What Is Value-Based Payment? A Guide to the Reimbursement Model

Value-based payment is a reimbursement method for the services provided by nursing homes, hospitals, skilled nursing facilities, home health facilities, and primary care practices. In the past, reimbursement was a fee-for-service model, but in recent years, payers have started shifting to a value-based payment system that focuses on the quality of care rather than simply the quantity. The goal is to encourage better care for patients.

And it’s doing just that. According to the Centers for Medicare and Medicaid Services (CMS), transitioning to a value-based payment system has three main goals: better care for individuals, better health for populations, and lower medical costs. While CMS has been leading this movement, most other payment providers are following suit because outcomes are improving and care is better coordinated. This reimbursement method for medical providers also creates more responsibility for cost savings and providing quality patient care. Providers will need to be well-versed in the goals, measurements, and team approach of this system.

What Is Value-Based Care Payment?

Value-based payment shifts how all medical providers think about treatment by incentivizing quality care and improved outcomes rather than just paying for all services provided to a patient. In 2021, The Commonwealth Fund published a healthcare study in 11 high-income countries. Despite spending more of its gross domestic product on healthcare than any other country, the United States ranked last in “access to care, administrative efficiency, equity, and healthcare outcomes.”

Value-based care goals are quality, cost, and equity, and providers can lose out on bonuses or reimbursements for services that do not meet these standards. Providers must thoughtfully consider what testing, procedures, and treatments are needed and will create better outcomes for that individual patient. They are also required to provide timely intervention and respect the needs and wishes of each patient by soliciting their input on treatment plans.

The CMS aims to have nearly all Medicaid and Medicare beneficiaries in a value-based payment model by 2030. As of 2019, only 38% of healthcare payments in the United States flowed through a value-based system. The transition takes time, but the outcomes are already showing great improvement. It was estimated in 2020 that value-based payment programs saved $4.1 billion that year alone, and they had an average quality score of 97.8%. This is encouraging data that supports a move to value-based payment systems over the traditional fee-for-service model for providers.

What’s the Difference between Value-Based Payment and Fee-for-Service?

The traditional model for payment for health care services has been fee-for-service. In this structure, providers detailed the treatments, procedures, and tests, and then payment was made for each service after it was delivered to the patient. Because services were itemized, providers were reimbursed for the quantity of the care rather than the quality. This unintentionally incentivized ordering more testing and more treatments. Services between various providers didn’t need to be coordinated since everything was billed separately by each provider.

Fee-for-service payment systems have no built-in measures for monitoring outcomes or the quality of the care provided. Results are completely divorced from the services. And even though healthcare spending continues to skyrocket, outcomes across populations have yet to improve. Value-based payment models were developed to put the focus back on the quality of care, efficiently providing treatment to unique individuals, and simplifying the complex and time-consuming billing system that healthcare providers are currently saddled with.

There’s another benefit of value-based payment systems: a renewed focus on prevention rather than treatment. Value-based care incentivizes avoiding hospital admissions and hospital-acquired conditions, closing gaps in care via annual wellness visits, and fully understanding the lives and needs of patients with thorough assessments. It places added value on patient engagement in their healthcare decisions.

What Are the Value-Based Program Models?

CMS has developed three models of value-based care programs. While CMS is leading the transition to value-based care, most other healthcare companies are also implementing these changes to save money and improve patient care.  The three models vary by risk management and how financial savings or losses are divided.

Accountable Care Organizations (ACOs)

These are coordinated networks of care providers, including physicians, hospitals, pharmacies, home health agencies, and others. Their shared goal is coordinating care for patients in specific geographic areas or with certain health conditions. These collaborative relationships avoid duplication of effort, consider the entire health history of a patient, and create a cohesive plan of care across all providers. A few examples of ACOs are:

• ACO Investment Model for rural areas.Comprehensive End Stage Renal Disease (ESRD) Care Model for dialysis patients.
• Next Generation ACO Model for populations with chronic illnesses.

Bundled Payments

Also called episode-based payment, this is a single payment made collectively to all providers to treat a specific incident or diagnosis. If a patient undergoes surgery, one payment would be made that needs to be distributed to the facility, anesthesiologist, surgeon, staff, and so on. While there is risk taken in the event additional treatments are required, there is also the understanding that providers would share in the savings if further treatment is not needed.

Patient-Centered Medical Homes (PCMH)

In a PCMH model, the primary physician coordinates all care with the input of the patient and their care team. This highly relational model requires the primary physician to be an attentive listener and the patient to actively improve and maintain their health. Physicians can coordinate with local service providers or virtual team members to access the care the patient will benefit from most.

Why Is Understanding Value-Based Payment Systems Important?

Value-based payment models are poised to change how care is delivered, and payment for care is calculated in the United States. All initial programs experimenting with any method of value-based care payments have seen a reduction in medical costs, better patient outcomes, higher satisfaction with healthcare, a focus on prevention and wellness, and less reported burnout from physicians and other healthcare providers. With this wealth of benefits, more payment systems will switch to value-based care in the coming years. In fact, according to the 2023 Measurement Effort by the Health Care Payment Learning and Action Center, more than half of healthcare payments made in 2022 were tied to some form of quality and value measurements.

