Value-Based Care: Crisis and Solution in the American Healthcare Industry

America’s healthcare system is at a breaking point — soaring costs and poor outcomes leave patients paying more for less. Medical debt has reached staggering levels, with U.S. citizens owing approximately $200 billion. Nearly 14 million adults owe over $1,000 in medical expenses (Rakshit et al. 2024). When patients can’t pay, the taxpayer often foots the bill.

In 2021, annual per capita health expenditure in the U.S. sat at $12,555, twice as much as comparable countries like Japan, Canada, and the United Kingdom (Wager and Cox 2024). Unfortunately, these higher costs are not reflected in better health outcomes: when ranked against eleven comparative high-income countries on health outcomes that can be modified by healthcare (as opposed to social or economic conditions) the United States came in last (Schneider 2021).

The issue lies in the ‘fee for service’ system, wherein healthcare providers are paid individually for each service provided instead of treatment over the course of a medical event. Doctors are monetarily incentivized to order more tests, prescribe more drugs, and recommend more treatments. Meanwhile, hospitals are incentivized to provide large suites of services with less emphasis given to specialized care. In other words, quantity takes precedence over quality.

Michael E. Porter proposed a solution in the form of value-based care: a system that paid providers for the quality and result of care, as opposed to the range of services provided (Porter and Teisberg 2006). Within such a system, competition in healthcare would be organized around the diagnosis, treatment, and prevention of specific health conditions, with payments to healthcare providers being made for specialized care over the full course of the medical event. This competition would also necessitate an infrastructure of informational technology that could accurately rate health plans and providers on the results of their services, as well as inform other players in the industry and patients of those results. Providers would be incentivized to specialize and provide the best results at the lowest price, instead of focusing on maximizing the number of profitable services offered.

Oak Street Health, a healthcare provider that chooses to bear the financial risk of its patients, is perhaps the most successful example of the practical implementation of value-based care. Incentivized to cut the medical costs of its patients, Oak Street began implementing preventative health measures such as risk-assessing first-time visitors and allocating care management resources accordingly.

Within three years, Oak Street was already producing results: they scored a stellar 91 on the Net Promoted Scale, a measure of overall patient experience with an industry average score of 3. Oak Street’s results also statistically corresponded to the top ten percent of health plans when measured by parameters such as asthma medication use, control of high blood pressure, measures of comprehensive diabetes care, and breast cancer screening. Finally, when adjusted for age, sex, race, and location, Oak Street’s hospital readmission rate was 43% below the Chicago benchmark (Porter, Lee, and Alger 2017). The success of the experiment was confirmed when CVS acquired Oak Street in 2023 with an implied valuation of $10.6 billion.

Despite being developed in an American context, value-based care has gained traction on an international scale, boasting successful implementation in multiple European states. Sweden pioneered the success of value-based care on a national level through the implementation of an outcome-based compensation system for specialized care. As a result, the rate of complications declined by 20% while Sweden’s per capita cost of healthcare declined by a monumental 17% (Barada and Awada 2021). Singapore and the United Kingdom achieved similar cost-cutting results when applying the principles of value-based care to the National University Health System and the NHS, respectively. Importantly, both states could decisively implement new ideas through large centralized healthcare providers, something the decentralized innovative American system lacks.

The Oak Street success story is not a standalone anomaly but rather part of a larger trend of capital flowing into the development of value-based care in America, and excitement in the sector appears to be mounting. Whereas in 2019, value-based care capital inflows sat at approximately two billion dollars, by 2021, they had grown to approximately seven billion (still well shy of the twenty-plus billion dollars allocated for hospital construction each year) (Abou-Atme et al. 2022). The excitement around value-based care may not have translated into cost reduction yet, but a longer temporal analysis may be necessary.

Meanwhile, Sweden’s success story calls into question the free-market American healthcare system: Can the American system adapt to the mounting cost crisis as efficiently as its more regulated Scandinavian analog?

Sources

Abou-Atme, Zahy, Rob Alterman, Gunjan Khanna, and Edward Levine. Investing in the new era of value-based care. United States: McKinsey & Company, 2022. https://www.mckinsey.com/industries/healthcare/our-insights/investing-in-the-new-era-of-value-based-care

Barada, S. and S. Awada. Value Based Healthcare. United States: PWC, 2021. https://www.pwc.com/m1/en/publications/documents/value-based-healthcare.pdf

Porter, Michael E. and Elizabeth Olmsted Teisberg. Redefining Health Care: Creating Value-based Competition on Results. United States: Harvard Business Review Press, 2006.

Porter, Michael E., Thomas H. Lee, and Meredith A. Alger. Oak Street Health: A New Model of Primary Care. (Harvard Business School: February 2017). https://www.hbs.edu/faculty/Pages/item.aspx?num=52357

Rakshit, S., M. Rae, G. Claxton, K. Amin, and C. Cox. The Burden of Medical Debt in the United States. (KFF, Feb. 2021). https://www.kff.org/health-costs/issue-brief/the-burden-of-medical-debt-in-the-united-states/

Schneider, Eric C. et al. Mirror, Mirror 2021 — Reflecting Poorly: Health Care in the U.S. Compared to Other High-Income Countries. (Commonwealth Fund, Aug. 2021). https://doi.org/10.26099/01dv-h208

Wager, E. and C. Cox. ‘International Comparison of Health Systems’ in Drew Altman (ed.), Health Policy 101, (KFF, October 2024) . https://www.kff.org/health-policy-101-international-comparison-of-health-systems/

Image Source: Zenstock, ‘Stethoscope with dollar bank and medicine capsules on white background. healthy lifestyle with business finance concept Free Photo’, https://www.vecteezy.com/photo/7182836-stethoscope-with-dollar-bank-and-medicine-capsules-on-white-background-healthy-lifestyle-with-business-finance-concept