Fee-for-Service to Value-Based Payment Transformation: Landscape Overview - Part 1

Contributors: Natalie Chau, Lisa Soroka, and Wren Keber
To learn more about, Natalie, Lisa, and Wren, click here.


image005.pngManaged care and risk delegation grew significantly between the 1970s and 1990s as a way to attempt to control costs, culminating in the shift toward health maintenance organizations (HMOs) in the 1990s.  The shift waned in the 2000s after failures due in large part to lack of adequate divisions of responsibilities among payors, providers, and institutions, and inadequate (in many cases non-existent) care management systems – critical to success in taking risk for populations. Patients (consumers) were asking for choice, while payors began refocusing on improving quality. However, as U.S. healthcare costs continue to grow, the Centers for Medicare and Medicaid Services (CMS) are now pushing providers and payors to balance managing utilization, proving the value of care, and ensuring the highest quality possible through “value-based payments” (VBP).

Current U.S. healthcare expenditures have alarmingly exceeded projections and consequently places the U.S. as the highest spender by a wide margin of healthcare per capita worldwide. According to the Organization for Economic Co-Operation and Development, the U.S. spent a staggering $8,508 per capita on healthcare in 2013, with Norway in second place at $5,699 per capita. While Norway spends roughly 9.3% of its GDP on healthcare, the United States spends 17.7%. This level of expenditure is unsustainable.

Value-based payments reward physicians, hospitals, and health systems for achieving positive health outcomes while decreasing or maintaining costs. Historically, physicians have not been completely aligned with this payment methodology since their payments have historically been based on the fee-for-service model. However, payors are now starting to aggressively reduce provider reimbursements and move towards performance-based reimbursements. Providers can either hold out as long as possible in the current system or proactively begin to adapt to be able to take risk and manage populations. In order for health systems to succeed with this new agenda, providers (physicians, hospitals, and post-acute providers) will need to achieve high-quality outcomes while reducing costs, thereby aligning with the value-based payment model.

Driving forces toward VBP
The following table outlines some of the existing, upcoming, and predicted forces pushing providers toward VBP.



Success elements
The rules for success in this new world of VBP are different depending on the player, market position, and current state of readiness for assuming risk.

It is not news that the focus of care is shifting from inpatient to outpatient as a way to control costs and that appropriate and timely deployment of primary care should help prevent progression of disease. In order to positively react to this change in payment methodology, hospitals along with other providers must do some serious soul-searching and visioning about their place in the new healthcare landscape. To some extent, this has resulted in large-scale hospital mergers focusing on economies of scale and increased purchasing power. This will only slow to some extent the effects of the shift to value-based payment.

In order to be a responsible partner in care, hospitals should begin to improve their ambulatory care networks through partnering with independent physician associations (IPAs) or hiring providers (through their foundations depending on the state and regulations in place). Payors are expecting hospitals to take more risk for population health, which can only be done successfully with a strong care continuum to manage patients’ wellness (not just illness in current models of care). Institutional risk (bundled payment, readmission penalties) and global capitated risk (through developing a health plan or delegated risk from managed care organizations) are both in hospitals’ futures. To prepare, hospitals should also begin to explore building wrap-around support services such as care navigation centers, care coordination, post-acute relationships/affiliations, and wellness initiatives.

Practitioners (physicians and other eligible clinicians) are starting to face pressure to provide value with the implementation of the Medicare Access and CHIP Reauthorization Act (MACRA). Under MACRA, CMS will implement a new payment system, the Quality Payment Program (QPP), for all physicians and other eligible clinicians by 2019. Two possible tracks of QPP are either a Merit-Based Incentive Payment System (MIPS) or an Alternative Payment Model (APM), under which physician reimbursement will be based on quality, resource use, clinical improvement, and use of electronic health records.

According to Allen Miller, CEO of COPE Health Solutions, “CMS, states, self-insured employers, and health plans will continue to look, perhaps even more aggressively, for healthcare providers that can effectively accept/manage financial risk for members/patients. This requires not only the necessary license(s) and funds set aside to bear risk, but also care management, utilization management, and other systems to succeed in reducing overall medical spending from the available premium.”

We will discuss provider strategies and readiness in our next installment, "Fee-for-Service to Value-Based Transformation: Provider Strategies and Readiness - Part 2."

As a payor, CMS is the main driver of value-based payment for Medicaid, Medicare, and uncompensated care. Commercial insurers historically follow Medicare’s lead.  In Medicaid particularly, funds were traditionally flowed through FFS payments directly to providers. This is changing with the increased presence and power of managed care organizations (MCOs). With many new demonstrations CMS is aiming to have funds flow through Medicaid MCOs to delegate some of the risk to these organizations.

MCOs are in a position to help advance VBP by building strong networks of providers who have demonstrated success in delivering high-quality care at a lower cost.


Contact Lisa at: [email protected]
Contact Natalie at: [email protected]
Contact Wren at: [email protected]


Special thanks to Alain Huynh and Sarin Khachatourians for contributing to this article.


About COPE Health Solutions
COPE Health Solutions partners with our clients to help them achieve visionary, market relevant health solutions.  We focus on all aspects of strategy, population health management, managed care contracting, CMS demonstrations, Medicaid redesign, and workforce development for clients across the healthcare continuum, including hospitals, health systems, physician organizations, health plans, and community based organizations.

Our multidisciplinary team of healthcare experts provides our clients with the tools, services, and advice they need to plan for, design, implement, and support successful operations in a challenging and rapidly evolving healthcare environment.

We are currently working with multiple health systems across the country to develop a clear roadmap to success under value-based payment. Please contact any of our leadership team members if you have questions and would like to discuss how to ensure success amidst the coming changes.