Understanding value based healthcare reimbursement models

VBC programs pay providers in a variety of ways, but they all move providers away from the current transactional model—fee-for-service—under which providers are simply reimbursed for the services they provide, whether or not they are effective at improving a patient’s health. Since fee-for-service is the most common payment model in US healthcare, value-based contracts are often referred to as alternative payment models (APMs).

Whether you're currently enrolled in a quality payment program like MIPS, or considering a move into VBC for the first time, there is likely a program and payment method that can work for you.

Most value-based care programs are designed to pay providers in one of three ways: through pay for performance incentives; shared savings payments; and upfront payments. Let’s take a closer look at these payment types and what you should consider about each.

Pay for performance (or performance-based) and bundled payments incentives

The most common type of value-based care reimbursement model is pay for performance (P4P). At the highest level, pay for performance rewards medical providers for meeting certain requirements and metrics for both the quality of care they provide and the value (or cost-effectiveness) of that care.

P4P programs can have upside-only incentives, where providers are rewarded for exceeding benchmarks, or upside and downside incentives where providers can be both rewarded with bonuses when they outperform set thresholds and penalized for performing below those same thresholds. Pay for performance payments often take the form of upward or downward adjustments to a participating provider’s Medicare Part B fee-schedule. Past performance can also determine pay schedules going forward.

How are pay for performance payments used?

You’re probably most familiar with pay for performance payments as the distribution mechanism for CMS’ Merit-based Incentive Payment System, or MIPS.¹

Under MIPS, participating healthcare organizations are evaluated on four criteria: quality, cost, promoting interoperability, and improvement activities.² Practices that meet MIPS requirements for these categories receive a positive adjustment to their Medicare Part B reimbursements for a subsequent year; practices that don’t meet these requirements may receive a negative adjustment to their fee schedule.

When and how are pay for performance payments distributed?

Pay for performance payments like the fee schedule adjustments used under MIPS are distributed to providers long after care is provided, typically 1-2 years later. This is because the data must be analyzed and compared across larger populations. The basic schedule is as follows:

• Performance year: your practice’s performance against requirements is tracked and documented during this timeframe
• Year-1: your practice’s performance during previous year (i.e., performance year) is calculated and fee schedule adjustments are determined
• Year-2: Upward or downward reimbursement adjustments are applied, resulting in a positive payment adjustment (additional payment for the performance year) or a negative one (percentage of reimbursements already received for performance year must be repaid). Performance criteria is updated annually based on performance data other program participants.

While we’ve mostly discussed MIPS here, it’s important to note that different P4P programs, from both private and public payers, have their own requirements and schedules. However, the basic approach to payment is consistent.

What are the benefits of pay for performance payments?

Pay for performance payments can help improve care for all your patients. That’s because your MIPS performance is tracked across all patients—not just Medicare Part B patients—so these incentives can help drive improvements to quality, cost, interoperability, engagement, and other metrics for your entire practice.

The programs also offer financial incentives for achieving better efficiencies and lower costs for patients.

What are bundled payments?

Bundle payments are a healthcare payment model similar to pay for performance, but with key differences. Bundled payment models encourage provider collaboration in an effort to provide effective and efficient services around a pre-defined episode of care.³ These programs, like the Medicare Bundle Payment for Care Improvement (BCPI) Advanced Model, are focused on specific episodes of care and are designed with little downside risk.⁴

MSSP and shared savings programs

Shared savings is a value based care alternative payment model most commonly used for shared savings and risk programs. Shared savings payments encourage providers to form Accountable Care Organizations (ACOs) to deliver comprehensive, high-quality care to specific groups of patients while limiting or avoiding unnecessary (or duplicative) and costly services and interventions. Providers that can manage these care costs well are entitled to a share of the savings they help achieve.

How are shared savings payments used?

