Value-based care: What it is and how it works 

It’s a term that two renowned researchers introduced in 2006 when they created “The Value Equation” for healthcare: 

Value = Quality/Cost. 

It was the first step toward bringing the healthcare industry together in acknowledging two of the industry’s ugly truths: Costs of care were outpacing the quality of care received, yet the healthcare system was built around a fee-for-service payment model that rewarded healthcare providers for the volume of care they provided. 

Since then, organizations like HFMA have taken a lead role in bringing consensus around what constitutes value in healthcare and how to achieve it.  

Understanding the components of value-based care 

Value-based care, sometimes referred to as “VBC,” reflects a desire to pay healthcare physicians, clinicians, hospitals and healthcare organizations for the quality of care, cost of care and experience of care delivered. 

Currently, most care and services are paid for on a “fee-for-service” basis. This means that healthcare providers are paid separately for every individual service, test and procedure they provide.  

Value-based care, on the other hand, seeks to reimburse providers based on a provider’s ability to meet agreed-upon standards for: 

• Quality of care  

• Improvements in health for a specific population (where “population” might mean people who live with diabetes and are covered by a specific health plan in a certain geographic area) 

• Costs of care 

• How patients would rate their experience of care 

• Access to care 

• And more 

Under value-based care contracts, payment might also be consolidated into a single fee for all of the services and supplies connected to a specific treatment. For example, an orthopedic surgeon might receive one pre-set payment for all of the services associated with performing hip replacement surgery and the care provided for 30 days afterward. This payment covers all the care a patient will need to recover from surgery. 

Value-based payment models are payment contracts between health plans and healthcare providers or, sometimes, employers and providers. They stipulate which conditions the healthcare provider or organization must meet to receive specific levels or reimbursement, or payment. Typically, the higher the value of care provided, the higher the reimbursement. This is commonly called fee for value. 

What adoption of value-based payment models looks like 

Here’s where efforts to increase adoption of value-based payment models stand: 

• Today, less than 45% of healthcare payment is tied to value-based care contracts that base reimbursement on the quality and cost of care provided, according to a recent industry survey. 

• Participation in value-based care and shared-risk arrangements among hospitals, health systems and health plans grew to 45.2% in 2023, a 2024 survey found. 

• Nearly 40% of commercial health plans participate in value-based payment models, up 5% year over year. 

• About 44% of Medicaid dollars are paid through alternative payment models that tie payment to achievement of quality metrics for care. 

• However, just one out of four physician practice leaders expected their participation in value-based models to increase in 2025. 

• This is in part due to challenges in finding alternative payment models that align with their specialties. 

• Also, some practices face difficulty achieving meeting the metrics for bonus payments. 

• Moreover, some experts maintain that there’s still a place for fee-for-service payment in healthcare. As a result, these leaders believe value-based care is unlikely to replace fee-for-service payment completely. 

Defining the types of value-based care models 

There are numerous types of value-based care and payment models. Here are four examples: 

1. Bundled-payment models pay physicians and healthcare organizations a single, pre-set fee for a defined episode of care. For example, a bundled payment for a heart valve replacement surgery could include payment for the surgery itself and the care provided for 30 days afterward. A bundled payment for a pregnancy might include prenatal care, childbirth and postpartum care. 

2. Capitation, also known as population-based care, provides a set monthly fee for all of the care a single patient receives each month, no matter how many visits the patient makes to the doctor’s office. This type of payment model is typically applied for patients who have chronic or complex conditions or who are at risk of developing chronic conditions. 

3. Pay-for-performance contracts pay physicians a set fee for services, with the opportunity to earn financial bonuses if specific criteria for quality of care, patient safety and patient satisfaction are met. 

4. Accountable care organizations (ACOs) are groups of doctors, hospitals and health systems that work together to provide care for a specific group of patients. For example, an ACO might care for patients with chronic disease who live in a specific Zip code and are covered by a specific health plan.  

Why value is a top focus — and pressure point — for healthcare leaders 

Value-based care is an area where healthcare CFOs need to become more up to speed if they are to achieve the desired results, according to HFMA’s Healthcare CFO of the Future report. 

Often, healthcare CFOs don’t understand “what value-based care is, how it is going to get implemented in their context and their type of organization, the principles of value-based care and how you drive ROI around it,” said Stephen Forney, formerly CFO of Covenant Health, a not-for-profit, regional health system based in Andover, Massachusetts. 

Today, some organizations are exploring whether to create an executive role for value because the journey toward value-based care and contracting is so complex. Some are seeking ways to partner more closely with health plans to ensure they are paid fairly for participation in value-based contracts. 

Overcoming barriers to value-based care and payment 

In addition to gaps in understanding how value-based care and payment work, there are a number of barriers that stand in the way of implementing value-based care more broadly. Here is a look at three common obstacles to value-based care adoption and success.  

