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Value-Based Payment Background: The Need for Change in the U.S. Healthcare System Pt. 1

Published Date
Author Lucy Li

This post is part of a series of blog posts aimed at unpacking the value based payment for primary care practices looking to make the transition to value based care. Click here to read more about how Elation supports the transition to value based payment. 

By: Lucy Li & Dr. Sara Pastoor 

One of the most striking aspects of the U.S. healthcare system is that it is extremely expensive both for the country and for its people and is only getting worse. To give you a picture, healthcare spending made up almost one fifth of the U.S.’s gross domestic product (GDP) and the U.S. spent almost three times as much on healthcare per person than other developed nations. As for patients, out-of-pocket costs for patients increased 24% from 2017 to 2021 and almost one third of Americans have medical debt, with many individuals owing at least $2.5k. 

Even though the U.S. spends more than any other nation on healthcare, a study of 11 high-income countries, showed the U.S. ranks last in all domains except one. Why is it that we spend far more of our gross domestic product (GDP) on healthcare yet perform so poorly? What are other countries doing differently?

The study concluded that countries with successful healthcare systems share the following attributes: 

  • Provide universal healthcare coverage and remove cost barriers: The U.S. remains the only high-income country lacking universal healthcare - with nearly 30 million uninsured and 40 million underinsured as of 2021. Even those with coverage face prohibitively expensive deductibles, coverage limitations, or out-of-pocket costs.

  • Invest in primary care systems to ensure that high-value services are equitably available to all people: The U.S. invests 4-7% of total healthcare spending on primary care compared to peer nations, which spend an average of 14%.

  • Reduce administrative burden that would otherwise divert resources from health improvement efforts: U.S. healthcare is fraught with administrative costs (which we’ll discuss in more detail at the end of today’s course). Many other countries have simplified their health insurance and payment systems, usually through legislation, regulation, and standardization.

  • Invest in social services, especially for children and adults under age 65: The U.S. political climate often puts us at an impasse when it comes to decisions around social services programs. However, countries with higher investment have healthier populations that put less strain on their healthcare systems.

Even though there are many external factors beyond healthcare that affect how progress can be made in these areas, we need to understand how for-profit healthcare insurance in the U.S. played a huge role in putting us in this position. An important component of our for-profit system is the mechanism of Fee-for-service (FFS). Fee-for-service (FFS) is a healthcare reimbursement model (also known as a payment model). It sets a way for a payer (for our purposes, a private or public insurance carrier) to compensate healthcare professionals for services rendered.

FFS applies the economics of the manufacturing industry, where quantity is a fundamental determinant of success. Imagine a factory that produces widgets - each one that’s sold brings in revenue. To maximize earnings in this arrangement, one would seek to set high prices and crank out as many widgets as possible. 

In healthcare, healthcare professionals are the factories, and the services that they perform are the widgets. Insurance carriers set the prices of these services to know how much to pay the healthcare professionals.One of the ways our execution of FFS falters is in how we set prices for healthcare services. Prices are calculated by payers using a concept called relative value units, or RVUs.

Every healthcare service is assigned an RVU based on a formula that considers 3 factors:

  • Physician work - complexity of performing the service 

  • Practice expense - resources needed to support the service

  • Malpractice - the medical/legal risk of performing the service

The higher a service scores in each of these factors, the higher the total RVU will be. One RVU equals approximately $35. Although RVUs try to measure the true “value” of a service, the equation skews heavily in favor of complicated procedures that are carried out in hospitals and by certain specialties. In other words - primary care loses out because it scores low in each of the equation’s factors.

  • Physician work- Primary care requires cognitive skill and expertise, but this equation rewards hands-on procedural skills. This is akin to rewarding a carpenter (who contributes primarily with their hands) more than an attorney (who contributes primarily with their mind).

  • Practice expense - Primary care historically has not had high practice operating expenses, but more expenses are emerging with the shift towards multi-disciplinary team-based care.

  • Malpractice - Risk in primary care is lower than in procedures (ex. prescribing the wrong medication versus botching open heart surgery), but this equation doesn’t reward primary care’s ability to prevent the need for risky procedures in the first place.

In fact, the very actions that make primary care special, important, and impactful don’t generate RVUs: 

  • Cognitive work of patient care

  • Relationship-building with patients 

  • Care coordination

  • Provider-provider consultations

  • Patient outreach

  • Responding to patient messages

  • Prior authorizations, FMLA forms, prescription renewals, or any other “between visits care.”

Our RVUs ultimately reflect the value system of U.S. healthcare - from how the formula was designed to the resulting calculations. These reveal what our decision-makers consider important versus negligible. Unfortunately, the consequence is that we are not incentivizing the right things that keep a population healthy and make a healthcare system sustainable.

Because expensive services and a high number of services will yield more revenue, FFS causes biases in healthcare delivery patterns that deprioritize prevention and wellness and glamorize “sick care.”  Studies show that up to ⅓ of all healthcare interventions do nothing to improve health, yet FFS incentivizes doing as much as possible. Excessive tests, procedures, and interventions often cause harm due to the associated risk of complications, making people sicker and costing even more. Healthcare becomes a matter of doing things “to” you and not “for” you, where keeping you sick is actually perversely profitable. 

For primary care, specifically where compensation is relatively low, doctors are pressured to treat more patients, do more procedures and tests, and squeeze in more during every visit - all for the sake of increasing the number of billable services. They’re kept in a reactive, fire-fighting mode rather than a proactive management mode.

Primary care providers often feel like they’re on a hamster wheel where they’re forced to do more, yet this only results in worse outcomes. The limited time that providers have with patients results in very transactional experiences, and what normally would have been treated in primary care leaks into other settings (urgent care, ER, and subspecialty care) - resulting in data fragmentation. Primary care providers rely on having a comprehensive view of each patient’s health history to make the best decisions, but practices rarely possess the time, resources, and technology to collate this data across the complex healthcare spectrum.

In our next post, we’ll dive deeper into the impact FFS arrangements are having on primary care and why policymakers are considering a transition to value-based payment.