Over the past few years, I have argued over and over and over that value-based care was simultaneously a good business model but a failed concept to bend America’s healthcare cost curve. I have also repeatedly stated that the harbinger of value-based care would be that every hip replacement surgery in the United States was reimbursed as a bundled payment. Having had two hip arthroplasties and two shoulder arthroplasties, I am a subject matter expert about the opportunity.
At the outset, it is important to define what value-based care is and is not, especially since no one else will. As I have written previously:
“Value-based care does not create value for the ultimate payer, whether the employer or the Federal government, but simply allows that ultimate payer to cap its financial exposure. Why? Value-based care participants focus on minimizing cost after negotiating the revenue pool from the ultimate payer to maximize marginal income on their share of the available funds, aka ‘subcapitation.’ Even when, like MSSP, value-based care ‘works’ and creates ‘shared savings,’ there are two parties who don’t participate: the Medicare beneficiary and the taxpayer.”
Based on this definition, I am, like Lloyd Christmas, telling you there’s a chance that value-based care is almost here.
On April 10, 2026, in a classic governmental press release late on a Friday afternoon, the Centers for Medicare and Medicaid Services (CMS) announced its proposed CJR-X model. If enacted, beginning October 1, 2027, every lower extremity joint replacement (LEJR) performed on a Traditional Medicare beneficiary on a hospital campus will be reimbursed under an “episode-based” model, either Transforming Episode Accountability Model (TEAM), which was mandated for ~725 hospitals on January 1, 2026, or CJR-X, which would apply to any hospital not participating in TEAM.
Applying the CJR-X model to all non-TEAM hospitals based on their actual 2024 LEJR volumes reveals the extraordinary variance in the type, amount and quality of post-acute care in a single procedure category.
“By holding participating hospitals responsible for care and spending during the LEJR procedure and after discharge, the CJR-X Model would encourage hospitals to:
Work as a team with physicians and post-acute care providers to support patients and ensure optimal outcomes;
Coordinate care across settings, especially care transitions, from the initial hospitalization or outpatient procedure through recovery; and
Produce high value care by reducing unnecessary or duplicative services, such as avoidable hospital readmissions.”1
CMS’s approach is heretical to the (blissfully unaware) readers of content sponsored by Arnold Ventures arguing that hospitals are the fundamental problem in America’s health economy, an idea that is suddenly in vogue in The New York Times, KFF News, The Paragon Health Institute and Health Affairs, among others. Based on the April 28, 2026, Congressional hearings, Congress also seems to believe that hospitals are the problem.
Last week, Representative Jason Smith, the Chairman of the House Ways and Means Committee, lambasted hospital CEOs for taking advantage of 340B and “administratively rural” designations. We identified the extent of each of those problems in the “Fraud, Waste and Abuse” section of our 2025 Trends Shaping the Health Economy Report:
That begs this question: If hospitals are the source of America’s healthcare cost crisis, why has CMS effectively delegated responsibility to hospitals for solving the cost problems that happen outside of a hospital, and how could the media and think tank experts have it so wrong? Both are rhetorical questions, but I will explain the answer to the former.
It is axiomatic that the physician’s pen, or rather electronic signature, is the most expensive item in the health economy. Applying the Pareto principle to this axiom, the most expensive pens have historically been those that sign orders to admit patients to a hospital for an elective surgery, though that is no longer true given the explosive growth in patented specialty drugs. As such, the most expensive parts of the healthcare services sector are downstream of a physician’s decision to admit a patient to a hospital. CMS must know this, if for no other reason than their 20-year history of mostly failed payment innovation models. Having failed to solve the problem, CMS intends to make hospitals, in the words of Steely Dan, do the dirty work for free through a mandatory delegation of financial risk to hospitals for the cost of both inpatient and post-acute care for either 30 days (TEAM) or 90 days (CJR-X) post-discharge.
Three things are notable about CMS’s approach.
First, TEAM and CJR-X implicitly acknowledge that the Federal government is unwilling – or unable – to address the most egregious but malleable issue in the health economy: the wide variance in total cost and quality for the exact same service, as demonstrated above. The fact that the unit price for Medicare procedures is effectively fixed in the above analysis evinces the extraordinary variation in post-acute sites of care and post-discharge utilization. Said differently, post-acute care is stochastic, and TEAM and CJR-X implicitly indict the entire post-acute industry for failing to provide value for money in their services, whether due to a lack of efficiency or quality or both. Regina Herzlinger explained how to address this issue 30 years ago in Market Driven Health Care, and the lack of tangible examples of a focused factory approach in the industry indict the industry.
