Defining the Players in Value-Based Healthcare
In a previous blog post, I examined the growing demand for value-based healthcare from providers, payers, consumers and the public. Nowadays, these players in the healthcare system expect higher quality at a lower cost, reflecting the dynamism of the industry and the increasing knowledge of healthcare consumers.
Elsewhere, I have shared my perspectives on how leadership and governing bodies can ensure greater quality in the form of safer care. Now, I’d like to address how cost pertains to value.
The political debate concerning free market-oriented systems and government-directed alternatives often misses the more complex differences in the vantage points from which to judge financial value in healthcare. Based on my experience in the industry, I feel it is important to look at key stakeholders in the healthcare sector, exploring their different definitions of value and their proposed strategies to achieve financial value. Only then can we begin to truly understand our policy options.
The common theme for all stakeholders is to provide or receive same or better quality of care at a lower cost. However, for the payer – typically in the form of consumers, employers or taxpayers – the need to reduce the total cost of care is essential to cover other necessities. For providers (e.g., hospitals, health systems, physicians or ambulatory surgical centers), financial value is defined as increasing operating income and profits.
In the case of for-profit providers, the need for increased profit is dictated by the need to provide increased return to the shareholders. In the case of not-for-profit providers, the need for increased margins is to have sufficient cash to pay for capital expenses and cover the fixed costs aspects of the enterprise including payments to employed physicians, academic partners and community benefit. Finally, insurance companies try to maximize their profit by balancing the needs of payers and providers.
Given the different definitions and roles in healthcare, each stakeholder uses a different strategy to achieve financial value:
Payers strive to cap the total cost of care without reducing service.
Providers’ strategy depends on how they are reimbursed.
Those reimbursed on a fee for service basis are incentivized to increase volume.
Those reimbursed on a capitated or risk-based basis are incentivized to reduce utilization (e.g., shorter length of stay and fewer ancillary tests) and variation in care (e.g., clinical pathways).
Insurances companies want as many healthy members as possible while reducing costs per member by getting favorable contracts with providers (e.g., low capitated payment rates), denying payments and restricting covered treatments and drug formulary.
Armed with this perspective, it’s easy to see the complexity of the debate and the inherent tradeoffs we may need to accept. Some examples of tradeoffs that society must consider:
A government run single payer system, in order to achieve financial value, will trend to put a hard cap on spending as they do with all budgeted spending. While some see the benefit in the elimination of private insurance, it’s important to remember that these costs are covered by taxpayers who also fund the bureaucracy necessary to oversee the system. Furthermore, there will most likely fewer dollars for providers to support their fixed costs. As a consequence, there may be a reduction in access to specialized services and less investment in academics.
A private risk-based payment system most likely would operate without a universal hard cap on healthcare spending. While this risk-based system would force providers to provide care more efficiently and at higher quality, there still be the opportunity for not-for-profit providers to create sufficient margins to continue their support for their fixed costs and maintain access. The downside is that societal spending on healthcare maybe less restrained, albeit with greater value.
While this is merely a summary of the issues in this debate, it illustrates how the simple policy and political discussion may miss important points.