Healthcare needs evolve. Thus everyone looks for new ways to utilise value-based healthcare with prime focus on quality and value over quantity. How is the health domain’s traditional system changing and which macrotrends are driving the shift? Which are the main benefits and what to expect the relationship between stakeholders within the healthcare domain to look like?
1. Traditional Contracting System
We base our traditional model in healthcare on physicians being reimbursed, depending on the number of services provided or the number of procedures ordered. Third option is the “fee-for-service” (FFS) reimbursement model. The traditional patient journey starts with a doctor’s appointment, a surgical consultation, or a hospital stay. Patients will pay for each test, procedure, doctor visit, and treatment provided, albeit some of these might be unnecessary, or unsupported by evidence-based data.
Hence, the classical model encourages and incentivises the use of more (and sometimes expensive) services. Thus driving volume, as payments are dependent upon quantity, not value. In a public setting, healthcare providers are reimbursed based on the volume of services they perform, pushing them to order more tests and procedures, and manage more patients. Such an arrangement still earns the majority of health systems’ revenue. Only 3% of health systems provide over one-half of all care under value-based contracts. 
2. Value-Based Contracting & Major Trends It Addresses
It’s natural to look for value-based model of healthcare that shifts the emphasis on care. From rewarding quantity (how many tests and services physicians order) to quality (rewarding them for providing appropriate, coordinated care that keeps patient populations healthy).
The proposal and implementation of the Affordable Care Act (ACA) in 2010 was an essential step. When lawmakers searched for ways to reduce the national deficit, Medicare became the target for deep cuts. Thus causing the Center for Medicare and Medicaid Services (CMS) to design a new strategy of accountable healthcare, hoping to provide better care for individuals and better health for populations at reduced cost. This resulted in an array of value-based care programs and payment models, such as the Hospital Value-Based Purchasing Program (HVBP), the Hospital Readmissions Reduction Program (HRRP), the Merit-based Incentive Payment System (MIPS), and Alternative Payment Models (APMs). These initiatives associated payment for healthcare directly to the quality of care provided, rewarding providers for delivering high quality, efficient clinical care. 
Furthermore, there are several macro trends that pave the way for increased value-based contracting and risk-sharing models related to scientific advances, budget constraints and maturity of data collection that drive the process: 
- Evolving innovation models and evidence thresholds for device approval and market access are becoming more and more needed. Innovative therapies are shifting treatment paradigms moving the focus towards outcome-based pricing and risk sharing models.
- The development of healthcare delivery and payment models allows systems which increase scale and purchasing power with a focus on quality and efficiency.
- Tech-enabled care allows partnership models between healthcare stakeholders.
- High quality health data and tools to analyse and measure it, is becoming widely available.
Factors accelerating the adoption of VBC, Definitive Healthcare research, incl. 1,090 healthcare leaders across the provider, biotech, financial services, staffing, life sciences, IT, and consulting industries: 
- Appropriate provider compensation and incentives (44.8%)
- Consolidating market moving more providers into the VBC model (18.9%)
- Policy requirements (16.1%)
- Increase in risk-sharing models like ACOs (11.9%)
- Other (8.3%)
3. What Are the Benefits?
On the one hand, we would look into the healthcare providers and how the value-based contracting can serve their needs better. VBC could be a way in for cost savings through reduced hospitalisation, readmissions or even ER visits. Hence lowering the burden and investment for the healthcare provider while accommodating improved outcomes for patients resulting in fewer medical errors.
In addition, improved operational and workload efficiency can be monitored through reduced length of stay/procedure times, leading to overall improved financial results. The healthcare provider could enjoy reduced financial risk whilst accelerating patient satisfaction and partnerships with strong industry players.
On the other hand, manufacturers also have lots to gain from a value-based contracting model. This could serve as a relationship boost rendering improvements and exclusivity to key accounts, which at later stage could grow into numerous cross and upsell opportunities. Furthermore, this kind of engagement unlocks the ability to avoid competition up to a certain point, especially in cases where tender procedures are based entirely on price. Overall, value-based contracting could result in increased sales volume with existing accounts and serve as an entry point for differentiation with potential new healthcare providers.
