The Healthcare Business Model That Will Define the Next Decade

Part 1 of a series on value-based care

If you're building AI for healthcare, there's a question worth asking: which healthcare are you building for?

Because here's something most people outside the industry don't realize: there are actually two different healthcare systems operating in the United States right now. They use the same hospitals, the same doctors, the same EMRs. But they run on fundamentally different rules, create completely different incentives, and are headed in opposite directions.

One is shrinking. The other is quietly taking over.

More than half of Medicare patients are already in value-based care arrangements. Within a decade, it'll dominate the industry. Major health systems are restructuring their entire operations around it. Private equity is pouring billions into it. CMS has set a goal to have all Medicare fee-for-service beneficiaries and the vast majority of Medicaid beneficiaries in accountable care arrangements by 2030.

The $4.5 trillion healthcare industry is restructuring itself around a completely different principle: paying for outcomes, not volume.

If you're building healthcare technology, this shift will determine whether your product becomes essential infrastructure or gets left behind. Not because value-based care is some trendy buzzword, but because the business model determines everything—what problems matter, what data flows where, what drives adoption, and ultimately, what makes healthcare better.

Let me explain what's happening and why it matters.

Two Business Models, Two Different Worlds

The traditional model—fee-for-service (FFS)—is elegantly simple: do a thing, get paid for that thing. Order a test, get paid. Do a procedure, get paid. Admit a patient, get paid.

For most of the 20th century, this made sense. Healthcare was about fixing acute problems. You got sick, you saw a doctor, they treated you, you got better. The model worked.

But healthcare changed. Today, 90% of the nation's $4.5 trillion annual healthcare expenditures are for people with chronic conditions. We're not treating pneumonia anymore—we're managing diabetes, heart disease, COPD. These aren't one-and-done problems. They're decades-long journeys that require coordination, prevention, and continuous care.

Fee-for-service wasn't designed for this world. It creates some strange dynamics:

• Prevention doesn't pay. That 30-minute conversation preventing diabetes complications? Maybe $150. The eventual amputation? $50,000. The incentive is backward.

• Coordination isn't rewarded. When a patient sees five specialists, nobody gets paid to make sure they're all on the same page. The PCP who spends hours coordinating care? That's essentially volunteer work.

• Volume trumps value. An empty hospital bed is a financial problem, even if it means your community is healthier.

The result? We spend more than any nation on Earth—18% of GDP—while ranking near the bottom among developed countries on health outcomes. We're spending more to get less.

This isn't anyone's fault. Good people are working incredibly hard in a system with misaligned incentives. The doctors, nurses, and administrators I've worked with genuinely want to help patients. But when the business model rewards activity over outcomes, even the best intentions get distorted.

The Solution: Flip the Incentives

Value-based care (VBC) starts with a different question: what if we paid for health instead of procedures?

Instead of paying per test or visit, providers take financial responsibility for a population's health outcomes. Keep patients healthy and spending goes down? The provider shares in those savings. Let preventable problems become expensive crises? The provider bears some of that cost.

The magic is in how this realigns everyone:

• Prevention becomes profitable. That diabetes counseling preventing complications? Now it's smart business.
• Coordination gets rewarded. Care management and PCP time become valuable, not overhead.
• Better outcomes drive better margins. Hospital readmissions cost money instead of generating revenue.
• Patients and providers become teammates. Everyone benefits when patients stay healthy.

The adversarial dynamics evaporate. The system suddenly optimizes for the right thing: keeping people healthy.

This Isn't New—And That's Good News

Value-based care isn't some untested theory. Kaiser Permanente has been doing this since 1945. (I wrote about the fascinating origins of Kaiser and how it pioneered this model.) They both insure and deliver care, so they directly benefit from prevention rather than treatment.

The HMOs of the 1990s tried to adopt similar models but got it wrong—they focused on restricting access rather than investing in prevention. Patients revolted, and for good reason. Modern VBC learned from those mistakes. It's not about saying no to care; it's about investing early so patients don't need expensive interventions later.

Today, VBC is quietly winning:

• Over 50% of Medicare beneficiaries are in value-based arrangements (Medicare Advantage or ACOs)
• 450+ ACOs in the Medicare Shared Savings Program serving 11M+ patients
• ~40% of all healthcare payments nationwide flow through value-based contracts
• Major health systems (Providence, Intermountain, Geisinger) have billions in revenue tied to VBC contracts

This isn't some pilot program. It's already mainstream and accelerating.

How VBC Actually Works

The mechanics vary depending on which model providers choose:

Shared savings: In programs like Medicare's Shared Savings Program (MSSP), providers continue to receive traditional fee-for-service payments for individual services, but also get a spending target based on historical costs for their patient population. If they deliver quality care below that target, they keep a percentage of the savings (typically 40-75%). This model allows providers to ease into value-based care without taking on downside financial risk initially, though many programs eventually require providers to share in losses too.

