From Fee-For-Service To Episode-Based Payments: The Shift Continues

As the prolonged pandemic continues, every executive in every industry is asking the question, “what’s next?” The health care sector has been completely upended by the pandemic crisis. From our analysis, it appears that the “next normal” holds more focus on “whole person” health management models, “hybrid” service programs with a mix of telehealth and face-to-face services, more leverage of technology, and more focus on value (see my recent presentation, Navigating From Challenge To Opportunity: The Best Of The 2020 OPEN MINDS Management Best Practices Institute).

That last piece—the focus on value—will be a move away from fee-for-service (FFS) reimbursement to some type of non-FFS alternative payment methodology (APM): bundled rates, case rates, episodic payments, and capitation reimbursement. I’m not certain what exactly that will look like and there will likely be significant variance by payer, consumer typology, and service models. Skeptics will say that we’ve been inching toward widespread acceptance of value-based reimbursement (VBR) for a decade or more with limited adoption. In 2018, 39% of payments were FFS, and another 25% were FFS with some link to quality and/or value, such as pay-for-reporting and pay-for-performance (see Entering The Next Phase Of Value-Based Payment Reform).

But that was before the pandemic. Moving to non-FFS APMs addresses multiple issues for payers and health plans. APMs support integrated care models. They allow health plans to address the growing prevalence of behavioral health conditions. They provide steady income for provider organizations. They address the likely budget compression that lies ahead by getting more alignment with provider organizations by increasing their downside financial risk—and shifting some administrative costs to them as well.

Immediately prior to the pandemic, the Centers for Medicare and Medicaid Services (CMS) implemented Patient Driven Groupings Model (PDGM) for home health agencies (HHAs) on January 1, 2020. PDGM was the most significant change to HHA reimbursement in 20 years, tying payment to an individual’s overall health condition rather than to therapy visits. Prior to implementation, there was widespread “the sky is falling” fear of the financial impact. The sky didn’t fall. There was the expected interruption in cash flow, but overall documentation, coding accuracy, and timeliness of claims submission have all improved, and reimbursement rates are better than projected. In some ways, PDGM helped HHAs prepare for the very sudden drop in utilization with the onset of COVID-19. That too, is turning around. Skilled nursing facilities (SNFs) had similar experiences with its new payment model, the Patient Driven Payment Model (PDPM). SNF utilization is declining, as expected, as the industry shifts to right person, right treatment, right setting with home being the preferred care delivery location.

And in anticipation of the “next normal,” on Tuesday, September 15, 2020, CMS released new guidance to help state Medicaid plans continue their shift towards VBR (see Value-Based Care State Medicaid Directors Letter). And, the CMS’ innovation center is about to roll out new risk-based model for those dually eligible for Medicare and Medicaid (see CMS Innovation Agency To Launch Risk-Based Model For Dual Eligibles). The model will allow Medicaid health plans to take on financial risk for a consumer’s FFS Medicare services.

In addition to CMS, health plans are also increasing their use of APMs. On September 14, 2020, Humana announced it was adding two more episode-based payment models—the Coronary Artery Bypass Grafting (CABG) model and the Total Shoulder Specialist Reward Program. These two episode-based models are in addition to Humana’s Maternity Episode-Based Model and Oncology Model of Care. Humana now offers a total of six specialty care payment models, with more than 2.6 million individual Medicare Advantage (MA) and commercial members receiving care through 1,000 value-based relationships across 43 states and Puerto Rico (see Humana Launches Two More Value-Based Programs for Specialty Care).

The implications are clear. More health and human service reimbursement is moving to non-fee-for-service payment models. And the provider organizations that are best prepared to accept value-based contracts with managed care plans are the organizations with a competitive edge. To get your team up to speed, these are some of the best OPEN MINDS resources on VBR models.

Assessments & Educational Programs

Managed Care Competencies Assessment

OPEN MINDS has developed a Managed Care Competencies Assessment, focused on the organizational and technical competencies needed to make the transition successful. This online self-assessment helps to evaluate and identify improvements in 12 domains.

Value-Based Readiness Assessment

To help provider organizations navigate the management challenges of transition to VBR, OPEN MINDS has developed a web-based readiness self-assessment for value-based reimbursement readiness, focused on scoring organizational and technical competencies needed for the transition. This tool was designed to evaluate and identify improvements in six domains.

