Why Shared Savings Still Isn’t a Viable Business Model for Hospitals

Shared savings programs are useful for nudging providers’ behavior toward value, but they aren’t a true payment model that can sustain a health system, according to one executive.

“Shared savings contracts are a really great mechanism for getting people to start to pay attention to value — but their structure is, by definition, not overall how we’re going to get paid for our care,” said Patrick Runnels, chief medical officer of University Hospitals in Cleveland, during an interview last month at Reuters’ Total Health conference in Chicago.

He pointed out that University Hospitals earned about $50 million in shared savings last year, but that was still less than 5% of its total revenue. Even if the health system doubled or tripled that amount, shared savings would not be a major revenue driver, Runnels stated.

To meaningfully shift incentives, health systems need either more downside risk and more capitated contracts, or much larger shared savings incentives than exist today, he declared.

In his eyes, the economics of value-based care are simply misaligned — every value-based dollar earned often requires giving up more lucrative fee-for-service dollars.

Runnels said University Hospitals is working with a healthcare economist to identify the inflection point at which reducing low-value care becomes financially rational under current incentives.

“Most systems are going to be reluctant to shift their economic engine to a value-based payment mechanism that is actually going to make them less money and be less sustainable. As a caveat to that, certainly part of the idea behind value-based contracts is that we reduce overall spending and overall costs — and health systems have work to do to figure out how to reduce costs,” he explained.

He noted that lower utilization only works if costs are reduced as well. 

For example, University Hospitals increased colorectal cancer screening from roughly 40% to 75%, which cut surgeries by half. But if the health system doesn’t decrease the cost structure around colorectal surgery, it still carries the same fixed costs despite lower surgical volume, Runnels said.

Many hospitals are not built to lower their internal cost structures quickly, he added.

He also mentioned that most of University Hospitals’ shared savings come from Medicare. Runnels believes CMS should change payment incentives — not necessarily by eliminating fee-for-service models, but reshaping them so that they reward high-value care and penalize low-value care.

Options include increasing shared savings percentages, adjusting fee-for-service rates to favor high-value services, and temporarily paying more for avoiding unnecessary procedures, he said.

Until those incentives change, he warned, shared savings will remain a useful pilot — but not a scalable business model.