The Secret to Making VBC Work Is...Specialty Care

Last week Chrissy Farr of Second Opinion Media and Adam Seabrook of B Capital co-authored an article pondering the future of value-based care. Specifically, they question if VBC is capable of producing the Power Law returns venture capitalists crave.

Contrasting two exited primary care companies, Oak Street Health (representing VBC) and One Medical (representing FFS), Chrissy and Adam conclude that VBC is too capital intensive and too incapable of MLR compression to make the economics work.

Fee-for service wins again.

Along the same lines, Nikhil Krishnan of Out-of-Pocket Health recently shared a dovish take on VBC, sharing insights from his healthcare data conference. Attendees felt that “the lion's share of money saved or made comes from documentation fiddling (e.g. risk adjustment) vs. actually changing the care model.” He went on to highlight “muted” optimism about value-based care.

I don’t think VBC is a dead end for VCs (or other private investors), nor do I think it’s impossible to achieve value primarily through care model innovation. While I agree that too much of VBC relies on “documentation fiddling,” I believe that’s a function of companies over-indexing on Medicare Advantage arbitrage and a mischaracterization of what “value” means.

How do we overcome this limitations to achieve value in healthcare?

The secret to making VBC work doesn’t involve primary care. Instead, specialty care is where the lever on MLR, margins, and patient outcomes really sits.

This week’s edition of The Surgeon’s Record presents a path forward: re-framing “value” and leveraging specialty care to make VBC work.

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Value, Improperly Defined

Somewhere along the way, we decided that value, and thus value-based care, was defined first and foremost by payment model. Part of this comes from a curious need to paint fee-for-service as healthcare’s rapacious vampire and value-based care as the wooden stake.

Conventional wisdom holds that FFS creates insurmountable perverse incentives. As long as we pay for productivity, we’ll never achieve value. The only way to fix things is to tie reimbursement to outcomes. While there is some truth here, this framing is largely a false narrative that’s holding back progress. It’s time we let it go.

All payment systems create incentives. Yes, FFS rewards increased utilization — more procedures, more ancillary referrals, more care, more…everything. Sure, there are providers (doctors, hospitals, and health systems) that abuse this dynamic.

In theory, FFS = do more, get paid more.

But reality is more nuanced.

In practice, utilization is mediated by clinical judgment, patient preferences, malpractice concerns, payer authorization, and cultural norms. In FFS, the incentives are clear. What’s less clear is how much they alter behavior. Utilization differences can also be attributed to patient demand, malpractice fears, and regional practice norms (as demonstrated by the Dartmouth Health Atlas).

While the argument that FFS incentivizes more care makes empirical sense, we lack strong real-world evidence to support this claim. The RAND Health Insurance Experiment is one of the most famous health economics studies, but its conclusions are often misinterpreted. RAND demonstrated that patient cost-sharing affects utilization, but that’s a commentary on demand-side, not supply-side, levers.

If FFS incentives were so overwhelming, shifting joint replacements or spine fusions into ASCs shouldn’t save payers money — but it does. The real driver is how specialists apply judgment at high-cost decision points, not the abstract payment model.

VBC is often viewed as mechanism to eliminate perverse incentives and, in a sense, legislate high-value care into existence. There are problems with this argument too. Bad behavior in FFS means doing “unnecessary” procedures. Bad behavior in VBC means cherry-picking healthy patients (“easy wins”) and avoiding high-risk patients (“bundle busters”). The result is restricted access and a tendency to massage metrics rather than improve care.

As Nikhil alludes to, we’ve seen abuse of risk adjustments, complexity hacking, and other VBC tricks. When CMS changed how it calculated Medicare Advantage Star Ratings, a key component of determining payments, payers fired back with lawsuits. Meanwhile, CMS has ramped up efforts to audit MA plans, recoup overpayments, and identify fraud. With all the back and forth, it’s easy to get jaded about VBC.

The problem is definitional, not conceptual.

The answer is to view value as a spectrum, not a choice between absolutes. Any approach that reduces costs, improves outcomes, maintains access, engages patients, and rewards quality is valuable. Wielding payment models as blunt instruments of value isn’t the right answer. We’ll be a lot more successful if we move away from a pure VBC v. FFS dichotomy and broaden our view of value creation.

For anyone who thinks it’s impossible to achieve value in FFS, I recommend listening to this episode of The Relentless Health Value podcast featuring Dr. Scott Conard. “You actually can produce high-value care in a fee-for-service model…if you think differently and you change practice patterns.”

While Dr. Conard proved this theory true in primary care, I’d argue this maxim applies across all healthcare. In fact, it may be even more true in specialty care.

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Why Specialty Care is the Answer

Primary care remains the foundation of the healthcare system. Its payment mechanisms could use an overhaul, but I’d argue that VBC models, as currently constructed may not be the right answer.

Delving into this further is beyond the scope of this piece, but I’ve written before about the Hub-and-Spoke Model and other approaches to re-thinking primary care. Briefly, from the VC perspective, VBC primary care timelines are too long, margins too thin, and utilization too unpredictable.

Specialty care solves many of these issues:

• Shorter time horizons: Specialty episodes (orthopedics, cardiology, GI, obesity medicine) generate measurable outcomes and cost savings in months, not years — more aligned with VC timelines.

