Increasing budgetary pressures and the proliferation of health innovations are pushing many countries to consider value-based healthcare, focused on cost-effective, high-quality and efficient medical services. After all, rewarding better health outcomes with higher reimbursement, while potentially improving patient experience and health equity seems like a step in the right direction. In fact, the United States, the United Kingdom and other countries are recognising the value of this approach to healthcare, and are implementing variants of it on a massive scale. 

For example, the UK National Health Service’s (NHS) Quality and Outcomes Framework (QOF) covers almost all general practitioners, making it one of the world’s largest outcomes-adjusted programmes. And under the US’ Medicare, value-based care has been expanding beyond primary to specialty care. 

But care systems are complex webs of interactions among patients, clinicians, multiple health care delivery organisations and governments that pay for care. And designing contracts to deliver on the promise of value-based healthcare is likewise complicated. 

Specifically, contracts determine whether individual providers or a group of practitioners provide the service, whether only patients’ or entire populations’ health outcomes should be measured, and whether reimbursement should be based on population size, based on service provided (i.e. fee-for-service) or be outcomes-adjusted. This means that depending on how contracts are designed, some do better than others at aligning incentives around health outcomes and costs of care.

Outcomes-based reimbursement in practice

Outcomes-based reimbursement means paying healthcare providers based on how well their patients actually do, rather than just for the services rendered. In other words, it’s about rewarding care providers for better health outcomes with higher reimbursement. 

But in practice, there’s a challenge: “Health” is co-produced by various care providers – from general practitioners to specialists and hospitals – in the course of the patients’ treatment and they may be on different budget lines in the system. Take the case of diabetes. The better the chronic condition is controlled at the primary care level, the fewer the complications and need for specialist intervention down the line. 

In an ideal world, under outcomes-based reimbursement, each provider would be appropriately rewarded for their contribution to the patient’s health. But lessons from other sectors and from economic models suggest that care must be taken to prevent kickbacks and free-riding. 

Kickbacks are illegal in many jurisdictions. But from 2020 to 2023, the US Department of Justice recovered more than US$376 million in settlements and judgements for violations of anti-kickback laws. However, outcomes-based contracts are exempted from laws that make collusion illegal since 2021, with the goal of incentivising care coordination. While coordination is important for holistic patient care, the exemption might have unintended consequences, including collusion.

Designing a sound contract

In designing outcomes-based contracts, the devil is in the detail. How do we measure outcomes? How should reimbursement be structured and how should the contract be designed? 

In the UK, the QOF measures quality based on 76 indicators across five domains including clinical, public health and quality improvement. In addition to defining the indicators, contract designs determine whether providers focus on the aggregate quality on a population level or only on outcomes of patients seen by the provider. 

Once the measures are defined, the question is: How do we map these measures to monetary rewards? This is where the reimbursement structure comes into play: whether providers are rewarded individually or as a group of providers along the care pathway. Examples include a fixed salary, fee for service, capitation (fixed fee per patient in a population), or some combination of these with an outcomes-based bonus component. 

In the US, under the Medicare scheme, the outcomes-adjusted bonus is capped at 3.4%. In the UK’s QOF, the adjustment component makes up just under 10% of GP compensation, and it can go up to 20% in other jurisdictions.

Based on our stylised model built with data from type-2 diabetes care in the US and UK, we show that in the absence of collusion, specialists holding an outcomes-adjusted capitation contract would bring the best outcomes. And if specialists are not given capitation contracts, group contracts outperform individual ones. That’s because group contracts, such as the US’ ACO (Accountable Care Organization) Shared Savings programme, induce providers to allocate care between themselves in a cost-efficient manner. The risk, though, is that of free riding by some providers.

Real-world trade-offs

Our study shows that among the current outcomes-adjusted contracts, volume-scaling contracts – whereby doctors are paid more when they see more patients instead of receiving fixed salaries – are  more prone to inducing patients’ demand for their services, as well as collusion. When caps are imposed on outcome-adjustments (e.g. Medicare’s Merit-based Incentive Payment System or MIPS), the chance of collusion may be reduced, but so is the incentive to improve healthcare quality. 

Volume-scaling contracts are not uncommon in the US. While fee-for-service is the most common contract type in the US, volume-scaling compensation is prevalent for GPs – even under outcomes-based contracts such as the MIPS. In fact, the compensation of 93% of specialists include a volume-scaling component, which can make up to 74% of their income on average. 

Our analysis reveals that outcomes-adjusted, volume-scaling contracts such as MIPS is susceptible to collusion, especially by specialists receiving referrals. This problem is amplified if the adjustment component is capped, as is the case with the MIPs and many other programmes, because there is a limit to augmenting their compensation by improving health outcomes. In the case of MIPS, the financial incentives to increase the number of patients to boost compensation outweighs the capped financial penalty for poor health outcomes.

There are of course ways to circumvent collusion, as the NHS has shown, by applying outcomes-adjustment only to GPs while specialists are paid a fixed salary. Although this may not reap the full benefit of outcomes-based contracts, such a system is virtually immune to collusion. Essentially, contracts must be thoughtfully structured to reduce the chances of providers taking advantage of “loopholes” in healthcare systems.

Overall, we also found that capitation contracts that are adjusted for individual health outcomes are highly robust to collusion, even when upstream providers are on different payment schemes. Such contracts are also optimal and collusion-proof, when compared to contracts that use population health (vs. individual health) as the variable. 

Healthcare systems across the world come with their own contexts and constraints. Complex as they may be, recognising the diverse incentives of the providers in the system, and making attempts to align these incentives through contract design, is a good start towards better outcomes – and hopefully healthcare equity.