1. Achieving cultural alignment around value-based care is harder than some healthcare leaders might expect. Without cultural alignment across the organization, even well-designed contracts will struggle to deliver results, leaders shared during HFMA’s 2026 Annual Conference. 

“Culture is the critical success factor to being successful in value-based care. And changing the mindset from volume to value for providers who are compensated based on the volume is a tricky mindset shift that we have to stay at continually,” one speaker said during the presentation, “Are We Ready for Risk? CFOs Confront the Next Financial Reality.”  

2. Translating value-based care from contracts to operations is where most healthcare organizations get stuck. “The biggest challenge isn’t signing value-based contracts — it’s translating those contracts into operational reality,” one leader shared during the HFMA Annual Conference.  

Here, success requires aligning health systems and health plans around value-based care, then educating frontline staff who make care decisions daily. 

“If it’s only the people in contracting or the clinically integrated network or the plan who are doing it, that you’re not close enough to where the decisions are being made,” a speaker said during the presentation, “Are We Ready for Risk? CFOs Confront the Next Financial Reality.”  

“We’ve actually spent a lot of time, even outside of the service lines and the physician leadership, talking about high value care. It’s about the nurse on the floor, the case manager helping the family make that decision.” 

3. Accepting risk and managing risk are fundamentally different capabilities. While accepting risk requires actuarial soundness — adequate attributed lives, good trend analysis, credible benchmarks and proper risk adjustment — managing risk involves changing the care delivery model, which is no easy feat. Many organizations focus on the financial mechanics without transforming operations, creating a disconnect between risk exposure and care improvement. 

“Accepting risk is making sure the actual science works. You need adequate attributed lives to make the math work,” a speaker said during a Vitalic Health session at HFMA’s Annual Conference, “The Future of Value-Based Payment: Performance, Tradeoffs, and What Comes Next.” 

 “You need good trend analysis, you need credible benchmarks, you need good risk adjustment,” the speaker said. “But sometimes I feel like risk and value get separated because what the clinicians are thinking, what the care model is thinking, is what are the better outcomes? More access, less fragmentation. You can have really sound actuarial numbers, but the operating model doesn’t change.” 

Commonly asked questions about value-based care 

1. What’s the difference between fee for service and value-based care? Fee for service is sometimes called “fee for volume.” That’s because providers like physicians or hospitals get paid for each aspect of care they provide: every blood test, office visit or procedure, for example. Value-based care considers the quality of care and service delivered when it comes to determine how much the doctor or hospital should be paid. Sometimes, payment is “bundled,” meaning one payment covers all of the care associated with a specific treatment. 

2. How will I know whether the care I receive is value-based care? You will know you are receiving value-based care if your doctor talks with you about how to prevent illness, assigns a care coordinator to manage your care, assists you in making your appointments (for instance, providing free transportation if you are unable to drive yourself ), helps you obtain medications for free or at a reduced cost, and more. 

3. Do value-based care programs improve health outcomes? The short answer is: It depends. Some studies suggest that value-based care programs can reduce costs and improve quality of care. However, these programs can also have mixed results. There is strong belief in value-based care’s potential to improve health and reduce care costs. That’s why adoption of value-based care programs is accelerating. 

Find out more about value-based care 

To learn more, explore the following resources: 

• Healthcare 2030: Still waiting for value-based care 
  This special report—published in 2023—assessed why employers had lost confidence in the healthcare industry’s ability to move the needle on value-based care. It also offered tips for negotiating value-based care contracts. 
• Healthcare reimbursement: Succeeding under value-based and FFS payment 
  There are many different types of reimbursement models, from fee-for-service (FFS) to value-based payment and shared savings. This article explains how four common types of value-based payment models work. 
• HFMA’s Healthcare CFO of the Future report: Turning risk into opportunity 
  There are two areas where today’s CFOs need to become increasingly well-versed: moving toward value-based care and addressing the consumer experience, an HFMA survey of healthcare CFOs found. HFMA’s Healthcare CFO of the Future report explores the steps healthcare CFOs should take to succeed in a value-based care environment. 
• Value-based care adoption grows, but challenges remain
  As healthcare costs began to outpace improvements in quality of care, by 2010, efforts to strengthen healthcare value began in earnest. Here’s a look at where those efforts stand.
• HFMA’s Value Project 
  Discover the history of the value-based care movement in healthcare and explore foundational strategies for improving value in this HFMA series of reports. 
• Value in Practice: Digital Strategies That Support Value-Based Care
  This on-demand webinar explores how financial strategy, population health operations and digital innovation can support value-based care.
• Finding the Future of Value
  This bite-size learning examines the underlying drivers of healthcare costs—such as chronic conditions, behavioral health, social determinants of health, and end‑of‑life care—and how they shape the future of value‑based care. 
• Join the discussion around value-based care on HFMA Community.