New Marketplace

Payment and Delivery-System Reform — The Next Phase

Article · October 2, 2018

After nearly a decade of experimentation with value-based payment (VBP), U.S. health care payers, providers, and purchasers are confronting uneven adoption of new care guidelines, modest early results, and still-unacceptable gaps in spending and quality. In determining what comes next, we believe it’s important to extrapolate from the lessons of these experiences to guiding principles for designing new approaches. It’s also essential to recognize that to truly redesign a system, one has to take a holistic approach and move multiple levers in concert, rather than fiddling with individual factors serially and hoping for a coordinated effect. Though we focus on tactics for private payers to consider, many of these principles and a holistic strategy could also be adapted to Medicare or Medicaid contexts.

We have observed, for example, that providers vary greatly in their commitment to VBP, appetite for financial accountability, and capability to improve care.1 Average results for a given VBP program therefore offer only limited information about the potential impact of initiatives involving partnering with selected providers. Payers and purchasers would do better to identify high-value providers with consistently strong performance and both favor them through mechanisms to increase their patient volume — such as narrow- or tiered-network products — and reward and ensure their continued participation by devising a sustainable business case within VBP arrangements. Unlike most current high-value networks that focus nearly exclusively on unit prices, value-based networks could favor providers on the basis of both quality and management of total health care spending. Smartly allocating resources and attention to high-performing providers, combined with exerting consistent pressure on fee-for-service prices and regulations, could induce greater competition and motivate lower-performing providers to focus and improve. Moreover, the risk in not differentiating among providers is that high-value providers who have taken political risks and made substantial management and infrastructure investments in value-based payment may question those investments if they don’t see proportionate returns. Relying solely on providers’ instincts for “doing the right thing” cannot be the long-term strategy for reform.

Most important, high-value narrow or tiered networks and complementary benefit designs would address the limits of what even committed and capable providers have been able to achieve in wide-open networks. For example, Medicare and the majority of patients in commercial accountable care organizations (ACOs) are insured through preferred-provider organizations, with few explicit tools to steer referrals or ensure that patients get care from ACO providers. Though true narrow networks would be preferable to tiered networks because they’re simpler to explain and differentiate, tiered networks could probably accommodate more cautious consumers and employers. Payers may therefore choose to design tiered networks as well, but with steep cost-sharing differentials.

Financial incentives alone, however, will probably be insufficient to motivate true patient engagement. There is a graveyard full of narrow-network products that never garnered the desired enrollment numbers. We believe that providers and payers need to offer patients more positive reasons to use high-value providers. Payers could build enticements — such as digital or other services that make care more convenient and responsive to patients’ daily realities, to address not just clinical needs but also expectations for customized care — into the capabilities that they expect providers to develop in order to participate in the network, and adjust them over time in collaboration with providers, purchasers, and patients as their collective vision of care delivery evolves. Payers could also directly invest in or otherwise promote the entry of new, disruptive providers who offer innovative patient-centered care to help jolt other providers into action. The promise of enhanced patient experiences could make product features such as required selection of a primary care provider (PCP) more appealing, as part of a pact to build a more constructive, rewarding care experience. The proof will then be in the actual experience that providers who are given such incentives can offer their patients.

Of course, even high-value providers need appropriate motivation to perform well. Most VBP arrangements still determine providers’ gains or losses on the basis of their ability to improve on their own baseline spending performance, with adjustments for quality. But those formulas, if applied in perpetuity, would push providers who are already efficient or successful in generating savings into an unwinnable situation. Although it may be possible to continuously improve on spending performance, the targets set to measure performance should be based on regional or other market-driven trends, not an individual organization’s trend, whose use will ultimately punish providers for good performance. Payers can offer a sustainable business case that includes financial rewards for both “most valuable player” and “most improved.”

In designing such a model, it’s important to acknowledge another shortcoming of many VBP arrangements to date: they’ve placed nearly all accountability for outcomes on the shoulders of PCPs. Though promoting and supporting primary care are critical policy goals, it’s not realistic to expect PCPs, given their limited financial and political leverage, to optimally drive efficient care on their own. PCPs wield influential prescribing, diagnostic, and referral pens, but theirs are often not the most powerful voices in decisions about resource allocation or investments in care infrastructure or process change. When PCPs and specialists belong to different organizations, PCPs may have even less influence over the use of specialty services, unless they’re affiliated with a practice or health system that is large enough to command attention through referral volume. We believe that this limited influence has contributed to the lack of a clear impact of primary care–focused VBP initiatives such as patient-centered medical home and ACO programs. Though specialists account for roughly similar percentages of ACO providers and of the general physician population, most ACOs seem not to engage their specialists nearly as deeply as they do their PCPs in population health management.2 If payers more assertively and directly engaged specialists in such VBP arrangements as bundled payments or new reimbursements for desirable services such as e-consults, they would have incentives to collaborate with PCPs. Payers can achieve that engagement either by directly contracting with specialists in VBP arrangements or by facilitating incorporation of such incentive structures into ACOs’ compensation approaches.

Payers with fortitude — and large market shares — could also begin to address the underlying price distortions in physician fee structures that lead to the lopsided provision of high-margin services and the incentives to grow volume in those services rather than focus on the total costs of care and outcomes for a population. Current pricing distortions are insidious: they underpin the way spending targets are set in all VBP arrangements, including Medicare Advantage plans and commercial ACO or capitation programs, which follow Medicare relative-pricing structures closely. Unless payers address these structural issues, they will always limit what VBP can achieve in reducing spending and hamper providers’ investments in creative care-delivery improvements, because plans will continue to pay unjustified sums for some services and not enough for other, higher-value services. The United States spends approximately 7% of each health care dollar on primary care services, for example, as compared with more than 20% in countries with better health outcomes and lower spending.3

There are, of course, lingering operational challenges to the success of VBP programs, including accurate, comprehensive, and timely data sharing; methods of attributing patients to providers that allow them to accrue sufficiently large populations to justify their investments and work; and technical assistance that is “right-sized” to an organization’s needs and goals.

Continuing with piecemeal solutions to these design issues is inadvisable: they are intimately interrelated, and it’s hard to solve one without considering the implications for the others. If payers align with one another and pursue a range of complementary solutions simultaneously, they may be able to avoid many more years of ambiguous results — and the disengagement of providers and purchasers that invested in VBP in good faith but cannot justify continued commitment if all key stakeholders don’t make critical trade-offs to build a holistic solution.


From Provider Alignment Solutions, Anthem (H.P.), and the Brookings Institution (P.B.G.) — both in Washington, DC; and the Schaeffer Center for Health Policy and Economics, University of Southern California, Los Angeles (P.B.G.).

1. McWilliams JM, Hatfield LA, Chernew ME, Landon BE, Schwartz AL. Early performance of accountable care organizations in Medicare. N Engl J Med 2016;374:2357-2366. Full Text | Web of Science | Medline | Google Scholar
2. Dupree JM, Patel K, Singer SJ, et al. Attention to surgeons and surgical care is largely missing from early Medicare accountable care organizations. Health Aff (Millwood) 2014;33:972-979. CrossRef | Web of Science | Medline | Google Scholar
3. Koller CF, Khullar D. Primary care spending rate — a lever for encouraging investment in primary care. N Engl J Med 2017;377:1709-1711. Full Text | Medline | Google Scholar

This Perspective article originally appeared in The New England Journal of Medicine.

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