This post is part of a series on the corporate consolidation and financialization of health care. Read the rest of the posts here.
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In 2010, the Affordable Care Act (ACA) ushered in a new governing consensus in health care policy. To address persistently high costs and poor outcomes, policymakers sought to break from the “fee-for-service” payment system, which reimburses physicians for each service provided and, critics argue, incentivizes excessive and low-quality care. In its place would come “value-based payment” (VBP), which holds physicians financially accountable for the annual health spending of their patients and for performance on a range of quality metrics. To date, however, VBP has failed to fulfill its promise of reducing costs and improving care quality—and it appears to be driving corporate consolidation.
VBP’s hegemonic status in health policy has not only obscured its underwhelming performance but has also shielded its ideological foundations from scrutiny. As I discuss in this post, VBP’s adoption–though heralded as a policy innovation–was in reality a continuation of the “managed care” paradigm: the preference, since the 1980s, for outsourcing public regulation to the private sector and relying on market-based solutions to control health care spending. In this way and others, the adoption of VBP also reflects the core tenets of neoliberalism, the broader political and economic order that remains deeply entrenched in health care law and policy.
Value-Based Payment and Managed Care
In response to escalating costs in private insurance, reformers in the 1980s rejected policies like direct price regulation and turned to market-based solutions known as managed care. Departing from traditional indemnity insurance, which passively paid physicians retrospectively for the care they provided, insurers were encouraged to find new ways to save money, devising narrow coverage networks and denying more services. They also shifted cost-management functions onto physicians—known as provider “risk” bearing—by paying them lump-sum, per-patient “capitation” payments, and by vertically consolidating with and owning the provider entity. Reformers believed that large provider systems integrating physicians, hospitals, and insurance would efficiently manage services, keep costs down, and outcompete other models of insurance and care delivery.
Despite stiff public backlash to these developments in private insurance in the late 1990s, policymakers doubled down on the market-based ideology of managed care by privatizing Medicare and Medicaid. In 2003, the Bush Administration rebranded and heavily subsidized Medicare Advantage, the private market alternative to traditional fee-for-service Medicare. In Medicare Advantage, the government pays insurance companies lump-sum monthly payments to administer Medicare to enrollees, with substantial bonuses for satisfying quality metrics. Medicare Advantage insurers compete with traditional Medicare and other Medicare Advantage plans to enroll patients and generate profits by keeping costs down. These Medicare Advantage plans began to adopt the original risk-bearing vision of managed care, distributing the insurance function to providers through the aforementioned capitation contracts or vertical acquisitions. Also in 2003, Congress expanded Medicare to include prescription drugs. This program, called Medicare Part D, also followed a managed care framework: instead of directly paying pharmacies for drugs dispensed, the government provided lump-sum payments to competing insurance companies and their pharmacy benefit managers (PBMs).
In 2010, the ACA entrenched the managed care approach by incorporating provider risk bearing directly into traditional Medicare, calling it value-based payment (VBP). Departing from the fee-for-service framework in traditional Medicare, providers would be reimbursed based on their ability to manage the total costs of patients. VBP thus implemented the same provider risk bearing that inspired the managed care movement from the outset. In both the VBP measures in the ACA and the design of Medicare Advantage, the government outsourced the cost-containment function to the private sector. However, in the ACA, instead of delegating the insurance function to private insurance companies, as with Medicare Advantage, VBP would delegate the risk-bearing function directly onto provider groups and hospital systems. Like Medicare Advantage insurers, these risk-bearing providers would keep a profit if they satisfied a range of quality metrics and kept total health care costs below a government-set spending benchmark.
Policymakers believed that with the right financial incentives, physicians would now be able to rein in health care spending. In practice, however, these managed care models—both Medicare Advantage and the VBP models in traditional Medicare—have struggled to reduce costs or improve quality. Nonetheless, regulatory outsourcing and provider risk-bearing remains the dominant health care policy approach.
Value-Based Payment and Neoliberal Governance
Neoliberalism generally refers to a view of the economy and an approach to policy that prioritizes privatization and unfettered markets—and its impact on U.S. health care policy has been drastic. For example, since the 1980s, publicly provisioned care has declined, high-deductible health plans that incentivize patients to “shop” for cheaper care have gained traction, and financial investment in health care has seen a meteoric rise.
