HealthTech Basics: A Tour of Value Based Care

Healthcare in the US is at a stage where technology can be used to better track and manage health metrics, and health improvements can be financially rewarded through a "value based care" arrangement. But what is value based care?

When I first discovered value based care (or VBC), I couldn't find a beginner-friendly guide to give me an overview. As a result, I decided to make one to allow others to get up to speed on such a 'hip' trend.

Example Premise

In all of the examples in this post, I'll use the scenario of a man named Bob getting a hip replacement to make the examples more tangible:

• Bob: The brave soul navigating our healthcare system to get a new hip
• DoctorCare: The hospital that employs everyone (called "providers") who does work to replace Bob's hip. They have a team of doctors and other medical professionals to handle all of the care, from initial evaluation to operation to recovery.
• InsuranceCo: The health insurance company, also known as "the payer", that Bob has been paying a premium every month for coverage. They've been collecting premiums from thousands of people to cover medical expenses like this when someone needs care

Value Based Care (VBC) vs Fee for Service (FFS)

Traditionally, providers and insurance companies would work together under a "fee for service", or FFS model, to allow insurance companies to spread risk over the population.

Description: Providers help the patient and send the list of services using standardized service identifiers called CPT codes.

Example: After DoctorCare replaces Bob's hip, they give InsuranceCo a list of the procedures they performed to evaluate Bob's condition, replace the hip, and rehabilitate Bob to get well again. Then InsuranceCo reviews the claims, approves everything that is covered, and pays DoctorCare for these services.

Benefits: Systems are all set up to track and account for everything, no need to track health outcomes over time.

Over time, the fee for service system has grown in both cost and complexity (who doesn’t love a surprise bill?), leading to the emergence of VBC agreements as an alternative.

At its core, VBC's goal is to align the incentives of people who need care, the people providing the care, and the people figuring out the costs and risks for the care. The "value" lies in tuning incentives to allow each dollar spent to provide higher quality healthcare than it would in traditional FFS.

New Challengers

Here are some examples of a hip replacement under different flavors of VBC to illustrate some of the core concepts.

Performance Based

Description: Operates like FFS, but providers get bonuses if they meet performance based care targets.

Example: InsuranceCo agreed to pay DoctorCare an additional $100,000 if they can reduce the infection rate after hip replacement surgeries to below 1%. DoctorCare added an extra check to de-contaminate the operating supplies before each surgery, and as a result, Bob and 99.2% of hip replacement patients developed no infections.

Benefits: InsuranceCo avoids paying for infection treatment, DoctorCare gets a bonus, and more patients like Bob get new hips without infection!

Bundled Payments

Description: A fixed lump sum covers all costs associated with a medical event, bundling pre-op, surgical, post-op, etc. into a single payment.

Example: When Bob goes to DoctorCare for all of his hip-replacement care (his consultation, surgery, physical therapy, etc.), InsuranceCo will pay DoctorCare a fixed amount that they pay for all hip-replacements.

Benefits: DoctorCare has more control over Bob's treatment, and as the expert in hip replacements and Bob's medical needs, DoctorCare can adjust their treatment procedures to replace his hip as safely and efficiently as possible. This reduces expenses from complications and extra treatments required, and as a result, DoctorCare keeps the savings and Bob gets a safer operation!

Capitation

Description: Providers receive a fixed payment per patient (like Bob) to cover all healthcare services.

Example: Bob has been getting annual check-ups with his doctor at DoctorCare for years, and DoctorCare has been earning a fixed sum to cover all of Bob's care. When Bob first has hip pain, DoctorCare first prescribes physical therapy to delay a hip replacement - or even avoid one altogether!

Benefits: DoctorCare is in total control of keeping their patients healthy. Patients like Bob go through life with fewer hip replacements, which translates to healthier patients experiencing less pain, and more money in DoctorCare's pockets. Preventive care is encouraged and rewarded!

Too Good to be True?

While these examples are meant to outline the intention of different VBC arrangements, real life implementation is certainly not without its challenges. Most scenarios are much more complex than these examples and have their own challenges aligning incentives. Those nuances will have to be saved for another post though!

VBC for Tech Startups

HealthTech startups often seek to lower costs for their users by getting their services covered by health insurance. However, most won't have a whole team of physicians in each specialty to manage every bit of care a patient might need like DoctorCare in the examples above. So how do they fit in?

The healthcare world is vast and complex, so even the big medical practices have trouble doing everything. They will often seek to partner with other companies to fill any gaps.

Let's extend our capitation example from earlier, DoctorCare might partner with a physical therapy startup called "IronHips" that develops exercise regimens specifically focused on strengthening weak hips before they become an issue. This can help DoctorCare avoid costly hip replacement procedures and end up saving more money even after accounting for the costs of the IronHips program.

Moreover, startups don't have to limit their partnerships to physician groups. Insurance companies are increasingly willing to cover preventive services as a means of reducing future medical expenses, so many startups partner directly with insurers.

Regardless of who the partnership is with, the startup will be able to grow much more effectively if they understand the incentives and constraints of their counterparts.