Measuring “Cost” in Value-Based Specialty Care (Part 3 of 3 in applying Porter’s Value Equation to Health Plans)
As health plans increasingly adopt value-based care models, measuring the cost of care becomes crucial for assessing program success and ensuring sustainability. For specialty care programs—particularly in musculoskeletal health—key cost metrics provide insight into performance and guide future innovations. Below, we explore three primary methods health plans use to evaluate the cost of care in specialty value-based programs. In Parts 1 and 2, we discussed the numerator of Porter’s value equation. Part 3 is about costs and an overview of three different ways to measure them. At the end, we will explain how to put all three components of the value equation together.
Three Common Types of Cost Measurements
1. Total Cost of Care (TCOC)
What It Measures: The overall healthcare spending for a patient population, including all services, providers, and settings within a defined period.
Why It Matters: TCOC provides a holistic view of cost efficiency, capturing the impact of specialty programs on overall resource utilization. Health plans can identify cost-saving opportunities and areas for improvement by comparing TCOC pre- and post-implementation of value-based initiatives.
Limitations: In small cohorts, outlier member cases (for example, prolonged hospital stay for an unrelated condition following total knee replacement) can have significant impact on TCOC calculations. TCOC should only be used in comparative analyses when the cohort size is sufficiently large enough to “absorb” these variable events in both the study group and the control group.
Example in Practice:
- Comparing TCOC for members with chronic back pain in those introducing a digital therapy program. Achieving decrease in TCOC compared to control cohort would lead to adoption of the program at larger scale within the health plan.
- Comparing TCOC to historical data in members undergoing total knee replacement as part of a full-risk value-based program. If the provider achieves lower TCOC for attributed members compared to the historical-driven expectations, there is a “bonus” payment.
2. Episode-Based Costs (e.g., 90 Days Post-Surgery)
What It Measures: Costs associated with a specific episode of care, such as surgery, including pre-operative, operative, and post-operative expenses within a set time frame (e.g., 90 days post-surgery).
Why It Matters: By focusing on a defined period, episode-based costs highlight the efficiency and quality of care surrounding significant healthcare events. This metric helps evaluate the effectiveness of bundled payment models and the impact of care coordination efforts.
Limitations: As with TCOC, if there are no carveouts for unrelated expenses, there could be outlier cases (for example, motor vehicle accident causing prolonged hospitalization following initiation of prostate resection surgery bundled payment) that could significantly impact financial performance.
Example in Practice:
- Tracking total hip replacement episode costs, including complications, readmissions, and physical therapy expenses within 90 days of surgery. If actual costs are lower than projected (“target”) costs, the provider receives a bonus payment.
3. Condition-Based Bundled Payments (e.g., 180 days post diagnosis of knee osteoarthritis)
What It Measures: The aggregated cost of managing a specific condition, such as osteoarthritis, over a predefined period. This approach includes all services related to the condition, regardless of provider or setting.
Why It Matters: Condition-based bundled payments encourage collaboration across providers to deliver high-quality, cost-efficient care. They align financial incentives with outcomes, fostering accountability for long-term patient health.
Limitations: These bundles can work very well in measuring efficacy of management of chronic conditions such as osteoarthritis or degenerative lumbar disc disease, as they assess utilization from a longer-term perspective than traditional surgical episodes. Health plans must make accommodations for “exits” from the bundle, such as undergoing surgical joint replacement, which can interfere with comparison to other non-operative costs.
Example in Practice:
- Retrospective assessment at efficacy of management of knee osteoarthritis, with financial payments given to providers demonstrating decreased utilization costs compared to target or historical controls.
Putting it All Together – Measuring Value of Specialty Providers
Value Equation Numerator: Clinical outcomes (PROMs) + Experience Outcomes (PREM’s or equivalent)
Value Equation Denominator: Costs (any of the three options above)
These are the steps to put the value equation into practice:
1. Define use case – surgical/non-surgical, what condition (and its appropriate ICD or CPT codes), and what time horizon (90-day, 6-month, one-year, etc)
2. Define metrics for the numerator and denominator components
3. Normalize assessment scales (many ways to do this, but end goal is to have a quantitative reference available for calculation and analysis)
4. Make protocol for the collection methods (from provider, plan, or third party, and when?)
5. Create comparison reports across providers and/or interventions
Early on, the focus should be on implementing a process which can be refined with focus on points 3 and 4 above. Once input metrics can be collected and normalized with regularity, the plan can begin to make value-based assessments about its specialty care. In focusing on one use case at first, the plan can create a system that can be applied to other conditions. This blueprint is exactly what CMS is doing with PROM collection as well!
Taking the Next Step
At Protera Health, we specialize in partnering with health plans to design and implement innovative specialty value-based care programs. Our solutions prioritize cost transparency, drive better outcomes, and support your mission to deliver sustainable healthcare.
Let us help you navigate these cost metrics to achieve success in your specialty care initiatives.
Contact us today or schedule a demo to learn how we can help your health plan reduce costs and improve member satisfaction in musculoskeletal care.
References
- Health Care Payment Learning & Action Network (HCP-LAN): Alternative Payment Models
- National Quality Forum: Episode of Care Framework
- Centers for Medicare & Medicaid Services: Bundled Payments for Care Improvement
