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.


PDF is available on the last page.

Issue: November 2012
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