This post is intended to be short and to the point. I’ll do my best, but I need to include two definitions of healthcare finance that are important to understand:
Fee-For-Service Reimbursement; The age-old traditional way of how doctors, hospitals, and other health care providers get paid by insurance companies, Medicare, and Medicaid. As an example, you have a nagging herniated disk in your back, so you go see an Orthopedic Specialist. He determines you would benefit by having surgery to repair it. To start off the doctor will bill your insurance company for the initial exam. He’ll also bill the insurance company for the actual procedure and any follow-up exams. The hospital will also bill the insurance company separately for your stay in the hospital, most likely including page after page of itemizing every single “service” you received such as a charge for using the operating room, a daily charge for your hospital room and every single pill or shot you received for pain. After all the follow-up visits to the doctor for the first surgery, you fall into the category where the surgical procedure did not alleviate your pain. So, you go back to the doctor and he decides to try a new surgical procedure that may help you. The charges to the insurance company start all over again. Get the picture? Under fee-for-service reimbursement, health care providers charge for every time they provide a “service”, regardless of the outcome. This system of paying for health care is a large part of the run-away medical inflation and sky-rocketing cost of U.S. health care. It’s not the only reason, but that discussion is for another blog.
Value-Based Reimbursement; This is the effort to change the system to pay for health care services as an “episode of care” from start to finish in a single, agreed upon charge instead of listing out each individual service that was provided during the episode. It also includes placing some of the financial risk on the health care provider to ensure the outcome of the care was actually beneficial to the patient (and the employer who is paying for it) and additional expense are avoided. In the back surgery example above the doctor and the hospital may not get paid for the second procedure because the first procedure didn’t produce the expected outcome. Value-based reimbursement payment plans have been battling their way into the health care scene for years without much luck, nor impact. Even the CEO of the largest Blue Cross Plan in the U.S. admitted at an industry conference earlier this year that 90% of their current Value-based reimbursement contracts with doctors and hospitals are really just Fee-for-Service agreements with some small bonus payment if costs are positively impacted.
That leads me to my prediction regarding how health care will be greatly impacted for 2021 and certainly beyond that: Genuine Value-based reimbursement from payers to providers will be adopted at a rate faster than anything in the past. And the reason is Covid-19. But not directly because of extra care and expenses associated with treating patients due to the pandemic. It has more to do with what treatments patients didn’t get because of the lock-downs and efforts to keep from spreading the virus in health care settings. It’s estimated that orthopedic procedures were down 90% from the previous year because patients didn’t want to risk catching the virus and hospitals wanted to reduce the risks of spreading it. I find that an amazing example of unintended consequences from this devasting pandemic. What the example means is that doctors and hospitals lost 90% of their expected revenue because they couldn’t perform the services they planned on. With Fee-for-service reimbursement there is no pay if there is no service. With spinal fusion costing as much as $100,000 a lot of doctors and hospitals lost out on lot of revenue in 2020. Had those doctors and hospitals participated in a value-based care contract with an insurance company where they managed large populations of orthopedic patients for a set monthly fee (the average being $160 per member per month) plus some reward for improving patient outcomes and lowering overall costs they would’ve had a steady income stream even when they weren’t performing surgeries.
Health care providers have historically not participated in Value-based payment contracts because they didn’t have to. There has always been a steady, predictable stream of patients to rely on. So why take a financial risk when the revenue seemed to be ever flowing? The insurance companies haven’t made much of an effort promote Value-based contracts (that really share financial risk) either. After all, they can always pass on increased health costs to the employer and patient. But perhaps the pandemic is providing an incentive for the insurance companies to put some “teeth” into their provider contracts that take a new look on how to stem the continually increasing cost of health care and improve health care outcomes now that providers have experienced an unforeseen disruption in the status quo and have a new financial risk (loss of income) they need to address. If our health care system is ever to become sustainable this could be a good place to start.
If your current employee benefits broker is not bringing you strategies to start this kind of change give me a call. I’ll help you get on the right track.