Value Based Payment

Closing Health Care’s Value Gap

July 31, 2017 10:21 am

“Mind the gap.” This phrase surfaced in the late 1960s to warn London Underground passengers of potential harm from falling into the gap between train door and station platform when entering and exiting a train. It has been used in health care in reference to the shift in focus from volume to value—perhaps because it is such an apt metaphor for expressing the need for providers to approach this transition with care.

Most provider executives, physicians, and clinicians with whom I’ve worked are committed first and foremost to the health and wellness of the people they serve. But this commitment has set them at odds with the financial well-being of their their organizations.

Historically, it was good for a provider’s bottom line when people did not take care of themselves and ended up as patients needing the provider’s services. For example, if someone presented with heart disease, the provider could put the patient through a series of expensive tests, exams, and scans—even open-heart surgery. If the patient was covered by commercial insurance or Medicare, each step in the process would include more payment and net income for the provider. Simply stated, the more providers did, the more they got paid. And the same still holds true today to a large extent.

But as society rightfully demands that provider financial incentives be aligned with positive patient outcomes, public policy has worked to transition health care from a system that rewards volume to one that promotes value.

This dichotomy has been explained in many ways, including the transition from volume-based “Curve 1” to value-based “Curve 2.” In the Curve 2 world, providers have incentives to keep people healthy through value-based payment models such as accountable care organizations (ACOs) and patient-centered medical homes.

Herein lies the problem: Financial incentives remain heavily slanted toward a Curve 1 environment, forcing providers to live in both worlds. Findings of a March 8 survey by Navigant of population health experts suggest that about half of providers have 10 percent or less of their revenue in any value-based model, with only 9 percent investing 60 percent or more in value-based programs (see the exhibit below). While commercial payers increasingly have invested in value-based care, a widespread increase in provider participation has been muddled by the uncertainty of the Trump administration’s approach to these models.

Provider Percentages of Revenue Derived From Value-Based Payment Models

Bridging the Curve-1-to-Curve-2 Gap

Provider executives nationwide continue to wrestle with the need to prepare for a Curve 2 future while surviving in a Curve 1 world—the challenge is not so simple as figuratively stepping from a platform onto a moving train, even though the Curve 2 “train” is still moving very slowly.

Although I’m confident that Curve 2 is coming, what’s key for providers is understanding when and how to move. We’ve heard the stories of organizations moving too quickly, resulting in a model that cuts them off from financial viability in the Curve 1 world, thereby denying them access to a much-need continuing source of revenue. Conversely, systems that remain stuck at the fee-for-service station risk missing opportunities for the following benefits from value-based payment:

  • Quality and cost improvements
  • Market share gains
  • Potential for incentive payments under the Medicare Access and CHIP Reauthorization Act (MACRA)
  • Development of partnerships with community physicians and other providers

Instead of waiting or obsessing about when to take the volume-to-value leap, healthcare executives should implement strategies that work in both scenarios. Following are three approaches providers can pursue now to function effectively in both a Curve 1 and a Curve 2 world.

Eliminating variation.Stats about waste in health care have been widely publicized. Notably, a 2012 peer-reviewed study by Don Berwick, MD, and Andrew Hackbarth, published in JAMA, suggested as much as a quarter of overall healthcare expenditures are wasteful, and not associated with improved quality. a

A proven way to reduce this waste is to target variation in clinical and nonclinical processes through the following steps:

  • Adhere to evidence-based clinical protocols, 
which have been shown to reduce hospital-
acquired conditions, medication nonadherence, 
and associated cost.
  • Closely scrutinize ROI from IT, supply and services contracts, and physician productivity.
  • Focus efforts on identifying and eliminating fraudulent and wasteful practices, excess administrative costs, and duplicative layers of management.

For example, a recent analysis suggests replacing manual submission of seven standard claims transactions with electronic automation could save providers $7.9 billion annually. b

Another method that has proven successful is leveraging clinical information to engage surgeons in the selection of lower cost and clinically equivalent implantable devices. Consider total knee replacements: The annual rate of these procedures in the United States has doubled since 2000 to more than 640,000, for a total annual cost of more than $10 billion. c Of these costs, as much as 87 percent can be attributed to the implantable device alone. d

To help address this concern, Baptist Health System (BHS) in San Antonio used clinical data to reduce variation in implantable device use and associated costs. BHS’s leaders understood that physicians are data-driven by nature, and they appealed to this physician predilection to engage surgeons on product selection, reviewing medical evidence to identify clinically equivalent implants. BHS’s leaders then identified a lower target implant price and contracted with manufacturers that met that price, highlighted by an online process through which manufacturers anonymously bid against each other.

The result: a 29 percent price decrease for implantable devices, double the national trend, coupled with retention of surgeon choice. e

Transitioning from a holding company to an operating company.Reducing waste and enhancing operational efficiency also is a motivating factor for provider transitions from a holding company to an operating company mentality.

