X marks the spot: Understanding the financial transition from volume to value

Many medical practices, particularly those offering primary care, are rapidly being driven from traditional fee-for-service (FFS), volume-based care to value-based care, which is increasingly associated with reimbursement methods that feature a combination of pay-for-performance, capitation, bundling and other risk arrangements. When a practice is primarily within one or the other reimbursement environments financial risk is more easily managed due to the predominance of one model. However, during the transition from volume-based to value-based care, financial management becomes more difficult to understand and organizational risk increases.

Practice administrators need an uncomplicated conceptual framework for understanding how to keep their organization’s financial performance on track during the inevitable period of transition to value-based care.

Editor’s note: This article was adapted from a paper submitted toward fulfillment of the requirements of Fellowship in the American College of Medical Practice Executives. Learn more about ACMPE certification: mgma.com/acmpe.

Reimbursement mix

The financial transition from volume-based to value-based primary care is underway. Depending on practice location and the payers serving the location, there will be a complex mix of reimbursement methods to be managed. The transition will move through five principal phases.

Fee-for-service

FFS reimbursement is the traditional method of reimbursement. A provider sees a patient and submits a combination of E/M, ICD-10, CPT and other codes, and is reimbursed based upon a particular level of service. The more services performed or a higher level of service generally results in higher reimbursement. This is a volume-driven method.

Fee-for-service with payment adjustments

Under new MIPS rules, Medicare Part B payments are subject to future adjustments based on performance in four areas: improvement activities, quality, cost and promoting interoperability. A scoring rubric using measurements from the four performance elements determines future CMS payments two years ahead of the measurement year. The adjustment can be as much as +-9% (by 2022). This represents substantial future upside and downside risk.

Fee-for-service with shared savings

CMS has offered various accountable care organization (ACO) and clinically integrated network (CIN) models to providers for implementation. Although these include a consortium of facilities and cooperating specialists, the core of these programs is generally primary care providers coordinating patient care. At the end of a period of time, any savings over actuarial expectations for the population served are shared with the ACO or CIN participants. Thus, total reimbursement is a combination of FFS and shared savings dollars.

Fee-for-service with shared savings and risk

In addition to an FFS component with shared savings, some plans combine downside risk. With this approach, the shared savings opportunity can also become a shared loss opportunity when costs exceed actuarial expectations for the population served. Downside risk is a serious matter during a transition from FFS to value-based care. A bad year can drive a practice out of business.

Capitation/bundling

Full capitation and bundling models represent the reimbursement approach most removed from pure FFS. Here, a per-member, per-month (PMPM), per-member, per-year (PMPY) or bundle payment is made by the payer to the provider up front. For the service period or major procedure, the amount paid will either fully cover the cost of care provided by the practice or not. The practice administrator works to an absolute budget with no recourse if losses appear on the bottom line.

It is extremely important for the practice administrator to recognize that the total patient panel does not just reflect the traditional idea of a payer mix. The total patient panel consists of several payers, with many offering multiple plans. These plans from multiple payers must be grouped into patient panels subject to the same reimbursement method. This constitutes the reimbursement mix.

Five example reimbursement methods are identified above, but there are other options that might better suit a practice’s market. Replacing payer mix with reimbursement mix helps the practice leadership more accurately identify the quantitative impacts to total margin as the mix changes during the transition. Patient panels linked to reimbursement models are the key.

Building blocks to better understanding

Building Block I: The provider encounter remains a useful measure

In a traditional FFS environment, a patient encounter is a face-to-face meeting between a provider and a patient in which a clinically significant interaction results. Generally, this meeting yields a reimbursable event.

New types of encounters in value-based care

In a value-based environment, a patient encounter can take many forms including: face-to-face meetings between a provider and a patient, phone calls to a patient by providers, phone calls to patients by nurses or care managers, e-mail exchanges with patients, text-message reminders to patients, telemedicine visits and home visits. All forms should represent clinically significant interactions. Unfortunately, health plans do not always pay for non-traditional encounters for FFS patients.

In a true value-based environment, providers are not paid a fee for each service. Providers are paid a capitated PMPM or PMPY fee for any and all required care during the reimbursement period. This means that a practice administrator must consider which types of encounters drive cost but are not separately reimbursed.

