Fee-for-Value: How Health Tech Helps Align Incentives in the Healthcare Ecosystem

By Brad Jones

Value-Based Care:

At Blumberg Capital, we partner with entrepreneurs that identify key industry, demographic and regulatory changes and apply novel technology to solve tough problems. Timing is an essential component of industry disruption and we believe healthcare is well-positioned for both technological and business innovation.

The United States healthcare system has undergone significant change over the last 15 years in an effort to expand access to care, improve quality and manage expenditure. One of the main tenets of healthcare reform has been to better align the incentive structure across various stakeholders in the healthcare ecosystem by means of value-based care models.

Historically, insurance carriers and government entities have made separate payments to providers for each service administered to patients over the course of treatment. This payment system, called fee-for-service, incentivizes quantity over quality because providers are paid more to provide more services, regardless of patient outcomes. In contrast, value-based (or fee-for-value) models reward healthcare providers based on patient-centric, evidence-based care while eliminating over-utilization of services, devices and medications that are not proven to enhance outcomes.

When healthcare providers are focused on volume, important components of care such as preventative treatments fall by the wayside, leading to higher cost and a slower rate of innovation in care practices. Recently, the fee-for-service reimbursement structure has caused significant financial strain on primary care practices. In the wake of COVID-19, many providers have been unable to treat patients in-office and therefore cannot receive payment for services. This has led to a 55% drop in revenue across the healthcare system, resulting in thousands of primary care practices closing down. This financial strain represents one of the many failures of the fee-for-service model.

The Rise of Value-Based Care

Value-based care, often called capitation, was adopted by early private payers such as Kaiser Permanente as a way to deliver healthcare that is 10-20% more cost-effective than traditional plans. With the Medicare Improvements for Patients and Providers Act (MIPPA) in 2008 and the Affordable Care Act in 2010, the federal government played an important role in accelerating value-based care initiatives. This led to the rise of various fee-for-value models. By 2017, the percentage of healthcare payments tied to value-based care reached 34%. Outside of the public sector, commercial payers have also accelerated adoption of value-based programs. Cigna covers over 2.5 million commercial customers under value-based care models. Humana has more than 60,000 value-based provider relationships across 43 states in order to cover 4.0 million lives under these models.

While this data shows promise that a transition to value-based care is underway, adoption has fallen short of expectations. Past predictions had estimated that 75% or more of healthcare payments would be value-based by 2020. We are certainly a long way from this level of coverage.

So what’s inhibiting adoption? Most providers, payers and regulatory bodies agree that value-based care can offer significant benefits in terms of cutting costs and saving lives. Proof lies beyond the logical nature of value-based incentive structure. Research has shown that fee-for-value models can enable annual savings of over 10% per patient. Given the U.S. spends more than $3.5 trillion each year on healthcare, there is significant opportunity to reduce expenditure.

Challenges Associated with Provider Adoption of Value-Based Care:

Value-based care comes with a high level of operational, administrative and technical complexity that can inhibit stakeholder adoption. COVID-19 has amplified these challenges, making it difficult for some providers to meet spending and quality targets tied to value-based models.

• Operational Complexity: Value-based care requires providers to transform their operational infrastructure and change the way they engage with patients. Under a fee-for-service model, standard practice is to see as many patients as possible to optimize revenue. As a result, providers typically spend 10-20 minutes per patient visit. Under a fee-for-value model, providers may be obligated to engage patients for longer periods of time (45-90 minutes) in order to enable holistic care. Clinicians are also accountable for services they did not previously offer (e.g. treatment adherence protocols), adding operational complexity.

• Increased Administrative Burden & Financial Risk: Value-based care models require providers to achieve a set “quality” of treatment for a set price. While most providers monitor standard care metrics, tracking and evaluating “quality” is extremely difficult in practice. As a result, providers need to track components of care they may not have considered previously. This can be a costly and time-consuming process, making value-based contracts less attractive to providers.

Given the level of sophistication around pricing and financial risk associated with value-based models, providers can face difficulty in predicting revenue and cost implications. For example, in bundled payment models, instead of paying separately for each service administered by a hospital or physician, all services required to treat the patient are bundled into a singular, predetermined “bundle.” If quality benchmarks are met and overall expenditure is lower than expected, providers can keep a portion of the money saved. However, determining the price of a “bundle” is challenging because differences among patient populations (e.g. age, geography, income, lifestyle choices) can lead to high variation in the cost of treating a disease.

• Lack of Interoperability: Value-based care requires an unprecedented amount of healthcare data exchange because increased communication between all stakeholders is required to ensure better patient outcomes. While regulation (and deregulation) targeting increased interoperability has made progress, the healthcare ecosystem remains ill-equipped to facilitate data transfer due to siloed infrastructure, hampered by legacy technology and practices.

Health Tech Can Address Challenges:

Technology plays a major role in accelerating the transition to value-based care. For example, technology enables providers to better benchmark patient outcomes and care quality using structured data and predictive analytics, among other benefits.

• Artificial Intelligence (AI) & Machine Learning (ML): Increased access to structured data allows AI to deliver predictive analytics. Many healthcare systems that participate in value-based care use datasets (e.g. claims, genomic, population health data) and ML models to identify patient risk factors. These insights enable providers to intervene with preventative treatment programs that reduce costs and improve outcomes.

AI & ML can also enable health systems to better determine the cost of treating patients over time, allowing providers in bundled payment programs to negotiate more transparent and favorable terms for care administration. In comparison to traditional actuarial calculation, AI can arm health systems with a richer set of tools that make value-based care more attractive by facilitating accurate / equitable pricing.

Finally, AI platforms that support clinical decisions and treatment protocols can reduce expenses related to medical complications and errors. AI tools have been shown to reduce cost by roughly $1,000 per patient. Companies such as Ferrum Health and Aidoc leverage AI in radiology diagnoses, while PathAI provides research tools and services for pathology. These offerings align incentives by delivering accurate, effective treatment at a lower cost.

• Operational Administration & Support Tools: In recent years, there has been an emergence of technology-enabled physician management and enablement platforms. Agilon Health, Stellar Health and Privia aim to simplify the operational complexity experienced by providers engaged in value-based contracts. Other companies like Olive, lower operating costs by leveraging robotic process automation (RPA) to automate mundane administrative workflows for claims processing and appointment scheduling.

Greater transparency into care metrics benefits providers as they transition to these new models. For example, Definitive Healthcare helps providers understand and track industry benchmarks associated with value. These metrics include length of stay, administrative cost, volume and treatment quality. Other solutions, such as SmithRx, enable price transparency for prescriptions, allowing health systems to better manage treatment cost. On the consumer side, Castlight Health enhances transparency by offering price comparisons and clinician reviews that can indicate quality of care.

• Digital Therapeutics & Wearables: An important determinant of healthcare expenditure is patient adherence to treatment protocol after they leave care facilities. Studies have shown that 20 – 30% of prescriptions are never filled and ~50% of chronic disease medications are not taken as prescribed. In order to improve treatment adherence, a variety of wearable devices and digital therapeutic apps have stepped in to support management of chronic conditions such as diabetes or asthma. Many of these tools have seen a spike in demand as a result of COVID-19. We expect an accelerated adoption of telemedicine and related trends to have lasting effects on the way consumers engage with healthcare, providing opportunities for startups to further deliver innovation in the space.

The startup ecosystem is well-positioned to solve some of the major challenges associated with this transition to a more effective, equitable healthcare system. At Blumberg Capital, we’re excited about the solutions that will emerge in the pursuit of value-based care and plan to continue backing great Health Tech companies.

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