Australia’s health system is under increasing strain. Healthcare costs are rising, chronic disease rates are climbing, and patients expect better care experiences and improved outcomes. Traditional fee-for-service models incentivise volume over quality, creating inefficiencies and fragmented care. Enter value based healthcare — a model that rewards better patient outcomes at sustainable costs. It shifts the question from “How many services did we deliver?” to “What value did we create for patients?”.
Value based healthcare is a simple concept that has required a somewhat significant shift in mindset to understand, and to accept. A shift towards re-shaping competition to focus on generating value for patients by improving outcomes, reducing costs and enabling access across a greater degree of geographical reach, is the basic premise of it. For healthcare leaders and boards, value based healthcare isn’t optional—it’s a strategic necessity for healthcare reform in Australia.
What is value based healthcare?
Value-based health care is a delivery model where health outcomes that matter to patients are achieved at the lowest possible cost. The widely accepted formula is:
Value = Patient Outcomes / Cost of Care
Rather than counting the number of appointments or procedures, VBHC focuses on outcomes such as recovery, quality of life, and functional ability.
Where did value based healthcare come from?
The concept of “value based care” began in 2006 with Michael Porter and Elizabeth Teisberg’s work on redefining the zero-sum competition nature of existing healthcare systems. This means that gains in one area of the system very often arise at the expense of another, resulting in a zero sum gain overall. This contrasts to a positive-sum competition framework, in which you get a win-win situation, with gains benefiting the system overall.
The basic principle is that healthcare market competition in its current state has been set up in a manner that incentivises cost shifting. It encourages increasing patient activity, favours compliance processes for data gathering, aims to reduce costs via a piecemeal approach (since healthcare is viewed as discrete interventions/treatments) and inevitably pushes excess costs of service provision to consumers.
Why value based healthcare matters in Australia
Australian healthcare is ranked among the best globally, but it faces systemic challenges:
- An ageing population with higher demand for chronic disease management.
- Health expenditure nearing 10% of GDP, putting pressure on funding.
- Growing patient expectations for integrated, personalised, and digital-enabled care.
Without reform, cost growth will outpace outcomes, threatening sustainability. Value based healthcare addresses this by aligning clinical quality, financial performance, and patient experience -the Triple Aim of healthcare.
Core principles of value based healthcare
1. Patient-Centred Outcomes
VBHC prioritises outcomes that matter to patients, such as functional recovery, quality of life, and emotional wellbeing—not just clinical metrics.
2. Integrated and Coordinated Care Delivery
Fragmented care creates waste and delays. VBHC supports team-based, integrated care across hospitals, primary care, and community settings.
3. Cost Transparency Across Care Pathways
Accurately calculating the true cost of care episodes is essential for efficiency and informed decision-making.
4. Payment Models Aligned to Value
Transitioning from fee-for-service to bundled payments and performance-based incentives ensures providers are rewarded for quality and outcomes, not volume.
Challenges for Australian Health Leaders
Adopting value based healthcare in Australia is not without challenges:
Data and analytics capability: Measuring outcomes and costs requires robust digital systems.
Cultural change: Moving clinicians from activity-based metrics to outcome-based metrics.
Funding alignment: Navigating federal-state funding models and private payer arrangements.
Despite these hurdles, value based healthcare pilots in Australia, such as integrated care trials and hospital-in-the-home programs, are showing promising results.
As an example, consider the recurring occurrences relating to out-of-pocket costs and increasing private health insurance premiums in Australia. Consider how even a simple colonoscopy procedure, which is currently paid per procedure, encourages rapid turnover of patients and a shortened procedure time. This increases the likelihood of the caecum not being adequately visualised, and could lower the accuracy of colon cancer diagnosis, which can result in a less-than-ideal outcome for the patient.
By putting a value based lens on this scenario, if the colonoscopy procedures were to be paid based on the performance of the procedure itself, such as meeting specific indicators (e.g. visualising the caecum), we would very likely see an increased accuracy rate of colon cancer diagnosis, better survival rates and safer clinical outcomes at the patient level.
How value based healthcare influences competition
So what is being proposed with value based healthcare is to re-shape the existing competitive system set-up towards one that is more value generating for patients. Value generation would be realised by either improving outcomes or reducing costs, or both, over the full cycle of a patient’s care episode.
Fostering constructive competition, by consolidating health provider experience and expertise at the disease or condition level of the patient, is one means of how this could be done. It emphasises generating competition by, for example, aligning funding mechanisms to integrated models of care that is designed to deliver cohesive and coordinated care at both the individual patient and the population level.
Therefore, the nature of competition it encourages is to achieve better results, improve patient outcomes, cover a greater degree of geographical reach and standardise high performance across regional and national levels.
Frequently Asked Questions (FAQ)
1. What are the benefits of value based health care?
Value based healthcare improves patient outcomes, enhances care quality, reduces unnecessary costs, and promotes integrated care models.
2. How does value based healthcare differ from traditional healthcare models?
Unlike fee-for-service, which rewards volume, value based healthcare incentivises providers for delivering health outcomes that matter to patients.
3. Is value based healthcare practical in the Australian healthcare system?
Yes. Value based healthcare aligns with Australia’s health priorities, but success requires investment in data infrastructure, governance, and cultural change.
4. What role do healthcare boards play in value based healthcare?
Boards set the strategic direction for value-based governance, ensuring that organisational decisions focus on patient outcomes and sustainability.
5. Where should organisations start?
Begin with outcome measurement frameworks, pilot programs, and leadership training in value based care models.
The future is value-based
Value based healthcare isn’t just a trend. It’s a fundamental shift in how healthcare is delivered and funded. For Australian healthcare leaders, embracing value based healthcare is the key to balancing quality, equity, and financial sustainability in a rapidly evolving health landscape.
Ready to lead this change? Register for our Foundations of Directorship Health Variant program to strengthen your governance skills and prepare your organisation for a value-driven future.
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