Value Based Payment

The key role of downside risk in the success of value-based care

June 2, 2024 7:40 am

The basic idea behind value-based care (VBC) is simple. By encouraging providers to focus on the value rather than the volume of the services they deliver, it should be possible to achieve the twin goals of lowering healthcare costs and improving clinical outcomes. Given that the United States now spends far more per capita on healthcare than any other developed country yet lags every other developed country in life expectancy, achieving these goals could hardly be more important.a

Unfortunately, the industry has been slow to adopt VBC, and its success is far from guaranteed. A recent survey of providers, payers and hybrid payviders examined the many obstacles VBC faces.b Chief among them is the widespread reluctance among providers to assume downside risk, the essential ingredient without which VBC lacks sufficiently strong incentives to elicit the changes in provider behavior needed to advance its twin goals.

The greatest obstacle

When asked what’s holding back the growth of VBC, three in five survey respondents (61%) said that reluctance to assume downside risk is a very significant factor, while just one in 25 (4%) said that it is not at all significant. Survey respondents also pointed to a variety of other obstacles to VBC’s growth, including:

  • The requirement to prove near-term ROI
  • The narrow definition of ROI
  • The near-term focus of leadership and the finance team
  • Upfront investment costs and ongoing administrative costs

However, reluctance to assume downside risk was the most commonly cited obstacle by a wide margin.

Not surprisingly, the level of concern about downside risk varies by organization size. While 75% of respondents at small organizations cited it as a very significant factor in slowing VBC’s growth, just 55% of respondents at very large ones did.

The level of concern, however, does not vary by organization type. Providers, payers and hybrid payviders were all equally likely to say that reluctance to assume downside risk is a very significant factor in slowing VBC’s growth.

This reluctance not only threatens to slow the growth of VBC, but also neuters it. Much of what now passes for VBC involves little more than pay-for-performance bonuses and upside-only shared-savings provisions. It is doubtful that the incentives in such payment arrangements are sufficiently powerful to fundamentally alter the fee-for-service (FFS) practice patterns that still dominate the healthcare system.

Payment arrangements that involve significant downside risk are needed to propel the shift from volume to value. But adoption of such arrangements remains the exception rather than the rule. According to the Health Care Payment Learning & Action Network, just 15% of total U.S. healthcare payments in 2022 were made to providers through payment arrangements that included shared savings with downside risk, and just 9.5% were made to providers through payment arrangements that included any form of population-based payment.c

Capability gaps

What accounts for the reluctance of providers to assume downside risk?

Part of the explanation surely lies in the prevailing medical culture. Physicians are trained to do whatever they possibly can for their patients, not to weigh cost-benefit tradeoffs when making treatment decisions. Yet weighing cost-benefit trade-offs is precisely what is required when exposed to downside risk.

Medical culture aside, many providers simply lack the capabilities needed to succeed in two-sided risk arrangements. When asked whether capability gaps have negatively affected the performance of their VBC programs, nearly three-quarters of providers reported that gaps in data availability have, while nearly two-thirds reported that gaps in analytical capabilities and IT/digital capabilities have. Smaller but still substantial shares reported having capability gaps in contracting expertise, risk management, financial planning, clinical care management and staff/skill sets.

Gaps in data availability and analytical and IT/digital capabilities are particularly problematic in a VBC environment. To succeed under VBC, a provider must track how patients fare from one stage of their medical journey to the next, both within the provider’s own practice and outside of it. The stress on holistic care and the need for greater attention to transition management in turn mean that the provider must not only undertake more extensive tracking, but also perform more extensive analysis and produce more extensive documentation than would normally be required in an FFS environment.

To be sure, having capability gaps does not necessarily preclude providers from participating in VBC. If their contracts simply provide for pay-for-performance bonuses and upside-only shared savings, the worst that can happen is that they will fail to reap additional financial rewards. But if providers are considering contracts that involve downside risk, capability gaps can be a show-stopper.

A tipping point

When it comes to VBC’s future, there is some good news and some bad news.

The bad news is that VBC is currently having only a marginal impact on how the healthcare system works. Only small minorities of survey respondents believe that their VBC programs have been very successful in advancing the quadruple aim of improving patient/clinical outcomes, controlling/reducing costs and improving the patient and the provider experience. And only slightly larger minorities believe that VBC will be very successful in advancing the quadruple aim in the U.S. healthcare system as a whole.

The good news is that VBC could have a much more substantial impact if most contracts included downside risk.

The place to start is to close the capability gaps that discourage providers from assuming downside risk and undermine the performance of their VBC programs when they do assume it. On the data front, this effort will mean ensuring IT system interoperability among providers and between providers and payers. At the same time, providers will need to upgrade their IT/digital and analytical capabilities. None of this will be easy or costless, but if done right it will yield positive returns over time.

Addressing the other obstacles to VBC’s growth identified by survey respondents could also make it easier for providers to assume downside risk. Improvements in patient health attributable to VBC, along with the associated cost savings, may take several years to materialize. Yet standard measures of ROI are calculated over a one-year plan horizon. They also focus on direct savings and ignore potentially important indirect benefits of VBC, such as enhanced brand appeal and improved staff productivity.

Clearly, a longer-term and more expansive measure of ROI is needed to accurately capture the costs and benefits of assuming downside risk. If ROI were more appropriately measured, it might turn out that the upfront VBC investment costs, which now seem to hurt providers’ bottom lines, will actually help them, while the ongoing administrative costs associated with VBC would surely appear more affordable. As a result, leadership and the finance teams would also be more likely to shift their focus from the near term to the long term, with all the positive knock-on effects that might entail. The prevailing medical culture will be more difficult to change. But it should fall in line if downside risk becomes a standard feature of VBC contracts. As things stand, providers often default to FFS practice patterns, regardless of contract type. In time, a tipping point may be reached when the default flips to VBC practice patterns. We should all hope that happens soon. 


a. The United States now spends more than 100% more per capita on healthcare than the average for OECD member countries and more than 50% more than the next runner-up, Switzerland; OECD, “Health at a glance 2023: OECD indicators,” November 2023.
b. This article presents results from a survey developed by Terry Health in 2023 and sent, with HFMA’s assistance, to member leaders of provider, payer and hybrid payvider organizations. The full report, 2023 perspectives on value-based care, was published in September 2023.
c. HCPLAN, APM measurement: Progress of alternative payment models, 2023 methodology and results report, 2023.


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