• Higher and more predictable margins: Facility fees, procedural bundles, and site-of-service arbitrage create reliable revenue streams not available in primary care.

• Lower CAC and more favorable LTV: Specialty care combines office-based evaluation and management with procedural interventions. This creates a form of vertical integration where CAC is amortized across both professional and facility revenue streams, and LTV expands meaningfully compared to primary care.

• More direct control of high-cost care: Specialists are best suited to make care decisions when it comes to high-acuity interventions that drive the majority of healthcare spending. Managing those decisions moves the needle on MLR in a way primary care simply can’t.

• Capital intensity with higher ROI: Yes, acquiring or building an ASC requires capital. But the ROI is higher than opening dozens of primary care clinics, especially once you layer in ancillary service lines.

• Closer alignment with true value: Specialists are uniquely positioned to modulate between low-value and high-value treatments. They decide whether a patient with knee arthritis needs more physical therapy or a joint replacement. These judgment calls sit at the intersection of cost, quality, and outcomes — where the real levers of value lie.

Put simply: specialty care squeezes the denominator of total medical spend (MLR) more directly and more efficiently than primary care. Global subcapitation plus nested procedural bundles = leverage.

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How Specialty Care Compresses MLR

The majority of healthcare spending comes in the form of high-acuity specialty care episodes. That’s where the opportunity to bend the cost curve and generate real value lies.

A few examples:

• Joint Replacements:
  A total knee replacement performed in the inpatient setting or hospital outpatient department (HOPD) can cost $35,000–$45,000 (with some estimates as high as $100,000). The same procedure in an ASC averages $18,000–$22,000 — at least a 40–50% reduction. Outcomes are equivalent or better, and patient experience is enhanced. Shifting site-of-service creates material MLR compression in a single episode. No complex payment models required.

• Spine Fusions and Disc Replacements:
  Historically inpatient-only, spine fusions and disc replacements are increasingly performed in ASCs for the right patients. Moving a case from hospital inpatient to ASC can reduce costs by 30–40% while maintaining outcomes. With spine surgery among the top cost drivers for commercial and Medicare Advantage plans, even modest shifts produce meaningful savings.

• GI/Endoscopy Procedures:
  Colonoscopy or endoscopic sleeve gastroplasty (ESG) in an ASC setting can be 35–45% less expensive than hospital-based care. Bundling these procedures with follow-up obesity medicine or metabolic care multiplies the value effect — reducing downstream admissions and complications.

• Cardiology Diagnostics & Interventions:
  Non-invasive cardiac imaging, PCI, and electrophysiology procedures are increasingly shifting to outpatient settings. Each migration trims 20–40% off episode costs while maintaining access and outcomes, directly improving plan-level MLR.

Site-of-service arbitrage is a straightforward way to quickly realize cost savings, but it’s only a piece of the larger specialty care value story. It’s well established that many value-focused specialty care programs hinge on avoidance of low yield care, often in the form of surgical avoidance.

While this is the biggest “bite of the apple,” there’s plenty of value creation opportunity in upstream care. The key is challenging the assumption that surgery = low value care and surgical avoidance = high value care a priori. Injecting an arthritic knee ad infinitum may avoid surgery, but it can paradoxically increase costs if knee replacement is clearly indicated. Similarly, efficient, cost-effective use of physical therapy, medications, imaging, and specialty care visits creates it.

Examples here:

• Virtual PT or a home exercise program rather than endless visits.

• Partnerships with low cost imaging centers and avoidance of facility fees.

• Evidence-based use of injections and other expensive “pre-surgical” interventions.

• Care pathways that engage and activate patients, engender trust and facilitate shared-decision making.

The “hack” is that specialty care compresses MLR in multiple ways that don’t require gatekeeping, complex care management structures, or “creative” use of payment mechanism loopholes. Linking high value upstream evaluation and management with high quality downstream care creates specialty care pathways that fundamentally shift care delivery.

Ultimately, the most successful care models are those that create value inherently. The goal isn’t simply cost arbitrage, it’s creating a sustainable system that makes value attainable. Care delivery innovation is about more than optimizing for VC returns or maximizing operational efficiency.

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The Not-So-Secret Secret

VBC fatigue is real. The current backlash is a predictable response to hype that has, thus far, failed to live up to reality. To date, VBC has mostly existed as some combination of complicated government programs, Medicare Advantage arbitrage, and pitch deck enthusiasm — mostly aimed at primary care.

The reality is that primary care isn’t really a great place to build VBC. Time horizons are long and care delivery is complex. Specialty care is more immediate with clearer delineations between low and high value care and multiple cost-savings opportunities. MLR compression happens a lot quicker in specialty care and at greater magnitude than it does in primary care.

VBC needs a reset — starting with how we define “value.” Value is anything that improves quality, service, and access and/or reduces costs, irrespective of payment mechanism. It’s that simple. Viewed from this lens, the VBC value prop of specialty care becomes clear.

The secret to making VBC work is specialty care.

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Ben Schwartz, MD, MBA

Editor-in-Chief, The Surgeon’s Record

SVP, Care Services & Strategy

ben@commonsclinic.com