The goal of value-based purchasing (VBP)—the payment model that links reimbursement for health services to patient outcomes1,2—is promising: to improve health outcomes and cut healthcare costs through increased provider accountability.3 However, in the last few years, an increasing number of healthcare payers have formed value-based care partnerships with healthcare systems4 that may have unintended negative consequences, for the healthcare systems and patients, if not implemented correctly.
The Tiered System
In these partnerships, payers select hospitals based on various criteria for their VBP programs.5 For example, Horizon Blue Cross Blue Shield of New Jersey’s OMNIA Health Plans divided its hospitals into two tiers based on quality and costs. The Horizon plan used the following six criteria: leadership mindset, clinical quality, consumer attractiveness, financial resources committed to population health, service offering across the care continuum and scale.6 Policyholders pay a lower out-of-pocket payment if they visit one of the 50 Tier 1 hospitals ($1,000 individual deductible) compared to the 33 Tier 2 hospitals ($2,500 individual deductible).7
Although some criteria, such as clinical quality, financial resources committed to population health and service offering across the care continuum, are objective and easy to measure, other selection criteria, such as leadership mindset and consumer attractiveness, are more likely to favor hospitals with more financial resources. Not surprisingly, Tier 2 hospitals under the Horizon OMNIA Health Plan include more independent hospitals and hospitals with a larger share of public insurance.8,9
Critical questions remain to be answered: How will partnerships like the Horizon OMNIA Health Plan affect the financial performance of the lower-tier hospitals? How will policyholders respond to the change in out-of-pocket costs?
Revenue Loss for Tier 2 Hospitals
Independent, safety-net hospitals—many of the Tier 2 hospitals—play a significant role in the U.S. healthcare delivery system.10 These hospitals provide care to low-income and vulnerable populations, including the uninsured and Medicaid patients, who total almost a quarter of New Jersey residents: In 2018, 17 percent of New Jersey residents received Medicaid, and 7 percent of the population had no insurance.11 In the last few years, an increasing number of independent and rural hospitals have closed or have been under financial stress.12,13 In fact, 53.2 percent of stand-alone hospitals lost money on an operating basis each year from 2014 to 2019 compared to the system-owned hospitals (25.9 percent).14
The federal government helps hospitals to offset the cost of providing uncompensated care through Medicaid Disproportionate Share Hospital (DSH) payments. However, the pending budget cut in Medicaid’s DSH payments will put independent and safety-net hospitals in further financial distress.15 It is estimated that New Jersey will lose $1.1 billion in federal DSH payments from fiscal years 2020 to 2025.16 This financial loss may lead to additional hospital consolidations and closures. Previous research suggested that hospital consolidations lead to price increases for hospitals, insurers and physicians.17
“When the number of commercially insured patients decreases, Tier 2 hospitals lose valuable sources of revenue from the emergency departments (ED) and elective procedures.”
When insured patients choose Tier 1 hospitals, the resulting reduction in patient volume in Tier 2 hospitals is an upfront loss in revenue. In recent years, as Medicare has introduced new regulations and penalties for poor care quality, significant cost-shifting has occurred in all U.S. hospitals towards commercial payments.18,19 Hospitals are more likely to make a profit from commercially insured patients that cover underpayment from public insurers like Medicare, Medicaid and charity care. When the number of commercially insured patients decreases, Tier 2 hospitals lose valuable sources of revenue from the emergency departments (ED) and elective procedures. Evidence suggests that EDs were responsible for about half of inpatient admissions between 2003 and 2009.20
In addition, hospitals and health systems that predominantly serve the most vulnerable populations qualify for the 340B drug discount program.21 The 340B is a Federal Drug Pricing Program that provides outpatient drugs at a reduced price to safety-net hospitals as an incentive to increase patient services to the poor. Hospitals can provide discounted drugs to all patients who receive regular medical care at the hospital or its outpatient affiliates.22 When the patient’s insurance provider pays for a drug at the list price, the hospitals can keep the profit.23 A recent survey administered between November and December 2018 found that the 340B drug discount program resulted in average annual savings of $11.8 million per facility among more than 1,300 public and private nonprofit hospitals and health systems that participated in the 340B drug discount program.24 Losing patients with commercial insurance may lead to revenue loss from the 340B program for Tier 2 hospitals.
Value-based care (VBC) is the future of how we pay for healthcare services as healthcare shifts from the traditional fee-for-service model to value-based purchasing. However, greater efforts are needed to ensure that VBC contracting does not lead to unnecessary consolidations or create barriers to healthcare access for patients. Greater emphasis should be given to the quality of patient care and outcome, which is the essence of VBP.
Changing Penalties and Incentives
As the U.S. healthcare system moves toward a population health-based model, payers should continue to work with hospitals to address the social determinants of health in the community. In recent years, several health insurance carriers, such as UnitedHealth, Humana and Blue have been working with hospitals to address the social determinants of health issues, such as housing, transportation, etc. For example, Humana, a payer and home-health provider, recently announced its Social Determinants of Health Value-Based Program, focusing on food insecurity, social isolation, loneliness and housing instability among their Medicare Advantage members.25 Acknowledging that access to transportation is a key social determinant of health,26 Florida Blue is partnering with Lyft to provide members who have individual plans through the Affordable Care Act (ACA) with transportation to their doctor’s office.27
“This kind of population health-based model promotes community health but is thwarted when payers base penalties or incentives on out-of-pocket costs for the policyholders rather than on the providers’ performance.28″
This kind of population health-based model promotes community health but is thwarted when payers base penalties or incentives on out-of-pocket costs for the policyholders rather than on the providers’ performance.28 Higher out-of-pocket payments for selected hospitals, as identified by the payers, can negatively influence patients’ behavior to seek care. A previous study reported that 27 percent of families delay or do not seek care due to higher costs.29 Moreover, people with poor health struggle even more and often choose not to seek healthcare because of affordability. Last, selecting more urban and suburban hospitals as preferred hospitals creates a geographic barrier, again decreasing access to care, specifically for patients in rural areas.
Providers and payers should be encouraged to participate in VBP to enhance the quality of care and population health and ultimately, bring healthcare costs down. The challenge, however, is to create an objective framework for VBP to achieve the desired outcomes with minimum negative repercussions.