Value-based Purchasing: A Definition
National Business Coalition on Health’s Value-based Purchasing Council
What is Value-based Purchasing?
Value-based purchasing is a demand side strategy to measure, report, and reward excellence in health care delivery. Value-based purchasing involves the actions of coalitions, employer purchasers, public sector purchasers, health plans, and individual consumers in making decisions that take into consideration access, price, quality, efficiency, and alignment of incentives. Effective health care services and high performing health care providers are rewarded with improved reputations through public reporting, enhanced payments through differential reimbursements, and increased market share through purchaser, payer, and/or consumer selection.
Effective value-based purchasing is an external motivator for providers to lead this re-engineering of health care delivery. Many NBCH members participate in and lead quality improvement projects, but they should not be confused with demand side purchasing strategies. Value-based purchasing is necessary for clinical quality improvement, but not sufficient.
Why is Value-based Purchasing Necessary?
There are two broad dimensions to solving the health care cost challenge in the United States. The first, and longer-term, solution is disease prevention and improving population health by impacting all the determinants of health status, not just health care. As the business community has learned over the past several decades, maintaining workforce health and preventing illness – particularly chronic conditions – improves productivity and competitiveness, and can lower health care costs over time.
Value-based purchasing can help shift the paradigm of why employers offer health benefits from seeing it as an employee recruitment and retention tool, to seeing it as a chance to improve population health and increase productivity, and ultimately the employer’s bottom line.
The other broad dimension to the health care cost crisis and the solution that can generate short-term savings is to fundamentally transform the current health care delivery system. It is widely acknowledged that the current system is plagued by fragmentation, inefficiencies, wide variation in both quality and cost, and an orientation towards treatment of illness rather than population health improvement and management as the desired outcome. It is also widely acknowledged that the current reimbursement incentives for and among providers and the health insurance incentives for consumers contribute mightily to these flaws delivery system attributes. Or in the words of the famous architect, Louis Sullivan, “form follows function.”
It follows, then, that the current incentives must change as a prerequisite to health care delivery system transformation. And, this responsibility falls to purchasers of health care to implement the strategy of value-based purchasing. Purchasers buying on quality, service, and cost, rather than cost alone, will catalyze the re-engineering of health care toward a system of population health improvement and management, and a value-driven system in which ever-increasing quality of care is achieved at the lowest possible cost.
Framework for Effective Value-based Purchasing:
Element One: Standardized Performance Measurement
Value-based purchasing and the concept of rewarding high-quality health
care by public recognition, differential payments, and consumer selection is not
possible without first measuring performance.
Performance measurement should be conducted on multiple levels,
including health plans, hospitals, physician groups, and individual health care
Effective value-based purchasing should also include measurement of
consumer behaviors, particularly lifestyle choices and chronic disease
self-management. Inclusion of patient
experience in value-based purchasing is important, but more work needs to be
done on measure development before things like patient-reported functional
status can be included. While this
development is underway, employers can and should be measuring employee health
and productivity to determine if value-based purchasing strategies are
Measurement should be able to answer the question, “Is care safe,
timely, efficient, effective, equitable, and patient-centered?” Each of these six elements is critical – one
does not take precedence over another, nor should one be emphasized over
another. Measurement must be able to
provide actionable information on cost, quality, and appropriateness of
care. However, this does not mean that
complete uniformity in the use of specific performance measures is
required. What is needed is agreement on
market signals and comparison measures among providers, with the overall goal
being driving towards outcomes measures, since that is what will drive
improvements in the system.
Just as rewarding excellence is impossible without measurement,
measurement is impossible without the ability to access and aggregate data from
multiple sources. The establishment of
all-payer, all-provider community databases with administrative, claims,
clinical data, and patient survey data becomes an important priority in
generating reliable performance measurement and a critical arena for coalition
and health plan focus.
Element Two: Transparency and Public Reporting
Standardized performance measures must be converted into useful,
accessible information for purchasers, payers, and consumers to inform decision
making, particularly for payment and provider selection. Research demonstrates that regular and timely
public reporting can be a significant external motivator for supply side
performance improvement, given the importance of community reputation among
providers in a market. Transparency in
prices for health care services is a special priority. Value-based decisions cannot be made without
validated quality and price information.