Another key aspect of neoliberalism is that it diverges from classical, small-government liberalism. Neoliberalism is not solely concerned with shrinking the state and setting markets free; it’s about deploying the state to erect, encase, and protect market imperatives. In this formulation, the state builds market structures and manages the ensuing consequences—seen, for example, in the metastasizing carceral state amid post-industrial decline, which Jamie Peck would call the “rolling back” and “rolling out” of the neoliberal state. The neoliberal state also creates vast bureaucracies—in both the public and private sectors—to design and tinker with market mechanisms. For example, through the ACA, the state created private insurance “marketplaces” and a complex attendant bureaucracy. Managed care saw much of the same: Congress, rather than administer the medical and prescription drug benefit directly through Medicare, opted to stand up markets within the Medicare program (Medicare Advantage and Part D) to encourage private-sector rationing of services.
And so too with VBP. In departing from fee-for-service, policymakers sought to transform physicians into mini-insurers, with profit incentives to limit service use and check off quality metrics. Rather than Medicare managing costs by deciding what to cover and at what price, the government delegated this cost-containment function to private entities. The idea was that physicians—now only able to profit if they managed total health expenditures—would compete with each other to discourage low-value care, refer away from expensive specialists, and invest in prevention. True to neoliberal form, VBP’s notoriously complex models and reporting apparatus required armies of government workers, consultants, and a new private bureaucracy of managers and investors to operate.
Neoliberal ideology also helps explain policymakers’ obsession with physicians’ economic incentives, which has been central to the shift to VBP. The theory, advanced most prominently by writer Atul Gawande, holds that the U.S. “spends so much because doctors get paid for doing things, not for keeping people healthy … The most expensive piece of medical equipment, as the saying goes, is a doctor’s pen.” Yet Americans don’t generally overuse health care, and compared to peer nations, our exorbitant costs are driven by high unit prices and private-sector administrative costs. And perhaps surprisingly, peer nations generally operate on fee-for-service reimbursement systems. The fixation on fee-for-service incentives may relate to what Wendy Brown calls the “neoliberal rationale.” Neoliberalism, according to Brown, reaches beyond a set of policies or a temporal demarcation; it’s a form of reasoning that has pervaded everything, from corporations, to government, to civil society. By this logic, individuals, too, are primarily economic actors—homo economicus—who exist to hone, perfect, and market their human capital.
Under this rationale, it becomes intuitive to assume that everyone—including physicians and other clinicians—would abuse the system if doing so padded their bottom line. Consequently, policymaking becomes an exercise in correcting financial incentives through market mechanisms and pay-for-performance measurement schemes. In 2008, while advocating for VBP in front of the Ways and Means Committee, economist Len Nichols argued that we should “align incentives so thoroughly that we actually link the self-interest of clinicians with our common interest in cost growth reduction and quality improvement.” This neoliberal rationale has by no means been limited to health care: we can, for example, see a parallel in education, where treating teachers as purely economic agents has led to relentless measurement and “accountability” schemes like pay-for-performance.
Incentives certainly exist in health care, and organized medicine has a history of arrogating power and using the state to insulate it from competitive forces. However, the neoliberal view of the physician as a purely profit-seeking actor ignores their non-economic motivations and may undermine their professional and ethical commitments to service. Embedded in VBP logic is an emphasis on configuring an incentive structure in which a secondary byproduct of profit maximization is cost containment and higher quality metrics. This approach reads out questions of altruistic motivation, existing peer accountability mechanisms, and ultimately, how power is allocated amongst actors in the health care economy. That is, by extension of this logic, it doesn’t especially matter whether medical practices and hospitals are controlled by private equity investors, the community, or clinicians—because everyone is foremost pursuing profit. Indeed, some observers have argued that the solution to private equity and increasing financialization of health care is more VBP.
Perhaps, then, it is no surprise that VBP adoption has coincided with corporate consolidation and the rising demoralization of the medical profession. While many factors drive these phenomena, VBP is a key component. Physicians are ill-equipped to assume the financial risk and navigate the maze of quality metrics that VBP requires. Private equity investors and insurance conglomerates have rushed to take over medical practices and operate these VBP models. Savings, as noted, have been elusive, but VBP models, like Medicare Advantage, have invited opportunities for financial engineering and extraction.
Ultimately, the private rationing of managed care and VBP is an abdication of governance—a failure of policymakers to wield the public authority required to equitably and efficiently administer a public health care program. A post-neoliberal health care agenda, by contrast, would contain costs through proper price administration and cutting private-sector administrative waste—the true drivers of overspending. It would directly reimburse physicians and other clinicians and nurture their professional autonomy, rather than empowering corporate executives and financiers to control them. It would use savings to make Medicare and other insurance programs more affordable for patients, and to properly pay overworked and underpaid caregivers. Now is the time to depart from the four-decade experiment with managed care and to structure financing policy to serve the interests of clinicians, patients, and their local communities.
The views expressed here do not reflect those of Brown University, Brown University School of Public Health, or the author’s research sponsors.
