Value Based Care – Let’s Do The Math

“Between two evils, I always pick the one I never tried before.”

- Mae West - Klondike Annie

Which one to pick

Primary care practices across the country have either embraced some form of value based contracting (VBC) or are being nudged to accept it from the health insurance industry. There are pros and cons to this form of reimbursement from a primary care practice point of view. But as with most strategic choices in the US healthcare system, the upside revenue opportunities are a major influence on the decision makers.

Currently there are two main revenue models in primary care: 1) fee-for-service payments, and 2) capitated per patient per month (PMPM) payments. Either may have additional upside financial incentives baked into the contract between the health insurance carrier and the primary care practice based on outcomes and performance metrics.

How they work

Fee-for-service payments are made on a per encounter basis, using encounter codes entered into the electronic medical record by the provider. Reimbursement payments are based on the Relative Value Unit (RVU) associated with the codes entered. RVU values are applied to a base contracted rate, agreed upon with the insurance carrier. The RVU increases or decreases the base rate by a factor representative of the complexity of the encounter.  As an example, if the base rate for a 99212 Established Office Visit is $65, the RVU associated with the health condition addressed at the visit is used to increase that base rate. The RVU modifier considers the professional services provided, a portion of the practice expense, and malpractice costs.

Capitated payments are simpler to calculate but have their own complexity. These payments are made monthly by the insurance carrier to the primary care practice based on the number of attributed insured lives the practice is responsible for. These payments are often about $20 - $25 per patient per month and are made regardless of number of visits or amount of healthcare these patients use. The scope of healthcare services that must be provided for this monthly payment is defined in the provider contract and excludes specialty care, high tech imaging, and other services typically outside the scope the of a primary care practice.

The trick is defining who is an attributed patient and who is not. Some health insurance coverage is crafted to guide patients to seek care at their attributed primary care clinic or pay additional costs. But patients don’t usually understand how this model works and may “wander off” to a provider they are not attributed to for care they “should” have received at their attributed clinic.

Show me the money

There are always considerations beyond the money in healthcare, but for the moment let’s do some (over simplified) math using a few informed assumptions and some CDC benchmark data.

So, while the capitated model certainly results in more revenue (using our assumptions) keep in mind success with this model requires proactive medical and practice management. It is also important for the providers and clinic administrators to have actionable outcomes and care gap data at their fingertips, in real time, so they can focus their efforts on the highest value cases.

A capitated model also places financial responsibility on the primary care practice for all care delivered during the plan year within the defined scope of services. If a patient attributed to a practice seeks care from another venue (like a retail urgent care clinic) for care within the defined scope of services, the practice effectively is penalized financially. For this reason, many providers are not willing to agree to a capitated contract unless the insurance carrier offers coverage that limits access to the attributed clinic via benefit design and/or network.

But wait, there’s more

Either reimbursement model may include additional financial incentives based on quality outcomes and patient experience metrics. These incentives are typically associated with VBC agreements but may be included in a fee-for-service contract as well. These upside incentives are offered by insurance carriers in an attempt to improve financial performance and the plan ratings assigned by the CMS Stars program.

The two key components of the Stars program are the CAHPS patient experience ratings and the HEDIS care quality ratings. In the future, CMS may include Net Promoter Score (NPS) as an additional measurement of patient experience.; and some carriers are experimenting with NPS incentives as well. Carriers may offer performance bonuses for any of these metrics, and may limit the bonuses to patients in a specific market sector like Medicare Advantage.

Many carriers will offer upside financial incentives to primary care practices for “bending the cost curve.” Health insurers call the expenses they incur paying providers and facilities for medical care their medical loss ratio (MLR.) The MLR represents the majority of the expense side of an insurance carrier’s P&L statement. They are highly incentivized to reduce their MLR whenever possible. To that end, they frequently offer primary care practices a portion of the savings achieved by reducing the practice MLR below a certain benchmark. This is where a well-run practice, embracing telehealth, mid-level providers, and efficient operations can see material financial upside.

Why this matters

There is real money to be made by a primary care practice via a capitated VBC agreement with upside financial incentives. So why are some practices hesitant? This requires a shift in practice patterns for some. But even for those that embrace the shift, access to real-time actionable care gap data and patient risk profiles are necessary tools to maximize the opportunities. Many of the tools currently available are rather clunky with user interfaces more like a 1990s computer game than an iPhone 16.

The incentives are out there, and many providers are interested in making the shift to VBC. But if they are going to embrace an evil they’ve never tried before, they need better tools that are easier to use.

This article was written by a human being; no chatbots or AI were used. No permissions are granted for any use of this content to train AI algorithms.

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2itive is a Portland based consultancy founded by Erik Goodfriend, offering a unique combination of market intelligence, knowledge of healthcare payment systems and creative business strategy insights. Feel free to contact us at info@2itive.com