Return on Health: The business case for a value got stronger in 2020 (part 1)

The Affordable Care Act of 2010 (ACA) created the accountable care (ACO) framework to improve the value delivered by the US healthcare system. An ACO is rewarded for performance or "value," defined as better outcomes and quality care delivered at the lowest possible total cost to a satisfied consumer.

The ACA was supposed to accelerate adoption of new care models and reduce the $935 billion of annual waste and low-value services -- 25% of the total annual spend -- delivered under the prevailing fee-for-service (FFS) reimbursement system.

What's the problem?

Ten years after the ACA became law, value-based contracts account for only 38% of total patient revenue. The structural risks created by the FFS revenue model have long been understood, but the consequences of delaying real change could always be rationalized. Health systems continued to prioritize volume over value, especially higher-margin elective services, and frankly had little meaningful incentives to reduce waste or lower total costs. Under FFS, cost savings benefit the entities bearing the financial risk -- i.e., insurers and large employers, and even consumers -- not providers or suppliers.

Simply stated, this misalignment of interests cannot yield the needed improvements in performance by tweaking a little more efficiency from legacy operating models.  As a result, at least in part, most health systems have not adequately prioritized investments in infrastructure or embraced the needed changes in their culture of care delivery that are essential to driving innovation and truly disruptive value-based care models.

In 2020, the known flaws in the fee for service revenue model were exposed when the collapse in volume caused by the pandemic, and compounding effects of unbudgeted expenses to meet demands for safe triage and treatment, became an existential  financial threat for many health systems.

The Kaiser Family Foundation documented the impact of the pandemic through September of last year.  Canceled elective care contributed to year-on-year declines in the medical loss ratios for every insured product line (i.e. Medicare Advantage, Medicaid Managed Care and Individual Market) offered by commercial health plans, driving up margins and profits.

Disconnecting financial risk from performance risk — as providers of services that maintain health and, when needed, deliver needed and effective treatment — stifles innovation and drives up administrative costs. The misalignment of interest between payer and provider adds useless complexity and resultant workflow friction for common customer services. And, finally, it makes it much more challenging to compete on value, i.e., customer experience, price transparency, outcomes, and lower total costs.