The New Economics of Healthcare Reimbursement

What’s Driving the Pressure on Healthcare Reimbursement Models?

The traditional healthcare reimbursement model is under pressure and health system leaders know it. National health expenditures grew 7.2% in 2024, reaching $5.3 trillion, while Medicare’s Hospital Insurance Trust Fund is projected to face depletion by 2040.

The question is no longer whether the financial model needs to change. It is how organizations navigate that change while continuing to perform.

Fee-for-Service vs. Value-Based Care: A Structural Comparison

The shift toward value-based care reflects a growing recognition that healthcare’s traditional reimbursement model is under increasing pressure. For decades, fee-for-service has served as the foundation of healthcare payment, reimbursing providers for individual services and procedures. While the model has helped expand access to care, rising healthcare costs have intensified efforts to better align financial incentives with quality, outcomes, and long-term patient health.

At its core, fee-for-service rewards activity, not outcomes, creating a structural misalignment between how organizations are paid and the long-term health they are trying to achieve.

Value-based care represents a different approach. Rather than focusing primarily on individual encounters, it encourages providers to take a broader view of patient health, emphasizing prevention, care coordination, and population management. These alternative payment models reward keeping patients healthier over time, not just delivering more services.

According to Pat Leonard, CEO of CorroHealth, the distinction ultimately comes down to how organizations approach health management. In a value-based environment, providers are incentivized to take a more proactive role in supporting patients before health issues escalate. Fee-for-service, by comparison, remains largely centered on delivering and reimbursing discrete episodes of care.

Managing Hybrid Reimbursement Environments

For most health systems the reality is not an either-or proposition. They must manage fee-for-service and value-based contracts at the same time, often with legacy incentives and workflows still optimized for volume rather than value. Navigating this hybrid environment requires leaders to understand how different payment models shape care delivery, physician engagement, operational priorities, and financial performance.

This challenge begins earlier than most organizations recognize. Many health systems enter value-based arrangements without a clear definition of what success requires. Understanding the outcomes being measured, the risks being assumed, and the performance metrics that drive reimbursement is foundational and it is often underestimated. Organizations that skip that step find themselves operationally misaligned from the moment the contract is signed.

The opportunity is significant. Bundled payment programs, for example, have reduced costs for joint replacement procedures by an estimated 20% to 30%, demonstrating the impact that stronger care coordination and aligned incentives can have across the continuum of care.

Why Staying Static Risks Healthcare Financial Performance

The Misalignment Between RVU Compensation and Value-Based Goals

While many organizations recognize the need for change in healthcare reimbursement, transformation is often more difficult than anticipated.

One of the most significant challenges is aligning organizational incentives with reimbursement goals. Leonard points to a common contradiction facing many health systems today. Physicians may be compensated primarily through relative value unit (RVU) production models while the organization simultaneously pursues value-based contracts that reward reduced utilization and lower costs.

Those competing incentives can create confusion throughout the organization.

A physician may be encouraged to increase procedures to maximize compensation while the health system seeks to reduce avoidable utilization under a risk-based contract. Without thoughtful change management, particularly around compensation models, clinical practice patterns, and documentation, organizations often struggle to achieve the outcomes their reimbursement models are designed to support.

How Legacy Operations Undermine Healthcare Financial Resilience

This challenge extends beyond physician compensation. It touches governance structures, performance metrics, operational workflows, documentation practices, and organizational culture. Health systems that treat value-based care as simply another contract, rather than a different operating model, often find themselves underperforming despite participating in risk arrangements.

The consequences of staying with legacy approaches can be substantial. Hospitals participating in value-based care arrangements have reported readmission rates that are lower than their counterparts outside such programs; improvements that translate directly into better patient outcomes and stronger financial performance. Organizations that fail to adapt risk are missing opportunities to reduce avoidable utilization while remaining exposed to rising costs and reimbursement pressure.

Staying static also means continuing to absorb inefficiencies that have become embedded throughout healthcare operations. Many of today’s revenue cycle and denials management work exists because of fragmentation, waste, and scalability challenges across the system. As healthcare reimbursement models evolve, organizations that address those inefficiencies proactively may be better positioned to capture long-term value and build greater healthcare financial resilience.

Why Clinical Documentation Improvement Is a Strategic Priority

Documentation’s Role Across Fee-for-Service and Value-Based Models

One area where fee-for-service and value-based care closely intersect is clinical documentation. It is also one of the most powerful levers organizations have to correct misaligned incentives and improve performance under both models.

