Why value-based care still hasn't replaced fee-for-service — and maybe never will

For close to two decades, the trajectory of American health care has looked settled, at least on paper. Payers and policymakers would steer physicians away from fee-for-service medicine, with its built-in reward for doing more, and toward value-based care (VBC) — paying for outcomes instead of volume. The Centers for Medicare & Medicaid Services set targets. Commercial insurers built products. The trade press ran headline after headline treating the shift as a matter of when, not whether.

But the move to VBC is not a foregone conclusion despite the efforts from CMS and insurance companies. Dan D'Orazio says the “when” has been badly oversold. “After 20 years, I think we're still treading water at its finest,” says D'Orazio, CEO of the health care advisory firm Sage Growth Partners. The problem, he says, isn't that physicians haven't tried, or that the technology isn't ready. It's that the entire financial architecture of American medicine was poured around fee-for-service over the better part of a century — and no one has figured out how to repour it without the whole structure fighting back.

A system built for fee-for-service

The roots run deeper than most industry conversations acknowledge, D'Orazio says. Fee-for-service traces to the years after World War II, meaning the system has spent roughly 80 years organized around paying for volume and only the last 10 to 20 experimenting with paying for outcomes. “We're really looking at a window of 10 to 20 years in a history of 80,” he says, “and that's what we're trying to make progress on.”

Follow the money, and the inertia makes sense. Even today's value-based programs are pegged to fee-for-service rates, and the penalties for staying in the old model are often trivial next to the revenue it still generates. Take hospital readmissions, D'Orazio says. Penalties have hovered in the 15%-to-17% range for years, and a typical hospital faces roughly $150,000 to $200,000 for avoidable ones. But if that hospital isn't at capacity, the revenue from filling the bed again can run 15 or 20 times the penalty. “Even though it's a penalty, the incentive is wildly disproportionate to keep going down the fee-for-service route,” he says. Against the $5 trillion the U.S. spends on health care each year, the sums these programs recover are, in his words, “so marginal” they barely move the system.

Where the model is already delivering

And yet, where value-based arrangements are actually up and running, the results are hard to wave off. Humana's 11th annual Value-Based Care Report, drawn from its Medicare Advantage population, found that patients in value-based arrangements had 32.1% fewer inpatient admissions and 11.6% fewer emergency department visits than those outside them. They were screened more often for colorectal cancer, diabetic eye disease and breast cancer, logged 10% more primary care visits in 2023, and reported 90% satisfaction with their physicians on CAHPS survey data.

The report's senior-focused findings add an equity dimension the VBC debate often skips. Compared with peers in Original Medicare, seniors in value-based primary care had 17% more primary care visits, 6% fewer hospitalizations and 11% fewer ED visits — with Black seniors seeing their physician 39% more often and low-income seniors at a 21% higher rate.

The financials are just as pointed. Humana pegged its 2023 savings at $11 billion, or 25.8% below Original Medicare spending, and said it plowed the difference back into lower premiums, at-home care, prescription delivery and food assistance. Physicians came out ahead too, earning up to 241% above the Medicare fee-for-service schedule. The report tied the model to lower burnout as well, crediting smaller panels and team-based coordination. “VBC is the best model for clinician satisfaction,” Palmetto Pediatrics physician Snehal Parikh, M.D., said in the report.

Humana’s leadership was also pleased. “Coordinated care that delivers the right care at the right time must become the standard,” Humana chief medical officer Kate Goodrich, M.D., said in a statement.

None of which D'Orazio disputes. His point is that the model works where it takes hold — but getting it to take hold is exactly the challenge the industry keeps underestimating.

Data, workflows and the limits of technology

Ask D'Orazio why, and he lands on data fragmentation and physician workflow — problems he says predate, and will outlast, the current excitement about artificial intelligence. He offers a case study from cardiology: implantable devices that can flag asymptomatic atrial fibrillation have been around for 15 to 20 years, beaming data over cellular connections while a patient sleeps. Even so, providers were “only remotely monitoring probably 20% of their patients that had this implantable device,” he says — and this during a stretch when Medicare paid more for a remote check than an inpatient visit. “It wasn't a technology problem,” he says. It was alert fatigue, murky accountability for who acts on the data, and information scattered across four different device makers' portals.

