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Value-Based Purchasing: The Evidence

The American Journal of Managed CareAugust 2011
Volume 17
Issue 8

A review of evidence about what works in 3 areas of value-based purchasing emphasized under healthcare reform: service delivery integration, payment, and value-based insurance design.


This report presents evidence about “what works” in value-based purchasing strategies emphasized in national healthcare reform legislation, with a focus on service delivery integration, payment, and value-based insurance design. We review key findings to address the question: What is the evidence that a value-based strategy will improve health outcomes or reduce healthcare costs?

Study Design:

This report is a review of peer-reviewed and field-based research associated with several value-based strategies purchasers can use to increase value in their healthcare market decision making: Accountable Care Organizations, Patient Centered Medical Homes, bundled payment methods and incentives, and value-based insurance designs.


Environmental scans and evidence reviews of value-based purchasing were conducted to inform this report.


Many value-based approaches are new to the healthcare arena, and evidence of performance in improving health outcomes or reducing healthcare costs is limitedbut increasing as experience with these approaches grows.


Purchasers should be aware that evidence is contingent on market environment and study assumptions in considering specific strategies, and be cautious implementing them. The need for a new measurement paradigm for cost and quality that reaches across the care continuum is evident.

(Am J Manag Care. 2011;17(8):e310-e313)

Value-based purchasing approaches including service integration, payment methods, and value-based insurance design are emphasized in national healthcare reform legislation, but evidence of “what works” varies by strategy and is often inconclusive.

  • Purchasers should be aware of evidence about performance, improving health outcomes, or reducing healthcare costs in considering specific strategies, and be cautious implementing them.

  • Many value-based approaches are new to the healthcare arena, and evidence of performance is limited but increasing as experience with these approaches grows.

A criticism of the 2010 national healthcare reform, enacted in the Patient Protection and Affordable Care Act (PPACA) and amended by the Health Care and Education Reconciliation Act, is that it does not address cost control. The national healthcare reform, however, did make several forays into encouraging value in healthcare purchasing. The message from President Barack Obama’s administration is that healthcare reform efforts should pursue value, not volume purchasing, and quality, not quantity, in healthcare services.1 A value-based strategy strives for improved healthcare quality and health outcomes while achieving efficiency. So, what is the evidence that a value-based strategy will improve health outcomes or reduce healthcare costs?

The PPACA legislation calls for implementation of demonstrations, pilots, and programs involving accountable care organizations (ACOs), patient-centered medical homes (PCMHs), payment bundling, and pay-for-performance (P4P) initiatives; extends a gain-sharing demonstration; and, in section 2713(a), calls for the creation of policy to “permit a group health plan and a health insurance issuer offering group or individual health insurance coverage to utilize value-based insurance designs.” We address 3 areas of value-based purchasing developed in the legislation of interest to purchasers: service delivery integration, payment, and value-based insurance design.

Service delivery integration is not a new concept in healthcare. Past examples of similar efforts range from the comprehensive planning legislation of the 1970s to Medicaid’s primary care case management model and from managed care’s integration and behavioral health carve-outs to physician hospital organizations. The results of these early experiences were inconsistent, due to challenges with implementation and measurement of cost savings and outcomes. As of late, there are high hopes for 2 models of service delivery integration: ACOs and PCMHs, which may employ payment bundling methodologies or financial incentives, such as P4P or gain sharing, to encourage providers to reduce cost and improve quality. In theory, these models generate cost savings from reduced hospitalizations and readmissions.

Accountable care organizations are networks or sets of providers and institutions, such as primary care physicians, specialists, and hospitals, which have joint responsibility for the quality and cost of care for a population. This care delivery model combines integration of care across providers to improve coordination and reduce duplication of services, and provides incentives for shared savings and insurance design focused toward population health improvement as strategies to enhance healthcare value. Congress mandated in 2000 that the Centers for Medicare and Medicaid Services (CMS) conduct the Physician Group Practice (PGP) Demonstration to test an ACO-like hybrid payment methodology that combines Medicare feefor- service payments with new incentive payments. The PGP encouraged the coordination of Medicare Part A and Part B services, promoted efficiency through investment in administrative processes, and rewarded physicians for improving health outcomes.2 A US Government Accountability Office evaluation concluded that the care coordination programs initiated by the participants showed promise, but that wider applicability of the payment methodology is questionable. In particular, the large size of the 10 participating physician groups, all with more than 200 physicians, gave the participants “certain size-related advantages that may make broadening the payment approach used in the demonstration to other physician groups and non-group practices challenging.” 2 Beyond the CMS PGP demonstration, few studies have rigorously examined whether ACO-type models do, in fact, improve quality and reduce costs. Given the recent introduction of ACOs, research in this area is limited and additional analysis is needed.

