When the conversation shifts toward value-based care (VBC), hospital systems find themselves in a delicate balancing act. On one hand, VBC strategies compel providers to prioritize preventive, coordinated, and holistic care to improve outcomes and reduce avoidable acute care utilization. On the other, hospital systems are largely embedded in a fee-for-service (FFS) environment, where inpatient admissions and emergency department visits often represent core revenue streams. This begs the question – are value-based care strategies at odds with hospital systems revenue goals?
Value-based care, at first blush, feels more aligned with payer interests than those of a hospital-based health system. Avoidable hospitalizations — many of which stem from poor chronic disease management, fragmented care, or inadequate social support — are costly to payers. Reducing such events is a core target of many VBC arrangements, including bundled payments, accountable care organizations, and condition-specific programs like Medicare’s Enhancing Oncology Model. However, for many hospitals, especially those operating under thin margins, each inpatient admission represents revenue. The fear, then, is that proactive care efforts that reduce admissions might cannibalize income needed to support clinical operations and infrastructure.
But the reality is that the tension is more nuanced than it appears. Executives increasingly view avoidable hospital utilization misaligned with the goals of the system. Additionally, pursuing that goal uses much of the same toolkit that many systems are already leveraging to reshape infrastructure, methodologies, and culture to thrive in a VBC-oriented future.
Understanding the financial landscape
First, most health systems operate within a hybrid payment structure. While fee-for service (FFS) contributes significantly to revenue, an increasingly meaningful share of revenue is tied to value-based arrangements – which span the gamut from meeting certain quality thresholds, to shared savings and risk with Medicare Advantage plans, to bundled payments for certain diagnoses with self-insured employers.
Wraparound services — such as care management and hot-spotting, behavioral health integration, palliative care, and robust post-discharge follow-up — are critical in reducing avoidable admissions. Though these services may not generate much direct FFS revenue, they are powerful enablers of performance gains under VBC contracts and shared-risk models.
Second, hospital finance leaders increasingly recognize that even within a FFS lens, many low-value avoidable hospitalizations involve long durations of stay that exceed the DRG limit, complicate efficiency and throughput, demand high resource use, and often result in poor patient satisfaction. Thus, value-based care principles around reducing acute care utilization find resonance even in the fee-for-service context.
Financing the strategic alignment
Health systems are operating in a precarious financial macro environment these days. CMS’s proposed site-neutral payment cuts and accelerated 340B ‘clawback’ policies will likely affect non-drug outpatient reimbursements. The recent One Big Beautiful Bill Act significantly reduces the Medicaid provider tax from 6% to 3.5%, which undermines the ability to draw down matching federal dollars. Further, the GOP tax and spending package slashes Medicaid and ACA subsidies, placing hospital finances – especially those that serve underserved populations – in jeopardy.
With all these policy changes compounding margin pressures, health systems may not be keen to support investments in value-based care infrastructure, like care coordination platforms, data analytics, EHR enhancements, and patient engagement tools like electronic patient reported outcomes. Partnering with a vendor to leverage external expertise and resources, and convert fixed costs to variable ones, may be a viable strategy. The VBC enabler can also help unlock additional revenue streams.
Importantly, VBC does not necessarily mean a reduction in all utilization. Rather, it means a rebalancing: fewer avoidable admissions, but possibly more use of home-based care, ambulatory services, and proactive outreach.
A surmountable paradox
While the tension between inpatient revenue and VBC goals is real, 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 evolving the financial structure to support them.
As more payer contracts move toward value, and as data capabilities enable better attribution and risk management, hospitals will be increasingly rewarded for outcomes, not activity. The organizations that succeed in this new paradigm will be those that reconcile their mission of care with a sustainable business strategy — not by clinging to the old fee-for-service model, but by building the infrastructure and culture required to deliver true value.
Photo: claudenakagawa, Getty Images
Dr. Samyukta (Sam) Mullangi is Thyme Care’s medical director, and a medical oncologist at Tennessee Oncology. Sam has a special interest in health policy, informatics and alternative payment models and is widely published across major academic and scientific journals, including The New England Journal of Medicine, JAMA, Health Affairs, Harvard Business Review, and Scientific American. She trained at the University of Michigan and Memorial Sloan Kettering, and received an MD-MBA from Harvard. She is passionate about leveraging technology and solving for business model deficiencies to improve the physician and patient experience in health care. In her spare time, she likes to read contemporary literature, try new healthy recipes, and spend time with her husband and daughter.
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