Why Shared Savings Is Still Not a Viable Business Model for Hospitals
Shared savings programs can help drive provider behavior toward value, but they are not a true payment model that can sustain the health system, one executive said.
“Shared savings contracts are a really good mechanism to start focusing on value, but by definition they're not structured in the overall way we get paid for care,” Patrick Runnels, chief medical officer at University Hospitals in Cleveland, said in an interview last month at the Reuters Total Health Conference in Chicago.
He noted that University Hospitals received about $50 million in shared savings last year, but that was still less than 5 percent of its total revenue. Runnels said even if the health system doubled or tripled that number, shared savings wouldn't be a major revenue driver.
To effectively change incentives, he claimed, health systems would need greater downside risk and more capitation contracts, or greater incentives for shared savings than they currently have.
In his view, the economics of value-based care are fundamentally misaligned—every value-based dollar earned often requires giving up more profitable service fees.
Runnels said University Hospitals is working with a health care economist to determine the inflection point at which reducing low-value care becomes financially justified under current incentives.
“Most systems are reluctant to shift their economic engine to a value-based payment mechanism, which actually makes them less money and less sustainable. It's important to note that part of the idea behind value-based contracts is of course that we reduce overall spending and overall costs, and health systems also need to work to figure out how to reduce costs,” he explained.
He points out that lowering utilization is only effective if costs are also lowered.
University Hospital, for example, increased colorectal cancer screening rates from about 40 percent to 75 percent, thus cutting the number of surgeries in half. But Runels said if the health system doesn't reduce the cost structure of colorectal surgery, its fixed costs will remain the same despite the lower volume.
He added that many hospitals were not built to quickly reduce their internal cost structures.
He also noted that much of University Hospital's shared savings come from Medicare. Runnels believes CMS should change payment incentives — not necessarily eliminating fee-for-service models but reshaping them so that they reward high-value care and penalize low-value care.
Options include increasing the share of shared savings, adjusting service rates to support high-value services and temporarily paying more to avoid unnecessary procedures, he said.
He warned that until those incentives change, shared savings will remain a useful pilot but not a scalable business model.