Succeeding With Value-Based Reimbursement: An OPEN MINDS Executive Seminar On Organizational Competencies & Management Best Practices For Value-Based Contracting

The evolution of health and human services away from a focus on cost-based/volume-based reimbursement—and the growing expectations of consumers, caregivers, and health plans—are changing both the successful business model and the market role of many service provider organizations. This evolution is one that will (like in retail, banking, and publishing) create new winners.

How To Build Value-Based Payer Partnerships: Best Practices Marketing, Negotiating & Contracting With Health Plans

In this presentation at the 2020 OPEN MINDS Management Best Practices Institute, OPEN MINDS Senior Associate Paul Duck discussed how to develop relationships with the payers in your market, initiate strategic conversations, demonstrate value, and secure and optimize service agreements. He also discussed how to help payers meet their performance requirements, align programs and services with their goals, and provide data to show that how service lines can deliver quality outcomes with lower costs.

Strategic Implications Of VBR

VBR: Are You Walking In Your Customers Shoes?

Despite the significant upset to the health and human service system caused by the pandemic crisis, the move to value-based reimbursement (VBR) seems to be moving along. On June 3, The Centers for Medicare and Medicaid Services (CMS) announced adjustments to 16 value-based care (VBC) models, with goals of accounting for COVID-19-related changes in health care delivery (and the uptick in costs), as well as allowing more time for participating provider organizations to transition to VBC (see CMS Makes COVID-19-Related Changes To Value-Based Care Models). And, on June 19, CMS issued a proposed rule to grant state Medicaid programs and other payers flexibility to enter value-based payment (VBP) arrangements with drug manufacturers (see CMS Proposes Regulatory Changes To Promote Medicaid Value-Based Drug Purchasing).

Why Value-Based Purchasing For Medications Matters

On June 17, CMS issued a proposed rule to grant state Medicaid programs and other payers flexibility to enter value-based payment (VBP) arrangements with drug manufacturers. The rule’s definition of VBP is an arrangement intended to align payments to therapeutic or clinical value in a population, such as evidence-based measures. The cost should be linked to existing evidence of the effectiveness and/or outcomes-based measures. Or payment should be linked to the drug’s actual performance in a consumer or a population—such as reduction in medical expenses.

Collect The Data, Connect The Dots Value

One key tool for executive teams planning for recovery after this crisis period is having the metrics to make the right decisions. I tend to think of this data in three domains. There is financial data for short-term cash management strategy. There is strategic market information for planning long-term post-recovery strategy (this includes both external and internal data). And there is service performance data to optimize value.

Show Me The Value, Show Me The Money

This year, what has been top of mind for many executives attending the Institute is how to adapt your strategy in the current crisis—and how to use innovation to succeed in an altered health and human service landscape. But one question keeps coming up—where do “value” and “value-based” reimbursement fit in all of this?

The Blues Move To Value—Will Others Follow?

In the past two weeks, we’ve covered two initiatives sponsored by Blues plans to move behavioral health to some value-based arrangement. Blue Cross and Blue Shield of North Carolina launched a new value-based purchasing model, Blue Premier Behavioral Health, which allows behavioral health professionals who either meet or exceed quality benchmarks to earn higher reimbursement rates. In New York, BlueCross BlueShield of Western New York announced that it entered into a value-based reimbursement arrangement with Value Network.

Bundled Rates – Opioid Treatment & More

We’re seeing more use of episodic payments, case rates, and bundled rates. Our recent health plan survey found the number of health plans using bundled payments or case rates rose from 39% to 59% from 2017 to 2019 (see Trends in Behavioral Health: A Population Health Manager’s Reference Guide on the U.S. Behavioral Health Financing and Delivery System and What Are The Health Plans Doing About VBR?). And, our recent survey of specialty provider organizations found that 24% of those organizations have some bundled rate contracts (see 2020 OPEN MINDS Performance Management Executive Survey: Where Are We On The Road To Value).

VBR – Where’s The Beef?

