Understanding Value-Based Payment Models in Healthcare 

by | Jun 27, 2024

Value-based care (VBC) is gradually gaining traction across the healthcare landscape as providers are enticed by the rewards of a performance-based payment model. Once it was concluded that healthcare costs can be reduced by raising the standard of care quality, payers such as the Centers for Medicare & Medicaid Services (CMS) saw an opportunity to promote VBC as an alternative to the longstanding fee-for-service model.  

One area of preparation for a transition to VBC is choosing which of the value-based payment models makes the most sense for your organization. To assist with this critical decision, this article covers these models and how they work. 

What is Value-Based Care? 

Value-based payment models are designed to drive down healthcare costs by improving care quality and achieving better care outcomes. Unlike the traditional fee-for-service model, where providers are paid for each procedure or visit, VBC offers compensation based on achieving better health results, such as reduced hospital readmissions and improved chronic disease management. The benefits of adopting a VBC model include: 

  • Operational efficiency: Once a drive for cost-effective care delivery is set in motion, other aspects of operations can be positively impacted as well. 
  • Patient retention: As providers take notice of a drop in patient loyalty, they can recover by offering patient-centered care to gain a competitive advantage. 
  • Reduced costs: With cost-savings as the objective of value-based models, adopting this new framework can promote savings in multiple areas of the business. 
  • Brand building: When value-based programs drive a significant increase in patient satisfaction, providers build prestige and establish a reputation that attracts more patients. 
  • Restoring public trust: Traditional care models that do not prioritize care outcomes and patient engagement can diminish the expectations of patients, but dramatic improvements in the patient experience can restore confidence in the healthcare system. 
  • Career satisfaction: A study found that VBC success came with a reduction in physician burnout. 

How Value-Based Payment (VBP) Models Work 

Value-based payment systems base compensation on performance versus volume of services provided (the fee-for-service model). When providers agree to help cut healthcare costs by meeting higher standards of care, in return they are rewarded financially through payment structures such as shared savings and risk-sharing arrangements. 

Shared Savings and Incentives 

Shared savings programs – as a value-based model – offer bonus payments or increased reimbursement rates for exceeding performance targets, thus incentivizing providers to excel in care delivery. Providers earn shared savings or other incentives by meeting quality and cost thresholds.  

Risk-Sharing Arrangements 

Not all incentives for meeting performance thresholds are financially rewarding. Value-based payment models that carry a penalty can also motivate providers to ensure targets are met. Capitation and bundled payments included in these models shift financial risk from payers to providers.  

Downside risk can deter providers from participating in value-based payment programs, but risk-sharing arrangements – such as accountable care organizations (ACOs) – offer a way to pursue incentives while mitigating exposure. Participants collectively share the rewards and the risks, while also receiving a wealth of support from program resources to propel their success. 

Quality Measures and Performance Assessment 

At the core of VBP models is the principle of linking reimbursement to performance on quality measures and patient outcomes. Providers are assessed on their ability to meet quality and cost targets set by the specific VBP model they participate in. Financial incentives within these models encourage a focus on preventive care, care coordination, and operating on evidence-based practices, fostering a system that rewards high-quality care rather than high service volume. 

Tracking key performance indicators (KPIs) helps providers see if they are on pace to earn a bonus, earn no bonus, or incur a penalty. Timely assessments give providers a chance to improve their performance metrics. Reporting will measure clinical outcomes, patient satisfaction, and care coordination. 

Cost Containment and Efficiency 

With healthcare costs reduction being the primary driver behind value-based programs, stakeholders will look to the data to see where this objective has been successfully achieved. Cost-effective healthcare is promoted by curbing the expense of redundant tests, or pricey brand-name prescription drugs, while also preventing outcomes that come with a large price tag, such as hospitalizations. Meanwhile, overall efficiency achieved through care coordination and effective communication also provides tangible cost-savings. 

