Insurers are “risk-bearing entities,” (RBEs). RBEs are tightly regulated business arrangements which promise to compensate their customers for certain losses incurred under defined circumstances in exchange for a fee. To ensure that they can pay off their claims, RBEs are required to hold aside a significant number of financial reserves invested in the safest assets. To further protect themselves, RBEs spread their liability and generate additional revenue on their reserves by reinsuring each other against losses, paying each other premiums to offset the expense of that risk. And then those reinsurance arrangements reinsure each other again. And so on, until our entire world is supported by one vast spiderweb of reinsurance arrangements, funded by trillions in reserves and all designed to support each other against excessive risk. Those reserves and the system it supported were more than robust enough to take on the financial risk of the government’s trillion-dollar healthcare promises. That is as long as they could make a profit from doing it.

Capping Resources

In its essentials, Value-Based Care for Medicare and Medicaid can be seen as a model which shifts the financial responsibility of the real cost of care from the US Treasury onto the shoulders of this vast insurance resource. Under FFS, there is no theoretical limit to the number of dollars a given beneficiary can generate for a provider. There’s certainly a practical limit for a specific clinician, but a health system employing thousands of clinicians can legitimately literally bill millions of dollars per patient per year. Add in illegitimate billings and the number can be much larger.

No longer.

Under VBC, the resources available to cover the annual care costs of a given beneficiary are capped, usually at around $15,000. Do more, and whoever is shouldering the risk bears the cost. Losses may be covered by reinsurance at first, but it will take only a few cycles of adverse experience before an underperformer is dropped like someone who has wrecked their car one too many times. As we will see, this funding transition from the bottomless, politically driven U.S. Treasury to a finite pool of dollars run for profit will have profound impacts which our industry has not yet begun to foresee.

Building The Model

CMS created what were essentially HMOs on steroids. CMS would pay a private insurer a guaranteed monthly payment for each beneficiary, one which would cover the actuarial cost of care, i.e. what the beneficiary’s care “should” cost. If the beneficiary’s actual care costs came in under the payment, the insurer could keep the difference as profit. If not, the insurer would be responsible for any deficit. To ensure he stayed in business, the insurer would re-insure themselves against any adverse experience just like they would for any other coverage. Margins could be tight, but given the size of the program, an insurer who controlled costs could do very well indeed.

But shifting risk onto the insurers was only part of the battle. A successful model depended on motivated beneficiaries, voluntarily engaged. HMOs had attracted beneficiaries due to their much lower premiums. CMS did not have those tools, but they could broaden benefits to attract beneficiaries into the program. It was an approach which proved very effective and when the program was announced enrollment far exceeded expectation.

Further changes were required to get the providers on board. HMOs had a bad reputation for both generating operational challenges and parsimonious monthly payments. So, to ensure the model was attractive, CMS liberalized contracting rules so that insurers could shift some or even all the financial risk onto the providers themselves, especially the PCPs. PCPs were given gatekeeping authority to control costs; no outside care could be sought by a beneficiary without their approval. And such authority was needed as the entirety of the PCP’s compensation would depend on managing the care of a group of patients for fewer dollars than the government paid and keeping the difference.

In this model, all the advantages providers possessed in the FFS “cost struggles” against payers would be stood on their heads. The insurers would now have an agent, on the ground, at the point of care with fully aligned incentives to remove over-utilization and promote health. And since the cost benefits of good health multiplied over time, PCPs were incentivized to maintain long-term relationships with the patients who they helped stay healthy.

By putting PCPs at financial risk for their own labor, by essentially treating the entirety of a beneficiary’s care as one giant case rate, all the incentives for providers to over-utilize would be removed. PCPs would only generate a financial return if they promoted health and optimized care.

It was an inspired design.

An Excellent Start

Insurers, at first, wanted no part of taking risk. The early arrangements had them take a fixed percentage of the government’s monthly payment. They passed on the rest to the attributed PCP or their employers to form a pool of dollars from which care costs could be paid.

The PCPs who took such risk did amazingly well. There was so much fat in the system and the bias for over-utilization so strong that immense reductions in costs could be realized with very little effort. Most such PCPs reinsured themselves against catastrophic loss using surprisingly affordable stop- loss insurance protection. The result was compensation many multiples of what they would have earned under FFS. And the overall savings to CMS for those beneficiaries was beyond any projections.

Interestingly, health systems who also took the opportunity did quite poorly. They paid PCPs RVU rates, perpetuating the conflicting incentives of FFS. The PCPs had no incentives to reduce costs, those health systems were quickly in a deficit, lost their reinsurance coverage, and dropped out.

With experience, payers became more comfortable to accepting risk under the program. They also understood that to succeed, PCPs must be directly tied to the financial performance of their attributed patients. Most contracts today are “shared-risk,” where the insurer and the provider each shoulder financial responsibility in approximately equal measure. Such contracts usually mandate risk-share compensation arrangements with PCPs, understanding that the health systems default approach of treating such clinicians as piece-workers results in losses for everyone under VBC.

Optimized for Growth

It only took a couple of years’ experience for CMS to recognize that it had innovated a winner. Their pilot was quickly codified into law and a significant number of beneficiaries and providers enrolled. But as the first movers and early adopters fully came on board, growth soon stalled. So, CMS began a process of optimization which continues to this day.

To add resources responsibly to the program, they tied the monthly premium CMS paid to the insurers to the beneficiary’s own disease burden as defined by their submitted ICD codes. This had the unfortunate effect of putting the PCPs and insurers at moral hazard as they could increase their revenue by fraudulently submit codes that weren’t supported.

For decades, this politically protected fraud more than masked any cost savings. It was not until the recent advent of AI-driven audits that fraud began to be brought under control, and the bending of the cost curve again began to be seen. Risk-coding did, though, have the salutary effect of incentivizing health systems back into the game, as most already had coding fraud embedded in the business model. This increased the number of participating providers and broadened public acceptance.

A quality rating period with bonuses was also introduced to maintain standards. It too was the source of much fraud, but it also did much to enhance the reputation of the model.

Helping Along The Journey

CMS also realized that most of its contractors weren’t capable of accepting the full risk of care costs. So, CMS created a steppingstone of payment arrangements designed to slowly move organizations forward. You know them as Accountable Care Organizations or ACO. Starting with shared savings, where only 5% of the risk is shifted, ACOs offer a spectrum of risk-sharing relationships specifically designed to nurture contractors and move them along the path to CMS’ ultimate goal; accepting full financial risk for the cost of care.

When seen in the context of government policy and fiscal reality, the journey and goal of Value-Based Care becomes clear. And despite wild political swings, CMS has stuck with it. First in 2015 and as recently as 2023, CMS explicitly stated that by 2030, all of Medicare and most of Medicaid will be paid for under some form of attributed, risk-shifting arrangement, with the unstated goal of moving everyone to full-risk as rapidly as possible. And since under the ACA the commercial insurers are essentially government utilities, where Medicare and Medicaid go, the private payers will quickly follow. VBC will be normalized, universal and mandatory.