Delivery models where each patient has an ongoing relationship with a primary care provider who leads a team that takes collective responsibility for the patient’s care, PCMHs infuse traditional primary care approaches with service delivery integration through interdisciplinary team-based care coordination to reduce duplicative care, and related payment innovations to control costs and provide quality care. Because PCMH models coordinate the spectrum of patient care needs, they are well suited to leverage innovative communication tools and information technology and new reimbursement structures to realign incentives in favor of providing highquality care efficiently. Like other innovative models of delivery, the PCMH is most advantageous for systems or purchasers that can realize cost reduction benefits from decreased utilization and that are already well connected and technologically advanced. However, the additional administrative costs of integration at start-up may hinder the model’s cost control benefits in the short term.

An evidence base is building for improved quality, but evidence regarding patient and provider satisfaction and decreased costs under the PCMH model is inconclusive. Current research shows the PCMH has been adapted to a wide variety of populations and markets. PCMH examples for Medicaid populations are seen in Community Care of North Carolina and within the large integrated health plans and delivery systems of UnitedHealthcare, Group Health Cooperative of Puget Sound, Intermountain Healthcare, and the Geisinger Health System. An evaluation of Community Care of North Carolina found significant net savings for fiscal years 2004 through 2006. Fiscal year 2006 savings, for example, were estimated at close to $300 million for the state. When compared with fee for service, savings were especially high for inpatient care and for care to patients less than 1 year old.3

Payment methodologies such as bundled payment, financial incentives such as P4P, or gain-sharing approaches may be combined with integrated delivery systems or employed alone to achieve value in healthcare purchasing. Even though bundled payment approaches have been attempted for at least 2 decades, evidence—whether bundling is by episode, condition, treatment, or admission—is sparse beyond studies of hospital care bundling by diagnosis-related groupings. However, select notable studies have been conducted that show promising results. For example, Geisinger’s coronary bypass program, called ProvenCare, is designed as a flat fee payment for surgery and all related care for 90 days after discharge, which places accountability for outcomes on the care team.4 Results showed a 10% reduction in readmissions, shorter average length of stay, and reduced hospital charges. The program achieved a 44% drop in readmissions over a course of 18 months.4

A financing incentive, P4P, rewards providers for achieving the purchaser’s established objectives. Evidence of P4P, especially regarding cost reduction, is mixed.4 The evidence of the effects of P4P on quality improvement is stronger. One systematic review of the literature found partial or positive effects of financial incentives on measures of quality in 5 of 6 studies of physician-level financial incentives and 7 of 9 studies of the provider group-level incentives.5 P4P effectiveness depends on who receives the incentive (individual providers responsible for treatment decision making or health plans), on knowledge of the incentive, and on the level of incentive.

Gain sharing, once controversial but now in popular use, is another approach to reward incentivized behavior. Gainsharing arrangements, particularly those used in hospital and integrated delivery systems, provide bonus payments to physicians and other providers, to reward cost savings resulting from their efforts to reorganize delivery of clinically appropriate care at lower cost, eg, by being prudent in their clinical choices, including selection of procedures, supplies, and devices. The existing studies of individual programs show cost savings, but few studies have rigorously examined this issue. CMS implemented a 3-year demonstration project in 2007 that was extended by the 2010 national health reform legislation. CMS launched another 3-year demonstration with a consortium of 12 New Jersey hospitals and their participating physicians in 2009 that is intended to reduce healthcare costs and improve quality of care.6

Value-based insurance design (VBID) seeks to increase value in healthcare through insurance design and incentives, and includes various strategies and approaches that can be used together or separately in different VBID models. One model of VBID reduces or eliminates cost sharing for services that have strong evidence of clinical benefit in order to improve healthcare quality and efficiency.7 Another model increases cost sharing for services that do not show evidence of clinical benefit. While VBID has broader healthcare system applications, many attempts—and available evidence—involve pharmaceutical benefits. In general, coverage and cost-sharing provisions address the problem of moral hazard, which is the overconsumption of health services in the absence of a consumer having a financial stake due to insurance coverage. By reducing or removing cost-sharing for benefits where utilization is highly desired, as in the case of clinical benefits, VBID leverages the cost-sharing incentives on consumer behavior.