In a holding company model, decisions are made in silos, limiting the opportunity to maximize economies of scale across a health system. By contrast, in an operating company model, decision making is centralized and results are scaled, which helps to reduce or eliminate redundancies across the system. Examples of improvements in efficiency that can be easily achieved through an operating company approach include systemwide standardization of facilities maintenance and inventory management, and the purchasing of items in bulk.

Making this transition can be more complicated when providers are a part of a merger or acquisition, although in many cases, the pain can be self-inflicted. Often in such transactions, executives will try to convince all stakeholders—including themselves—that the organizations can merge and maintain their autonomy. We now know that a successful outcome under such an approach is the exception and not the rule, and unwinding can be painful, often requiring employee layoffs.

Not-for-profit health systems can learn a lot about how to run their organizations from investor-owned providers. As someone who ran not-for-profit health systems for two decades, I never thought I would make that statement. But to be frank, investor-owned providers are much more skilled at creating an operating culture, including making tough internal changes that ultimately drive economies of scale. Studies show that this increased emphasis on efficiencies does not come at the expense of patient care. Indeed, a Harvard University study found hospitals switching to for-profit status improved financial health while maintaining quality of care. f

As pressure on hospitals and health systems to simultaneously enhance quality and cost intensifies, it’s time for not-for-profit providers to take a lesson from their investor-owned colleagues when operating care facilities.

Reaching beyond the hospital walls.The pressure on providers to deliver value will continue, no matter what policy decisions are made. So it is imperative for health systems to develop long-term strategies that transform care across the continuum, with a focus on collaborating with physician groups and other post-acute providers.

Although a merger or acquisition is the answer for some, collaborations of hospitals, physicians, and post-acute care providers in clinically integrated networks (CINs) also can be effective means for improving value. Like a merger or acquisition, these types of partnerships require substantial changes to care delivery, and a strong physician engagement culture is core to success.

To ensure their CIN is professionally managed and physician-led, provider executives should take the following steps:

  • Develop physician incentives and disincentives up front, with clearly defined rewards and penalties, respectively.
  • Create an infrastructure that supports physician performance and team-based care, including a documented level of assistance to physicians to help them meet goals.
  • Provide physicians with data for meaningful reporting, allowing them to self-assess the effectiveness of their practices and compare their own performance with that of their peers, thereby informing their efforts improve performance and deliver value.

St. Augustine, Fla.-based Flagler Hospital provides a case example of these principles in action. g Flagler partnered with more than 80 local physician practices to form First Coast Health Alliance, the area’s first jointly owned physician-hospital organization. The CIN focused on engaging physicians to develop and implement data-driven, collaborative protocols to remedy suboptimal performance. To support these efforts, the organization implemented a value-based compensation model to reward improved outcomes and reduced costs. The results: a 65 percent decrease in excess length-of-stay and a $3 million decrease in associated costs.

An Irrevocable Future

Although the Curve-1-to-Curve-2 transition has been more incremental than many have predicted, health care’s transition to value remains inevitable. The imperative for providers is no longer simply to “mind the gap”; rather, it is to take deliberate action to bridge the gap between volume and value to ensure current and future success. Health systems should jump onboard immediately to develop the tactics and strategies that drive value, before the train leaves the station.

Rulon Stacey, PhD, FACHE, is managing director, Navigant, Chicago; chair of the Board of Overseers of the Malcolm Baldrige National Quality Award, and chair of the International Hospital Federation CEO Circle. A former health system CEO and chair of the American College of Healthcare Executives (ACHE), Stacey received ACHE’s highest honor, the Gold Medal Award, in 2017.


a. Berwick, D.M., and Hackbarth, A.D., “Eliminating Waste U.S. Health Care,” JAMA, April 11, 2012.

b. Hallowell, B.A., “Finding Efficient Solutions to Explanation of Benefits Processing,” Infographic, Navigant,May 2, 2017.

c. Ferket, B.S., Oei, E.H., Bierm-Zeinstra, S.M.A., and Mazumdar, M., “Impact of Total Knee Replacement Practice: Cost Effectiveness Analysis of Data From the Osteoarthritis Initiative,” BMJ, March 28, 2017.

d. Okike, K., O’Toole, R.V., Pollak, A.N, et al., “Survey Finds Few Orthopedic Surgeons Know the Costs Of The Devices They Implant,” Health Affairs, January 2014.

e. Navathe, A.S., Troxel, A.B., Liao, J.M., et al., “Cost of Joint Replacement Using Bundled Payment Models,” JAMA Internal Medicine, February 2017; Ubl, S., Price, R.J., “Letter to the Editor on ‘Total Joint Arthroplasty: Trends in Medicare Reimbursement and Implant Prices,’” The Journal of Arthroplasty, September 2016.

f. The JAMA Network, Hospital Switch to For-Profit Status Associated With Improvements in Financial Health, But Not With Differences in Quality of Care, Mortality Rates,” For the Media, News release, Oct. 21, 2014. 

g. Gursahaney, V.R., and Butts, D.K., “Florida ACO Improves Quality, Reduces Costs Through Navigant Engagement,” Case Study, March 13, 2017.


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