The VBC paradox: How health systems balance inpatient revenue with value-based care goals

When the conversation turns to value-based care (VBC), hospital systems find themselves in a delicate balance. On the one hand, VBC strategies force providers to prioritize preventive, coordinated, and holistic care to improve outcomes and reduce avoidable acute care utilization. Hospital systems, on the other hand, are primarily embedded in fee-for-service (FFS) environments, where inpatient stays and emergency department visits often represent core revenue sources. This begs the question – are value-based care strategies inconsistent with hospital systems’ revenue goals?

At first glance, value-based care is more in the interest of payers than hospital-based health systems. Avoidable hospitalizations—many of which stem from poorly managed chronic conditions, fragmented care, or inadequate social supports—are costly to payers. Reducing such events is a core goal of many VBC arrangements, including bundled payments, accountable care organizations, and context-specific programs (such as Medicare's Enhanced Oncology Model). However, for many hospitals, especially those operating on razor-thin margins, each inpatient admission represents revenue. The concern, then, is that proactive care efforts to reduce hospital admissions could eat into the revenue needed to support clinical operations and infrastructure.

But the reality is that tensions are more nuanced than they appear. Executives increasingly believe that avoidable hospital utilization is inconsistent with system goals. Furthermore, to achieve this goal, many systems are already leveraging the same toolkit to reshape the infrastructure, methods, and culture to thrive in a VBC-oriented future.

Understand the financial landscape

First, most health systems operate under mixed payment structures. While fee-for-service (FFS) contributes significantly to revenue, an increasingly meaningful share of revenue is tied to value-based arrangements—which range from meeting certain quality thresholds to sharing savings and risk with Medicare Advantage plans to bundled payments with self-insured employers for certain diagnoses.

Comprehensive services—such as care management and hotspot targeting, behavioral health integration, palliative care, and robust postdischarge follow-up—are critical to reducing avoidable hospital admissions. While these services may not generate much direct FFS revenue, they are powerful drivers of improved performance under the VBC contract and risk-sharing model.

Second, hospital financial leaders are increasingly recognizing that, even within an FFS perspective, many low-value, avoidable hospitalizations involve long stays that exceed DRG limits, complicate efficiency and throughput, require significant resource usage, and often result in poor patient satisfaction. Therefore, the principles of value-based care around reducing acute care utilization resonate even in the context of fee-for-service.

Provide funding for strategic adjustments

Today, health systems operate in an unstable financial macro-environment. CMS’ proposed site-neutral payment reductions and accelerated 340B “clawback” policies may impact nonpharmaceutical outpatient reimbursement. A recent BEAUTIFUL bill dramatically lowered the Medicaid provider tax from 6% to 3.5%, which reduces the ability to withdraw corresponding federal funds. Additionally, the Republican tax and spending plan slashes Medicaid and Affordable Care Act subsidies, putting hospital finances—especially those serving underserved populations—in jeopardy.

As all these policy changes add to margin pressures, health systems may not be keen to support investments in value-based care infrastructure such as care coordination platforms, data analytics, EHR enhancements, and patient engagement tools like electronic patient-reported outcomes. Working with suppliers to leverage outside expertise and resources and convert fixed costs into variable costs may be a viable strategy. VBC enablers can also help unlock additional revenue streams.

Importantly, VBC does not necessarily mean reduction in utilization for all. Instead, it means a rebalancing: fewer avoidable hospital admissions, but potentially greater use of home care, outpatient services and proactive outreach.

a paradox that can be overcome

While the tension between hospital revenue and VBC goals does exist, it is not an insurmountable paradox. Most health system leaders understand that avoidable utilization represents inefficiency, not a sustainable business model. The real work lies in navigating the hybrid landscape—both investing in upstream services and developing the financial structures to support them.

As more payer contracts move toward value and data capabilities enable better attribution and risk management, hospitals will increasingly be rewarded based on outcomes rather than activity. The organizations that succeed in this new paradigm will be those that can align their care mission with a sustainable business strategy—not by adhering to the old fee-for-service model, but by building the infrastructure and culture needed to deliver real value.

Photo: Crowden Nakagawa, Getty Images

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