Health care pricing is currently a smoldering mixture of ill-conceived cost-based pricing with twisted value-based pricing components. For simplicity purposes, let’s examine the pricing of physician services. As for all health care, the pricing of physician services is driven by Medicare. The methodology is neither cost-based nor value-based and simultaneously it is both. How so? Medicare fees are based on relative value units, which are basically coefficients for calculating the cost of providing various services in various practices, of various types and specialties. The price, which is also the cost since it includes physician take home compensation, is calculated by plugging in a dollar value, called conversion factor. The conversion factor, which is supposed to represent costs, is not in any way related to actual production costs, but instead it is calculated so the total cost of physician services will not exceed the Medicare budget for these services. Buried in this complex pricing exercise is a value-based component. A committee of physicians gets to decide the requisite amount of physician effort, skills and education, for each service. Whereas in other markets the value decision hinges on buyer perceptions, in health care it is masquerading as cost.
The commercial insurance market adds a more familiar layer of complexity to the already convoluted Medicare fee schedule baseline. Unlike Medicare fees, which are nonnegotiable, private payers will engage in value-based negotiations with larger physician groups and health systems that employ them. Monopolistic health systems in a given geographical area can pretty much charge whatever the market can bear, just like the beer vendor at your favorite ballpark does, and brand name institutions get to flex their medical market muscles no differently than Under Armour does for socks. This is value-based pricing at its best. Small practices have of course no negotiation power in the insurer market, but as shortages of physician time and availability begin to emerge, a direct to consumer concierge market is being created, providing a new venue for independent physicians, primary care in particular, to move to a more profitable value-based pricing model.
Unsurprisingly this entire scheme is not working very well for any of the parties involved, except private insurers who thrive on complexity and the associated waste of resources. Upon what must have been a very careful examination of the payment system, Medicare concluded that it does not wish to pay physicians for services that fail to lower Medicare expenditures, and Medicare named this new payment strategy value-based health care, not because it has anything in common with value-based pricing, but because it sounds good. Another frequently used term in health care is value-based purchasing, which is attempting to inject the notion of quality as the limiting factor for cost containment. However, since Medicare is de facto setting the prices for its purchases, there is really no material difference between these two terms.
We need to be very clear here that value-based health care is not the same as quality-based health care. The latter means that physicians provide the best care they know how for their patients, while the former means that physicians provide good health care for the buck. To illustrate this innovative way of thinking, let’s look at the newest carrots and sticks initiative, scheduled to take effect for very large medical groups (over 100 physicians) in 2015. Below is a table that summarizes the incentives and penalties that will be applied through the new Medicare Value-based Payment Modifier.
There are several things to note here. First, if your patients receive excellent care and have excellent outcomes, you will receive no perks if that excellence involves expensive specialty and inpatient services, whether those are the accepted standard of care or not. You would actually be better off financially if you took it down a notch and provided mediocre care on the cheap. The second thing to notice is that you will not get penalized for providing horrendously subpar care, if you do that without wasting Medicare’s money.
Another intriguing aspect of this new program is that you have no idea how big the incentives, if any, are going to be. The upside numbers in the table are not percentages. They are multipliers for the x factor. The x factor is calculated by first figuring out the total amount of penalties, and that amount is then divided among those who are due incentives. If there are few penalties, there will be meager incentives. Lastly, those asterisks next to the upside numbers, indicate that additional incentives (one more x factor) are available to those who care for Medicare patients with a risk score in the top 25 percent of all risk scores.
As with everything Medicare does, this too is a zero sum game. For there to be winners, there must be losers. One is compelled to wonder how pitting physician groups against one another advances collaboration, dissemination of best practices, or sharing of information, and how it benefits patients. Leaving philosophical questions aside, the optimal strategy for obtaining incentives seems to be transition to a Medicare Advantage type of thinking: get and keep the healthiest possible patients, and make sure you regularly code every remotely plausible disease in their chart. Stay away from those dually eligible for Medicare and Medicaid, the very frail, the lonely, the infirm, or the very old, and don’t be tempted to see a random person who is in a pinch, because there is always the chance that he or she will be attributed to your panel following some hospitalization or other misfortune.
The Value-based Payment Modifier is for beginners. It is just the training wheels for the full-fledged risk assumption that Medicare is seeking from physicians and health care delivery systems in general. The grand idea is not much different than providing an aggregated and risk adjusted defined contribution for a group of assigned members, and having the health care delivery system absorb budget overruns, or keep the change if they come in under budget. There is great value in such a system for Medicare and commercial payers certain to follow in its footsteps, and perhaps this is why they decided to call it value-based. Ironically, the equally savvy health care systems are fighting back precisely by building the capacity to create a true value-based pricing model for their services through consolidation, monopolies, corralled customers, artificial shortages, confusing marketing, and diminished physicians.
It is difficult to lay blame at the feet of health systems for these seemingly predatory practices, because transition to a perpetual volume-reducing health care system is by definition unsustainable. The infrastructure and resources needed to satisfy all the strategizing, optimizing, counting and measuring activities required for value-based health care, whether the modest payment modifier or the grown up accountable care organization (ACO), are fixed costs added to health system expenses year after year. However, the incentives or shared-savings are temporary at best, because at some point volumes cannot be reduced further without actually killing people. Either way, in the near future, and for already frugal systems, in the present, all incentives will dry up leaving only massive outlays for avoiding penalties coupled with increased risk for malpractice suits.
And as these titans are clashing high above our little heads, two outcomes are certain: individual physicians will be paid less and individual patients will be paying more for fewer services. This is how we move from volume to value. Less volume for us, more value for them.