The healthcare industry is changing rapidly, influenced by new regulations, higher consumer expectations, and increasing cost pressures. In addition, the Centers for Medicare & Medicaid Services (CMS) has a big goal: by 2030, all Medicare beneficiaries should be in value-based care (VBC) arrangements. This means we’re seeing a fast shift away from the traditional fee-for-service (FFS) model, where providers are paid per treatment, to VBC, where payments are based on both the quality of care and the cost.
Recent data from the 2025 Milliman Medical Index highlights the urgent need to address rising costs of healthcare. In 2005, the total healthcare cost for a family of four was $12,214; by 2025, that figure has nearly tripled. This increase far out paces wage growth over the same period, with wage growth reported at 84% compared to the 188% growth within healthcare costs. Annual outpatient facility care costs have risen from $3,704 to $9,876, and yearly pharmacy expenses have soared from$1,785 to $5,954. Value-based contracts present a potential path forward, focusing on improving care quality while managing and controlling costs.
In this blog, we’ll explore the journey towards VBC, highlighting its benefits and impact on the healthcare landscape. We’ll provide practical insights and actionable steps for organizations to navigate this shift, ultimately leading to better patient outcomes and financial health.
Market forces pushing for value-based care:
A growing portion of healthcare revenue is being tied to VBC, signaling a fundamental shift in the industry. The Affordable Care Act (ACA) of 2010 was instrumental in accelerating this change, introducing policies that incentivized providers to prioritize higher-quality, more coordinated care. By the late 2010s, VBC models had become increasingly prevalent across healthcare systems, reflecting a collective push toward better patient outcomes, improved care coordination, and reduced overall costs.
This momentum continues to build: in 2021, 35% of Medicare Advantage (MA) and 24% of Medicare FFS spending flowed through alternative payment models (APMs). Looking ahead, 83% of payers anticipate that APM activity will increase, with none expecting a decrease. Furthermore, 96% of payers agree or strongly agree that expanding APM adoption will lead to higher-quality care and enhanced care coordination—underscoring the industry’s strong commitment to VBC as a central driver of future revenue.1
The “HCPLAN Year in Review” published in 2024 noted that by 2023, 28.5 percent of U.S. healthcare payments flowed through APM contracts that included downside financial risk, up from 24.5 percent in 2022. This figure has continued to grow in response to the rising cost of care.
There are four main types of value-based payment models:
When talking about value-based payment models, it’s helpful to understand the Health Care Payment Learning & Action Network (LAN) framework. This framework divides payment models into four levels, but not all are truly value-based. For example, Level 1 is your typical FFS with no tie to quality, so it doesn’t really fit the value-based mold. There’s also some debate about Level 2 models, which have a limited connection to quality, and whether they should be considered value-based. The real focus tends to be on Level 3 and Level 4 models. Level 3A involves shared savings, where providers benefit if they save money, while Level 3B includes both shared savings and losses, adding more risk. Level 4 is where you find partial or full capitation, which means providers are paid a set amount per patient, and 4C emphasizes integrated care. Understanding these distinctions helps explain how VBC aims to improve patient outcomes and manage costs.
The benefits of value-based care:
VBC is transforming healthcare by offering long-term financial and clinical benefits. For organizations transitioning to VBC, it represents an opportunity to revolutionize care delivery by focusing on medical excellence.
By receiving targeted interventions or education at the point of care, patients may become more receptive, potentially leading to fewer hospital visits, reduced costs, and improved care coordination. This approach enhances patient experiences by ensuring timely, personalized care. Historically, primary care has been central to achieving these improvements, focusing on preventative measures and chronic condition management.
Building on the strengths of primary care, integrating specialists into VBC models is essential for further enhancing patient outcomes. Specialty care plays a crucial role in this transformation, as it represents a significant part of healthcare spending. By involving specialists, healthcare systems can harness their expertise to manage complex conditions effectively, resulting in better treatment plans and outcomes. Coordinated care teams, comprising both primary care providers and specialists, ensure patients receive comprehensive care without delays, improving the overall efficiency and quality of healthcare delivery.
On the financial front, VBC drives cost savings by streamlining operations and using data insights to eliminate waste. Enhanced data sharing and transparency, facilitated through Electronic Health Record (EHR) systems, provide a comprehensive view of the patient journey, helping to reduce errors, close care gaps, and minimize readmissions. Near real-time access to patient information enables effective collaboration, ensuring timely and appropriate care. Additionally, leveraging claims data is crucial for managing financial performance, as it provides insights into cost patterns and resource utilization. By analyzing this data, hospitals can identify areas for improvement, optimize billing processes, and ultimately enhance their overall financial health.
Embracing VBC not only enhances patient care but also positions organizations for sustainable financial success. By integrating specialists into VBC models, healthcare organizations improve care quality and efficiency, setting the stage for improved population health and financial stability.
Challenges in transitioning to value-based care:
Transitioning to VBC is like embarking on a new adventure for healthcare organizations, and it comes with its own set of challenges.
Financial Risks:
- Moving away from FFS to VBC payments introduces financial uncertainty.
