AJMC

Value-Based Purchasing

Published Online: November 21, 2012
Sarah Thomas, MS; and Margaret O’Kane, MHS
The rise in healthcare spending is affecting business, government, and individuals. Too often the reaction is to shift large chunks of financial risk to beneficiaries, which lowers cost but can work against the agenda to address the underuse of needed services and better health. Also, the shift does nothing to send price and quality signals to the delivery system. With more use of reference pricing with quality built in, for example, providers who deliver care more efficiently would receive greater market share. This would make efficiency a “business issue” for providers. Although we do not underestimate the challenges of healthcare system reform, change to delivery systems, incentives, and expectations offers a better path to getting more value for healthcare spending.

So often, health plans, providers, and beneficiaries have no good reason to obtain better value. Health plans can have higher revenues if they do less to manage total spending; indeed, new rules limiting profits, administration, and utilization management may reward the plans that do the least to manage spending. As has been amply discussed elsewhere, fee-for-service payment systems to doctors, hospitals, and other providers reward volume over value. Current payment norms also reward specialty care over primary care and procedures over cognitive services, which heavily affects the mix of what is being delivered. Providers that are successful in commanding high fees through market power or cache also are rewarded with higher revenues. Due to the way insurance coverage— both the premiums and cost sharing—is generally structured, the consumer who seeks out more cost-effective care receives no financial reward for doing so. Moreover, there is usually little financial consequence for people who make unhealthy choices; eg, have a poor diet, lack exercise, do not take charge of chronic conditions.

Value-based purchasing offers a set of tools to achieve 2 important goals:

  • It pays providers for what consumers want the healthcare system to do, ie, reward value and quality.


  • It engage consumers to be sophisticated and knowledgeable users of healthcare and therefore encourages them to do more to improve their health.


We see purchasers—employers and government programs—as being the primary actors for pushing these changes; health plans can be partners. To the degree possible, purchasers should send consistent signals to plans, providers, and consumers about what they want the healthcare system to achieve. Providers facing different incentives and measures from different payers often have no way to respond effectively. Ironically, if all pile on in a similar direction but in different ways, the signal to noise ratio goes down. Alignment among payers is very important. This does not necessarily mean that every initiative needs to use the same measures and payment methods—innovation is important in this area and we still need to learn more about what works best. But we have seen examples of multipayer initiatives, eg, the patient-centered medical home, where collaboration among payers has sent a strong signal to primary care physicians, resulting in impressive outcomes.

Specific recommendations include the following:

  • Value-based insurance design. Aligning cost sharing with value. Cost sharing would be lower for high-value services (eg, maintenance care for chronic conditions) and higher for low-value services.


  • Centers of excellence. Another example of value-based purchasing is the use of “centers of excellence.” Health plans can use cost sharing to guide patients to high-value hospitals and providers. They can identify hospitals that are centers of excellence for treating high-cost or high-risk conditions, and make them preferred providers with the lowest cost sharing for patients. This approach could also reward hospitals or other providers that have strong patient safety records. The high-value plan of the future should rely heavily on value metrics to select its network. Ensuring that members have access to physicians with good credentials is an important part of consumer protection and of the National Committee for Quality Assurance (NCQA) health plan accreditation. But excellent health plans must also measure the performance of providers. They must use that information to build networks and report the information to consumers.


  • Payment and delivery system reform. The last 3 years have seen an encouraging trend toward delivery system reform, and away from traditional fee-forservice payment methods that reward volume over value. The growth in the number of practices and providers involved in patient-centered medical home programs is a great example of this trend. This growth has been stimulated by the many purchasers—both public and private—that have embraced this effective model of care. Public purchasers include many state Medicaid programs and federal government agencies like the Health Resources and Services Administration and the Department of Defense. Medicare is following the lead of these types of innovators and making payments for Medicare beneficiaries who see clinicians participating in existing multipayer pilots.


  • Reference pricing. This strategy steers physicians and patients to the most cost-effective treatments by tying reimbursement for an item or service to the price of the most effective treatment. Less cost-effective treatments are still covered by the plan, but members pay more for them. Reference pricing needs to be done in a way that builds in quality, so there would need to be a quality threshold as well, except for items and services where quality is indistinguishable.


Now that there is a firm start toward delivery system reform made for primary care, the next challenge is building from this model and developing others that include specialists and hospitals. One way is through the accountable care organization (ACO), with Medicare leading development. Other purchasers, including private insurance companies and Medicaid programs, are beginning to experiment with the concept; however, employers are not driving forces in this area. To make it more worthwhile for providers to invest in the systems and other organizational changes needed to run successful ACOs, payers should work together to set the same requirements for ACOs. Based on our experience with the patient-centered medical home, we also recommend that payers go beyond the set of performance measures in these initiatives to include standards that articulate, in clear and unambiguous terms, what program elements are needed to lead to success and can be evaluated consistently. Too often these programs require lengthy descriptions that can be difficult to evaluate and thus not terribly useful.

Another approach for building from the patient-centered medical home is in the “patient-centered home neighborhood” idea, aspects of which the NCQA is building into its specialty practice recognition program. This program is designed to recognize the commitment specialists make to not only coordinate the care of their patients inside their practice but also to coordinate with primary care providers. Although health reformers have developed more complex payment models with stronger incentives than the simpler versions of the pay-for-performance schemes of the 1990s, rigorous and meaningful measurement is still critical to help both plans and providers focus on what they need to do to be successful and to reassure consumers that any economies achieved will not be at the price of lower quality.

  • Pay for value health plans. Employers should further the value agenda by awarding higher payments to plans that demonstrate high value. Many state Medicaid agencies have such programs; the Medicare Advantage program has one as well and we are beginning to see early signs of performance increases. Reference pricing can be used for choosing health plans also. This would make the patient pay the difference between the “benchmark plan” based on cost and quality and higher-priced options.


  • Exchanges. While we support many of the policies regarding health plans in exchanges, we wish there were greater emphasis on using exchanges as a strategy to pursue a value agenda. Apart from a few states, the emphasis seems to be more on operational issues. While this emphasis is understandable, given the enormity of the task, we would like for the pace to pick up on articulating quality measures and encouraging health plans participating in exchanges to participate in statewide delivery reform initiatives. More investment should be made in developing useful measures of value—overuse, misuse, and waste. In an effort to keep subsidies relatively affordable, the benefit packages offered in the exchanges wil likely have high deductibles. We encourage both federal and state policy makers to look for flexibility in the law to use elements of value-based insurance design to keep premiums down in place of high cost-sharing requirements. For example, consumers using exchanges could be allowed to reduce the deductible if they agree to get care in a patient-centered medical home, or participate in wellness or care management programs. Plans and purchasers are developing benefit designs that waive cost sharing for effective services like those measured by the Healthcare Effectiveness Data and Information Set.


PDF is available on the last page.

Issue: November 2012
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