Consumers and employer purchasers are hamstrung by the dearth of
information on what a health care provider or hospital charges until a procedure
or visit is complete, eliminating their ability to act as informed and
cost-conscious buyers of health care.
Employers need to speed the process of moving their employees towards
higher-value providers. Benefit design
is critical because there needs to be financial incentives for employees to
change behaviors, but employees will not be able to make these changes unless
they are provided with meaningful and actionable data. What matters to consumers are their
out-of-pocket costs, not overall health care costs to their employers or the
system, or even for a particular procedure or service. So employers and plans both have a special
interest in ensuring transparency and public reporting efforts are successful. Employers want their employees using
high-value providers (high-value both for the employer and employee), and
health plans want their contracted providers to be among the best performers in
their markets. But data for data’s sake
isn’t the answer. Employers and plans
also have a vested interest in the ongoing research around what information
consumers find useful, and how best to convey it so that consumers can be
confident in using the data.
Element Three: Payment Innovation
Successful payment innovation re-thinks how to reimburse providers
based on demonstrated performance and re-designs payment methodologies to
better align economic incentives with desired outcomes. Differential reimbursement, or “pay for
performance,” reflects the principles found in the rest of our economy that how
much we pay for something is determined by its quality. Pay for performance creates a powerful
business case, now missing, for providers to produce high quality and efficient
Fee-for-service reimbursement – the most prevalent payment methodology
– incents providers to do more individual units of care, regardless of whether
that care is efficient or effective.
Instead, reimbursing providers for bundles of services or complete
episodes of illness would reward providers that efficiently bring to and keep
patients in good health. Our payment
system reflects the fact that we pay providers for doing things to sick people,
rather than paying providers to get and keep people well. Even more ambitious
than bundled payments, if our desired outcome is population health improvement
and management, capitation may be a preferred payment methodology because
although it may blur the costs of individual services, it can greatly promote
integration and coordination of care. Improvement
in overall health status must include both clinical and social determinants of
health, and payment innovations should be able to take all of these varying
factors into account. Experimentation
with these and other payment methods is necessary for value-based purchasing to
spread and succeed.
Element Four: Informed Consumer Choice
Consumers have many choices to make in their own health and health care
journey that affect their health status and the cost and quality of health
care. These choices include lifestyle
decisions, seeking preventive services and care when sick, making treatment
decisions based on personal preferences and evidence, treatment compliance, and
selecting health care providers and – when they have a choice – health plans. A
core element of value-based purchasing is the notion of individual consumer
choice or selection. As in other
competitive industries, the desired goal is for consumers to make choices in
health and health care on the basis of value.
Through incentive programs, information dissemination, and coaching and
counseling, strategies must encourage and motivate consumers to change their
behaviors and to choose better performance at all levels of the system. Consumers will achieve positive results related
to lifestyle choices and treatment decisions, while providers will achieve
increased market share and positive differential payments. Regarding consumer selection of health care
services and providers, we must keep in mind that what matters to consumers is
their out-of-pocket costs, so strategies to help consumers make informed
decisions must focus on this information, and not on the costs of procedures or
services (especially those that are covered benefits under a health plan), or
the costs that incur across the health care system as a whole.
Strategies to influence informed consumer choice include:
• Employer- and community-based health and
productivity programs to encourage health lifestyles and behaviors that keep
people out of the health care system;
• Health care quality information dissemination,
particularly through employer-employee communication channels and health plan
• Value-based insurance design (VBID), which tiers
medical treatments and/or providers by evidence of efficacy and efficiency. Financial incentives then steer patients
toward high-value treatments and providers (e.g. no or reduced co-pays for
prescription medications for chronic disease management), and away from low
value treatments and providers (e.g. high-cost imaging studies when not
indicated by the evidence).
Savvy employers and health plans
both know that buying health care on price alone is a quick win, and might save
some money in the short-term, but is neither a sound nor sustainable strategy
in the long run if we want to bend the cost curve. Value-based purchasing is the necessary
catalyst for transforming the health care delivery system and getting us to the
goal of a high quality and affordable system.
Coalitions, employers, and health plans all have roles and
responsibilities for advancing value-based purchasing. No one employer, coalition, or health plan
can succeed alone; we need to work together on each of the four elements if we
are to achieve the improved health care, improved population health, and