Greetings from Florida and the opening day of The 2020 OPEN MINDS Performance Management Institute. It’s a power-packed agenda full of sessions focused on optimizing performance and sustainability in the complex consumer market. I opened the institute with results from our 4th annual survey on the state of value-based reimbursement (VBR) in the market (see Where Are We On The Road To Value? The 2020 OPEN MINDS Performance Management Survey). The findings reminded me of the 1980s advertisement for Wendy’s with the woman, the insistent Clara Peller, asking, “Where’s The Beef?” (see Where’s The Beef) – and saying “I don’t think there is anybody back there…”

Access Matters: Payer Provider Partnerships & Shared Vision

This presentation was delivered on August 26, 2020 at The 2020 OPEN MINDS Management Best Practices Institute. Speakers discuss how the problem of access in behavioral health requires new partnerships, integrated care, collaboration, and a shared vision between payers and provider organizations; and how each payer is working to solve the access problem.

Getting Paid More For What You Do – Tactics To Increase Fees & Rates From Payers & Moving To New Reimbursement Models

OPEN MINDS hosted an executive web forum for executives of health and human service organizations. Led by OPEN MINDS Senior Associate Paul M. Duck, the forum took a deeper dive into different tactics and strategies provider organizations can leverage with payers to negotiate optimal fees and reimbursement rates.

VBR Updates

Alternative Payment Methods For Behavioral Health Associated With Lower Utilization & Spending

Alternative payment methods (APMs) for mental health and addiction disorder treatment are associated with lower behavioral health service utilization and lower spending, as well as improvements in process of care outcomes, according to a review of evaluations of 17 APM implementations. Of the 17 APM implementation evaluations, 11 assessed utilization changes and five found lower utilization. Eight evaluations assessed spending, and half found an association with lower spending. Fifteen evaluations assessed process of care, and 12 reported statistically significant improvements due to the APM.

CMS Unveils APM Strategy For Rural Health Care

On August 11, 2020, the Centers for Medicare & Medicaid Services (CMS) announced an alternative payment methodology (APM) for rural health care services. The APM is called the Community Health Access and Rural Transformation (CHART) Model. CHART has two value-based payment models: the Community Transformation model and the Accountable Care Organization (ACO) Transformation model.

Blue Cross Blue Shield of Massachusetts Launches New Value-Based Payment Model For Small Practices

On July 15, 2020, Blue Cross Blue Shield of Massachusetts (BCBSMA) announced plans to pilot a new value-based payment model for small practices that provides financial support through a global payment, upside risk incentives, and an immediate support payment.

Technology Planning For Integrated Care & Value-Based Reimbursement

Knowledge Partner Session at The 2020 OPEN MINDS Performance Management Institute

Providers are becoming more aware of and involved in the changing reimbursement landscape. While many can build the internal talent and resources needed to win in the VBR world, technology often seems a barrier that can’t be hurdled. The executives, who often have no technical background, are faced with expensive choices that will require focus and effort to implement. In this session we will explore questions that providers have about their technology decisions:
• How can they determine if they can afford these options?
• What are alternative options if they can’t afford technology at this time?
• Which options will bring the best return?
• Are there some that can be delayed?
• How can they allocate internal resources to tech projects without overwhelming their staff?

In this session we will explore building a plan that helps executives make choices with confidence, manage them financially, and overcoming VBR’s most challenging task, the development of an EHR systems that can optimize results.

Ten Steps to Align Your Financial Management Systems with VBR

Value-Based Reimbursement (VBR) is an opportunity for payers and providers to establish and build new relationships based on shared goals, outcomes and incentives. Ultimately, patient mental and physical health outcomes are improved. Financial leaders must reevaluate their strategies and system. They must consider the investment in the patient experience, as well as clinical outcomes. Both will likely be measured. Key steps to position the financial systems of the organization to support VBR are outlined.

Step 1. Discern the Goals of the New Paradigm and Investment Needs

A first step is to understand the investment of new service lines, support systems and their staffing implications, technologies and other expectations by payers to successfully meet value-based care expectations in your region. This may include chronic care management, improved care coordination, and integration of physical health. Accreditation could also be required, which is a significant expense for a smaller organization. The clinical and operations teams will specify the resources needed and the finance team will help develop pro-forma to accomplish clinical and operations objectives.

