Using Risk to Drive Outcomes and Innovation (In Healthcare vs. in Marketing)

Subtitle: How Studying Healthcare’s Contracting Models Changed the Way I Buy Ads

The Promise of Outcomes

Raise your hand if you’ve ever worked with or had to hire an advertising/performance marketing agency and been underwhelmed by the promise – but not guarantee – of improvements and value.

✋ ← That’s me.

I recently went to hire a digital ad agency for Dragon Blood Balm and every pitch sounded the same:

“We’ll create media. We’ll run ads. We’ll optimize through experimentation. We’ll grow your ROI.”
- Every Agency

But the pricing? A kickoff fee, monthly retainer, and collection of a percentage of ad spend. All risk-free... for the agency.

Everyone talked about outcomes, but no one wanted to get paid based on them. I asked a dozen marketing agencies to tie their pay to actual sales growth, and they all said a variation of the same thing:

"We can't/won't do it. We can't guarantee results."

That’s when I realized: I’ve seen this before… in healthcare, of all places.

In the traditional US healthcare model, doctors get paid for every test, visit, and prescription—regardless of whether patients get better. But healthcare has been shifting. Slowly, painfully, but perceptibly.

And what healthcare learned about outcomes and incentives, performance marketing still hasn’t. Why’s that?

How Healthcare Aligns Risks and Incentives

There’s a concept in healthcare called Value-Based Care (VBC). Stripped to its core, it means:

Pay for results, not just effort.

VBC is a major and long-running shift in healthcare, but you're probably more familiar with its opposite: the traditional fee-for-service (FFS) model where care providers and vendors get paid for doing things—whether those things make patients healthier or not. VBC flips the incentive: it’s outcomes, not activity, that get rewarded.

To illustrate, imagine you run a company that helps reduce flare-ups in a chronic condition.

• Value-Based Care (VBC):
  In the simplest VBC implementation, you’re compensated a fee based on decreasing the average volume of flare-ups among your patients. There's a control group against which you're measured to account for externalities. The more you move the needle, the better you're paid.*
• Fee-For-Service (FFS):
  You get a flat fee every time you perform a service—regardless of results. Your work maps to a CPT code (Current Procedural Terminology) with a standard payment plus or minus some time, effort, and complexity considerations. Want to make more money? Do more services. Whether patients improve is beside the point.

(* Fastidious note: There are many types of VBC models. “Getting paid” often means sharing a pre-negotiated percentage of savings, and outcomes are usually risk- and impact-adjusted. Quality and process metrics can be included in this calculation, above and beyond ‘hard’ clinical outcomes such as “patient didn’t get sick.”)

VBC (and Risk) Leads to Innovation

VBC aims to align incentives between payers (Insurers, Hospitals) and care providers. Better care results in better outcomes, which results in better compensation.

Moreover, untangling the payment model from the activity of care has allowed providers and vendors to experiment with different models of care. There is no financial penalty in the form of lost fees to stopping an activity that’s not working. And there’s no penalty (in the form of uncompensated work) to trying something new.

In the past, the only care providers or organizations that could afford to experiment with care were ones that had huge endowments or financial subsidization, direct payment relationships with patients, or academic institutions. Payer openness to VBC arrangements has opened the door to any organization to drive care forward through experimentation, innovation, and challenging conventional wisdom and common practices. That’s a good thing for everyone involved.

But Implementing VBC Isn’t Easy

And if you talk to healthcare executives, you’ll hear similar near-unanimous consensus that VBC is the way to go. Even federal agencies have been pushing (slowly) toward it. Yet much of primary care and hospital contracting in the U.S. is still FFS-driven.

