In this piece, I will discuss the headwinds / tailwinds facing health systems right now, why they’ve been slow to adopt VBC, how they’re adopting VBC, and where the future lies. First, some headwinds / tailwinds:

• Overall increased utilization: Patients are getting their long-awaited surgeries after COVID, mostly in Orthopedics and Cardiology.
• Surgical procedures moving outpatient: Starting in 2019, CMS removed certain surgical procedures from its inpatient-only list, allowing them to be covered in outpatient surgical centers. Along with overall increased demand, this trend is leading to more outpatient facilities being built by health systems.
• Two-midnight rule contributes to higher inpatient revenues: CMS recently expanded the two-midnight rule to Medicare Advantage (MA) patients, which requires Medicare plans to pay for inpatient stays longer than two midnights.
  • At the same time, there's a decline in inpatient admissions that's hurting systems, likely due to payers responding to the rule and actively working to reduce inpatient admissions.

Before all of these plusses and minuses (in the late 2000s), health systems were predicted to sit at the epicenter of innovation in value-based care. Health systems were building their pool of at-risk lives via ACOs, provider sponsored health plans (PSHPs), and risk sharing contracts with payers. ACOs were literally defined as hospital-centric and “the extended hospital medical staff” in Elliot Fisher’s seminal 2007 paper. However, as Ezekiel Emanual said, “they proved unimaginative and demurred from being the leaders of transformation.” Lack of imagination is not the only reason health systems have been resistant to change. I would also point toward their proximity to the patient and their ~$10B of revenue coming in from FFS as factors that prevented them from moving into VBC.

• Proximity to the patient: As Bob Kocher said, "hospitals have moved slow because they're scared of hurting people." Payers don’t have to worry as much about hurting the patient via existing care delivery.
• Foot in one-canoe: At the end of the day, health systems have created a sustainable business model in the FFS world, and it will take an outstanding value prop for health systems to change; a value prop that VBC has not yet demonstrated.

That said, progress is being made, and many clinical leaders at systems recognize that VBC gives them the freedom to do what’s best for the patient. Not only does VBC benefit their patients, but it can also benefit their bottom line. Health systems that have diversified their portfolio into risk are performing better: “health systems reporting the strongest and most consistent financial performance from 2020 to 2022 — with operating margins between 6% to 12% — either have sizable health plans or a significant number of covered lives in value-based or shared savings plans. Health systems that have not taken risk find themselves with more typical margins of 1% to 4%.” Zooming into the ACO side, this financial benefit has not been realized: “on average, physician-led ACOs produced almost 7 times the amount of Medicare savings per beneficiary than hospital-led ACOs.”

Alli-in-all, systems are going to do what’s best for their bottom line and there is a case for VBC. This case becomes even stronger, once CMS starts using the stick rather than the carrot.