Most organisations are paid whether they solve the problem or not. Activity-based models made sense in an earlier era. The problem is that paying for activity and paying for outcomes are fundamentally different propositions. And as pressure on public budgets intensifies and investors look for businesses with genuinely defensible value creation, the distinction matters more than ever.
Think about that for a moment. A consultant submits an invoice when the project ends, regardless of what happened to the business afterward. A care provider bills for hours attended, regardless of whether the person being cared for is actually improving. A staffing company charges per placement, regardless of whether anyone performs differently when they start the role. A hospital receives its reimbursement for the procedure, regardless of whether the patient is readmitted three weeks later.
This is not a criticism. It is a description of how most commercial systems have been designed, and of the profound limitations those systems carry with them.
The Limitations of Activity-Based Models
When a system pays for activity, it creates incentives around volume. More assessments. More consultations. More care hours. More visits. The provider is rewarded for doing more, not necessarily for doing better.
In some sectors this produces a quietly perverse result. A poorly-performing care provider that triggers repeated emergency interventions may generate more billable activity than a high-performing one that keeps residents stable, independent, and out of hospital. The commissioner pays more for worse outcomes. The high-performing provider is, in effect, commercially penalised for its own effectiveness.
Long-term services and supports are not immune. When Medicaid waiver contracts specify a number of visits per day rather than a set of outcomes for the person receiving care, the measurement system gravitates toward compliance rather than quality. The care worker ticks the box for the visit; no one is measuring whether the person is actually doing better.
What an Outcome-Based Contract Actually Is
An outcome-based contract is one where a material portion of the commercial arrangement is contingent on the achievement of a defined result. The result might be clinical, social, financial, or behavioural, but it must be measurable, attributable, and agreed in advance.
The simplest version is a fixed fee plus an outcome bonus. More sophisticated models involve gain-share arrangements, where the financial benefit created by the outcome is shared between provider and payer. Social Impact Bonds extended this logic further, introducing private capital into the structure — risk is explicitly transferred; return is explicitly linked to outcome.
Why Care Is a Particularly Interesting Example
Care is where the logic of outcome contracts becomes both clearest and most commercially compelling. Consider senior care in a skilled nursing or assisted living setting. The traditional model pays a daily rate per bed. A well-designed outcome contract might tie payments to residents maintaining functional independence beyond projected trajectories, bonuses for reductions in falls, shared savings from reduced emergency hospital admissions.
The economics become genuinely interesting when you model the savings. A single avoidable hospital admission for a mental health crisis can cost several thousand dollars. An emergency residential placement for a young person in crisis can run to hundreds of thousands annually. The question is whether the provider delivering the intervention that prevents these outcomes ever captures any of that value.
| Setting | The outcome that matters | The cost avoided |
|---|---|---|
| Skilled nursing / assisted living | Independence sustained longer; falls reduced | ER admission, avoidable hospitalization |
| Youth behavioral health | Functioning improved; crisis reduced | Emergency placement, inpatient admission |
| Criminal justice | Reoffending rates below baseline | Custody, court, victim services |
| Post-acute / step-down care | Readmissions avoided; discharge sustained | Medicare 30-day readmission penalties, bed-days |
| Supported living / HCBS waiver | Continuity of placement; crisis avoided | Placement breakdown, emergency intervention |
The Scale of the Problem: Why Payers Are Running Out of Road
Combined federal and state Medicaid spending totaled $900 billion in fiscal year 2023, with the federal government alone spending $618 billion in FY2024. Medicare added a further $1.1 trillion in 2024. Together, these two programs cover one in three Americans and represent the largest single pool of healthcare purchasing power in the world. The money is overwhelmingly allocated to activity: procedures performed, days occupied, visits conducted.
| Cost pressure | Estimated annual impact | Who absorbs it |
|---|---|---|
| Medicaid LTSS spending (FY2023) | ~$170bn | Federal and state governments; activity-based reimbursement dominant |
| 30-day Medicare readmission penalties (annual) | ~$500m+ | Hospitals; financial incentive to reduce avoidable readmissions |
| CMS avoidable hospitalizations (estimated preventable) | 20%+ of admissions | Medicare, Medicaid, and commercial insurers absorbing preventable costs |
| Projected NHE growth above GDP 2023–2032 | $7.7tn by 2032 | Federal budget, state budgets, employers, individuals |
"The Medicaid plan or ACO that can shift reactive expenditure into prevention, and verify that it worked, has a financial case that does not depend on Congressional appropriations."
The Payer's Lens: What They Are Actually Looking For
Medicaid managed care plans, ACOs, and state agencies are not passive recipients of provider proposals. The ones moving toward value-based contracting have developed a fairly consistent set of questions they ask before committing to a model that carries mutual financial risk.