One common example of shared savings payments is the Medicare Shared Savings Program (MSSP).⁵ The MSSP encourages groups of medical providers to collaborate and form ACOs in order to pool resources and achieve better operational efficiencies than they could individually. This also enables practices to spread risk across the larger group. More enrolled practices mean more patient care being managed, which gives the ACO a larger risk pool. This increases their overall likelihood of achieving shared savings and VBC success as an organization.

Under MSSP, an ACO is eligible to receive a portion of the savings it achieves for Medicare, sharing the savings and incentivizing cost effectiveness and better health outcomes.⁶

When are shared savings payments distributed?

Shared savings payments are distributed after the period for which performance is tracked. For example, under MSSP, funds are distributed to a participating ACO based on the amount of savings the group achieves over a 1-year period. The ACO then redistributes those funds to each practice within the group.

What are the benefits of shared savings payments?

Shared savings payments used for programs like MSSP encourage smaller practices and groups to work together to achieve better economies of scale, especially for higher-risk and higher-cost patient populations. In addition to encouraging interoperability and creating a more holistic picture of a patient’s healthcare across organizations, they can also be an entry point for smaller organizations to participate in value-based care without taking on more risk than they can manage on their own.

Upfront capitation and pre-payment reimbursement models

Some value-based care programs pay providers ahead of time for the care they deliver to groups of high-risk patients. These capitated payments encourage capable providers to take on the financial risk associated with caring for groups of high-risk patients.⁷ They also provide predictable cashflow for the practices that helps mitigate charge entry lag and doesn’t rely on waiting for reimbursement for services.

How do capitation payments work?

Capitated payments are used for a variety of value-based care programs from commercial payers, but they are most associated with global capitation programs like Medicare Advantage⁸ and Medicare’s Program of All-Inclusive Care for the Elderly (PACE).⁹ Under PACE, participants receive a set amount of money per patient, per month to cover the entirety of a patient’s healthcare costs for that time period. This includes services like home care, physical therapy, recreational therapy, social work counseling, and other services in addition to primary care. The provider receiving the capitation payments is responsible for tracking and measuring these costs. Any funds remaining after that care is paid for goes to the participating practice.

When are upfront payments distributed?

Upfront payments are paid out at different times depending on the program. For programs like PACE that function on a per patient, per month structure, funds are distributed monthly. The predictable revenue stream and earlier payment structure makes these attractive for many practices that have healthcare IT solutions that provide the capability to track patients across multiple providers.

What are the benefits of capitated payments?

Capitated payments provide a predictable cashflow for practices, especially compared with standard fee-for-service billing, which can be delayed by claims denials and charge entry lag. Global capitation programs in particular can be beneficial for large medical groups with the operational sophistication to predict and track the healthcare costs for panels of high-risk patients. They can also be a good option for specialists with expertise in caring for specific high-risk patient populations, such as chronic disease management like kidney disease, diabetes, or auto-immune disorders.

Succeeding with alternative payment programs and VBC reimbursement models

No matter which value-based care programs and alternative payment models you leverage, there are certain skill sets your organization should cultivate to support your success.

Almost all value-based care models (with the exception of global capitation programs) still require some element of accurate and efficient fee-for-service billing. For that reason, utilizing a healthcare IT (HIT) solution with revenue cycle management capabilities can enable you to succeed in both traditional and quality-based models of delivering care.

A consolidated HIT platform that combines other core functions like electronic health records and patient engagement tools can help with accuracy and efficiency when tracking and reporting on program-specific quality measures.

A consolidated HIT platform that combines other core functions like electronic health records and patient engagement tools can help with accuracy and efficiency when tracking and reporting on program-specific quality measures. Integrated reporting dashboards that provide real-time data and AI-powered analysis that automatically determine your most favorable time periods and auto-submit to CMS on your behalf also optimize performance and streamline the administrative tasks.

Encouraging greater interoperability between healthcare systems is also a primary goal of many VBC programs, so choosing the right technology partner is crucial to ensuring you have the holistic view into a patient’s care across providers.

If you’d like to learn more about value-based care, popular quality- and performance-based programs, and other considerations around this growing sector of the US healthcare industry, read the articles below.