Step 2. Bridge the Gaps Between Finance, Operations and Clinical Leadership

Examine your leadership culture, skill sets and silos. Many behavioral health provider organizations are mission-driven and may be ‘allergic’ to a ‘bottom line’ business model. However, VBR is a more complex reimbursement process that marries quality outcomes with cost effectiveness and ultimately defines reimbursements.

Finance leaders need to understand the clinical outcome and patient experience requirements and how to resource staffing and technology to support them. They must be properly funded. Operations and Clinician Leaders need to learn to formulate and present the ROI on additional resource needs and clearly articulate those in financial terms.

The finance department will need the new skill of correlating service data to VBR contract terms and projecting short and long-term cash needs. Keep in mind the financial analysis is only as good as the encounter data feeding the system. In turn, quality improvement can only be realized when the feedback loops are accurate. The lack of good data will diminish outcomes and over time, drive down cash flow. The finance department can often identify red flags in billing practices. In many organizations this may be a new role for the finance department and necessitates a closer working relationship between finance and operational departments.

Step 3. Evaluate Baseline Costs to Deliver Services

In order to evaluate cost effectiveness, you need a baseline of current costs. The average cost per visit is a good start, and this can also be broken down by service line. Engage with your finance department and ensure you are accurately tracking direct costs like staffing costs, and administrative costs that include occupancy, technology, and infrastructure.


Step 4. Determine the Investments Required

Consider the goals and investment needs discerned from Step 1. The development of VBR processes can be expensive. For instance, implementing a new evidenced-based practice can include ongoing trainings, certifications, and continuing education expenses. More to the point, can you afford the VBR plan you are planning? Remember you may have many options such as incentive-based ‘withholds’ that lower your financial risk. Having a sound understanding of your financial bandwidth allows you to effectively negotiate with payers and set up programs that will meet the need of the individuals you serve. Also, carefully assess hidden costs such as workforce training to accommodate a new payment model.

Step 5. Consider Your Cost Strategy

A more in-depth breakdown of costs will help increase that value for the consumer and the organization alike. Key tools are cost-driver analysis, activity analysis, and performance analysis. By understanding these crucial concepts, the move to operational implementation, changes and improved outcomes become viable. A few concepts to consider:

  • Activity-based costing—Identify the key activities of a service. Key activities need to be broken down into definable tasks. Then we can identify the resources needed to complete the task. In turn, changes in productivity can be monitored and addressed on a systemic basis.
  • Target costing—With our initial analysis we can identify the cost of a service to hit a specific target market rate to realize the required profit margin. While this type of analysis is derived from manufacturing processes it can be thoughtfully implemented in the behavioral health setting where profit margins are often slim at best. In the end Target costing balances three areas – price (what the consumers will pay), quality (the acceptable level of quality expected), and functionality (the service components expected).
  • Value engineering—Define the functional outcome and identify ways to improve the process of reaching your goals. For instance, a new technology may be added to a service activity that reduces time spent traveling and associated costs like mileage and insurance. The role of the finance team in identifying cost drivers will be a key step in seeking cross-functional input from service line, IT and quality teams and transforming this information into a holistic view that incorporates the different perspectives on the path to better productivity.

Step 6. Take A Systematic Approach to Payer Contracting

It is a critical step to develop, hire or outsource the talent to negotiate payer contracts effectively. Practices should take small steps when entering into VBR. Gain experience with a few select outcome performance areas before entering into a full risk agreement. As you get experience with payer expectations and they with your practice’s cabilities, you can then broaden the contract risk. Identify the diagnoses or procedures you can most easily impact. Consider what matters to your payer by finding two to three diagnoses that comprise the most potential spend for them. It is ill advised to blindly enter into the contracting process without understanding your costs, reporting capabilities and current performance. As provider organization must objectively demonstrate both the improved results and ‘cost effectiveness’ of their approach, it will make it possible to negotiate to thrive, not survive. Also prepare the payer contracting function with national and regional benchmark data. Closely examine the underpinnings of benchmarks such as HEDIS measures. It will come in handy to level-set realistic expectations.

