Value-Based Care: How Physicians Can Prevent the Corporate Takeover of Medicine

Brian S. Kern, Esq.

In 2019, the US spent $3.8 Trillion on healthcare. At 18% of GDP, this figure is neither affordable nor sustainable. Efforts by the federal government to rein in healthcare spending have been met with fierce resistance from corporate interest groups and trade associations representing those that benefit most from the status quo. Indeed, legislation designed to level the playing field for independent physicians and large corporations – from site neutrality rules to greater system transparency – has resulted in lawsuits, stepped up lobbying and even noncompliance by institutional players. The US Government remains resolute in its efforts to curb spending and is consistently developing new programs for physician practices aimed at improving outcomes while reducing costs. Three main hurdles stand in the way of success for such physician-led “value-based care” (“VBC”) programs: cost, risk and access. All can be overcome.

Cost

The biggest perceived hurdle of value-based care programs is the expense. Practices that want to succeed in VBC need to have a sophisticated data analytics platform, and the ability to coordinate care based on what their data reveal. There are numerous companies that specialize in data analytics, with a wide variety of specialization. The cost of these companies, including their revenue models, also varies. The fee structure to retain a data analytics company can be designed around the value-based care program being supported, and the data that will be obtained. Data has independent value to analytics companies, as it is necessary to develop new functionality and can “train” machines. Many value-based care programs include upfront payments to participants, often in the form of a “per-member, per-month” (“PMPM”) payment. Data itself, and PMPM payments, might together be sufficient to cover the cost of a relationship. Most VBC programs are known as “shared savings” programs, as the payor and the participant split a percentage of any reduction in overall expenditure. To calculate savings, participant groups are first provided a benchmark, and then a “target price,” under which the total patient spend must fall in order to achieve a profit. In general, the amount of available shared savings (“upside”) increases in proportion to the downside risk taken. In lieu of paying a data analytics company upfront, physician practices projected to achieve shared savings can negotiate splitting a percentage of the savings. Given the creative mechanisms available to fund data analytics and accompanying care coordination partnerships, cost should not be the biggest barrier to enter a VBC program. Should downside risk?

Risk

Downside risk refers to the amount of expenditure above the benchmark or target price that a group would have to pay back to a payor under a VBC program. For example, under the Bundled Payments for Care Improvement – Advanced (BPCI-A) program, groups can receive up to 20% of the target price in earnings, but also owe up to 20% of the costs above it. Revenue opportunities through BPCI-A are substantial; so are the risks.

Example:
For illustration purposes, consider a 60-physician orthopedic group which generates about $60 million in CMS revenue for elective orthopedic procedures. Assume for these procedures that the total cost to CMS is $600 million (factoring in hospitals, skilled nursing facilities, home health care, rehab, etc.) In this scenario, the benchmark for a value-based care program might be $600 million, in which case the target price would be $582 million (3% below benchmark). If this orthopedic group achieved a 6% savings under the program, it would generate an extra $18 million, or a 30% increase in revenue. If the group performed exactly the same under the new VBC program, the total expense would remain $600 million. The group would thus owe $18 million back to CMS (3% above target). The maximum downside risk to the group is $116,400,000. Table 1: Practice Revenue Model for Orthopedic Practice Participating in
Value Based Care Program

Few medical practices have the appetite or the balance sheet to put up more than $116 million in collateral to cover downside risk. But large insurance companies with sophisticated underwriting teams do and can lend collateral in the form of stop loss insurance. Major health systems have long relied on stop loss insurance to hedge the downside risk in self-insured benefit or capitation programs. By tapping the stop loss market, physicians can fully embrace value-based care.

Downside Risk Transfer via Stop Loss

Physician groups participating in government programs are learning how stop loss can be used to maximize profits while protecting them from financial catastrophe. Stop loss coverage is commonly priced off the target price. Premiums are determined by range of factors based on trend and investment in infrastructure, such as data analytics and care coordination. The cost of stop loss can be material, leading private physicians to seek out financial partners to help defray it. Financial partners come in a variety of forms, many of which desire equity. Hospitals and corporate-backed physician consolidators are two examples. Both often point to the high cost of risk-taking when approaching physician acquisition targets. Ironically, the acquirers also point out that their fee-for-service reimbursement rates are higher than those of the private physicians they seek to acquire. While generally true, the higher rates are based more on volume than quality. Under a value-based system, “corporate” medicine will lose its power to negotiate on size alone, and instead be forced to compete on a level playing field with independent providers. Access to affordable capital in the form of stop-loss allows independent physicians to accelerate the transition to value, and rather than sell to corporate medicine, compete with it – fairly and transparently. Just as value-based care programs are slowly but steadily gaining traction, so too is the stop-loss market for physician groups. VBC program underwriters must develop a deep knowledge of the models, and at times with relatively few participants nationally. As demand for stop loss increases, supply will surely follow. Physician groups that can remain independent and learn how to succeed in VBC stand to gain the most.

Access

The final major hurdle to value-based care adoption is the lack of available programs. CMS consistently tests new models, but enrollment can be challenging. Private payors have been slow to transition to value, particularly with a downside risk component. Fee-for-service (FFS) has long been – and remains – the predominant form of reimbursement in healthcare. In fact, most of the value-based care programs are built atop the FFS system. For now, shared savings or losses accrue based on FFS billing, with periodic reconciliations against target pricing. Reconciling total care costs around a procedure is complicated. Consider a patient who undergoes a total hip replacement surgery. In the weeks following her surgery, assume she goes to the eye doctor. Should the orthopedic group bear the cost of the eye exam? What if the patient was hospitalized for an infection? Or took an ambulance ride to the ER that turned out to be a false alarm? Current FFS systems are not designed to address VBC questions. Developing such capabilities requires significant investment, with an uncertain short-term return. Future, “prospective” reimbursement programs that replace FFS should simplify the system and unleash substantial growth. They are being piloted all around the US.

Although payors were slow to partner with practices on value-based programs, they are growing in number. The private sector is also expanding VBC offerings. Those interested in partnering with private payors or government programs directly should attempt to demonstrate success in one of the available programs. It is only a matter of time before private payors fully embrace the transition to value, and private physicians need to be prepared to seize the opportunity.

The Future of Fee for Service, and the Risk of Doing Nothing

As value-based care continues to evolve, corporate-owned provider groups pursuing a strategy based mainly on increasing their FFS rates will have to compete on price. Under a transparent, value-based system, patients can learn in advance that the orthopedic surgeon owned by the hospital charges twice as much as the independent orthopedic surgeon. Independent practices will still need to demonstrate comparable or better outcomes, quality scores and patient satisfaction. To do so, they will need strong data, analytics, and care coordination. To access the necessary data, the practices need to participate in VBC programs. To meaningfully participate, they need to cover their downside risk.

Brian S. Kern, Esq. is the CEO of Deep Risk Management, a financial risk consulting and brokerage firm that supports physicians & healthcare entities taking downside risk in advanced payment models.