While this change will happen over years, it is a large disruptor to the current methods of providing medical treatment, and every provider will need to reevaluate the way they work with patients and other providers as well as the way they document progress and treatments. The Healthcare Information and Management Systems Society advises that sweeping changes will need to be made to data collection, revenue planning, and business processes to achieve the goals set out by CMS in transitioning to value-based care models.

What Do Providers Need to Know?

Value-based payment has its risks, particularly for medical providers. There are one-sided and two-sided risk models, and providers must determine what they are comfortable participating in. Some models only have positive financial incentives for providers who exceed expectations. Others also carry negative risks, where providers are penalized for not meeting their goals. Providers will also need to understand how the disbursement of funds is managed.

In fee-for-service models, all payments are made retrospectively—after treatment has occurred. In some value-based payment models, payment is made prospectively, with a set amount for a particular diagnosis or set of patients. Providers must understand what the payments are intended to cover and develop methods for efficiently coordinating all care to stay within the assigned budget.

Every provider must be committed to providing high-quality care at a reasonable cost and within a reasonable timeframe. Teams coordinating on treatment plans will be the norm in order to expedite the diagnosis and treatment process. All value-based care providers will be responsible for eliminating fractured communication and duplicate care. The patient is a critical component of this model. They should be included in all planning for their allocation based on their particular medical need and considering their living environment.

Providers will also need to track and protect more patient data than ever. Data is the backbone of a value-based care system and the only way to determine if quality care has been delivered. Payment will be based on health measures tracked and submitted to the payer. While there is more administrative work, electronic health records and automation will be essential to keeping accurate records on population health outcomes. Providers will have an outsized responsibility to protect and maintain these databases to prove the value of their care and achieve financial incentives.

What Documentation Is Required for Value-Based Payment?

To start, physicians, hospitals, therapists, home health centers, and other care providers must opt-in to value-based payment models. Several value-based payment programs are available, and each practitioner must determine which model is best for their practice. These could include Medicare, Medicaid, private insurance, ACOs, PCMHs, etc. Understanding the difference between each payment plan, data collection, patient outcomes, and provider expectations will be important to determine what model is best for each situation.

Once a provider chooses their payment plan, they will need to embrace the record-keeping required by that plan fully. We know that medical coding is a skill providers need to develop and a routine to maintain. This becomes ever more apparent in value-based payment models. Because payments are often made based on the number of patients with specific conditions within a population, this data is essential for accurate billing and allocation of those resources.

Data is the foundation of the value-based payment system. Providers must monitor their recommendations and look for ways to reduce unnecessary spending. Costs are categorized as either planned or unplanned. Unplanned expenses include hospital admissions, emergency visits, and treatment for issues that could have been avoided with better preventative care. The goal is to increase planned spending and decrease unplanned spending—since unplanned spending is also an indication of poorly managed health conditions.

Some of the data points that providers will need to track under a value-based payment system include:

• Preventative care
• Hospital readmissions
• Patient satisfaction
• Spending trends
• Wait times
• Workflows and time spent on record-keeping
• Chronic health condition measures (such as A1C numbers in diabetic patients)
• Holistic population health

Technology for Accurate Payments

With various metrics to track and report on, providers must lean heavily on technology to monitor outcomes, effectively report on their value, and submit accurate data for payment. Electronic health records are a great start for monitoring data, but further analytics will be needed to track outcomes across multidisciplinary teams and diverse populations.

University of Utah Health developed an equation to express the elements that will need to be tracked. At their core, value-based payment models can be considered value equals quality plus service divided by cost. Providers are incentivized to add new tracking technology in a value-based payment system.

Some of the systems that will help smooth the transition include:

• Enterprise data management that can aggregate data from every source that provides care to a patient
• Predictive and prescriptive analytics that surface trends and risk factors
• Payment technology that streamlines workflows
• Artificial intelligence that can predict the occurrence of preventable diseases
• Population Health Management machine learning systems that identify patients at high risk
• Telehealth providers for cost-effective consultations
• Clinical Decision Support systems that help providers make data-driven decisions about patient care.

The Important Shift to Value-Based Care

While value-based payment systems are not yet standard across the healthcare industry, initial programs have shown such success that providers should prepare to implement it in the coming years. One study of value-based payment models for treating bowel disease showed fewer surgeries, emergency department visits, and long-term steroid use. Another study demonstrated that penalized hospitals improved their care processes in the next year. Even medication costs were reduced in studies of value-based payment systems.

Now that studies have shown the effectiveness of value-based care systems in improving patient outcomes, increasing provider satisfaction, and reducing medical costs, the general recommendation by CMS and others is to move toward more models of value-based payments. All medical providers should decide what kinds of systems they want to participate in and prepare for the data collection and billing required to participate in these new models effectively.