That gap between capability and execution is precisely what Megan Zakrewsky spends her days trying to close, and she frames it as a shared-data problem before anything else. The vice president of product for clinical data exchange payer solutions at Veradigm, Zakrewsky told Medical Economics that payers and physicians need to treat data as a single source of truth — with payers surfacing care gaps and suspected conditions clinicians might otherwise miss, then handing back performance analytics benchmarked to national standards to sharpen HEDIS scores and Star Ratings. But volume isn't the goal, she cautioned: dump enough undigested history on a physician and you compound the very frustration D'Orazio describes. Her prescription runs on three tracks — a common language between payers and the independent and rural physicians least steeped in VBC mechanics, responsible data-sharing to close visibility gaps, and predictive analytics to flag high-risk patients, forecast demand and watch contract performance in real time.

D'Orazio doesn't think AI changes that equation as much as its boosters claim. “AI will only be as strong as the data that it sits on top of,” he says, “and in fact, AI can make things worse quicker because we don't have the right data.” He sees genuine value in automating administrative grind — call centers, scheduling — but says none of it touches the incentives underneath. “It doesn't change fee for service,” he says. The deeper obstacle is human behavior, and he reaches for a familiar analogy to make the point: “We wouldn't need GLP-1s if it were easy to change behavior.”

Capitation's return — and its real difficulty

Capitation — paying a fixed amount per patient regardless of services rendered — is back in fashion, a generation after the HMO backlash of the 1990s soured physicians and patients alike. D'Orazio is skeptical it scales this time either, not because the concept is broken but because it demands a level of clinical, financial and administrative integration few organizations possess. “Capitation means you have all the clinical and financial and administrative capability to make it work,” he says, though some organizations with the right resources have proven successful.

He points to Maryland's global budget model, which pays hospitals a fixed sum regardless of admission volume, as a rare instance of the approach working at scale — largely because a single state authority controls the levers. Stretch that logic to physician practices, or to commercial insurers with members scattered across the country, and it becomes, in his words, “a wildly daunting task.” Even at a smaller scale the logistics bite: one Sage client runs a fully capitated home-health, durable-medical-equipment and infusion business covering about 6% of total Medicare spend, and D'Orazio ticks through what that requires — underwriting risk, wrangling data, coordinating a discharge down to getting the right equipment to a patient's door. Health systems that pushed further into running their own health plans have often retreated; he cites reporting that roughly eight have sold or folded those operations, evidence, he says, that welding clinical and financial risk together “is no easy task.”

Where progress looks real

For all the skepticism, D'Orazio isn't writing the model off. He singles out physician-led accountable care organizations as the clearest bright spot — they “perform better than hospitals,” he says, because their incentives point more directly at patient outcomes. That, to him, argues for a revival of independent practice at a moment when roughly 70% of physicians work inside some corporate arrangement, driven there by the sheer difficulty of running a practice as rent, labor and flat Medicare rates squeeze the margins.

Zakrewsky arrives at a similar place from the payer side. Value-based care works, she told Medical Economics, only when both parties treat it as shared responsibility rather than something one side imposes on the other — and when they do, she says, chronic disease gets managed better, total costs fall, administrative burden eases and quality scores climb. It is, in effect, a description of what D'Orazio says physician-led ACOs are already pulling off.

The unresolved pieces, though, are stubborn. Prior authorization alone, D'Orazio notes, can involve 41 to 45 discrete, often manual, state-specific steps — the kind of complexity technology can't simply automate away. A physician can even clear prior authorization only to have the patient turned away at the facility level, a small illustration of how many seams still run through the system after a decision has, on paper, been made.

A gradual, not sweeping, shift

So where does that leave value-based care five or 10 years out? “Incremental gains at best,” D'Orazio says. He doesn't expect fee-for-service to vanish, nor value-based care to recede — just a slower, messier grind than the clean transformation the industry keeps promising, advancing wherever physician leadership, usable data and payment reform happen to line up at once.

That, finally, is the tension physicians are left to navigate. The Humana numbers and Zakrewsky's collaboration playbook show what value-based care can deliver when the pieces align — better outcomes, real savings, clinicians who report enjoying the work more. D'Orazio's account is a reminder of how rarely they all align, and of the scale of what still stands in the way. “It's the inordinate task of unwinding fee for service,” he says, “and finding enough meaningful places to have dollar savings when we spend $5 trillion a year.” Two decades in, the honest answer to when value-based care will take over is the one the data and the skeptic both point to: unevenly, in the places ready for it, and slower than anyone promised.