Value-based care: Why is adoption so slow among small businesses?

Aside from individual patients, one could argue that small businesses are most victimized by the dismal state of US health care.

Only payroll surpasses health benefits as companies’ largest expense category. And small businesses pay from 8% to 18% more than a large company for an identical health insurance policy, according to a 2018 National Conference of State Legislatures report. Worse, 40% of small businesses reported that they’ve increased the prices of goods and services due to rising health care costs, according to a 2021 survey by Small Business for America’s Future.

American health care: Paying more for less

What exacerbates the uneven playing field on which small businesses must compete is an increasingly broken American health care system. Despite health care spending mushrooming to 18.8% of gross domestic product in 2020, up from 12.5% ​​of GDP in 2000, according to the Peterson-KFF Health System Tracker, the US ranked No. 35 on Bloomberg’s 2020 World Health Index. Among 11 high-income nations examined in 2021 by the New York City-based Commonwealth Fund, America’s system rated last in health care performance.

Our commercial health insurance system isn’t driving better health care value for a very simple reason: It is not designed to.

An answer exists

A value-based care (VBC) system provides small businesses with a strategy that can simultaneously reduce health care expenditures and improve patient health outcomes.

Broadly speaking, VBC is any health care model designed either to increase the level of health delivered for a dollar of health care spend, or reduce the health care spend required to deliver a certain level of health.

Envision health care systems producing a value curve in which trade-offs occur between better health and lower cost. VBC models’ goal is to push the curve toward better health and more affordability.

A common VBC model ties provider compensation to improved health, quality of care delivered, and/or reduced health care cost. Such an approach incentivizes providers to take a proactive strategy to achieve those outcomes. While this may appear to be a common-sense formula, its appearance in the real world is rare. A 2021 University of Pennsylvania’s Institute for Health Economics study found that a majority of payments made by commercial payers in 2018 had zero link to the value of care.

VBC’s foundation: Primary care

A key to optimizing VBC is an investment in primary care. Doing so enables employers to realize savings by preventing conditions that require hospitalization and specialist care. Countries ranking highest on The Commonwealth Fund’s list of countries with best overall health care outcomes prioritize primary care. Nations such as the Netherlands and Norway, for example, ensure timely primary care availability by phone on nights and weekends, with in-person follow-ups at home, as needed. Countries composing the Organization for Economic Co-operation and Development (OECD) spend on average at least twice as much of their medical spending on primary health care as the United States.

The correlation between primary-care investment and better health outcomes also plays out domestically. The Patient Centered Primary Care Collaborative in July 2019 reported that states with higher primary care spend had lower hospitalization rates:

A combination of primary-care investment with specific types of VBC models frequently yields the best outcomes.

VBC strategies consist of two distinct characteristics: care-payment models and incentive-alignment structures.

Care-payment models set the rules for how providers are paid for care — ranging from fee-for-service (FFS) to population-based.

FFS models are those where payers reimburse providers for services. Without incentive alignment structures, FFS models financially incentivize physicians to provide and bill for more services.

Population-based payment models work by paying providers a set fee for the entire care — or the entirety of a subset of care, such as oncology — given to a specific population, even if the total of patients composing that population is one.

Without incentive-alignment structures, population-based payment models financially incentivize care providers to provide the minimum possible care to minimize costs for a set revenue amount. A caveat: Most providers desire to care for patients at the highest level possible, regardless of reimbursement. So, the risk of under-utilization in population-based models could be less than that of over-utilization in FFS models.

Optimal VBC strategies systematically align provider, patient and payer incentives.

Incentive-alignment structures generally fall into three categories:

  • Upside risk — providers receive more payment by producing better outcomes or higher cost-savings;
  • Downside risk — providers share losses increased due to more expensive care or worse health outcomes; and,
  • Reporting — providers receive bonuses for supplying utilization data, or are penalized for not sharing such data.

Aligning provider incentives with payers and patients

The Baltimore-based Health Care Payment Learning & Action Network has created a four category schema for VBC models based on combining different payment models with different incentive-alignment structures:

The most effective structures in the HCP LAN framework are those that most closely align the incentives of providers to payers and patients.

Rosen Hotels & Resorts, for example, has succeeded by implementing its own onsite primary care model. Headquartered in Orlando, Florida, this small-to-midsize business (SMB) has achieved an uncommon feat in its company category: Rosen slashed per-employee health care costs to half the national average. While many SMBs are unable to replicate this structure, Rosen’s results speak to the significance of aligning incentives and payment models.

A direct primary care (DPC) practice generally is a more accessible model for SMBs. This approach replaces the FFS payment model with a flat, monthly capitated payment for each member. A set, dependent and upfront revenue amount for each patient removes the cost of billing of a third-party payer and allows primary-care providers to invest more time and resources in the population’s primary care. The structure also eliminates any incentive that otherwise might exist to bill for care that has only questionable healthcare value. The Direct Primary Care Coalition maintains a useful map for finding DPC facilities across the country.

Other VBC approaches

Benefits advisors also can mitigate health care costs for small business clients in the specialist-care context by seeking out health plans that include access to Centers of Excellence. Those focus on providing pre-negotiated, “bundled” payment rates for the most expensive and complex health care, such as heart surgery or cancer treatment. They provide value in at least two ways. First, the payment model states a transparent, fixed rate for all treatment related to a specific condition. That replaces the opaque and often predatory pricing practices employed by many facilities and providers during complex treatments. Second, Centers of Excellence attempt to contract only with the highest-quality providers when treating a given condition. Ensuring patients get the best treatment for these difficult conditions both improves the patients’ expected length and quality of life post-treatment, and lowers total cost of treatment by reducing the need for follow-on care.

Even outside the Centers of Excellence context, the bundled-payment arrangement incentivizes the primary provider to avoid complications — and further treatment — through proactive follow-up and coordination with other providers, such as physical therapists. A Health Affairs study published last year analyzing three types of major surgical procedures found that bundled payments reduced total surgery costs by an average of $4,229. Employers captured 85% of that savings.

Even SMBs that encounter obstacles to implementing an appropriate VBC strategy still may adopt a model that yields better, more affordable health care.

Reference-based pricing (RBP) is one example. This pricing model allows the ability to pay claims based on an established benchmark — a certain percentage above Medicare’s reimbursement rates, for instance. By placing a clear and fair cap on what providers charge for each service, RBP curbs the worst excesses of opaque pricing that occur when health insurers and hospital are free to arbitrarily determine exorbitant negotiated rates that have no relationship to value.

While there have been attempts to federally regulate transparent pricing — such as the Hospital Price Transparency Rule, which requires hospitals to publicly post their prices, and regulations authorized by the No Surprises Act that protect against surprise balance billing — their effectiveness has been questionable. Just 5.6% of hospitals were found to be fully compliant with the price transparency rule as of January 21, 2021. The RBP model is a surefire way to ensure transparency, and it can result in savings of up to 40% on medical spending.

It might not always be feasible to achieve comprehensive VBC solutions —those with both the highest-value payment structure and the highest-value incentive alignment structure — for small business clients. But it is always possible to help them access at least some elements of VBC. VBC is the only way forward to solving the value crisis in US healthcare. Benefits advisers are in a unique position to inch clients, big and small, toward VBC healthcare models. Doing so will also steer the country closer to a VBC system that will improve health care for all America.

Will Young is the co-founder of Sana Benefits.

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