimize treatment: the whole system has been moving in one direction, and needs to be stopped and re-organized in another direction. In fact, the hospital may even still be admitting many patients with insurance that pays fee-for-service, so there are mixed incentives, and the hospital can’t optimize for either one. It’s a strategic trap, but one that KP hospitals don’t have to worry about.
Outlook
This is not to say that fully vertical systems are a panacea: they of course have their own drawbacks. For one, they limit patient choices (because your insurance dictates a narrow range of providers that you can see). However, value-based care contracts that create only a partial alignment between payers with providers contain many of the same drawbacks, and are likely to fall short of realizing the same benefits.
As for fee-for-service, the misalignments in that system are extremely clear, and its poor track record as the dominant system speaks for itself. I’m happy to at least see steps taken to move away from it as quickly as possible.