Winning With Value-Based Care: Balancing Risk, Analytics, and Digital Innovation

Value-based care (VBC) is the future of health care. It is the best approach to improving patient outcomes, reducing costs, and addressing overall population health through a focus on prevention, care coordination, and overall wellness.  

More than 2 and a half decades ago, the Centers for Medicare and Medicaid Services (CMS) stated a desire to be an informed purchaser of health care services rather than an indiscriminate payer. As VBC has become more prevalent, CMS has now expressed the goal of having all Medicare and most Medicaid beneficiaries in a care relationship with a provider accountable for both quality and total cost of care by 2030.¹

The sophistication of VBC arrangements has paralleled the development, availability, and understanding of population health analytics. These analytics are crucial in assessing and managing the health care burden of chronic conditions within a population, along with the associated financial risks. Increasing the number of quantifiable care dimensions and enhancing data granularity lead to a more precise understanding of health care needs. This understanding goes beyond academic or intellectual analysis; it directly impacts the financial risk, with VBC arrangements designed to share both the upside and downside of that risk.

Typically, payers consider the cost of care in terms of the Medical Loss Ratio (MLR).  This is the percentage of overall revenue devoted to paying for health care services. Ideally, payers set a target of 85% of overall revenue for the MLR.² The challenge with the MLR is that it encompasses both the costs of treating illness-related events and the expenses related to wellness activities, creating a complex balance in health care spending (more on this distinction in future articles). 

The cost of treating illness, rather than preventing it, tends to be the overwhelming portion of the MLR and is highly unpredictable. By delegating responsibility to providers for cohorts of the population and fixing the payments to these providers, the MLR becomes much more predictable for the payer organization.

As VBC arrangements grow more sophisticated, incorporating both upside (shared savings) and downside risk, a provider’s financial success hinges on accurately assessing the risks within the delegated population. Similarly, payers must thoroughly understand the financial risks they delegate to providers. Without a clear understanding of these risks, both parties run the risk of over- or under-compensating the other. The payer aims to avoid overpaying the provider beyond the actual cost of delivering high-quality care, while the provider must accurately assess expenses to prevent financial losses in the arrangement. 

These contracts generally have additional metrics to ensure accountability and quality. Typical metrics can include attaining performance levels on Quality metrics such as the Healthcare Effectiveness Data and Information Set (HEDIS) and the Consumer Assessment of Healthcare Providers and Systems (CAHPS), reducing or not exceeding certain levels of hospital admissions, containing emergency room (ER) and pharmacy costs, among others. The metrics are limited only by the imagination and strategic priorities of the parties involved, and the terms can differ substantially from one to the next. For example, certain health conditions, including transplants or even specific types of transplants, may be included or excluded.

Similarly, while vaccines may be included in the providers’ responsibilities, certain medications (eg, particularly high-cost medications) may be “carved out” and remain the financial responsibility of the payer organization. For both the payer and the provider, it is imperative to understand the composition of the delegated member/patient cohort, the demographics, social determinants of health (SDOH), and the chronic condition burden to project the service utilization and health care-related costs to avoid a cost-compensation mismatch.

The more detailed the data and analytics, the deeper and more granular the understanding of the population cohort and its health care demands. Before accepting a contract for a cohort of patients, a provider must thoroughly understand that population by considering the following:

• Competency in managing the population: Does the provider have experience managing this group according to the proposed metrics, or are they taking on both clinical and financial adverse risk?
• Scope of responsibility: Are there conditions and services they prefer to exclude (eg, “carve out”) from the contract, or do they feel confident managing them while maintaining a positive financial margin?  
• Specialty provider availability: Are there in-network specialty providers to meet population’s needs, or will the provider need to negotiate potentially expensive out-of-network arrangements?  
• Risk acceptance level: Does the provider want to accept risk only for primary care services (PCP-capitation or PCP-cap), or are they prepared to take on all services (full capitation or full-cap)? 

These questions, and myriad others require answers during the negotiating process.  

Once the VBC contract has been negotiated and executed, it must be administered. Here, the burden rests predominantly with the payer. Regular reconciliation of the Division of Financial Responsibility (DOFR [pronounced “do-fur”]) requires diligence on the part of the payer. Assuring the responsibilities delegated to the provider are satisfied requires regular “true-ups” of claims and accurate tracking of agreed-upon metrics. A common example is vaccinations, such as flu shots. Patients typically choose the most convenient location—often a pharmacy—which then bills the payer. However, vaccinations, including flu shots, may be a delegated service, meaning the provider is already receiving payment for them as part of the monthly per-member-per-month (PMPM) capitation fee. The payer does not want to pay the pharmacy for a service (the flu shot) for which they are already paying the provider as part of the capitation. Therefore, the payer needs to recognize the potential double payment and deduct it from the monthly capitation fee, a process called capitation deduction or “cap deduct.”  Similarly, financial penalties must also be deducted if the provider does not meet the agreed-upon care metrics. These financial calculations may occur monthly with a final reconciliation at a specified date or time interval. There may be a sliding-scale capitation fee for performance above and beyond certain metrics, such as achieving HEDIS Star ratings.  These types of performance-based compensation rewards are usually negotiated by providers based on their confidence in their ability to meet and exceed care metrics.  