The empirical evidence of VBID is mostly related to select attempts to implement the approach by employers and other purchasers, including Pitney Bowes and Oregon’s Public Employees’ and Educators’ Benefit Boards. For example, Pitney Bowes shifted all diabetes drugs and devices from tier 2 or 3 formulary status to tier 1. This single change in pharmaceutical benefit design immediately made critical brand-name drugs available to most Pitney Bowes employees and their covered dependents for 10% co-insurance, the same co-insurance level as for generic drugs compared with the previous cost share of 25% to 50%.8 A study conducted 2 to 3 years after the policy change found that for plan participants with diabetes total pharmacy costs decreased by 7%, emergency department visits decreased by 26%, and hospital admission rates, although slightly increased, remained below the demographically adjusted Medstat benchmark. Overall direct healthcare costs per plan participant with diabetes decreased by 6%.8 Another Pitney Bowes effort eliminated copayments for cholesterol-lowering statins and reduced them for a blood clot inhibitor called clopidogrel. The change resulted in an immediate 2.8% increase in adherence to statins relative to controls and, for clopidogrel, a 4-percentage-point difference in adherence rate between intervention and control patients a year later.9 Forthcoming evaluations are pending on the University of Michigan’s MHealthy: Focus on Diabetes project and Aetna’s Post-MI Free Rx Event and Economic Evaluation trial.

The end game in healthcare purchasing is not strictly one of cost control nor one of quality improvement in isolation; it is a search for value. The evidence about value-based purchasing is mixed but promising for some care delivery models and markets. Integrated healthcare systems, Intermountain and Geisinger, and public payers with dominant market share have experienced the greatest success to date, as have select large employers that are dedicated to VBID (Pitney Bowes in particular). It is not known whether these same results are transferable to other contexts. In an era when individuals increasingly change employers many times throughout their working lives, it is likely that many employers and purchasers may never see the economic benefit of their investments in value-based care. A danger is that this dynamic may push selective applications of VBID with potential to produce gains in the short term, with lesser emphasis on applications generating longer-term results.

Ultimately, value-based purchasing is part of a much broader policy “experiment” to advance value as a remedy for spiraling health benefit costs and quality concerns in US healthcare. To date, experience with value-based purchasin and evidence about what works for which populations and contexts has been limited, drawn largely from Medicare demonstrations and a few pioneering employers and private health systems. However, small pilots and programs have shown sufficient promise to maintain public interest in these approaches. What is needed now are rigorous studies that examine the performance of value-based strategies and compare these approaches to one another and to competing approaches to cost control and quality improvement. Studies are needed to determine how to effectively optimize the impact of value-based approaches in different contexts and in combination with direct patient care management strategies.

Conducting these studies has proved difficult and sometimes controversial. Coming to consensus about common frameworks and methodologies for measuring impacts and outcomes of value-based interventions and system design, conducting analyses with less than ideal administrative data, and completing a systemic view of patient utilization and cost across and within fragmented care settings are key challenges in attempting to show impacts of value-based approaches on healthcare utilization, quality, and cost. Practical issues such as how episodes and duration of care are determined; how quality of patient care and outcomes are to be assessed; how costs, cost savings, and cost offsets are determined; and to whom costs and benefits accrue remain fundamental concerns to purchasers, payers, providers, patients, and other stakeholders. Ultimately, addressing these issues will lead to the development of a performance measurement system that incorporates care coordination—a new paradigm that is meant to incorporate data from across the care continuum.