Capitation: In more advanced models like ACO REACH, providers can opt for capitated payments—a fixed amount per patient per month to cover all or some care. For example, primary care capitation covers primary care services, while total care capitation covers all Medicare Part A and B services. This completely flips the incentive—profit comes from keeping patients healthy, not treating them when sick. The capitation payments flow through the ACO, which then contracts with individual providers in its network.

These aren't mutually exclusive choices providers make individually—they're different program structures that entire organizations (like ACOs or health systems) select based on their readiness for risk.

Quality metrics: Regardless of payment model, you can't just cut costs. VBC contracts include extensive quality benchmarks that determine whether you share in savings and by how much. For Medicare Advantage plans, this shows up as Star Ratings—a 1-to-5 scale measuring performance on roughly 40 measures across domains like:

• Staying healthy (preventive screenings, vaccinations)
• Managing chronic conditions (diabetes care, blood pressure control)
• Member experience (CAHPS surveys on care quality and access)
• Patient outcomes (hospital readmissions, medication adherence)

Plans with 4 or 5 stars receive bonus payments from CMS, which translates to enhanced benefits for patients or lower premiums. The measures are data-driven, pulling from claims data, medical records (HEDIS), and patient surveys. Good care isn't just the right thing to do—it's the path to profitability.

Here's what changes:

Why Now? Three Converging Forces

If VBC is such a good idea, why didn't it happen sooner? Because the infrastructure finally exists:

1. Data infrastructure matured

Early VBC attempts struggled because providers couldn't track population health effectively. You can't proactively manage diabetes if you don't know someone missed three appointments or their A1C is dangerously high.

Modern EHRs, health information exchanges, and analytics platforms enable real-time population monitoring. High-risk patients can be identified before small problems become expensive emergencies.

2. Policy momentum is undeniable

Medicare launched the Shared Savings Program in 2012. Medicare Advantage grew from 31% to 50%+ enrollment. Commercial payers followed. Each success story creates more momentum—more providers learn VBC, more payers offer VBC contracts, more providers join.

CMS has explicit goals to move most Medicare spending to value-based models by 2030. This isn't speculation; it's stated policy with billions in implementation funding.

3. AI unlocks new capabilities

VBC has been succeeding for over a decade without AI, using operational discipline, care management teams, and analytics. But AI opens new possibilities:

• Predicting which patients need intervention before they deteriorate
• Personalizing care plans based on what actually works for similar patients
• Coordinating complex care at scale for tens of thousands of patients
• Identifying social determinants that impact health outcomes

AI won't create VBC, but it could dramatically accelerate what's already working.

The Real Opportunity

Here's what makes this moment so interesting: we're watching a $4.5 trillion industry restructure itself around different incentives.

In fee-for-service, healthcare is transactional. You get sick, see a doctor, get treated, pay a bill. Episodic and reactive.

In value-based care, healthcare is continuous. Your provider knows you, monitors your health, intervenes early, helps you stay healthy. Longitudinal and proactive.

One model treats disease. The other builds health.

For anyone building in healthcare—whether AI tools, infrastructure, analytics, or new care models—this shift determines what problems are worth solving:

• What data becomes valuable (claims, social determinants, continuous monitoring)
• What workflows need support (risk stratification, care coordination, intervention tracking)
• What outcomes matter (total cost of care, quality metrics, patient experience)
• What business models work (SaaS fees vs. percentage of savings vs. risk-bearing)

The opportunity isn't just in building better tools. It's in building for a better system.

This is why we at Pear are all-in on value-based care—we've seen firsthand how the right infrastructure can transform organizations from reactive fee-for-service providers into proactive population health managers who actually improve outcomes while reducing costs.

What's Next

Over this series, I'll unpack:

• The VBC ecosystem: How ACOs, MSSP, ACO REACH, and Medicare Advantage actually work
• The infrastructure opportunity: What technology VBC organizations desperately need
• AI's role: Where machine learning creates genuine leverage (and where it doesn't)
• The flywheel effect: Why VBC creates compounding advantages over time
• Building in healthcare: Lessons from the trenches on what actually works

The shift from fee-for-service to value-based care represents the biggest structural change in American healthcare since Medicare was created in 1965. It's not just about new payment models—it's about finally aligning the system around what everyone actually wants: keeping people healthy.

If you're building in healthcare, investing in healthcare, or making strategic decisions about healthcare, understanding this shift isn't optional. The business model shapes everything else.

The exciting part? We're still early. The infrastructure is immature, the workflows are being invented, the technology stack is incomplete. There's enormous opportunity for builders who understand where healthcare is headed.

But first, you have to understand the game that's being played.

Continue reading: Part 2 - Inside the Value-Based Care Ecosystem