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Value-based Purchasing: A Definition

From the 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.

A 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 practitioners.   

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 effective. 

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 services. 

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 websites;      
• 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 reduced costs. 

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 National Business Coalition on Health.
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Payment mechanism in which a provider is paid a fixed rate per person per month, usually prospectively, to cover all care within a specified set of services and administrative costs without regard to the actual number of services provided.
A chronic condition is a disease that has one or more of the following characteristics: (1) Is permanent; (2) Is progressive if unmanaged; (3) Is caused by nonreversible pathological alteration; (4) Requires special training of the patient for rehabilitation, self-monitoring, and self-management; or (5) May require a long period of supervision, observation, or care.
Health care services that are aimed at preventing complications of existing diseases, or preventing the occurrence of a disease. Recommended services may vary by age and gender. Examples of preventive services include physical exams, immunizations and certain cancer screenings.