July 30, 2023

By Grace Totman, Co-Head of Capstone’s Healthcare Practice

I recently enrolled my dog, Marvin, in a value-based care model, a growing approach to healthcare where providers are paid based on outcomes as opposed to per visit or service. For Marvin, that means $600 annually for unlimited telehealth, preventative treatments, and next-day appointments. The wall in the vet’s lobby has a mural that reads, “Care so good you’ll ask if we take humans!” I’m tempted.   

Value-based care has taken over the entire healthcare ecosystem, even reaching veterinary facilities. Its underlying logic makes a lot of sense. If you pay doctors for every visit with a patient, the doctor wants to see the patient more and is in some ways disincentivized from keeping that patient healthy and, therefore, out of the doctor’s office. If you pay doctors a flat fee, however, and encourage them to use that fee to keep the patient as healthy as possible while minimizing the cost of care, everyone wins. The government drives down costs by lowering unnecessary healthcare utilization, the doctor gets paid more generously, and the patient stays healthier.

In theory, it is the perfect system and its promise has captivated the entire healthcare ecosystem into believing value-based care is the future, the answer to all our problems. Is healthcare spending too high? Try value-based care. Are doctors not paid enough? Try value-based care.

In theory, value-based care is the perfect system and its promise has captivated the entire healthcare ecosystem into believing it is the future, the answer to all our problems. So where does it go wrong?

So where does it go wrong? Problem #1, the average doctor didn’t go to business school. They are exceptionally skilled at providing care to patients, but trying to manage flat payments and balance costs over a longer period can be daunting. It also requires additional resources: data providers to predict costs, virtual capabilities, and, above all, money. To combat this challenge, many of the value-based care models currently in place for doctors are one-sided; doctors can make money if they drive down costs but they won’t lose money if they don’t. This is a natural first step, but the transition seems to be taking longer than it should, inhibiting the incentive to truly keep patients healthier.

If keeping patients healthier is the goal, then providers should be paid on this metric rather than a per-visit system. Most value-based care models do include some form of outcomes bonus, but this brings us to problem #2. How do you measure a healthy patient? For some areas, this is obvious: Did the surgery patient end up back in the ER? Was the kidney transplant successful? For others, it’s nearly impossible to measure. If a patient’s cancer returns, is that their doctor’s fault? What if the patient is a chronic smoker? What if the patient ignored their doctor’s persistent calls for followup care? Most healthcare is in the gray, but value-based care works best when outcomes are black and white, and doctors can be rewarded, or penalized, accordingly.

The idea of penalizing doctors for outcomes that often are entirely out of their control seems insane. And yet for value-based care to work, there must be “losers.” Welcome to problem #3. Value-based care requires two-sided risk. There has to be both risk and reward for doctors entering these arrangements. In the current inflationary environment, with labor costs rising, and coming off the back of a global pandemic, this seems like an unthinkable ask.

Perhaps even more important than doctors’ experience with value-based care is patients’ experience. The goal is to keep patients healthier, which should drive down costs. But the other way to drive down costs is by managing the utilization of healthcare or playing a larger role in patient decision-making, steering them to lower-cost options that aren’t always in their best interest. Take the recently corrected Medicare opioids issue. Medicare pays for many surgeries using bundled payments—a type of value-based care where doctors are paid a flat fee for everything associated with a surgery. The drugs, supplies, time, and followup care are all included. In the past, drugs prescribed after surgery have largely been opioids. For obvious reasons, doctors have tried to move away from this option when possible. Non-opioid pain treatment alternatives, however, are much more costly than opioids. For doctors getting paid a flat bundled payment, this became a difficult conundrum: either give patients non-opioids but reduce your own profit significantly or continue to prescribe opioids and maximize the portion of the bundle you get to keep. While Congress recently fixed this specific issue, it exemplifies how value-based care can create less-than-ideal decision-making.   

Capstone believes value-based care is here to stay, and you can view it as the promised land while recognizing its imperfections.

There are countless other flaws within value-based care, and even still, its concept is too convincing not to believe in. As more flaws are realized, companies promising to solve value-based care—and restore it as the answer to all our problems—are popping up everywhere. Some promise to help providers with the resources needed to be successful, others seek to find more black-and-white endpoints to judge outcomes on. With the value-based care buzzword attached, these solutions are seeing significant interest from companies and investors alike who believe in the concept but have witnessed its shortcomings. Capstone believes value-based care is here to stay, and you can view it as the promised land while recognizing its imperfections. The devil is always in the details. The challenge for industry and investors will be finding and recognizing the interesting solutions to those imperfections and understanding the implications for the healthcare landscape—developments that Capstone will continue to pay close attention to for our clients.

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