What Is Wrong with “Value-Based Payment”?
Stephen Kemble, MD, Chair, PNHP Policy Committee
September 25, 2024
You will be told by many health policy experts that the cause of excessive U.S. healthcare cost is the fee-for-service payment system that rewards “volume” of care, driving over-utilization, and that the solution is to replace fee-for-service with “value-based payment,” which promises to control cost while rewarding quality and equity in delivery of care.
However, consider the experience of Hawaii. Due to our Pre-paid Healthcare Act, Hawaii has had an employer mandate since 1974, with the broadest coverage of the population, the richest commercial insurance benefits, the lowest patient cost-sharing, and among the lowest insurance premiums in the country, and we had the lowest per-capita Medicare spending in the country in 2009, when everyone was paid with fee-for-service. Since widespread imposition of “value-based payment,” encouraged by the ACA and aggressively implemented by our dominant health insurance plan, our health insurance premiums have more than doubled and our per-capita Medicare spending has been climbing up the state rankings list. A few years ago we had moved from lowest up to 9th lowest and climbing. And Hawaii has developed a severe doctor shortage and worsening access to care.
There are various degrees and forms of “value-based payment”, but all forms of VBP shift insurance risk onto intermediary private plans or in varying degrees onto providers of care. The goal is full capitation for care of a population, replacing fee-for-service.
Up-front payment and shifting insurance risk require defined “members” to enable payment per-member, whether the payee is a health plan, such as a Medicare Advantage plan or a Medicaid Managed Care Organization, or an organized group of doctors or doctors and hospitals paid as an Accountable Care Organization, or ACO. With ACOs “members” don’t choose to be in the ACO but are “attributed” according to where they usually seek primary care. In any case, the performance of a capitated plan depends heavily on which “members” it captures.
You will be shown many articles purportedly showing that Medicare Advantage plans and ACOs can reduce Medicare spending and demonstrate improved quality measures.
BUT –
Many of the articles on ACOs don’t account for the cost of bonuses based on savings and quality measures, and if bonus costs are included savings are minimal or the program costs Medicare more than if care were paid with fee-for-service.
Almost none of these studies mention the administrative cost borne by the Medicare Advantage Plan or ACO, and if these are included the total cost is always higher than with fee-for-service. This is why many otherwise successful ACOs drop out of the program after a few years because they are losing money, even if Medicare is saving a little.
And almost none of these articles account for the demonstrated ability of capitated plans to game their risk pool by capturing healthier “members” and avoiding or ejecting sicker, more expensive ones. If the pool of “members” in an MA plan or attributed to an ACO is healthier than average, then of course cost will be lower and quality measures will be higher because the population was healthier to begin with, without any improvement in cost-effectiveness of care.
In fact, VBP carries much higher administrative overhead than fee-for-service, and up-front payment with capitation introduces perverse incentives to capture the healthy and avoid the sick, up-code to beat the risk adjustment formula, and skimp on care, both necessary and unnecessary alike. And capitation of fiscal intermediaries creates a major opportunity for profiteering, fraud, and abuse in health care.
The poster child for these problems with VBP is Medicare Advantage. MedPAC has calculated that Medicare Advantage plans are overpaid by 22% compared to if the same beneficiaries were in Traditional fee-for-service Medicare. Medicare Advantage plans game their payment formula by capturing healthier-than-average members and up-coding (often to the point of fraud), and from skimping on care, including denial of necessary care. Medicare Advantage is the most profitable line of business for health insurance companies, outstripping commercial insurance and Medicaid managed care. Medicare Advantage is already draining the Medicare Trust Fund, and if it were quickly expanded to all of Medicare, as Project 2025 would have, the Trust Fund would run out of money by 2031, 5 years sooner than current projections.
There is also extensive evidence of harm to both beneficiaries and providers of care due to Medicare Advantage. Plans restrict beneficiary choice with narrow and “ghost” networks (publicized networks of physicians, many or most of whom are not actually available to plan members). Doctors complain of large amounts of time wasted on prior authorizations. Hospitals are increasingly dropping out of Medicare Advantage because of high rates of claims denials and difficulty getting paid. And perhaps most insidious, when for-profit insurance companies and private equity firms buy up physician practices and secure “value-based” government contracts with Medicare and/or Medicaid, they then seek return on investment by pressuring doctors to compromise patient care in service of the financial goals of their corporate owners, driving an epidemic of “moral injury” and burnout.
The CMS version of fee-for-service is admittedly flawed and in need of reform. However, abuse of fee-for-service was a minor problem when independent doctors were paid with fee-for-service, but it has become increasingly problematic with corporate ownership of doctors’ practices and chains of hospitals by large companies pursuing profit, instead of independent physicians whose ethics require prioritizing the best interest of the patient.
Since “Value Based Payment” carries much higher administrative costs than fee-for-service, capitated plans or care delivery systems can compensate for high overhead and be profitable only by gaming the payment formula to be grossly overpaid and/or by denying and sabotaging care, and there is extensive evidence for both.