Across the country, community and mid-size hospitals are facing a new financial reality: a shift to a riskier payer mix. Commercial coverage that once cross-subsidized care is shrinking, Medicare is growing, and Medicaid “churn” is pushing more patients into uninsured status. At the same time, input costs are continuing to rise, leading to exceptionally thin – or nonexistent – margins for many health systems. As of 2025, 46% of rural hospitals operate with negative margins, and over 400 of them are vulnerable to closure.
In this context, value-based care (VBC) is gaining momentum because it offers an alternative financial incentive for both patients and healthcare systems. VBC aligns reimbursements to outcomes, emphasizing the quality and effectiveness, not quantity, of healthcare activities. But the same cost constraints driving interest in VBC can also turn it into a liability. Taking downside risk without cost discipline is like putting expenses on a credit card when you don’t have the cash to pay the bill. When the revenue doesn’t arrive as planned or operating costs overwhelm the value being delivered, VBC can turn into a debt-like risk.
The value and hidden risk of VBC
Value-based care models are becoming an attractive option for all players in the healthcare space. In Performance Year 2024, the Medicare Shared Savings Program (MSSP), one of the nation’s largest value-based payment programs, produced $2.5B in net savings to Medicare across approximately 10.3M beneficiaries. That’s a record high savings per capita for the program. At the same time, of the participating Accountable Care Organizations (ACOs), 75% earned payment bonuses by meeting or exceeding quality benchmarks, the highest share for the program to date.
Despite that promising picture, the flipside is also worth noting: the remaining 25% of participating ACOs either broke even or lost money in this model, despite the gains the program made as a whole. These were organizations whose benchmarks, risk level, or operational execution fell short and who now have choices to make about how to move forward sustainably.
For these organizations, part of the fix starts with the contract itself. Using data to set scope, quality, attribution, and funding will help ensure achievable benchmarks and math that matches operational reality. But the biggest lever to ensure VBC sustainability is operational costs. If not carefully controlled, they will compound like high-interest debt in a VBC arrangement.
Where value-based contracts leak money
Early data from the MSSP suggest that value-based care models work well at scale. It also shows, however, that hospitals and health systems with thin margins – often the small and medium-sized organizations that serve rural communities – will feel the earliest losses. The good news is that we’re seeing common patterns for this kind of risk, pointing to a road map for organizations in that danger zone who want to prepare themselves for this shift.
- Cost and data blind spots: Organizations that don’t fully understand their actual cost per patient across sites and service lines have limited visibility into losses and their root causes and, therefore, limited ability to resolve them.
- Clinical variation: A lack of care pathway standardization, referrals, and discipline around best practices intended to prevent avoidable admissions and overutilization erodes efficiency and drives up the cost of care delivery.
- Risk before readiness: Aggressive terms and quality benchmarks increase the risk of financial harm.
- Lax vendor and procurement oversight: Contract terms like auto-renewals, minimum commitments, or service bundling must be carefully managed or minimized to avoid financial waste and take advantage of opportunities for savings.
- Duplicate tech post-acquisition: Mergers and acquisitions without a complete and thoughtful integration result in duplicate systems as well as duplicate costs for licenses, support, and cyber exposure.
- Workforce friction: Mergers, acquisitions, and other major cultural shifts without clear vision and intentional change management can trigger costly turnover and slower adoption of efficiencies and process improvements.
- Cybersecurity and resilience risks: Every extra system expands the risk for breaches, revenue, and reputation loss.
Evaluating these common opportunities for cost containment is a critical step for hospitals considering a value-based care model.
What “good” looks like
Getting cost containment right isn’t a one-size-fits-all playbook. Before embarking on any VBC arrangement, each organization must establish what an appropriately disciplined posture looks like for them. For instance, organizations can explore Activity-Based Costing (ABC) strategies to identify every resource consumed at the individual encounter level. This helps to minimize blind-spots when negotiating bundled payments or capitation rates, and it also helps set more accurate baseline cost thresholds before pursuing any VBC arrangements.
In addition, by evaluating technology redundancies and cybersecurity risks, tightening care pathways with data-informed standardization and best practices for care, and then bringing teams along on the journey through thoughtful change management can help organizations lay the groundwork for a more forward-looking and value-oriented financial model.
VBC remains one of the most compelling paths to a better healthcare system. Within it, patients get more preventive, coordinated care, clinicians operate within clearer pathways, and payers and providers share incentives to reduce avoidable spend. But that promise is fragile if your cost base is undisciplined. The health systems that succeed prioritize cost containment before pursuing aggressive VBC initiatives to avoid debt-like risk. The result is a health system that’s financially sturdier, digitally simpler, and more relentlessly focused on value. That’s a model that benefits everyone.
Photo: atibodyphoto, Getty Images
Sajeed Chowdhury is the director of transformation and innovation services for Nordic, where he advises provider organizations on operational transformation, performance improvement, risk mitigation, and technology-enabled change.
This post appears through the MedCity Influencers program. Anyone can publish their perspective on business and innovation in healthcare on MedCity News through MedCity Influencers. Click here to find out how.