Step 7. Refine Your Revenue Cycle Management

A clear understanding of the hard and soft costs will help to determine the transaction price; an organization’s ability to identify the payment terms for the services provided. While the transaction price was is relatively clear in the fee for service system, the uncertainty of VBR needs heightened attention. Remember, many VBR reimbursements are not determined until the results are obtained. While an agile Electronic Health Record (EHR) can shorten this turn around, there can still be a lag in reimbursement timing. Having the economic stability to deal with these fluctuations is key to the organization.

Another key area of input by the finance department is timing of payment. If an outcome goal is reached over two fiscal financial periods, what is the contract language on how that incentive should be paid out. Again, the generally tight profit margins in behavioral health require a clear understanding of the financial terms of the VBR contract, including payment cycles.

Step 8. Evaluate Supplier Contracts

Consider your vendors and suppliers to be your partners in the delivery of value-based care. Under HIPAA rules, you are required to have business associate agreements with vendors who handle your organization’s Protected Health Information (PHI), which protects your organizational risk. Likewise, build in shared accountability into vendor agreements, whenever possible, to ensure timely metrics, adherence to system uptime slas, and data availability to obtain target reimbursements in providing cost-effective care. Perhaps you outsource your chronic care management program. You should have clear performance expectations in your contract to mirror payer performance. Insist upon performance guarantees and financial penalties if the vendor doesn’t perform to established expectations. Routine rebid of vendor relationships help organizations contain costs and maximize their quality.

Step 9. Bring Your Board “On Board”  

A financially savvy provider organization executive team understands the need to align strategies for organizational performance with their ability to manage financial risk. The board has a fiduciary duty to oversee the financial investment and return on value-based care. An important element of this process involves effective education of the board or bringing the ‘board on board’. This topic is often neglected in literature, yet some resources exist (see Get the Board of Directors on Board for ChangeGetting A Board On Board, and A Chaotic Environment Demands Fluid Strategic Planning).

Step 10. Leverage Technology for Efficient Cost Reporting

Many organizations are drawn to the belief that the VBR processes will be managed with EHR software. The good news is that EHRs have become increasingly more agile in the ability to output quality and financial data. The bad news is that there are pitfalls with over reliance on software. George Braunstein has been Executive Director of numerous behavioral health care provider organizations and has seen the evolution of ever more sophisticated software. He notes, “EHR software should be seen as support for VBR” and not a substitute for substantial planning and process implementation. George also noted that without consistent feedback and ongoing education at all organizational levels, there will be little functional change within your organization. (see the Financial Thought Leader article for the complete interview with Mr. Braunstein).

Final Thoughts: You’re Not Alone

Fluency in the language of finance is uncommon in the world of behavioral healthcare. Even seasoned administrators may struggle with the intricacies of alternative payment arrangements and shared risk. The evolution of VBR has made it a need to become familiar with financial processes, however, it does not mean you need to be an expert. Identifying and utilizing your available staff subject matter experts is always a good starting point. Once you have a sense of your organizational financial capabilities you can then move to process planning. Again, finding good resources is critical. For instance, an organizational preparation guide (see can demystify and give direction to successful VBR implementation. Finally, the use of an agile EHR can give you the systemic support throughout the VBR process.

Does Your Strategy Prepare You For Success In A Value-Based Market?

Two top concerns currently on the minds of executive teams of provider organizations are how to increase consumer impact and assure financial sustainability, and moving to a value-based care business model. Value-based care contracting opportunities have been increasing for behavioral health organizations, with a growing number of organizations entering into performance-based contracts based on outcomes, and other alternative payment methods. To understand this growth in value-based contracting, it is important to look at both the factors pushing provider organizations toward this change, as well as pulling them toward a focus on value.

The push factors are related to the realization that the fee-for-service (FFS) funding mechanism that our healthcare system was built on is unsustainable moving into the future. CMS announced in the 2017-2026 Projections of National Health Expenditures(see, CMS Office of the Actuary releases 2017-2026 Projections of National Health Expenditures ), that national health expenditure growth is anticipated to increase by 5.5% per year during the next ten years, resulting in healthcare costs as a percentage of GDP rising to 19.7% by 2026. There are a number of reasons for this increase – including the aging population – however, the bottom line is that when the approach to slowing this growth is focused primarily on controlling costs by freezing fees and limiting productivity, quality will suffer. A business model built on the FFS model has sustainability issues because the focus is only on price and volume. This reduces the conversation between payers and provider organizations to an adversarial conversation around negotiating fee increases and limiting consumer access through benefit limitations or required authorizations. Discussions around quality results for consumers become secondary to focus on payer cost control and provider organization financial sustainability.

