Might different payment models have saved hospitals during COVID?

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Sep 14, 2021

As the US works to move forward from what continues to be a tumultuous couple of years, several industries are facing a reckoning, and healthcare is no exception. COVID uncovered deep flaws in how the healthcare system currently operates, bringing lasting issues and their proposed solutions into rather harsh perspective.

The pandemic unleashed havoc on the healthcare system. Staffing and supply shortages grew, and hospitals cancelled virtually all non-emergent care as they overflowed with COVID patients. Hospitals ultimately lost so much money that many faced bankruptcy and closure. If the pandemic highlighted anything, it’s that the healthcare system, as it currently stands, is not designed to handle nationwide public health emergencies and the resulting fallout. 

A major culprit of why hospitals in particular suffered so much is the fee-for-service (FFS) payment model that has long been the predominant payment model in healthcare. Under FFS payment, the more patients that are treated, the greater the profit. That’s why simple, predictable procedures such as joint replacements are so beneficial to hospitals—they get a lot of people in and out the door. But when elective procedures were cancelled to protect hospital patients from being exposed to COVID, that steady source of dependable income disappeared, putting hospitals in a sticky situation. Might hospitals have fared better had other payment models been more prominent during the pandemic?

Value-based payment models

In contrast to the FFS model, in which payers reimburse providers a fixed fee for each service they provide from an approved list, value-based payment (VBP) models hold providers financially accountable for both the cost and the quality of care they deliver. VBP models reward providers financially for delivering better, more cost-effective care, and can penalize them for failing to do so. 

Value-based payment models tie the amount a healthcare provider is reimbursed to predetermined cost and quality targets, created by either a public or private insurer. While quality targets can vary based on who is designing them, many payers have similar targets, such as post-hospitalization readmission rates, provider-to-patient ratios, and percentage of patients receiving preventative care (such as immunizations).

Value-based payment models ultimately incentivize keeping people healthy and, unless absolutely necessary, out of the hospital. Were VBPs the norm, it’s conceivable that hospitals might have been able to develop systems and procedures to increase profit during the pandemic instead of relying on keeping every bed full. US hospitals might therefore have been better equipped to handle the pandemic, while at the same time participating in an industry that prevents illness rather than treating illness. 

Where can hospitals go from here?

Even before COVID, many healthcare administrators were pushing  the industry to switch towards VBPs. In 2016, for instance, the Department of Health and Human Services announced its goal of switching 30% of fee-for-service Medicare payments over to a value-based model. Adoption of VBPs across the board, however, historically hasn’t been as widespread as many desire.  

Once the healthcare industry regains some normalcy and is able to focus on regrouping, hospital administrators ought to use this opportunity to integrate VBP into their halls.  While many providers have not yet developed the know-how to achieve clinical and financial success with VBP, three factors should push administrators to explore VBP despite their concerns: 1) reflection on their precarious situation during the pandemic, 2) shrinking margins due to an aging US population and increasingly sophisticated and costly treatments, and 3) payers’ pressure to deliver a better return on care dollars invested. As more and more success stories are reported, evidence points toward value-based payment models as a step in the right direction for healthcare.

It’s unclear at this point if  COVID has impacted the nationwide push towards value-based payments. So much of healthcare saw drastic operational shifts while adjusting to address the pandemic. But as the dust settles, there is a real opportunity to take the time to reshape aspects of our healthcare system. The question now is whether or not the pandemic will be the final push needed to fully adopt value-based payment.

Jessica is a research associate at the Clayton Christensen Institute for Disruptive Innovation, where she focuses on business model innovation in healthcare, including new approaches to population health management and person-centered care delivery.