That’s because VBC is had to implement. Here’s why:

• Stability, Familiarity
  FFS is stable, easy-to-administer, and has predictable payment structure. It's easy to work with, even if inefficient and disliked. It's been around forever, and its implementation is standardized... whereas VBC contracts are all uniquely tailored to the arrangement between a client and vendor.
• Complex patients = complex care
  Healthy people don't need outcomes-based contracting. Complex populations — the people who need better outcomes — are much harder to drive outcomes for, are likelier to have multiple caregivers and vendors involved, and improvements aren’t always immediate or linear.
• Attribution is messy
  It’s hard to cleanly tie specific actions to specific outcomes, especially when multiple vendors are involved. Everyone wants to claim credit. Moreover, the “shared savings” pool for a given patient population can quickly evaporate as additional vendors are added in.
• Believability gap/Burden of proof
  Everyone pitches outcomes. Few can prove them, and real results take time. Organizations often start with a FFS model (or hybrid, more on that below) to de-risk the proof-generating phase. Later vendors try to renegotiate for a bigger share of the upside. By then, the contracting organization has little incentive to give up a low-cost, high-return setup.
• Access to Data
  Proving impact requires good data... and most healthcare orgs don’t have it. Vendors often depend on clients for data access and impact analysis. This is why typically only large healthcare organizations (hospitals, payers) can offer VBC arrangements: they have the resources to manage control groups, untangle attribution, and absorb financial risk. It’s also why VBC tends to reinforce healthcare’s existing cash flow and power dynamics (but that’s for another post).
• Impact
  VBC and taking in risk is no guarantee of results. There are plenty of VBC programs that fail. Many organizations have a low tolerance for vendor failure and negotiate VBC arrangements by leaning into managing the downside risk, while vendors and providers negotiate to raise their upside value capture. The negotiations pull in opposite directions.

“There is No VBC, There’s Only the Hybrid Model”

None of this is insurmountable. But it is difficult. So instead of pure VBC, many settle on hybrid models that offer value-based upside payment bonuses while managing risk through FFS-like payment floors.

The two most common hybrid models are:

• Capitated Risk
  You get paid to manage a population. This is often simplified to "PMPM" or "per member per month". This accounts for a population where the risk is unevenly distributed. You’re compensated for the healthy and the sick alike—extending the insurance pooling model to subcontractors. The flipside is that if a patient population has low utilization or engagement in a given year, you'll get pushback to lower costs or shrink the population. Because no one wants to pay for unused services, ya know?
• Bundled Payments
  Another model is called "bundled payments" which can be better described as “FFS+”. Bundled payments create a single custom payment for a package of services (often tied to a multi-day episode of care), and flattens what would otherwise be multiple CPT codes and procedures into a single cost "package". This flattens the risk of FFS justifications/denials at each step of care and reduces administrative burden that would be associated with piecemeal billing. (This model gained a lot of popularity when it was subsidized by government programs for a few years).

Most hybrid models will also include some bonuses for hitting certain outcome benchmarks (some more of that upside without giving away the cow). Additionally, risk of poor outcomes outside of a provider's control for any single patient is offset by the average net positive results for a population.

These models all wrestle with the Principal-Agent Problem: how do you align the incentives and coordinate the activity of two independent actors, when one is supposed to act on behalf of the other?

The business answer is to balance stability and risk-sharing. These hybrid models exists because they help hedge financial risk, create financial predictability, and ease operational challenges while nudging incentives toward better outcomes. Hybrid models protect both the vendor and the payer (insurance or hospital). Base fees smooth cash flow, while value components incentivize performance.

And crucially, they provide a model for what should look for in other industries where results matter more than the activity itself.

The Curious Absence of Risk in Marketing

Let’s revisit the standard marketing agency pitch with that in mind: flat fees (and often growing higher the more you spend), the promise of outcomes, and no downside risk for not delivering on that promise. And every pitch offers the same set of services: media generation, implementation, data analysis.

Compared to healthcare, why is there so little appetite for risk in marketing?

