The Evolution of Outcomes-Based Pricing in Healthcare: Aligning Incentives for Better Patient Care

In recent years, the healthcare industry has undergone a transformation in how services are priced and delivered. One of the most promising developments in this arena is the shift towards outcomes-based pricing models. This approach, pioneered by companies like Omada Health and adopted by others such as Sword Health, is reshaping the landscape of healthcare delivery and insurance. Let's explore its implications for the future of healthcare.

Understanding Outcomes-Based Pricing

Traditionally, healthcare services have been priced based on volume - the more services provided, the higher the cost. However, this model doesn't necessarily incentivize better patient outcomes. Volume-based healthcare models can misalign incentives, encouraging providers to increase the number of procedures rather than prioritize the most effective treatments. Outcomes-based pricing addresses this issue. Compensation is tied to the actual results achieved for patients. Let's look at an example.

Sword Health’s newly introduced "Outcome Pricing" model ties fees directly to measurable health improvements in their client population. This means clients only pay the full cost when members experience the benefits, such as pain reduction, decreased medication use, or improved productivity. With reported outcomes like 62% of members becoming pain-free and a 50% reduction in surgeries, it’s clear that patient outcomes are being positively impacted.

To illustrate the practical application of outcomes-based pricing, I thought it could be helpful to look at two additional case studies of how this model is being used in the real world:

Example #1: Medicare's Bundled Payments for Care Improvement (BPCI) Initiative

The BPCI initiative is a voluntary program for hospitals, physician groups, and post-acute care providers aiming to improve care coordination and reduce costs through outcomes-based pricing. Incentives are tied to patient outcomes.

Outcome: The program has shown a decrease in total episode spending by 1.2% in participating hospitals compared to non-participating hospitals, primarily through reduced use of high-intensity post-acute care. 

Key Finding: If the care isn’t necessary, medical providers are no longer incentivized to offer irrespective of outcomes. The actual reduction in Medicare payments varies but indicates positive outcomes without compromising care quality. For example, a study found a decrease in quarterly patient cost trends of -$78 per quarter in BPCI-A hospitals compared to -$26 in non-participating hospitals.

Example #2: UnitedHealthcare's Spine and Joint Solution

UnitedHealthcare provides a value-based care program. The goal was to bundle payment arrangements for spine and joint procedures, aiming to improve care coordination while reducing costs.

Outcome: Using value-based care methods, they saw a 22% reduction in hospital readmissions. For joint replacement surgeries, they saw a 10% reduction in total spine surgeries. Alongside these readmissions, the program resulted in a 17% decrease in complications reported. For joint replacement surgeries, with a 3.4% decrease for spine surgeries Average Savings of $18,000 per Procedure: Participating employers have realized significant cost savings compared to median costs in the same metropolitan area.

Key Finding: Outcomes-based pricing can reduce costs. The program demonstrates this potential, and that improving care quality can go hand in hand for these specific medical specialties.

Challenges and Considerations

While outcomes-based pricing holds great promise, let’s slow down and take a look at some of the challenges it may pose as well. One of the primary concerns of OBP is ensuring that incentives are properly aligned with overall patient health, rather than narrow metrics that might not tell the whole story.

Weight loss is a poignant example. Yes, compensating the provider based on the amount of weight lost instead of simply the hours of care provided helps to ensure that the provider is driving towards the same goal as the patient. However, what happens when the patient reaches a healthy weight?  My colleague shared a story about her father's experience with a weight loss program. Despite achieving significant weight loss and reaching a healthy weight, he continued to receive incentives for further weight loss, which could have been detrimental to his overall health.The provider was driven by the wrong metric; instead of simply the largest number of pounds lost, they should have been aiming for a healthy weight.

Holistic, and patient-centered metrics for outcomes-based pricing models are essential. The big picture always needs to be considered.

The Future of Healthcare Pricing

As we look to the future, outcomes-based pricing has the potential to continue to shape healthcare delivery best practices. 

For both employers and benefit managers, this presents an opportunity. You essentially have two options:

1. Conduct the analysis yourself, which requires access to comprehensive data from your healthcare vendors.

OR 

2. Invest in programs that incorporate outcomes-based pricing into their structure, leveraging their expertise and data analysis capabilities.

The reality is, there’s a ton of work that’s involved, and it may be difficult to gain access to the data. That said, the results are ultimately worth it. Outcomes-based pricing not only simplifies the process for employers but also ensures that the incentives are properly aligned for optimal patient care.

Conclusion

The shift towards outcomes-based pricing has shown the potential to do what was previously thought nearly impossible: improve healthcare delivery while reducing costs simultaneously. As this trend continues to evolve, it will be crucial for all involved - providers, insurers, employers, and patients - to work together to refine these models and ensure they truly deliver on the promises they set out to deliver on.

For employee benefit brokers and those in the employee benefits industry, staying informed about these developments is important. As healthcare costs rise, the emphasis on value-based care and outcomes-based pricing is only likely to increase. And ultimately, this will be a win for both patient outcomes and employer’s budgets alike.

Interested in seeing a demo of the PlanYear Benefits Platform? Reach out to sales@planyear.com.