The financial challenges faced by healthcare providers during the COVID-19 pandemic highlight the revenue risk exposure imposed by the traditional fee-for-service (FFS) payment model and the benefits of participating in value-based payment models.
Value-based payment models, in which providers are compensated on outcomes rather than activity, are designed to transform how providers deliver care and manage their patient populations through incentive alignment. Despite broad support for value-based payment models and a decade of experimentation, the majority of payments in the U.S. health system are still based on FFS.
Employer-Sponsored Plans Represent the ‘Chasm’ in Transformation to Value-Based Payment Models
The “Crossing the Chasm” framework has been used in the marketing literature to understand how innovative products become widely adopted. It outlines the product life cycle: adoption first by the early adopters, then the early majority, next the late majority, and finally the laggards.
The greatest challenge to successful product adoption is to “cross the chasm” from the early adopters to the early majority. As applied to the healthcare payment system, in order to generate system-wide care transformation providers will need a majority of their patients in value-based payment models.
The Medicare program can be considered the early adopter of value-based payment models — both traditional Medicare and Medicare Advantage had greater value-based payment model penetration than other market segments. The adoption among employer-sponsored plans, which covered 60% of the insured population in the U.S., has been slow.
While many insurance carriers claim they have moved their commercial payment contracts past a certain critical threshold to value-based payment models, these payment models, in large part, still provide strong financial incentives for providers to increase service volumes rather than enhance value. Given their market size, employer-sponsored plans represent the “chasm” that needs to be crossed if the U.S. health system aims to achieve the transformation to value-based payment models.
Challenges to ‘Cross the Chasm’
If value-based payment models benefit both patients and employers, then why haven’t they proliferated across employer-sponsored health plans?
The simple answer is that the geographic dispersion of employees covered in employer-sponsored plans inherently presents difficulties that make the alignment of incentives more challenging than for insurance plans with locally concentrated risk pools, such as traditional Medicare and Medicare Advantage.
Challenge I: Employer-sponsored plans are not aligned with providers when defining value
Value-based payment models rely on setting a target for the total cost of care to hold providers accountable for delivering value. Many models are still defining value as the incremental cost-saving compared with the previous year(s).
This value definition seems convenient for employers, who typically set budgets based on their expenditures in previous year(s) and make purchasing decisions accordingly for the current year. It also encourages provider participation by assuring providers that their future revenue will not differ wildly from their previous revenues. However, when a provider successfully reduces expenditures and that in turn reduces the future year’s target, this arrangement quickly becomes unsustainable.
Challenge II: Health insurance carriers struggle to communicate provider-driven value to employers
When attempting to demonstrate value exclusively for a specific employer, the carrier faces mounting challenges. Since the employer’s population is served by various providers and/or Accountable Care Organizations (ACOs), calculating a counterfactual is complicated and requires numerous assumptions. Although not insurmountable, the value estimation becomes impractical for smaller and geographically diverse employers.
Can the challenges identified above be addressed with a series of technical fixes such as adopting more sophisticated methods for measuring and defining value for employer-sponsored plans? These have the allure of being less disruptive and more politically palatable. However, technical fixes are likely to add significant complexity.
Furthermore, after years of being told that they should pay more to save more (e.g., workplace wellness programs), many employers are likely to be skeptical of paying for anything that relies on a complex set of assumptions made by health insurance carriers with potential conflicts of interest.
“Crossing the chasm” requires addressing the deeper structural issues. In contrast to geographically dispersed employer-centered risk pools that present substantial challenges for industry-wide adoption of value-based payment models, locally structured risk pools would better reflect how healthcare delivery is organized, facilitate value definition and measurement, and identify accountable parties.
It might be argued that individual consumers may lose the regional and/or national strength of purchasing their insurance through a large group. However, it is unclear how much strength individual consumers have currently, given employers’ lack of success in containing costs over the past several decades with their current program structures.
Many potential solutions exist to create locally structured risk pools. For example, employers could transfer financial risks — such as through the capitation method — to third-party administrators that can manage the risk locally. This approach mitigates employers’ risk exposure and creates strong incentives for health insurance carriers and downstream providers to minimize medically unnecessary utilization of medical services.
Alternatively, employers could move away from the business of purchasing health insurance for their employees and instead migrate towards health reimbursement arrangements, through which employers can reimburse workers’ Medicare or individual insurance plan premiums (regardless of whether the individual plan is purchased through an Affordable Care Act marketplace).
These solutions, by transferring risks to more locally structured risk pools, have the potential to address the structural issues with employer-sponsored plans, enable these plans to purchase healthcare services effectively, and overcome barriers to “cross the chasm.”
For many healthcare providers navigating the COVID-19 crisis, reliance on FFS payments is resulting in serious financial strain and an inability to adapt care while still being paid. The crisis provides an opportunity for the U.S. healthcare system to recognize the potential benefit of transforming to value-based payment models.
Employer-sponsored plans represent the “chasm” to cross, with geographically dispersed employers posing a structural challenge to aligning incentives with geographically concentrated healthcare providers. Transferring risk to local pools would create a structure more conducive to value-based payment models and help the U.S. healthcare system “cross the chasm.”
Cory Gusland, FSA, MAAA, is a consulting actuary at Milliman Inc. Ge Bai, PhD, CPA, is associate professor of accounting at Johns Hopkins Carey Business School and associate professor of health policy & management at Johns Hopkins Bloomberg School of Public Health.
The authors declare no financial interest related to this article.