Why Value-Based Pricing Is Doomed To Fail

Paul Levy, former CEO of Beth Israel Deaconess Medical Center in Boston, recently wrote a blog for athenainsight.com entitled, “The game that shows why value-based pricing is doomed.” In his blog, Levy discusses how a key element of President Obama's healthcare policy was a push for "value-based pricing" using CMS to offer pricing incentives to reduce overuse in clinical care.

Yet switching from the traditional “fee-for-service" pricing—in which doctors and hospitals were paid per procedure, which many believe led to skyrocketing healthcare costs due to overuse of services resulting from this financial incentive—to the ACA’s "value-based pricing” did not work. Why not?

Fee-for-service vs. value-based pricing: does either one work?

According to Levy, the answer is partially because “some policy analysts decided that doctors and hospitals should be given a countervailing financial incentive to reduce certain kinds of diagnostic tests and to avoid medically unnecessary procedures.” Hence, value-based pricing, or the so-called “global payment."

Under this plan, Medicare or private insurers, Levy explains, would give each health system (now called an accountable care organization or ACO) an annual number of dollars per year per patient, based on the risk profile of that system's population. “If the health system could treat the patient for less money, it would keep the surplus. If its spending exceeded that budget, it would suffer a loss,” he writes.

This means that CMS and private insurers were trying to transfer the actuarial risk of patient care to providers, counting on the new financial incentive to change behavior. Levy’s argument is that this logic was flawed from the start because the system was rigged against doctors.

To illustrate the effect of global payments on doctors' pay, Levy offers this scenario:

Say you are a gastroenterology doctor in an ACO anchored by an academic medical center. You are paid in great measure by how many endoscopies you perform. Your health system has signed a global payment contract with its insurers, looking at data which suggests that many of these procedures can be avoided by “tincture of time," dietary advice, and observational treatment overseen by the primary care doctors in its network.

You are skeptical, but you're willing to be a team player because you've been told that, should a surplus emerge at the end of the year, you'll get a bonus on your paycheck. At the end of year one, your clinical volumes have declined because of the new care management protocols adopted by your health system. Your bonus arrives, but you notice that your net income is less than before because the bonus has been shared across the health system, with a portion being given to those primary care doctors in return for their diversion of procedural cases.

He goes on to say that “if the premise of global payments is that doctors are economically rational creatures who will respond to financial incentives, then the financial incentives have to be substantial, immediate, and transparent to be effective. Under a global payment regime, however, the incentives are minor, delayed and fuzzy.”

The result is that even those doctors who want to be good corporate citizens will find themselves pushed to game the system, i.e., to order tests and make referrals that aren’t truly warranted, because the promised end-of-year paycheck bonus never arrived.

Whatever happened to caring about the patient?

Levy concludes his blog by saying that “value-based pricing, however well-intentioned, is likely to be an energy-sapping distraction, while we fail in the major task of addressing the disenfranchisement of consumers in their treatment decisions.”

To me, all of this begs the question: How about better medicine, and better outcomes? Oh, and keeping people out of the hospital while we’re at it. (Because that was why I thought ACOs were formed.)

So why is this important for the ancillary healthcare provider industry? 

As ancillary providers, we are (or at least should be) a very important part of that chain of professionals who need to deal with quality care, keeping people out of the hospital, providing services at home and reducing readmission rates. That’s why building relationships with ACOs and providing quality service will make it better for value-based medicine supporters and in fact, better for all of us.  

At NAQAP, we are working hard to make sure that our members are part of the continuum of care, and we advocate every single day to ensure that ancillary providers are included in today’s most pressing healthcare discussions.

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