The first question is about proof, not promise. Can the provider demonstrate outcomes it has already achieved, in a comparable setting, with a comparable population? The second is about attribution. How does the provider know its intervention caused the outcome? The third is about financial resilience. Does the provider have the balance sheet to deliver through a contract period without needing emergency rate renegotiation?
| What commissioners ask | What they are really testing | What strong looks like |
|---|---|---|
| Can you show outcomes already achieved? | Whether the model is proven or theoretical | Multi-cohort data across comparable populations, independently verifiable |
| How do you attribute the outcome? | Methodological rigour; resistance to challenge | Pre-agreed measurement framework; counterfactual baseline; external audit capability |
| Can you sustain delivery if payment is delayed? | Financial resilience; balance sheet strength | Capitalised to bridge working capital gap; track record of financial stability |
| Who else have you delivered this for? | Whether the pipeline is replicable, not bespoke | Multiple commissioner relationships across geographies |
| What if you don't hit the target? | How risk is structured; skin in the game | Clear contractual consequences; provider accepts partial risk |
| What does your data infrastructure look like? | Whether reporting can be trusted and sustained | Real-time dashboards; HIPAA-compliant; no dependence on manual compilation |
The Stakeholder Map: Where Interests Align and Where They Collide
One of the reasons value-based models are harder to implement than they appear is that they require alignment across a stakeholder landscape that is rarely pulling in the same direction.
| Stakeholder | Primary interest | Principal tension |
|---|---|---|
| Service provider | Commercial sustainability; upside from performance | Capital constraint |
| Payer / State Agency | Value for public money; measurable social return | Annual budget cycles |
| Investor | Defensible IP; retention; premium valuation | Revenue concentration |
| Insurance business | Reduced claims through prevention funding | Emerging alignment |
| End user / family | Actual improvement in life quality and outcomes | Rarely at the table |
| Taxpayer / public | Better outcomes at lower long-run cost | Interests align |
The Investor Perspective: Valuable or Risky?
The question of whether investors would pay a premium for a business built around value-based contracts depends almost entirely on how well the business has been constructed. A provider that consistently delivers measurable, attributable outcomes occupies genuinely differentiated ground. Its outcomes data constitutes proprietary intellectual property that is difficult for a new entrant to replicate.
"Outcome-based contracts do not automatically create value. Predictable outcome delivery creates value. That is a meaningful distinction, and most providers have not yet understood it."
The Commercial Mechanics: How Risk and Reward Move
The simplest structure is a base rate with an outcome bonus. The provider receives a base payment sufficient to cover operating costs, and an additional payment if defined milestones are achieved. Shared savings models go further — well-established in US healthcare through ACO structures and the Medicare Shared Savings Program. Multi-year value-based partnerships, where a payer and provider agree a three to five-year framework with outcome-linked payments building progressively, offer the most sustainable structure for both parties.
One practical consideration that often catches providers off guard is the timing of payment relative to investment. If a provider must invest in staffing, training, data infrastructure, and clinical governance before the first outcome payment arrives, the working capital requirement can be substantial.
Why This Requires a Different Kind of Leader
The organisations that thrive in outcome-based models are, almost without exception, led by people who are willing to back their own capability. Most organizations in health, care, and social services have been shaped by a reimbursement environment that rewards compliance and penalizes risk. Accepting downside risk is a genuine act of commercial courage.
"There is a meaningful difference between an organisation that talks about outcomes and one that has built its commercial model around delivering them. The difference shows up in conversations with commissioners, in the quality of outcome data produced, and eventually in the enterprise value of the business."
A Broader Market Shift
The conversations now happening across senior living, community mental health, intermediate care, and supported housing represent a broader market shift in how outcomes are understood, measured, and valued commercially. Across several of the sectors described in this article, we are currently working with organizations exploring exactly these questions: how do you move from being paid for activity to being rewarded for outcomes?
What connects these conversations is not just a federal and state policy environment that has run out of alternatives. It is a recognition that the organizations capable of delivering predictable outcomes at scale possess something rare: a model that works for everyone at the table. For investors, that is precisely the kind of asset worth understanding, and worth backing, before the market fully prices it in.
A Closing Observation
The most valuable organisations of the next decade in health, care, and social services may not be those that can demonstrate how hard they worked. They may be those that can demonstrate what actually changed, and that they can change it again, predictably, in a different setting, with a different commissioner, at greater scale.
At Fielding, we spend much of our time helping founders and operators understand how investors think about value. Increasingly, the businesses generating the most interest are those moving beyond billing for activity and toward contracting for outcomes. When it is done well, the commercial interest of the provider, the public interest of the commissioner, and the personal interest of the person receiving the service begin to point in the same direction.
For those capable of delivering predictable results at scale, value-based contracting may become one of the most powerful value creation opportunities of the next decade in American healthcare and social services. Commercial value and social impact are no longer in opposition. In a well-constructed model, they become, quite simply, the same thing.