How value-based care can help boost health system revenue

Risk contracting for value-based care requires a long-term transformation strategy with new financial drivers, EY-Parthenon analysis shows.

In brief

• Value-based care models are a viable path for some health systems as US health care costs rise, but the current approach is not feasible for many providers.
• Risk-based contracting between payers and providers creates near-term provider financial risk, but EY-Parthenon analysis shows a path to long-term growth.
• Health systems can develop a value-based care strategy linked to an actionable transition plan to develop and mature VBC and realize margin recovery.

Hospital leaders increasingly face a decision to invest in value-based care models that can improve patient care and curtail unsustainable systemic costs.

While a scaled transition to risk contracting has proved unworkable for many health systems over the past decade, value-based care is likely to be a renewed focus as systems address continued reimbursement pressure, rising delivery costs in the wake of the COVID-19 pandemic and pressure from vertically integrated competitors accelerating the transition to risk-based primary care. The Centers for Medicare and Medicaid Services (CMS) and the Center for Medicare and Medicaid Innovation (CMMI) are also encouraging hospitals to institute VBC arrangements to improve the quality and coordination of care, while investors continue to fund VBC provider platforms and enabling technologies. EY-Parthenon analysis¹ suggests that VBC risk contracting, where payers and providers change the payment to reward patient-oriented outcomes, can produce long-term growth for health systems committed to transforming operations in line with a well-defined financial strategy.

How a transition to value-based care impacts health system financial performance

VBC contracts can change the traditional revenue engine and margin profile of a hospital system compared to fee-for-service contracts (FFS).

These contracts may accelerate cash flow via prospective payments and allow for improved financial performance through a model that increases clinician responsibility for outcomes and rewards the right care in the most cost-effective setting. Continued improvement in managing the cost of care within VBC contracts can produce sustainable growth for health systems with the right capabilities, incentives and expectations. As contracts and operations ramp up, there likely will be short-term financial disruption, but this can be replaced with steady single-digit margin recovery as the system moves along the maturity curve, according to an EY-Parthenon analysis (see Figure 1). Compared to the lasting margin erosion that FFS models will experience, driven by demographics, coverage and expense trends, it is clear systems should consider a shift to VBC despite the known risks.

Figure 1: Projected system margin FFS baseline vs. Full risk scenarios

A negative margin impact stems from an incomplete understanding of patient costs and legacy practice patterns that fail to effectively manage utilization and quality outcomes. With VBC contracting, clinical risk data informs reimbursement and allows the provider to tailor a care plan to patient needs, costs and complexity. Similarly, provider organizations must fundamentally redefine their clinical model and care pathways to eliminate systemic gaps in care, to avoid unnecessary hospitalizations, and to deliver a more seamless patient experience that supports a reduction in the total spend and improvement in the outcomes. As providers’ VBC capabilities mature, patients can move from unmanaged to managed and medical loss ratios can improve. Any potential performance trajectory a health system may realize through value-based care adoption, however, will be unique for each organization and should be thoroughly understood to support efficient adoption.

Which health systems can adopt value-based care contracts?

It is not surprising that hospitals and provider systems with already thin margins and rising labor and supply costs are skeptical about VBC adoption — a large up-front investment, a period of margin decline, a need for a strong payer partner and the significant change management agenda require a multiyear commitment that many systems cannot support. But for those with the financial ability and organizational will, the VBC maturity J curve can be navigated. The best VBC candidates are systems with strong balance sheets, adequate clinical and administrative governance, and a willingness to champion transformation. For VBC to thrive, systems also need a significant primary care footprint, a scalable care clinical model focused on prevention across core conditions and a robust member engagement strategy.

To reduce the severity of the financial dip and steepen the growth trajectory, EY-Parthenon financial and operational analysis suggests organizations that prioritize transforming the following areas early in their VBC adoption increase their ability to manage the total cost of care for the at-risk population and improve the likelihood of sustained success:

1. Attribution growth. Patient attribution and long-term engagement are critical to both maintain a stable population under risk and allow for patients to be fully managed under a holistic care plan. Growing attribution in initial stages of adoption works best when systems focus on a single population of patients (e.g., Medicare or Medicaid) and redesign downstream operations to fit the care and engagement needs of the population at risk before adopting VBC across multiple populations or patient cohorts.
2. Accurate risk coding. Accurate and comprehensive documentation of each patient’s disease burden is necessary for the system to be appropriately compensated for managing the underlying population. Risk coding functions are a reimbursement mechanism, as well as a foundational data source for the individualized care plan to identify clinical gaps and undiagnosed conditions. The inability to capture patient risk appropriately during the transition to VBC contracts will likely cause an avoidable margin dip by reducing payment in the early years compared to the actual cost for care.
3. Medical management and site of care optimization. A holistic and evolving care plan allows the system to intervene effectively to avoid exacerbated health challenges, hospitalizations and catastrophic outcomes so that patients maintain a positive health status for longer. This goes beyond traditional payer-led care and utilization management. The focus is on leveraging direct patient relationships to deliver the right care at the right time in the right clinical setting to reduce costs as a patient’s health is managed.
4. Managing operating expenses. The cost management discipline supports success in risk contracts. As costs rise, hospital systems today pass those costs to insurers and the patient. But with value-based care contracts, if the cost rises, the hospital faces a margin risk given the population spend benchmarks or capitated payment. While contracts should account for inflation with flexibility under a multiyear arrangement, hospitals will have to better control costs for supplies, staffing and administration. EY experience suggests deploying generative AI (GenAI) technology can support cost control.
5. Governance and physician alignment: No enterprise transformation can be accomplished without clear responsibility, decision-making, performance targets and accountability structures that set up each part of the care continuum and population health infrastructure for success. Likewise, no system-wide transition to bearing financial risk for health outcomes can be accomplished without physician buy-in through education so that they can champion and lead efforts to improve the value and efficiency of care protocols. Practice patterns must change to operationalize risk, and even the decision to enter risk and define the clinical goals will require physician input and leadership.