• Is it because attribution of results is hard?
  They have access to all of my data and it’s way simpler and less regulated than healthcare data.
• Or because they lack the data to measure their true impact?
  Again, they have all the same data I do.
• Or because they’re not confident in their ability to deliver adequate results?
  Valid for agencies that don’t handle implementation and aren’t given full implementation control. But for Agencies of Record that own the full delivery cycle, it's all in your hands!
• Or because potential clients are too small to capture meaningful revenue from risk-based arrangements?
  Fair concern, but an engine for turning $1 into $2 is limited only by CPG production and fulfillment limits. Prove the model and growth is unlimited.
• Or is it because there is risk that a client won't actually get results?
  Risk-based models work by aggregating the risk of any one campaign/client failing across the average success of all clients. The risk of failure should be priced in to the cost of services and the knowledge of how clients perform in the aggregate.

If anything, performance agencies have more data and ability to tie payment to outcomes than healthcare organizations, but they routinely don't.

Is There a Relationship Between the Lack of Risk and Commodification?

I'm pressed to believe that for standard campaigns (I don't think I'm special here), performance marketing has become commoditized.

In a commodified field, there is no secret knowledge; all that matters is execution quality. It also means that vendors are largely interchangeable with downwards price pressure – you can easily pit vendors against each other on easy-to-measure and easy-to-compare axes.

And to be sure that I don’t hand-wave all marketing agencies away, there can be some secret sauce, if operating at a large enough scale:

• Aggregation of learnings across clients and practice (operational efficiency).
• Scale efficiencies if you're buying advertising from traditional sources (buy at scale and resell inventory across your client base).
• Relationships with third parties that can be leverages (especially important for influencer and media relations).
• Population Taste. Extremely large agencies add value in the form of practical population insights, creative testing frameworks, and culture-setting.

Without risk, agencies are encouraged to run the same best-practices playbooks that everyone else is running. After all, it’s a “best practice” for a reason. And that reason means that there is little appetite for trying to do something different.

Doing something different requires you to sell a more complicated pitch, and to balance the cost of potential failure against the greater upside of potential success. Risk-based arrangements like VBC give organizations greater operational flexibility to experiment by decoupling the work from the outcomes. That’s why healthcare is seeing a surge of innovative care models…. And marketing isn’t seeing a surge of innovative anything.

Risk-sharing: an antidote to commodification, a force to drive experimentation.

Back to the Drawing Board: A Risk-Based Model for Performance Marketing

So, I flipped the pitch.

Instead of hiring on a fee basis, I’ve been going back to any vendor that’s pitching me and offer two models:

1. The Unlimited Upside Model
   Get paid a meaningful percentage of net new attributed revenue. No base fee. No cap on upside.
2. Capped Downside Model
   Modest base fee. Smaller upside share. Measurable results within 3 months or contract ends.

This structure aligns incentives perfectly:

• The agency gets paid more if we collect more revenue
• We can earmark that cost to an acceptable bound within our profit margin.
• The agency is incentivized to get results, not to do 'stuff'.
• Growth is built in, because the incentives drive everyone to build a machine for turning $1 into $2.

It’s simple. It’s fair. It puts outcomes at the center.

(And if you’re an agency that’s interested on taking on a risk-based contract, let me know!)

Skin in the Game

The other nice thing about a commodified field with best practices is that those practices are learnable. And in marketing, there is no gatekeeping.

For a small consumer product good brand like Dragon Blood Balm, growth is too important to outsource. If execution is the differentiator, I can do that myself (with benefit of becoming a more informed client in the future). And if no one wants to bet on results, I’ll bet on myself.

Final Takeaways

If you’re hiring a marketing agency, ask them to share risk and to tie payments to outcomes. If they won’t, dig into that to understand why, and use the gaps you identify to drive process improvement. Interrogate that. Get curious. Address it. Lean into understanding what they're worried about, because their blockers/concerns about success are ultimately going to become your problems, one way or another. Give your vendors (or team!) the flexibility, guardrails, and ownership to try different things. And if you can't find a good partner, learn the game. Buy your own ads, run your own processes.

Because the best growth (and innovation) engine is one you control.

Execution beats promise. Risk and accountability creates opportunity for success and innovation. Healthcare learned that the hard way. Marketing is next.