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What You Need To Know About Value-Based Payment Models

For over a decade, we have heard the terms “value-based care” and “value-based payment” in discussions about how to improve health care quality and reduce costs. But as a major difference in how most providers have operated, change has come slowly. For example, less than 20% of Medicare spending is currently value-based.

But momentum will continue, since the Centers for Medicare and Medicaid Services (CMS) announced in 2021 that it plans to transition fully to value-based reimbursement by 2030. Here’s what you need to know about value-based payments.

Why the change to value-based care?

Healthcare organizations in the U.S. have traditionally used a fee-for-service payment model. An inherent problem with this model is that providers who deliver more services are likely to generate more revenue.

A system that incentivizes quantity, whether intentionally or not, does not necessarily prioritize quality or efficiency. For example, providers may routinely order many tests, visits, and procedures and manage high numbers of patients. Such a system inevitably uses more time and resources — and incurs greater costs for both providers and patients — than models that prioritize value.

Free-market competition based on value

Experts have proposed alternate models that better align with patient outcomes. Notably, Porter and Teisberg of Harvard Business School were early proponents of the concept of “value-based competition,” as they explained in their book, Redefining Health Care: Creating Value-Based Competition on Results (2006).

The authors noted that competition in most industries generally leads to improvement in the quality and cost of products and services. Conversely, they observed that the healthcare industry has not benefited from free-market competition because competition has been happening in the wrong places.

Porter and Teisberg theorized that competition in the fee-for-service model has been happening among health plans, networks, and hospitals instead of where it should happen — in the areas of diagnosis, treatment, and prevention of health conditions. Their work was among the earliest to suggest redefining health care competition based on patient outcomes. They reasoned that this change would result in improvements in both quality and efficiency of care.

Reducing health care costs

Before value-based care (VBC) started to emerge, public and private payers were actively seeking to lower costs. One approach was the managed care model, which focused on managing risk and containing costs. It was largely unsuccessful because it deprioritized quality and patient satisfaction.

By 2005, the Centers for Medicare and Medicaid Services (CMS) began piloting value-based care programs that linked payment to quality measures. The passage of the Affordable Care Act in 2010 brought more VBC programs into existence.

One of the biggest CMS programs, Accountable Care Organizations (ACOs), incentivizes providers to reduce overall spending while meeting clinical quality and patient satisfaction measures. Programs such as this are still growing, and commercial payers have also implemented similar payment models with positive results.

In a study that conducted a systematic review of the quality, utilization, and spending effects of commercial value-based care and payment models, 81% had quality improvements, 58% had more efficient utilization, and 56% had spending improvements.

VBC programs are continually evolving and expanding. More healthcare organizations are now tying physician compensation to quality performance metrics, up from 26% in 2016 to 42% in 2021. And even though medical practices are still earning a majority of their revenue from fee-for-service activities, nearly half currently participate in some form of value-based care.

How does value-based care differ from fee-based care?

Some of the differences between fee-for-service and value-based care models are:


  • Links reimbursement to quantity of care.
  • Providers are incentivized to manage many patients and order tests and procedures.
  • Payments are made based on annual fee schedules or charges for individual tests and procedures.

Value-based care…

  • Links reimbursement to quality of care.
  • Providers are incentivized to manage patients effectively, prioritize patient outcomes, and use quality measures, such as reducing readmissions, using healthcare technology, and emphasizing preventative care.
  • Payments are based on the quality of care provided, with providers earning an overall sum for treating a patient with a given condition.
  • Seeks to coordinate care and improve the patient experience with price transparency, bundling of services, and personalized care teams called “medical homes.”

In addition to providing better patient care and reducing costs, value-based models can also help achieve the larger goal of improving population health management. Because providers must report on specific metrics to demonstrate improvement, they generate data on their patient populations. Data on hospital readmissions, adverse events, patient engagement, and other metrics can give a holistic picture of the efficacy of certain courses of treatment across groups of patients, helping to improve outcomes over time.

Value-based models also incentivize the use of evidence-based practices, technological advancements, data analytics, and better coordination among providers. All these benefits work in favor of patients and help advance health care overall.

What are the obstacles delaying value-based care?

Several significant obstacles have prevented or delayed health systems and providers from switching to value-based care.

  • As with any major change, adopting a value-based care model requires investment in education and resources so that staff members can learn new methods and procedures and have the technology they need to support them. Completely changing the way providers practice and bill for services requires time and planning.
  • Interdependencies with other parties, such as co-providers, service vendors, payers, and other healthcare partners, must be coordinated. All parties need to transition together. For example, providers who contract their medical coding and billing services must work with a service provider who can support the changes that VBC requires.
  • Providers who join an accountable care organization (ACO) or bundle services assume some financial risk. Savings could be significant, but there could also be shared losses. For example, if a payer such as Medicare determines that the care provided does not qualify under a value-based model, providers may need to absorb the cost.

Despite these obstacles, providers that successfully transition have the potential to decrease costs over the long term. RevCycleIntelligence reported that in 2015, ACO programs saved $417 million for Medicare and reduced hospital readmissions for Medicare beneficiaries by 8%. By 2020, the cumulative savings estimate had increased to $4.1 billion.

Despite the difficulty and slowness of conversion, it is clear that value-based care and its associated payment models will continue to be a focus for the healthcare industry over the next decade.

Value-Based Care vs. Fee-for-Service

The transition from itemized care to quality of care can help providers prioritize patient outcomes. Ease the administrative burden of this shift with innovative education that prepares you to reap the benefits of value-based reimbursement.

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