For the purposes of this analysis, face-to-face meetings between providers and patients will form the common ground for both FFS and value-based considerations. Other types of value-based encounters will be considered part of the cost model.

Why understanding the flow from FFS to value-based encounters is critical

The total patient panel can be separated into two broad panels. The first is the FFS panel, which includes all patients whose care is reimbursed by FFS plans. The value-based panel contains all patients whose care is reimbursed by capitated plans. During the transition, the net patient flow is from the FFS panel into the value-based panel. This change toward value is complicated by the fact that patients in one panel may not always land in the other. Further, new patients to the practice can enter either panel over time.

In any case, the net flow of patients is from the FFS panel to the value-based panel. When patients move, their encounters move as well. Hence, the analysis that follows focuses on changes in encounter volumes as patients are pushed by the marketplace to new value-based models of reimbursement. Simultaneously, average margin-per-encounter in each panel is a significant consideration. These margins are the fundamental factors in the calculations described next and the examples that follow.

Building Block II: Total margin (TM) or total earnings

FFS: (Total FFS encounter volume) x (Average FFS margin/encounter) = TMFFS

Capitation/bundling

(Total VAL encounter volume) x Average VAL margin/encounter) = TMVAL

In the figures that follow, the green line represents total margin (total practice earnings) before, during and after the period of transition from 100% FFS to 100% value-based reimbursement. At any given point on the green line, the total margin is calculated as:

TMFFS + TMVAL = TM 

In these idealized examples, the early period is only supported by TMFFS, the transition period is supported by both TMFFS and TMVAL, and the late period is supported only by TMVAL.

Building Block III: Visualizing a profitable give-and-take

The Second Curve

Ian Morrison’s The Second Curve describes businesses as following s-curved growth cycles. If business leaders only ride the first curve, their business will rise to a satisfying height only to heel over into a downward trend. To overcome the dangerous downward trend, leaders must know when to jump to a new business s-curve that begins its own rise to success. Failure to transition to the second curve through innovation and adoption of new learning can be disastrous. The best leaders master both the first and second curves and decide whether and when to ride both during the transition.

X-bar analysis

This analysis is based upon the concept of Morrison’s first and second curves. It’s not a new approach in healthcare and offers many avenues for learning. The first curve represents the growth and decline of an FFS patient panel, and the second curve represents the simultaneous development of a value-based patient panel. Practice administrators face the difficult task of knowing how to ride both curves to not only avoid financial crisis, but build business during the transition. Riding both curves involves a financial give-and-take, losing one source of revenue while building another. The transition from FFS to value-based care is a period of great financial risk to the practice. The examples that follow offer a simplified way to achieve success.

Case examples

Impact of variation in encounter volume

In this analysis, encounter volume is the most direct measure of business production. During the transition, patients will flow from FFS plans to value-based plans. Working to manage this give-and-take of patients and the encounters that follow the patients is crucial. Patient panels produce encounters, which are the lifeblood of any practice. As the transition unfolds, an imbalance in encounter volumes between panels impacts total encounter volume. If total encounter volume dips, total margin (earnings) will also dip without changes to margin-per-encounter.

Impact of variation in margin

On a fundamental level, the average margin-per-encounter considers all costs and collections attributable to it. The dollar margin can be determined by a simple calculation:

(average dollars collected/encounter) – (average delivery cost/encounter)

The difference is either positive (profit earned) or negative (a loss). Depending on the volume of encounters produced, a positive average can yield very favorable cumulative earnings. Likewise, a negative average accelerates the business to a hard landing. The analysis that follows considers only positive margins, which are declining or increasing relative to each other.

Analysis

The classic X-bar illustrates an idealized transition from volume-based to value-based care. For every encounter lost to a volume-based contractual arrangement, an encounter is gained to a value-based contractual arrangement. An example of this might be a group of long-time patients whose employers have moved them from one health plan to another. The original plan may have paid the practice on an FFS basis, while the new plan may pay on a PMPM basis. In either case, the patients experience an office visit, but the practice is compensated very differently.