For example, in the case of VBID, better understanding of costs and benefits—how and to whom to target incentives, at which levels of risk—is essential if these strategies are to be economically viable and sustainable. If prescription drug costs are calculated in exclusion of metrics such as hospital admissions, readmissions, emergency department use, and costs of adverse events, then the “value” of VBID may be missed altogether. When cost components are considered independently, using an uncoordinated measurement approach, the cost of increasing adherence in a prescription drug regimen for depression where the average person in the VBID program increases use by a dose per year at an additional cost to the insurance plan of $30 per member per year will show on the balance sheet as an additional cost. However, from a more comprehensive, integrated systems perspective, the cost of enhanced prescription drug adherence would be measured against the offset, or prevented, costs of averted adverse events. Are the savings from these prevented adverse events greater than $30 per member per year? Until the measurement paradigm connects these types of data in a coordinated effort, it will be difficult to measure “value.” Value is not free. However, if value-based purchasing techniques are applied with the benefit of coordinated measurement and from a systems perspective, cost control can be demonstrated—and for specific populations.

While some short-term benefits may be demonstrated in value-based purchasing, it typically takes years before improved patient outcomes and related cost savings can be realized. At this time, select value-based purchasing mechanisms have been proved effective in select circumstances under particular assumptions. Now, the challenge is to replicate these results in varied environments, as the American health system is made up of diverse markets operating under different conditions. Purchasers will need to assess if the environments and assumptions of the existing evidence are close enough to their own to merit a value-based purchasing experiment. Further, the PPACA has established a new Center for Medicare and Medicaid Innovation in CMS to test and study the most promising models of payment and service delivery. After reviewing the value-based purchasing evidence, the need for a new measurement paradigm for cost and quality that reaches across the care continuum is evident. Given the length of time from concept to evaluation results, the need for development of such a framework is pressing. The existing evidence in combination with the new revelations of pioneering purchasers and the recommended measurement framework will push forward our understanding of how cost and quality can be interrelated in the value proposition.

Author Affiliations: From Altarum Institute (GNE), Washington, DC; Altarum Institute (HK), Portland, ME.

Funding Source: None reported.

Author Disclosures: The authors (GNE, HK) report no relationship or financial interest with any entity that would pose a conflict of interest with the subject matter of this article.

Authorship Information: Concept and design (GNE, HK); acquisition of data (GNE); analysis and interpretation of data (GNE, HK); drafting of the manuscript (GNE, HK); critical revision of the manuscript for important intellectual content (GNE, HK); administrative, technical, or logistic support (GNE, HK); and supervision (GNE, HK).

Address correspondence to: Holly Korda, PhD, MA, Altarum Institute, Systems Research and Initiatives, 4 Milk St, 3rd Fl, Portland, ME 04102. Email: holly.korda@altarum.org.

1. Sebelius K. Speech at the National Business Coalition on Health Annual Meeting; November 15, 2010; Washington, DC.

2. US Government Accountability Office. Medicare Physician Payment: Care Coordination Programs Used in Demonstration Show Promise, but Wider Use of Payment Approach May Be Limited. February 2008. GAO-08-65.

3. Lurito K. Mercer Consulting Letter to Jeffrey Simms, State of North Carolina, Office of Managed Care, Division of Medical Assistance. Community Care of North Carolina Web site. http://www.communitycarenc.com/PDFDocs/Mercer%20SFY05_06.pdf. Published September 19, 2007. Accessed December 7, 2010.

4. Mechanic RE, Altman SH. Payment reform options? episode payment is a good place to start. Health Aff (Millwood). 2009;28(2):w262-w271. http://content.healthaffairs.org/cgi/content/abstract/28/2/w262. Accessed December 11, 2010.

5. Peterson LA, Woodard LD, Urech T, Daw C, Sookanan S. Does pay-for-performance improve the quality of health care? Ann Intern Med. 2006;145(4):265-272.

6. Pizzi R. CMS approves New Jersey gain-sharing demonstration project. Healthcare Finance News. http://www.healthcarefinancenews.com/news/cms-approves-new-jersey-gainsharing-demonstration-project. Published August 19, 2009. Accessed December 7, 2010.

7. Fendrick AM, Smith DG, Chernew ME. Applying value-based insurance design to low-value health services. Health Aff (Millwood). 2010;29(11):2017-2021.

8. Mahoney JJ. Reducing patient drug acquisition costs can lower diabetes health claims. Am J Manag Care. 2005;11:S170-S176.

9. Choudhry NK, Fischer MA, Avorn J, et al. At Pitney Bowes, valuebased insurance design cut copayments and increased drug adherence. Health Aff (Millwood). 2010;29(11):1995-2001.

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