It’s vital that when measuring actual results from this engagement, real-world outcomes data is essential, ergo undoubtedly resulting in pinpointing actual actions related to improved population healthcare globally. Whether these actions are driven by positive publicity and marketing or pure profit, in the end they would serve the main goal of the value-based contracting – focus on quality rather than quantity. 
Given the complicated nature of the healthcare domain, it is only natural to notice differences in the way this applies to MedTech providers or Pharma when it comes to manufacturers. While the uptake in Pharma is significant and already showing results, MedTech is still in the pilot stage. This is a direct result of the actual stakeholders involved in the process. While the end user takes part in the Pharma domain, when it comes to MedTech the Healthcare providers being on the other end of the deal express mixed interest or lower awareness towards such relationships. And while agreements in Pharma could be complex, based on different outcomes and KPIs, within the MedTech domain they are currently host to only single-measure agreements. 
Biggest benefits of value-based purchasing in healthcare, Definitive Healthcare research, incl. 1,090 healthcare leaders across the provider, biotech, financial services, staffing, life sciences, IT, and consulting industries: 
- Fewer medical errors (48%)
- Reduced costs (28.4%)
- Increased patient satisfaction (17.6%)
- Other (6%)
Regardless of the benefits of value-based contracting in MedTech, there a few factors which determine the willingness of a healthcare provider to engage in such relationship model. Such engagement could be beneficial only in certain scenarios – related to high demand products with a significant or highly scrutinized cost. In the end, it’s essential to measure the results in improved clinical outcomes, reduced costs or increased efficiencies.
4. The COVID-19 Aftermath: What Comes Next?
Going forward, macro trends are expected to drive the value-based engagement and outcome-based models forward. Main trigger would be the continued pressure for cost consolidation and value-oriented care. In time, as the benefits are even more visible and we have sufficient evidence-based success stories, there would be a push from various stakeholders within the healthcare ecosystem to engage in such models.
How VBC programs will shift in 2020, Definitive Healthcare research, incl. 1,090 healthcare leaders across the provider, biotech, financial services, staffing, life sciences, IT, and consulting industries: 
- ACOs and bundled payment models will continue to evolve (31.1%)
- Shift away from voluntary programs in favor of mandatory participation (stricter limits on fee-for-service models) (27.6%)
- Increased provider focus on benchmarking their success against that of their competitors (21.3%)
- Market consolidation: new partnerships and networks will capture market share (18%)
- Other (2%)
It is yet unclear how the VBC models will look like. But they would most likely be tailored to evidence-based success stories leveraging existing datasets and registries requiring limited efforts to prove results. Being a tool for strategic access to accounts, major manufacturers would need to adapt. But whether such manufacturers would rely solely on VBC or also utilise other strategies remains to be seen.
What impact from COVID-19 can we expect, though? The current global pandemic has set our course off track, focusing our attention more towards numbers and statistics in the wait for a vaccine. We may want to consider adjusting VBC programs to focus on what outcome improvements providers can control, rather than changes driven by or reliant on COVID-19: 
- Attribution: consider minimum activity levels. Extend the window for determining activity, including telehealth visits in attribution methodologies, or alternative adjustments.
- Quality Metrics: considering both overutilisation in some places (emergency medicine departments, etc.) and underutilisation in others (screening, vaccination, follow-up etc.) an option would be excluding the time horizon affected by COVID-19 in the calculation of metrics, or resetting the threshold to adjust for its impact.
- Risk Adjustment: the decrease in utilisation—and coupled lack of access to recent diagnosis information—may make populations seem artificially less risky.
- Cost Benchmarks: this time of reduced utilisation may be followed by a “surge” as routine care recommences.
However, undoubtedly, we will be expecting the shift from quantities and numbers back to quality and value once this global pandemic is over.
- Arnaub Chatterjee, Casey Dougan, BJ Tevelow, and Amir Zaman, Innovative pharma contracts: When do value-based arrangements work? (McKinsey & Company, 10/2017)
- Julius Bruch, Adi Kumar, and Christa Moss,Implications for value-based payment programs: Weathering COVID-19 (McKinsey & Company, 30/06/2020)