Risk-Based Revenue Stalls Despite Challenges with Fee-For-Service

Most hospitals suffered heavy financial losses during the COVID-19 pandemic as a direct result of the fee-for-service payment system, yet progress toward a more stable, risk-based revenue structure seems to be stalling.

That is the key takeaway from the sixth annual State of Population Health report from consulting firm Numerof & Associates and David Nash, MD, founding Dean Emeritus of the Jefferson College of Population Health. Each year, the firm and Nash collaborate to analyze the evolution of population health management in the US.

This year, the survey of about 300 C-suite healthcare executives showed little progress with the shift to population health management, which according to the report is operationalized through value-based payment contracts.

Over 40 percent of respondents reported that 10 percent or less of their organization’s revenue came from risk-based revenue contracts. The percentage is an increase compared to the results from prior surveys, but it falls short of the projections executives have made. For example, in 2018, executives told researchers that they expect 15 percent growth in risk-based revenue within the next two years. Over 50 percent of respondents that year reported less than 10 percent of revenue from risk-based contracts.

Healthcare organizations have consistently failed to meet their risk-based revenue projections, the annual reports show.

“Progress toward improving population health is still moving at a frustratingly glacial pace,” Rita Numerof, PhD, the firm’s president, said in a press release. “Like many, we hoped that this year’s survey would show some progress toward value-based practice integration, yet we found many executives still failing to see the shortcomings of the fee-for-service status quo.”

Numerof attributed slow progress to an “unwillingness to see and address these now obvious, fundamental issues” with the fee-for-service payment system.

Financial losses as a direct result of the COVID-19 pandemic topped $120.5 billion for hospitals in 2020, according to estimates from the American Hospital Association (AHA). And those losses could deepen by another $53 billion to $122 billion this year, the AHA says. Similarly, physician practices saw their revenue cut in half in 2020, the Medical Group Management Association (MGMA) reported last year.

Much of the losses are tied to dramatic reductions across patient volumes. In early 2020, many communities shut down to prevent the spread of the highly contagious coronavirus. However, this left many providers without a stable revenue source since most revenue is still tied to fee-for-service contracts.

Healthcare executives (80 percent) generally agree that population health management is the future in healthcare, and nearly all (99 percent) expect their organization to put revenue in contracts with upside and/or downside risk in the next two years. The median estimate of the percentage of annual revenue was 31 to 35 percent.

Progress with risk-based revenue goals may be stalling because of financial concerns. Fear of financial loss was the most cited barrier to the adoption of risk-based revenue contracts, the report found. This barrier was followed by navigating cultural change.

The report also found a major gap in risk-based revenue capabilities: respondents demonstrated a lack of confidence in their organization’s ability to manage cost at the individual physician level.

“It’s long been known that the most expensive piece of equipment in the hospital is the physician’s pen.” Michael Abrams, managing partner of Numerof & Associates, said in the release. “Yet, in our sixth annual survey, 62 [percent] of respondents rated their organization’s ability to manage variation in cost at the physician level as ‘average’ or ‘worse than average’. If executives have so little insight into the cost differences between physicians, how can they possibly expect to control them?”

Examples of how organizations can better manage cost include establishing care paths, using order entry systems to identify variation from care paths, providing physicians with comparative cost and quality data, and tying physician compensation to management of cost and quality.

This year’s survey found little progress with organizations implementing these best practices.