What Healthcare Has Learned About Risk and Incentives, and Marketing Still Hasn’t

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

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 it's opposite: the traditional fee-for-service (FFS) model where vendors (care providers) get paid for doing things—whether or not those things actually make patients healthier. 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.”)

Unfortunately, Implementing VBC Is Hard

Much of primary care and hospital contracting in the U.S. is still FFS-driven, and in my view, it’s a huge reason why American healthcare is so dysfunctional.

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.

But in practice, it’s hard to implement! Here’s why:

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.

The Usual Compromise: The Popularity of Hybrid Models

None of this is insurmountable. But it is difficult. So many organizations compromise with a hybrid model of value-based upsides and risk management in the form of FFS-like payment floors. The two most common ones 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 population. Because no one wants to pay for unused services, ya know?
• Bundled Payments
  Another model is called "bundled payments" which is less value-based and more 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 costs "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).

Additionally, most hybrid models will include some bonuses for hitting certain outcome benchmarks (some more of that upside without giving away the cow).

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.

None of this is unique to healthcare. 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?

Especially when the person you’re paying (the agent) may not act in your best interest (the principal) because their incentives aren’t fully aligned with yours?

Performance Marketing Agencies Have the Same Problem

Now, why the long detour through healthcare?

Because I’m running into the exact same Principal-Agent dynamics while shopping for a digital advertising agency for Dragon Blood Balm (our CPG brand), and I think healthcare contracting offers a great guide how to navigate this complexity.

Here's my starting point: I've interviewed many, many agencies and every agency pitches the same thing:

• We’ll create media.
• We’ll run ads.
• We’ll optimize through experimentation.
• We’ll grow your ROI.

And the pricing? Always familiar:

• There's a kickoff fee,
• There's a monthly retainer,
• There's a captured percentage of ad spend, and
• That's run for a set of months to prove results and ultimately generate ROI.

That means your ROI has to cover all of those costs and then some, otherwise you’re burning cash. (I'll spare y'all the math I have to do to evaluate each agency pitch).

Here’s the kicker: all of them pitch outcomes, but none want to share risk for achieving those outcomes.

• Is it because attribution of results is hard?
  They have access to all of my 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?
  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.

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

Turning the Tables: Risk Based Performance Marketing

As an experiment, I’ve been flipping the pitch. Instead of hiring on a fee basis, I’m offering a risk-based model to agencies:

Unlimited Upside Model:

• You help us grow revenue.
• You take a meaningful percentage of net new attributed revenue.
• No caps on upside.

Capped Downside Model:

• Same as above, but with a modest base fee.
• Smaller share of the upside.
• If we don’t see measurable impact within 3 months, the 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.

Refocusing the Performance Pitch

Given that model, it also changes what an effective marketing agency pitch looks like. Instead of a long-winded “about us” speech trying to explain how you're different (you're not, sorry), a winning proposal would be structured as:

1. What did you understand about our business?
   We did a kickoff call and shared data. Don't give me a generic playbook. Reiterate to me what you've learned about us and our challenges, which challenges you can address, and how you'd do it.
2. Expected results
   Based on your experience doing this for many different clients, what results should we expect? Give me a plausible range, not hype.
3. Believability
   Why should I trust your estimates? Blind case studies are fine. Show me proof and comparable examples to build my confidence.
4. Value justification = Pricing
   You’ve seen our product costs, margins, and conversion rates. Prove that hiring you will drive profitable growth, not just increase expenses. Double check your rates against your expected results to justify the ROI we'd be getting.

Is Performance Marketing a Commodity? If So, Why Not Just Do It Myself?

Given the volume of agencies out there offering performance marketing, the similarity of their offerings, and their reluctance to take on risk, I'm pressed to believe that for standard campaigns (I don't think I'm special here), performance marketing has become commoditized.

And in a commodified field, execution quality matters more than any secret knowledge.

So what is execution? It is:

• Data Analysis to understand performance and attribution
• Graphic Design and Copywriting to create the media that runs
• Implementation of the ads into a self-service ad-selling platform.
• Execution, the time and effort to actually get it done.

What agencies uniquely bring to the table is:

• 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).

But the premium they charge is in account management—keeping things moving, staying organized, tackling administrative overhead, with extra costs to fuel their client acquisition efforts. (Caveat that extremely large agencies generate additional value at at scale: practical population insights, creative testing frameworks, taste-making.) But for a small business running a digital growth campaign, only the first section matters.

The nice thing about a commodified field is that it has best practices that are quickly learnable and upskillable if you put some time and effort into it. In fact, that's how I got into the business in the first place:

Data analysis? I can do that.Graphic design and copywriting? I can do that or subcontract at below-agency rates as needed.Technical ad configuration? Time-consuming, but straightforward, and I've done it at scale for luxury brands in earlier roles.

Ultimately, driving sales is too important to fully outsource... it's the engine of the business.

So… I’m diving back into the advertising world myself.

For better or worse.