The pull side of the equation is related to the fact both payers and consumers are interested in value, and most provider organizations have a mission of improving consumer lives through effective services. Aligning payment with quality outcomes reframes the conversion and establishes new ground for negotiating both service outcomes and sustainable revenue to provide those outcomes. The focus moves to value-based care – identification of opportunities to create new services to better address consumer needs and eliminate unnecessary costs. The decision on what services to provide, along with where and how they are delivered, shifts from costly treatments in acute settings to community-based alternatives focused on integrated coordinated care. In a value-based care approach, the consumer preferences, outcomes, and satisfaction drive the conversation because engaged consumers result in more effective outcomes. For an example of how value-based care creates innovative solutions that result in greater consumer engagement, see Hidden Behavioral Health Opportunities In Value-Based Reimbursement.

The other aspect of value-based care is that reimbursement can be aligned with consumer outcomes. This changes the focus from managing productivity, to driving performance to achieve around outcomes. There are a number of new payment methods that support this shift of focus to results that also supports provider organization sustainability. Bundled rates, case rates and pay for performance arrangements move the business model from managing the encounter volume and rates, to driving performance. This shift requires the development of new organizational competencies, and the infrastructure of staff, processes, and technology to support it. Staff need new skillsets to ensure standardized service results, analyze data, and adapt processes with a focus on results. Processes require re-engineering to remove activities that are no longer needed and maximize the use of technology. The other key area to driving performance is acquiring the technology to optimize the value of consumer care and support performance management.

What are the key competencies that organizations need to develop to be successful in the new business model? OPEN MINDS has identified key competencies, organized into six domains of focus:

  • Payer Relationship Management & Care Coordination – Enhancing relationships with payers and facilitating care coordination with other providers, creates opportunities for new service development and integrated services opportunities (see Coordination, Care & Value-Based Contracting).
  • Clinical Management & Clinical Performance Optimization – Ensuring consistent treatment results and identifying opportunities to improve service quality requires the development of competencies around using data to drive clinical decision-making and quality management (for more on the role of clinical protocols and value, see Why Clinical Guidelines Matter More With Risk-Based Contracting).
  • Consumer Access, Satisfaction, & Service Engagement – Empowering consumers and creating engagement is important for delivering quality service outcomes and includes competencies such as consumer-informed access to services, mobile and service support technology, and a strong consumer feedback loop (for more on creating a consumer-centric organization, see No Whole Person Care Without Person-Centered Organizations).
  • Financial Management – Managing financial risks related to contract outcomes is key in value-based reimbursement, because payments are related to those outcomes.  Competencies to assess in financial management include revenue cycle effectiveness, encounter reporting, implementation of value-based payment management capabilities, and the ability to monitor and forecast performance (see Value-Based Reimbursement & Accounting:  Show Me The Money).
  • Technology & Reporting Infrastructure – Utilizing technology to leverage data for analysis and insight, creating a performance dashboard and management system, implementing consumer access functionality, and facilitating the exchange of data or integration of services are all important functions of the technology infrastructure driving value (See The Tech Equation In Value-Based Reimbursement Success and Your Tech Functionality Checklist For Value-Based Reimbursement).
  • Leadership & Governance – Aligning the governance and leadership focus around the new performance model that drives value, ensuring that the workforce has the required skillsets, and creating a culture where staff embrace the opportunities of innovation are important leadership competencies under value-based reimbursement (for more on educating boards on value-based reimbursement, see The New Board Conundrum – Managing Value).

To help provider organizations navigate the leadership challenges of this transition, OPEN MINDS has developed a web-based readiness self-assessment for value-based reimbursement readiness. The assessment is focused on scoring the organizational and technical competencies needed to make this transition successful. This tool was designed to evaluate, educate, and identify improvement opportunities in each of the competency domains.  Members of VBCforBH can access the assessment for free at OPEN MINDS Value-Based Reimbursement Assessment.


1 OPEN MINDS 2019 VBR Survey