Over the past month, the nation's largest health insurance companies have committed to or doubled up on earlier pronouncements to negotiate more "value-based contracts" with doctors and hospitals. The value-based approach ties more medical-care provider payments from insurers to health outcomes, performance, and quality measures when compared with traditional fee-for-service medicine that can lead to overtreatment and unnecessary medical tests and procedures.
Even the government is going big on value-based care. The Centers for Medicare and Medicaid Services said half of all Medicare dollars paid to doctors and hospitals by 2018 will be made through "alternative" reimbursement models, U.S. Secretary of Health and Human Services Sylvia Burwell said in a perspective in the New England Journal of Medicine.
For health insurers, this approach lessens their risk, as it puts more responsibility on doctors and hospitals to control how they spend the premium dollar. That's good for the government in the case of Medicare, but it's also good for private health insurance companies and their shareholders.
A fast-growing form of value-based care is the accountable care organization, or ACO, which groups doctors, hospitals, and other providers under one umbrella to contract with insurers. If the providers in the ACO achieve better outcomes, they divvy up money saved with employers, insurance companies, or the Medicare health insurance program through what are called shared savings arrangements.
Though there are several models of value-based care, such as patient-centered medical homes and bundled payments paid to doctors and hospitals, the ACO has become insurers' greatest push.
UnitedHealth Group's (NYSE:UNH) UnitedHealthcare subsidiary, for example, has contracts with more than 520 ACOs today and said in February it would increase that number by "up to 250" more in 2015.
"UnitedHealthcare is building more collaborative relationships with more care providers to ensure our plan participants have access to higher-quality, cost-effective care," said Dan Rosenthal, president of UnitedHealthcare Networks. "Working with care providers to ensure they have the right support and incentives will help connect the people we serve to the most effective care, place a greater focus on the quality of their care, and compensate providers for improving patients' health."
UnitedHealth is committed to increase payments that are tied to value-based arrangements to $65 billion by the end of 2018. This amount is currently more than 25% of the value of United's contracts with providers.
Insurers Anthem, Humana, and Cigna are also escalating the number of value-based contracts, with the most aggressive announcement thus far coming from Aetna (NYSE:AET).
Aetna said 28% of its claims payments go to physicians and other providers who are in value-based contracts. Aetna has more than 1,000 such agreements that oversee health benefits for nearly 3.2 million health-plan members.
By 2018, more than 50% of Aetna's spend will be in value-based contracts, and by 2020, the insurer is committed to reach 75%.
"I believe we are the largest payer to make the commitment to have 75% of its spend in value-based contracts," said Dan Finke, chief executive of Aetna's Accountable Care Solutions business.
While ACOs tend to need a patient population of 5,000 or more, making it difficult for smaller doctor groups to form such an arrangement with an insurer, health plans say they're open to many different value-based approaches. Insurers are also making substantial financial commitments to help providers with this new order.
"We have a range of value-based models and have invested $1.5 billion in enablement solutions to meet providers where they are on the transformation continuum and move them along to increasing levels of accountability for quality and cost," Finke said.
Rather than continually paying more and more revenue from higher premium dollars, insurers can more easily keep a lid on expenses with shared savings models. And that's good for insurance company bottom lines and the prices of their investors' stocks.
Bruce Japsen has no position in any stocks mentioned. The Motley Fool recommends Anthem and UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.