VBP Arrangements: Drivers

There are six key drivers of the movement to a risk-based healthcare environment:

1. Rising Healthcare Expenditures

The growth in healthcare expenditures is driving policymakers, employers, and public and private purchasers to explore VBP arrangements that incentivize quality and performance improvements that drive efficient, cost-effective care. With hospitals representing 32% of total healthcare expenditures, they have become targets for cost reduction initiatives.

2. Reimbursement From Medicare and Medicaid

Hospitals and health systems are motivated to reduce costs to stem losses from the growing portion of patients who are insured through public health programs. Reimbursement for publicly insured patients is generally lower than for those who are commercially insured and is often below provider costs.

3. Federal Policy

Medicare is a major driver of the transition to VBP. The Affordable Care Act (ACA) created new Medicare pay-for-performance programs. In addition, the ACA encouraged the development and implementation of new payment and delivery models by authorizing the Medicare Shared Savings Program (MSSP) for accountable care organizations (ACOs) and creating the Centers for Medicare & Medicaid Services (CMS) Center for Medicare & Medicaid Innovation (CMMI), tasked with testing “innovative payment and service delivery models to reduce program expenditures … while preserving or enhancing the quality of care.”

Building on the foundation set by the ACA, in 2015, the Department of Health and Human Services (HHS) announced new goals to increase the percentage of Medicare payments tied to value and made through alternative payment and delivery models. Specifically, the department’s goal was to tie 30% of Medicare payments to alternative payment models (APMs) by the end of 2016 and 50% by the end of 2018. In early 2016, HHS announced that it had met its first goal.

Most recently, the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) mandated a new physician payment system that further advances adoption of VBP arrangements by tying a greater percentage of physician payment to performance and encouraging participation in risk-bearing payment models. Medicare’s push toward value may encourage some hospitals to consider engaging more rapidly in APMs, including models that require downside risks.

More recently, CMS signaled that it may provide additional flexibility in the move to VBP. The agency has issued regulations that reduce the number of hospitals and physicians required to participate in VBP models. In September, CMS solicited input on the future of CMMI and expressed interest in promoting patient-centered care, market-based reforms, pricing transparency, and increased choice and competition to improve quality and reduce costs.

4. State Policy

States have encouraged VBP adoption through a variety of mechanisms related to Medicaid, including state Delivery System Reform Incentive Payment (DSRIP) programs and contractual arrangements with managed care organizations (MCOs). Some states require Medicaid MCOs to adopt rigorous incentive payment programs—and up to 22% of states have implemented Medicaid pay-for-performance or bundled payment programs.

5. Financial Stability and Access to Capital

Hospitals and health systems’ uptake of VBP is influenced by financial stability and access to capital. VBP arrangements inherently involve a greater level of financial risk, which may discourage hospitals experiencing financial uncertainty from participating. However, as VBP arrangements become more prevalent, hospitals may seek to standardize clinical processes and align financially and/or operationally with other providers to achieve economies of scale, improve financial stability and enhance access to investment capital.

Health systems and aligned provider networks are more likely to seek oversight of a larger portion of healthcare spending via VBP. These collaborative networks often result in more integrated healthcare organizations that combine the functions of traditional hospital systems, provider networks and insurers.

6. Payer Dynamics and Culture

Many commercial payers also have begun to implement VBP arrangements similar to those being developed by federal and state governments. However, payers differ in their interest and pursuit of VBP arrangements. In some markets, providers may need to initiate discussions with payers on new payment models. In other markets, some large employers are bypassing the traditional insurer intermediary and establishing VBP arrangements directly with providers.

Organizational Experience With VBP

The timing and process of transitioning to VBP are complex and require the consideration of both external factors and the organization’s internal readiness. Following are critical requirements to consider:

1. Provider Alignment

Value-based arrangements require buy-in from physicians, as well as alignment of hospitals’ clinical leadership and the broader care delivery system. Some systems seeking to align leadership and engage clinical leaders in finance and risk decisions establish either a dual reporting structure or a dyad management model. In a dual reporting structure, physician leadership reports to both the system’s clinical lines and the medical group. In a dyad model, a clinical lead and an administrator are paired to jointly oversee a service line or clinical area.

While clinical alignment is critical, determinations on operational configuration vary. Ownership of the entire continuum of care is not always necessary but can produce efficiencies in many cases.

2. Technical Capabilities

As providers accept increasing levels of financial risk, they must invest substantial time and resources to develop new capabilities. The technical requirements associated with VBP expand as hospitals and health systems increase their exposure to financial risk.

3. Financial Requirements

The financial investments to build new competencies can be significant. For example, ACO startup costs, much of which were attributable to information technology and other systems infrastructure, were estimated to be $4 million in 2013, while provider-sponsored plan startup costs were estimated to be $9 million in 2014. Systems can complement their own operations by leveraging partners’ capabilities.

4. Culture and Organization

Ensuring that an organization’s culture and institutional supports align with delivering value is essential for success in VBP models. The organizational transition to become a truly integrated delivery system can be challenging. Strong leadership and consistent incentives across management, operations and clinicians along the care continuum is critical. Leaders must establish clear definitions and measurements of success that apply throughout the organization.


Hospitals and health systems—influenced by both policy and market forces—are increasingly moving away from fee-for-service payments toward value-based arrangements. There is no single model that will work for everyone. Hospital and health system leaders should assess the personnel, infrastructure and other capabilities required for success in each model when considering the most appropriate path for their organization.

Hospitals and health systems may find that their value-based destination evolves over time as policy, market and organizational forces change. Leaders will want to revisit their vision and objectives frequently to assess which model may best help them achieve organizational goals and understand the tools, information resources and delivery network required to succeed in a particular model.