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» Types of Value Based Care Models

October 9, 2020

Healthcare Innovation, Healthcare Spending

With the United States spending¬† nearly 18% of it’s GDP on health care, which works out to $3.6 trillion or $11,172 per person, pressure for reducing costs is growing. U.S. health care spending grew 4.6% in 2018. If that continues, our system will eventually be forced to change.

To make change today, many organizations are adopting value based care models to reduce costs and improve outcomes. Currently, much of U.S. health care spending is through a fee-for-service model (FFS), in which providers are paid for increased volume and more services (and expensive ones) are encouraged. We pay for quantity of treatment, not quality of treatment. Instead, we must reward providers and health systems for delivering better outcomes at lower costs.

Concerns with Fee-For-Service Payment Models

The FFS payment model in the U.S. is a major driver of high costs for care, due to the misaligned incentives it represents. If a hospital is paid more with more services, more procedures, more everything, there exists little incentive to reduce costs.

As an example, spending variation is a concern with this model, as there can exist wide variations in services delivered and resulting costs for similar conditions or procedures (case study). One concern with FFS is that clinical reforms that can provide higher-value care may be reimbursed at lower costs under fee-for-service. Another is that under some arrangements, savings accrue only to the payer, be it the public or private payer such as Medicare or Medicaid.

In order to generate real change and improve quality outcomes while reducing expenses, key parts of the Triple Aim of Healthcare, we need a health care system that incentivizes the right behaviors in our providers and care systems.

This is easier to say than do. There isn’t a single best approach, rather there are a number of ways to structure value based care and the choice of model will depend on a number of factors for the stakeholders involved.

Types of Major Payment Models including FFS and Value Based Care

Fee-for-service (FFS)

Providers are paid set fees after covered medical services and procedures occur. This was originally started with Medicare in 1965 and evolved in the 1980’s with per-admission payments to hospitals. There¬† is low risk to providers other than low volume.

This model is typically the most profitable to for health care organizations, and significant barriers exist to changing it within both clinicians and the business administrators overseeing organizations.

Shared Savings

A shared savings model looks like FFS for much of the year, until a reconciliation occurs in which savings bonuses are paid based on performance and if a provider hits quality goals. There is no financial risk if cost or quality goals are not met.

Shared savings programs have grown since the passage of the Affordable Care Act (ACA) in 2010. There is medium risk in the sense that a provider may miss out on bonuses and savings opportunities


This is an episode-based payment where a provider is paid for all services relating to a treatment or condition for a set period of time. It started in the 1980’s for solid organ transplant and expanded to heart bypass and end-stage renal disease, and now includes a number of procedures and pilots are underway for chronic conditions.

The risk with bundled payments  lies in not managing costs well and missing savings opportunities, as well as treating more severe than anticipated illnesses. There are possibly fines for losses.

Shared Risk

Similar to shared savings, this model again has a provider paid under FFS until a reconciliation at the end of the year. But instead of savings for reaching goals, there is a portion of revenue at risk if the provider exceeds certain cost targets. This is not yet widely adopted, because as we discussed before, it only creates penalties for providers and does not provider a proverbial “carrot on a stick.”

Global Capitation

Under capitation, a single payment is made for a member over a certain period of time. The provider is expected to then cover all care needs for those patients over a set period of time, regardless of cost. There is high risk in a capitation model for the provider in the form of higher than expected costs, penalties, and severity of illnesses.

Managed care saw growth in the 80’s but faced backlash from consumers in the 90’s, with many consumers still today avoiding HMOs, health maintenance organizations, a form of capitation.

Final Notes on the Shift to Value-Based Care Models

The U.S. health care market is working for only a small subset of the stakeholders it touches, with the majority, including consumers, increasingly left out. Most of us are net contributors to the system, paying money in the form of premiums, cost sharing, and social welfare taxes, and we need to know our dollars are being spent on getting quality outcomes at a fair price.

Given healthcare’s increasing share of U.S. GDP, health care organizations experience more and more pressure to shift to payment models with more risk to themselves and more responsibility to other stakeholders. One key framework is how well are incentives aligned, and what does the current economic structure lead participants to do?

Health care organizations and payers are at the forefront of this shift, but many questions remain to be answered.


Posted by in Healthcare Innovation, Healthcare Spending