- Payments are tied to achieving specific health outcomes, requiring careful financial planning.
- Organizations must manage finances carefully to ensure stability during the transition.
Operational Changes:
- Providers need to redesign care delivery processes and train staff in new coordination methods.
- This shift demands a cultural change, prioritizing patient outcomes over service volume.
- Changes can disrupt established workflows, necessitating strong leadership and clear communication.
- VBC programs are subject to policy changes that need to be navigated to ensure financial success. Providers must stay informed and adapt to regulatory shifts to maintain viability.
Data and technology requirements:
- Organizations must invest in modern technology and analytics solutions.
- These systems are essential for tracking patient data and guiding clinical decisions.
- Integrating new technology requires significant investment and expertise for seamless operation.
Facing these challenges head-on is key for organizations wanting to thrive in a VBC world. Success requires strategic planning, innovation, and a commitment to continuous improvement.
Steps to implement value-based care:
Implementing VBC requires strategic planning and execution to ensure improved patient outcomes while effectively managing costs. The process begins with a thorough assessment of the current healthcare system to identify opportunities for enhancing care delivery and financial models. Based on this assessment, a strategic plan should be developed, setting clear objectives and outlining a roadmap for transitioning to a value-based model.
Investment in technology and digital transformation is critical, as many healthcare systems currently operate in fragmented data environments. Organizations should adopt modern data management and advanced analytics technologies as part of their digital transformation strategies to integrate systems seamlessly and support effective change management.
Building a collaborative team is another vital step. Providers must take responsibility for patient outcomes and costs, often assuming greater risk in advanced models. This necessitates effective collaboration with payer partners and proactive data sharing to ensure accountability for meeting cost and quality targets, which directly impact reimbursements.
Finally, continuous monitoring and adjustment are necessary to ensure the success of the VBC model. This ongoing process allows organizations to refine strategies and achieve improved outcomes over time.
What it means to take on risk in value-based care
Taking on risk in VBC signifies a transformative shift in healthcare, where providers are financially accountable for the quality and efficiency of the care they deliver. This approach involves various risk models:
Upside Risk Models: Providers earn a share of the savings when they reduce healthcare costs but face no financial penalties if they don’t achieve savings.
Downside Risk Models: Providers must cover excess costs if expenses exceed targets, encouraging them to manage resources efficiently to avoid financial losses.
Full-Risk Models: Providers share in savings if they reduce costs and incur penalties if costs exceed targets, balancing the incentives to improve care quality and efficiency.
To successfully navigate these risk models, healthcare organizations must employ effective risk management strategies such as:
- Leveraging data-driven decision-making to identify trends and opportunities.
- Enhancing care coordination to ensure seamless patient transitions and reduce inefficiencies.
- Adopting evidence-based practices to improve patient outcomes consistently.
Milliman MedInsight offers a suite of innovative solutions to support providers in this complex landscape:
- VBC Platform: Acts as a comprehensive hub for managing VBC. For example, a hospital can use the platform to centralize patient data, streamline care coordination, and track performance metrics in real-time.
- VBC Insights: Provides actionable intelligence to help providers understand their performance and identify areas for improvement. This might include pinpointing inefficiencies in care delivery or identifying trends in patient outcomes.
- VBC Analytics: Offers advanced data analysis capabilities, enabling providers to forecast future trends, assess risk levels, and optimize resource allocation. An accountable care organization (ACO) can use these analytics to predict which patient populations are most likely to benefit from specific interventions, thereby improving outcomes and reducing costs.
- VBC Contracts: Facilitates the structuring of agreements that align financial incentives with desired health outcomes, ensuring that all stakeholders are working towards common goals.
- Innovation Portal – Powered by Databricks: Enables advanced data analysis using R, Python, and SQL, allowing super-users to gain deep insights. It integrates diverse data sources for comprehensive reporting and offers an intuitive interface for both technical and non-technical users, promoting data-driven decision-making organization-wide. With Artificial Intelligence (AI) and Machine Learning (ML) capabilities, the portal enhances predictive analytics and automates complex data processes, enabling users to discover hidden patterns and trends for strategic advantages.
Together these capabilities empower healthcare organizations to manage risk more effectively, enhance patient care, and achieve sustainable financial success in a VBC environment. With Milliman MedInsight tools, providers can confidently navigate the complexities of VBC, ensuring they not only meet but exceed the expectations of both patients and payers.
Embrace the future of healthcare with value-based care
The shift to VBC marks a significant evolution in the U.S. healthcare system, emphasizing improved patient outcomes and operational efficiency. While transitioning from a FFS model presents challenges, it also offers substantial benefits, including enhanced patient experiences and reduced costs.
Now is the time to embrace VBC and redefine your approach to healthcare delivery. With Milliman MedInsight, you can confidently manage the complexities of this transition, ensuring better care for patients and sustainable financial success for your organization.
For more information on how Milliman MedInsight can support your journey, visit our website to explore client testimonials, or contact us directly. Let’s work together to create a healthier, more efficient healthcare system.
References
1. Health Care Payment Learning and Action Network (HCPLAN)