Types of Value-Based Payment Participation 

Many payment models meet the definition of value based. In fact, if you visit the CMS website’s information page on VBC, you find a detailed and granular presentation of program opportunities. Many value-based payment models will fall under one of the following categories: 

  1. Accountable Care Organizations (ACOs): ACOs are provider-led groups focused on primary care, responsible for the quality and total cost of care for a patient population. They sign agreements with CMS or private payers to meet quality, cost, and patient experience targets, sharing in any savings achieved. The formula for success consists of collaboration, patient-centered care, reduced care variations, and improved coordination.  
  1. Bundled payments: To incentivize efficiency, providers are given a single payment for all services needed in a care episode. This model, used in programs like CMS’s CJR and BPCI, aims to improve care quality and outcomes while reducing costs. How it works is that if the provider can deliver the services at a lower cost, they keep the difference, but if the costs exceed the payment, they absorb the overage. 
  1. Patient-Centered Medical Homes (PCMH): PCMHs have primary care physicians coordinating comprehensive, patient-centric care with a focus on quality and patient safety. Objectives include better chronic disease management, higher satisfaction, cost savings, and more effective preventive care. Because implementation involves a significant investment, this poses a financial risk. 
  1. Capitation: Similar to bundled payments, providers receive a fixed payment to care for a single patient in a single instance, with net pay depending on cost-savings. Knowing what payment to expect, providers can plan around it by finding new ways to cut costs as to maximize the remainder. 
  1. Shared risk: In this model, both the savings and the risks are pooled so that earned bonuses are split among participants, but everyone is responsible for a share of any penalties incurred as well. Providers are rewarded based on quality and cost targets, and may also see penalties for overspending. Shared risk arrangements can plan for success by leaning on experience gained working with other value-based payment models, solidifying true care costs, obtaining the necessary data, and fostering buy-in from physician teams. 

Which value-based payment model is best for providers venturing into value-based care for the first time? What should providers know about these models before signing on the dotted line? Working with consultants who are experienced in value-based care programs can help you find where you fit in.  

Summary: Understanding Value-Based Payment Models in Healthcare 

Value-based care (VBC) is becoming more prevalent as providers are drawn to performance-based payment models that reward improved care quality and outcomes rather than service volume. Benefits of VBC include operational efficiency, patient retention, reduced costs, enhanced reputation, restored public trust, and increased career satisfaction for providers. 

VBC models work by compensating providers based on performance metrics, including shared savings and risk-sharing arrangements. Providers are incentivized to meet quality and cost targets, fostering preventive care, care coordination, and evidence-based practices. The focus on quality measures and performance assessments ensures care improvements translate into tangible cost savings and overall healthcare efficiency.  

Shared savings programs reward providers for exceeding performance targets, while risk-sharing arrangements like capitation and bundled payments shift financial risk to providers, motivating them to achieve better outcomes. With a variety of value-based payment models to choose from, providers can choose the best inroad to value-based care. 

Venture into Value-Based Care with the Right Guidance 

Every year, healthcare organizations are running out of reasons to not participate in value-based care. Our experienced consultants can not only clear out any lingering questions you have about value-based model onboarding, but they can also help you decide which option is the best fit. Whether it’s joining Medical Advantage’s own ACO or equipping your organization to be successful in a new payment model, our teams are the best qualified to help you successfully transition to value-based care. Contact us to learn more about Advantage ACO and other VBC-related solutions. 


Related Posts

In Recognition of Medical Advantage’s 2023 Commitment to Core Value Award Winners 

Annually, Medical Advantage honors two individuals who epitomize our eight core values. Medical Advantage’s Core Values serve as a compass to navigate daily actions and steer the decisions of every member of our organization. The Core Value Awards acknowledge those who excel in fostering an open, supportive, collaborative, and accountable workplace environment, contributing to our […]
Read More

Exploring the Benefits of Value-Based Care for Practices 

Value-Based Care (VBC) is poised to revolutionize healthcare by shifting the focus from volume of services to delivering value in the interest of cost efficiency. This approach not only improves health outcomes by prioritizing early detection and regular wellness visits but also enhances patient health through high-quality, equitable, and coordinated care. This article covers six […]
Read More

Contact the Medical Advantage Team


Email Icon

Stay up to date!

Subscribe to be notified anytime we post more valuable content.



Medical Advantage - TDC Group