While the two models reward providers differently, both depend on documentation that accurately captures the patient’s condition and the care delivered. Strong documentation influences everything from reimbursement and revenue integrity to risk adjustment, quality performance, and patient management.

According to Leonard, documentation remains one of healthcare’s most significant opportunities for improvement. Documentation error rates can range from 25% to 40%, creating ripple effects that impact financial performance, quality measurement, and clinical decision-making.

In fee-for-service settings, complete and accurate documentation helps ensure appropriate coding and reimbursement. Under value-based arrangements, it provides the foundation for accurately representing patient complexity and supporting more effective population health strategies.

The organizations achieving the strongest performance across both models increasingly view documentation not as an administrative requirement, but as a strategic capability and a core enabler of health system growth strategies.

How Technology Is Closing the Documentation Gap

Technology is helping drive that evolution. Advanced analytics, artificial intelligence, and clinical decision support solutions are making it easier to identify documentation gaps, uncover missed risk factors, and improve data quality across large patient populations.

Those capabilities are becoming increasingly important as healthcare organizations rely more heavily on data to guide performance. Moreover, healthcare executives believe data-driven decision-making is critical to achieving success in value-based care and modern healthcare reimbursement models.

How Value-Based Care Strategy Drives Health System Growth

For many executives, value-based care discussions begin with risk. Increasingly the organizations that lean into risk thoughtfully, by redesigning incentives, strengthening documentation, and investing in data, are discovering that value-based models can be a primary engine for growth.

Leonard argues that one of the most common misconceptions about value-based care is that health systems underestimate its economic potential. “Fee-for-service is a game of inches,” he says. “You move the ball a yard at a time. Value-based care, when you understand the contracts and manage risk well, is how you move five to ten yards at a time.”

Organizations that understand their contracts, align incentives, and effectively manage patient populations often discover that value-based arrangements can generate stronger returns than legacy reimbursement alone. The pattern is visible in practice.

Proving the Value-Based Economics Model

At Mercy, for example, CorroHealth’s work in utilization management has delivered strong results but the return from the value-based care relationship has grown to surpass it. For health system leaders skeptical of value-based economics, that kind of proof point matters more than projections. This dynamic helps explain why leading health systems have been aggressive about building ambulatory and outpatient capabilities.

Why Ambulatory Expansion Supports Alternative Payment Models

Additionally, Tenet and HCA, two of the most financially successful health systems in the country, have each made ambulatory strategy a defining priority. The correlation is not coincidental. Ambulatory settings offer greater ability to manage cost and care delivery, and they are more conducive to value-based contracts than traditional acute care environments. The rapid expansion of telehealth further supports this transition. Telehealth utilization increased 154% during the pandemic, demonstrating how technology can expand access and patient engagement, while supporting more proactive care management.

Innovation in healthcare reimbursement is ultimately about creating greater alignment between financial performance and patient outcomes. Organizations that successfully connect clinical insight, operational execution, and financial strategy are often better positioned to thrive regardless of how reimbursement continues to evolve.

How to Prepare for the Next Decade of Healthcare Reimbursement Models

The future of healthcare reimbursement is unlikely to be defined by a complete replacement of fee-for-service with value-based care. Most health systems will continue operating within hybrid reimbursement environments for the foreseeable future.

Over the next decade, the performance gap between organizations that build real fluency in both models and those that treat value-based care as a side initiative is likely to widen.

The organizations best positioned for long-term success will be those that develop fluency across both models. They will understand contract performance, align incentives throughout the organization, strengthen documentation practices, invest in data-driven decision-making, and expand their ability to manage care beyond the walls of the hospital. These capabilities will increasingly define effective health system growth strategies.

Healthcare’s financial challenges are real, and the path forward is not without friction. Meaningful change in how health systems are paid and how they operate typically requires a forcing event and the question is whether Medicare’s projected funding pressures will be that catalyst, or whether the industry will continue absorbing the tension rather than resolving it.

What is clear is that the organizations building fluency in both models now, rather than waiting, will be better positioned when that moment arrives. The leaders who treat value-based care as a strategic capability rather than a contractual obligation are the ones most likely to find themselves ahead of the curve, regardless of how the reimbursement landscape continues to shift.