Industry goals for healthcare payment transformation

Over the past several decades, the US Healthcare Industry has become increasingly complicated and has continued to face issues throughout the past several decades. According to CMS National Health Expenditure Data, healthcare spending for 2023 totaled $4.9 trillion dollars, averaging $14,570 per person, and constituting 17.6% of the nation’s gross domestic product (GDP). This unsustainable growth in healthcare expenditures is largely attributed to the traditional FFS reimbursement model, under which the vast majority of the industry continues to operate.1  

In an FFS model, providers are financially incentivized to perform services in large volumes with limited financial accountability over the quality of care delivered. This model does not align health plan and provider incentives and deemphasizes patient-centered care, often resulting in increased medical costs due to unnecessary or duplicative services and suboptimal care outcomes.  In recent years, there have been increasing pressures for the industry to address these issues and implement value-based care (VBC) programs, which are aimed at optimizing cost efficiencies, while aligning provider and health plan incentives and improving the quality of care. 

The Healthcare Payment & Learning Action Network (LAN) 

LAN is a group of private and public healthcare leaders that was launched in 2015 by the Department of Health and Human Services (HHS) through CMS. Their purpose is to provide thought leadership, publications, resources and other insights related to best practices that can help commercial, Medicare (i.e., both traditional and Medicare Advantage programs), and Medicaid health plans and providers transition from FFS models towards alternative payment models (APMs) that drive two-sided risk. 

Two-sided risk models substantially transform how healthcare is paid for and delivered by shifting more of the financial accountability from health plans to providers, while still holding providers accountable for quality of care standards. It is very unlikely for health plans of healthcare providers to quickly shift from an FFS model to a two-sided risk model; rather, it is a journey to first take on one-sided risk models before transitioning to two-sided risk models. 

The lack of sustainability in the current U.S. healthcare system has prompted LAN to set aggressive industry goals across all commercial and government lines of business by 2030, to increase the percentage of healthcare payments tied to two-sided risk payment models, which will require health plans and providers to continue to work closely together. Both parties must align on program goals and incentives, and at the same time, continue to update and advance their payment models, operational processes and technical systems, to meet the demands of the ever-changing healthcare landscape. 

Challenges with switching from FFS to VBC 

In 2023, more payments than ever before have been linked to APM payments 45.2% of healthcare dollars spent on healthcare (up 4% from 2022, according to the HCP LAN MY2023 measurement effort). However, convincing providers to modify their business model to support shared risk is a marathon, not a sprint. The first step for health plans is to engage providers in a one-sided risk model to get them comfortable with VBC programs before gradually transitioning to a two-sided risk model where providers take on more risk. This requires health plans to implement flexible payment transformation solutions that can support both one-sided and two-sided risk programs. 

It’s very important that these solutions are thoroughly fleshed out so that they suit the health plan and provider’s program goals and incentives. Attaining mutual understanding and agreement (i.e., among the health plan and provider) of program goals, and efficiently administrating required operational and technical capabilities, are both imperative and of equal importance for program success. Implementing these capabilities without agreement on program goals will result in a failure to reach the desired VBC program quality and financial outcome targets. 

Capabilities requirements 

VBC models require health plans to expand people, processes and technology to support the capabilities required for VBC programs such as program population management, quality outcome measurement, information sharing, care delegation management, cost efficiency measurement and financial settlement. These new capabilities introduce a wide spectrum of implementation challenges related to both technical enhancements and operational improvements that are necessary to support a robust, end-to-end payment transformation. 

Aligning incentives 

In both one-sided and two-sided risk models, health plan and provider incentives must be closely aligned to achieve program success. VBC models require a reformed care delivery approach as providers increase their focus on individual patient health improvement; health plans must support providers through developing actionable insights into patient performance and quality metrics. It is necessary for both the health plan and provider to agree on a clear program definition and a road map to transition from a one-sided risk model to a two-sided risk model to mitigate future conflict. 

What happens if we ignore this problem? 

The expected continued increase in healthcare spending contributes to an overly burdensome and broken system, where expenses occupy increasing amounts of state and national budgets, employer budgets, health plan and out-of-pocket expenses. The entire industry as a whole is operating under an inefficient system; therefore, the entire industry needs to take action. 

LAN has slightly different incremental goals from government to commercial lines of business over the next five years but has the same overarching goal of migrating a majority of healthcare payments tied to two-sided risk models by 2030 (100% adoption for Medicare contracts and 50% for Medicaid and commercial contracts). 

Some steps have already been taken, more so in the government line of business. In calendar year 2030, 43% and 33.7% of healthcare payments were tied to two-sided risk models for Medicare Advantage and traditional Medicare health plans, respectively. In contrast, only 21.6% of commercial healthcare payments were tied to two-sided risk models – a metric that shows that the commercial line of business has been slower to adopt these two-sided risk models. Wholistically though, the industry is gradually moving in the right direction; and together, commercial health plans and CMS can collaborate with providers to transform the healthcare world. 

Doing business with CMS 

CMS is mandating that Medicare and Medicaid providers progressively assume more financial risk for the health outcomes of their patients and the cost of the care provided. Commercial health plans should be following suit. Thus, if a commercial health plan is offering Medicare Advantage, they should already be encouraging their providers to participate in one-sided risk payment models. By 2025, LAN has set a goal to have 60+% of all traditional Medicare and Medicare Advantage healthcare payments tied to quality and value; and by 2030, targeting 100%. These are notably aggressive targets and will require continued improvement in processes and capabilities. This is in part why a gradual transition from an FFS model, to a one-sided risk model, and then to a two-sided risk model, is recommended for long-term success. 

Effects on commercial health plans 

Commercial health plans occupy the largest percentage of provider funds, are privatized with no direct oversight, and are not standardized like government programs, which will likely make adoption of two-sided risk models more difficult. Additionally, the current trend of increased year over year cost of healthcare spending is not only affecting commercial health plans and providers, but also employer groups, ranging from small businesses to some of the largest corporations. According to a 2023 Mercer survey, the average total health benefit cost by employee will increase by 5.4% in 2024. These increased costs are rising faster than overall inflation, making them unsustainable.3 

Employer groups who enter Administrative Services Only (ASO) contracts with an FFS health plan is especially suffering from these rising costs, as they are financially responsible for all their employees’ medical claim expenses. Therefore, the health plan’s journey from FFS to value-based programs is crucial to employer groups involved in ASO contracts. The health plan’s achievement of value-based program goals will result in reduced medical expenses and improve the overall health of the insured employees. 

LAN has established a pathway for success by setting the goal of 30% of total healthcare payments to be tied to two-sided risk models by 2025, and 50% by 2030. It’s important that health plans and providers take steps towards implementing these VBC programs because failure to do so risks elongating the current trends of increased year over year cost and suboptimal care interactions. (Figure 1)  

Where should health plans start? 

Training for a marathon can be incredibly difficult, but it doesn’t have to be. Health plans can begin by assessing where their VBC program portfolio is today and setting clearly defined goals for the future. Whether health plans are launching a new risk sharing model or expanding contract volume within existing risk arrangements, there are many steps along the way. Health plans should determine the feasibility of the program, design a clearly defined and agreed-upon program, enable the necessary operational and technical capabilities, and monitor program performance. 

Baker Tilly encourages health plans to reflect on their own journey and challenges them to work towards crossing the finish line. Is your health plan ready to help LAN achieve its goals and take part in this industry-wide transition towards a more sustainable healthcare system that prioritizes reduced costs and improved patient health outcomes?