Looking at Figure 2, during periods 1 through 5, there are only FFS patients in the full patient panel. During periods 15 through 19, there are only value patients in the full patient panel. The transition lasts from period 5 to period 15. At the point where the gray and green lines intersect, the full patient panel is shared equally between an FFS panel and a value panel.

The green line represents total margin. In this idealized view, margin-per-encounter is the same for FFS and value-based encounters, so total margin reflects only a balanced 1:1 shift in encounter volumes. In this baseline transitional view, total margin as a straight horizontal line illustrates perfect maintenance of the practice’s total margin over time. The practice is neither losing nor making more money as the transition unfolds. A steady financial state is the best way to describe what is happening.

Results

Most practice administrators want to at least maintain a stable total margin over time. Better yet, they want to increase total margin even under the difficult circumstances of a transition from volume FFS to value. The following examples demonstrate the impact to total margin during the transition given variations in margin-per-encounter and/or imbalanced shifts in volume. The value of the X-bar analysis for transition planning is that it helps the practice administrator see the impacts of individual and combined drivers of total margin.

Analysis

Figure 3 reflects an alarming loss of FFS encounters without a 1:1 replacement of value-based encounters. This illustrates the loss of FFS patients at a rate higher than the acquisition of value-based patients. Even though the margin-per-encounter is the same, the FFS encounter loss rate exceeds the value-based encounter acquisition rate yielding a steep drop in total margin until about period 12. This is followed by an upward climb to the pre-transition total margin level by period 15. Note that the green total margin line follows the gray line at about period 12. This is because all FFS patients are now out of the practice, and only value-based patients are in the full patient panel driving all encounters.

Results

During this transition, the practice administrator wisely maintains the cost model to keep margin-per-encounter constant. However, the patients in the full panel are flowing out of FFS plans quickly and not landing in value-based plans contracted by the practice. In the end, the same full patient panel is restored but not before a serious loss is incurred. The key here is to retain the patients. If possible, a practice administrator must offer value-based health plan options for the served population that will include their in-network providers. Patients departing a contracted FFS plan must have a contracted value-based plan to land in. Otherwise, a rapid market change from FFS can leave a large total margin deficit (loss) for the practice during the transition.

Analysis

In Figure 4, the opposite of Figure 3 is happening. Even with equivalent margins per encounter, the black total margin line is rocketing upward because the differential rate of value-based patient growth is rapidly building the value-based encounter volume. Not only is margin not being lost during the transition, the practice is becoming dramatically healthier financially.

Results

In this example, the practice administrator wisely maintains the cost model to keep margin-per-encounter constant during the transition. Over time, the total margin is being driven upward by large numbers of encounters generated by new patients moving into the value-based patient panel. These are incremental patients above those who simply move from contracted FFS plans into contracted value-based plans. The successful practice administrator is not only retaining existing patients, but new patients are also coming into value-based plans that already were contracted or were aggressively added during the transition. In this case, the practice administrator should probably earn a bonus.

Summary of findings

For many years, healthcare industry theorists have insisted that reimbursement was going to transition from FFS to value-based care. This transition is underway and represents not only a change in how a practice is paid but also a change in the care of patients. In an FFS environment, payment generally comes only when a patient is seen in the office. In a value-based environment, a capitated fee is paid to cover all activities associated with primary care of patients. In the latter case, it is not about volume of visits; instead, it is about performing a variety of care management activities, some of which are traditional encounters, to produce better health outcomes for attributed patients.

In either case, encounters remain a useful and primary measure for understanding the financial dynamics of the transition. Within the context of a very complex financial transition, the encounter as a unit of production continues to offer a way to grasp what is happening. When encounter volume is conceptually combined with margin-per-encounter, the product is total margin. These three principal metrics can help us define the financial impact of different rates of change on earnings as the FFS to value-based encounter give-and-take unfolds over time.

The X-bar model can help practice administrators graph the impact to total earnings during the transition caused by changes in margin-per-encounter, as well as the rate of evolution from FFS encounters to value-based encounters.

Practice administrators are urged to use the X-bar model to analyze their own practice and learn to visualize the way total dollar margin is impacted by particular trends across their FFS and value-based patient panels. The movement to value-based care is accelerating. Medical practice leaders must endeavor to understand the many factors that will combine to produce financial success or failure as they navigate the transition.

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