How can digital infrastructure assist with payment strategies in VBC? The transition toward VBC includes the development of multiple policies and payment strategies, including bundled payments, accountable care organizations (ACOs), the Medicare Shared Savings Program and others.  

The CMS aims to have nearly all Medicare beneficiaries in a VBC model by 2030. VBC is making inroads in non-government programs as well. Current estimates of participation rates vary.³ In 2018, only 45% of US physicians were estimated to use at least one Medicare payment model, while between 2017 and 2022, 66% to 91% of physician practices participated in at least one VBC model. 

However, despite the progress made and a broad consensus on VBC advantages, adoption hasn’t been as swift and widespread as it needs to be to have the desired impact. Part of this is due to institutional inertia. Health care has been operating primarily under the fee-for-service (FFS) model for decades and it is difficult to shed one system for another, particularly in an enormous and highly regulated industry with so many stakeholders. 

Another reason for the slow transition is the relative complexity of VBC compared to the standard FFS model which, for all its faults, is fairly simple in terms of contracting. Typically, a primary care physician sees a patient, creates a claim and submits it to a payer–private or public–for reimbursement.

By contrast, and as noted earlier in the article, a VBC model contains far more participants, including, potentially, multiple payers, ACOs, social service and community-based organizations, and various providers. In addition, the implementation of VBC requires far more data generation and data exchanges among stakeholders to manage contracts, meet various reporting requirements, improve collaboration, and account for SDOH, etc.

Many payers are finding that their IT infrastructures cannot adequately support this new VBC ecosystem. Their legacy IT was built to handle less complex FFS and/or pay-for-performance (P4P) models and cannot manage the multistakeholder data exchanges and complex analytics required for VBC.

As opposed to the more linear FFS model, a VBC network is a complex hierarchy with payers and other funding sources as the top layer. The risk-bearing entities—such as hospitals, ACOs, independent practice associations, direct primary care, and specialty carve-out organizations—are the middle layer while participating providers are at the bottom.

Every stakeholder within this hierarchy interacts with many other members as data, funds, and electronic health records flow among them in multiple directions. These many-to-many relationships allow providers to participate in VBC programs as individuals and parts of groups, across multiple locations, and in different payer programs and networks. That means a greater burden on payers who must manage multiple contracts with different reporting and reimbursement schedules. To be effective, data exchanges within the hierarchy need to be transparent, automatic, and in real time.

However, most payers’ legacy IT systems do not have the flexibility and interoperability to handle these transactions. While adequate for FFS claims adjudication, they fall short for VBC. What’s needed is a value-based administration (VBA) platform that supports the hierarchies among these entities—a network-of-networks framework.

This so-called “tech debt” to outdated IT infrastructure is a serious barrier to VBC adoption. Many health care organizations are under enormous financial pressure and are not able to replace or upgrade their IT on a large scale. As a result, organizations either avoid or postpone transitioning to VBC, or they try to implement it with their inadequate legacy IT, which results in unsatisfactory outcomes for all involved.

Fortunately, most payers can implement VBA without a complete overhaul or replacement of their IT systems. This can be done with an interactive platform that processes and digitizes disparate data sets, allowing users to model and build custom contracts based on risk-based analysis of patient populations. 

Payers get a scalable analytics platform that collects and synthesizes data, including unstructured data, from disparate sources to provide a risk-based analysis of patient populations and subgroups covered under various contracts. Payers also can track their performance against the contract requirements.

Payers can employ the analytics for risk stratification, analyzing different types of providers, their risks and respective clinical measures. This gives payers accurate benchmarking among providers and comparisons regarding overall cost and utilization. Payers also can use analytics to explore opportunity and what-if scenarios as well as ad hoc reporting. They can analyze data to demonstrate the overall value of solutions they're putting into market for their clients.

Payers trying to manage multiple reimbursement models and contracts within the VBC hierarchy need to segment contract specificities while also reporting outcomes and financial performance—capabilities beyond the reach of legacy IT systems.

They need a scalable and reliable cloud-based infrastructure that enables a network of multiple stakeholders, including hospitals and physician groups, social service agencies, and community organizations, to participate in VBC activities.

The success of VBC hinges on the seamless integration of financial strategy, risk management, and digital infrastructure. While well-structured contracts define responsibilities and incentives, advanced analytics and modern IT systems ensure these agreements function efficiently. Overcoming the limitations of legacy technology and embracing VBA platforms will be crucial for payers and providers to manage risk, track performance, and optimize patient outcomes. As CMS and private organizations push for broader VBC adoption, stakeholders must collaborate to build scalable, data-driven solutions that enhance care coordination, improve health equity, and drive sustainable cost savings. By aligning innovation with patient-centered care, the health care industry can fully realize the promise of VBC. 

1. McClellan M, Lyford S, Buschon L, et al. Medicare accountable care in 2030 | the pathway to 100%. Presented at: National Press Club; October 3, 2023; Washington, DC. 
2. Medical Loss Ratio data and system resources. CMS. Last Updated December 23, 2024. Accessed March 17, 2025. https://www.cms.gov/marketplace/resources/data/medical-loss-ratio-data-systems-resources
3. Winberg DR, Baker MC, Hu X, Horvath KA. Who participates in value-based care models? Physicians characteristics and implications for value-based care. Health Aff Sch. 2024;2(8):qxae087. doi:10.1093/haschl/qxae087