Second, the history of CMS’s payment innovation confirms that carrots appeal only to rabbits, not healthcare providers, who respond better to the stick that price caps represent. Even the most successful CMS payment innovation models have generated barely enough per capita savings to purchase a set of AirPods.
Are some hospitals deeply flawed? Certainly, whether by failed governance or mediocre leadership or poor clinical quality or the misfortune of being in a bad market that is beyond repair. But flawed in comparison to what? Health insurers or strategy consultants or EMR vendors or Beltway pundits or “evidence-based philanthropists” or members of Congress? Who other than the hospital staff is on the front lines every day addressing America’s poor, sick, traumatized, psychotic, broken citizens? Who did America turn to in the darkest days of the COVID-19 pandemic? Or have you forgotten?
The physicians and nurses and employees in a hospital, day after day, are the very definition of what President T. Roosevelt described in his speech “Citizenship in a Republic”:
“The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, and comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows the great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who know neither victory nor defeat.”2
If you are not in the arena, then you are, according to T. Roosevelt, the critic who doesn’t count. You get no credit for pointing out “how the strong man stumbles or where the doer of deeds could have done them better.” I think the critics know that, and I think it bothers their conscience, which explains the vitriol.
Even if I am wrong about that, I am not wrong about this. At a minimum, TEAM and CJR-X represent what mathematicians define as an “order of magnitude” change. Since the introduction of diagnosis-related groups (DRGs) in 1983, hospitals have been responsible for the costs associated with a patient’s hospital stay. In 2024, the average length of stay (ALOS) for a total hip arthroplasty was 1.1 days, down from 3 days in 2012.3 The ability of hospitals and surgeons to reduce the ALOS by 1.9 days over that period undoubtedly made those surgeries more profitable…which is how a free market works. Scale and efficiency lead to increased margins.
However, except for hospitals that participated in CJR or BPCI, hospitals have never been required or incentivized to manage the financial cost of a patient’s post-discharge care. Under TEAM or CJR-X, CMS delegates to a hospital the financial risk for what happens for 30 or 90 days post-discharge, respectively, a time horizon that is 10–90x longer – orders of magnitude longer than before.
The mandatory nature of TEAM and CJR-X requires a 180° change in the clinical, operational and financial approach for every hospital. Having focused exclusively for the past 43 years on controlling the things that happen inside the hospital, TEAM and CJR-X require hospitals to extend their focus to events that occur in literally dozens of sites of care – inpatient rehabilitation, skilled nursing, physical therapy clinics, physician offices, imaging centers, home health – that the hospital does not control. How CMS thinks that hospitals can “coordinate care” across post-acute settings without incurring increased administrative costs is a mystery and, in turn, seemingly antithetical to the stated goals for “a more affordable health system.”4 Of course, the impact of TEAM and CJR-X is not limited to hospitals. Each health economy stakeholder downstream of the decision to admit a patient to a hospital, whether a device manufacturer or post-acute provider or durable medical equipment supplier, should expect to be squeezed by what is a price cap by any other name.
The Emergency Medical Treatment and Labor Act (EMTALA) effectively makes the hospital the provider of last resort. TEAM and CJR-X are seemingly designed to make the hospital the insurer of last resort, at least for select high-volume, high-cost surgical cases. Under CJR-X, for example,
“[a]ll providers and suppliers furnishing LEJR care to patients would continue to be paid under existing Medicare payment systems. Following the end of a model performance year, actual total spending for the episode would be compared to the participant hospital’s target price and, depending on quality and spending performance, the hospital could receive an additional payment from Medicare or be required to repay a portion of the episode spending.”5
As revealed in the graphic above, the vast majority of hospitals should expect to repay a portion of the episode spending.
Making hospitals the insurer of last resort may be the most radical change in healthcare policy since the creation of Medicare and Medicaid in 1965. The question for America is when policymakers – and employers – will target the thousands of health economy stakeholders delivering services that lack any fundamental value, which means that they can never deliver value for money. Until every health economy stakeholder delivers value for money, having a more affordable health system is a fantasy.