New Marketplace
Navigating Payment Reform

Changing Health Care Compensation by Rewarding Value-Based Outcomes

Article · November 20, 2017

Virtually every conversation about health care delivery and financing today includes a discussion about the need to change from volume-based incentives to value-based incentives in order to improve patient outcomes and move from the unsustainable cost structure of fee-for-service reimbursement. However, current payment methodologies do not support behaviors that lead to improved quality and efficiency in health care delivery and financing.

For these reasons, Arkansas Blue Cross and Blue Shield has created the Value-Based Compensation Initiative (VBCI), a 5-year plan designed to facilitate the evolution from volume-based incentives to value-based rewards. Under this new model, funds that formerly represented per-service profitability for providers will be used to reward value as defined by stakeholders who fund health care delivery.

The Challenges of Changing Health Care Payment Models

In my experience, almost all stakeholders admit that the cost of fee-for-service compensation is unsustainable. The problem is that few, if any, payers have rationally explained how value-based payment will work or how we will get from where we are to a very different compensation model that rewards value instead of volume.

In rural markets such as those in Arkansas, provider business models are not designed to accept payments in a manner that is significantly different from what currently exists. If payers were to attempt to force providers to accept prospective global or bundled payments, much disruption would undoubtedly result. Furthermore, if Arkansas Blue Cross and Blue Shield does not lead the market in this change from volume to value, we risk the possibility that our position in the new market will be commoditized, and a standard will be imposed on the system by outside sources — probably public programs — requiring us to be reactive.

Holding Down the Rising Cost of Health Care

Each year, Americans are forced to divert money intended for other purposes toward paying for health care because the rate of increase in the cost of health care is higher than the average growth of income. It is generally accepted that this trend cannot continue, and 80% of the members who terminate coverage with us each year are not going to a competitor, but are rather joining the ranks of the uninsured unless a highly subsidized alternative can be found. Such alternatives generally are financed through a fee-for-service methodology, and at some point the subsidies will not keep pace with the rising cost, either. Our ultimate goal is to hold the rate of increase in the cost of health care at or below the rate of growth of the economy. This goal represents an opportunity of monumental proportions.

How the Value-Based Compensation Initiative Works

Arkansas Blue Cross has announced its intention to change the way in which it rewards providers by taking dollars that are already available in the system and reallocating them to reward high-value outcomes (e.g., quality, efficiency, patient satisfaction). This approach involves incrementally reducing fee-for-service payment rates to a level that removes profitability from the provision of units of service and uses the savings to fund a “value pool”.

Arkansas Blue Cross and Blue Shield Value-Based Compensation Model

  Click To Enlarge.

Individual providers will earn value payments according to a scoring system that analyzes their practice patterns. This scoring system is based on an algorithm, created by RowdMap, that incorporates 40 years of research on cost variability and quality from the Dartmouth Atlas, as well as measures created by Choosing Wisely’s 72 participating medical societies. Provider scores will also include a focus on the submission of information for the purpose of population risk identification and quality of care, important factors in public program funding. Performance scores are the basis for redistribution of health care dollars to high-performing providers, resulting in reduced payment for low-value care.

The end result will be a very different value proposition for both the provider and the patient. In the future, a successful health care business model will be achieved not by providing a high volume of services, but rather by meeting goals and expectations regarding high-quality outcomes, patient-satisfaction measures, and the elimination of services that are preventable, redundant, or of low value to patients. Successful financial models of the future will be achieved by accessing a stream of revenue (i.e., the value pool) that is not directly tied to the consumption of resources.

Primary Care Value Pool

Primary care providers that are currently at the low end of the compensation model because of their reliance on evaluation and management-code reimbursement will receive proceeds from the value pool for creating successful patient-centered medical homes. While unit reimbursement for the provision of services will be reduced for primary care providers to the same degree as it will for all other providers, meeting agreed-upon population management measures and achieving high value scores will be rewarded by increased per-member per-month care coordination fees.

The proceeds will allow primary care providers to build the infrastructure required to manage their populations more efficiently, ensuring that appropriate resources are matched with patient needs. As a result, this approach will eliminate the current incentive to see a high volume of patients, which not only creates pressure to double-book appointment times and establish block scheduling, but it also significantly reduces the amount of time that a provider can spend with a patient.

Specialist Value Pool

Specialist access to the pool will be based on expectations related to quality, resource utilization, appropriateness of care decisions, pharmaceutical choices, and admitting patterns, among other things. A specialist’s ratings will be shared with primary care physicians because each PCP’s value rating will be impacted by the value rating of the referral specialist selected.

We will continue to track and report on specific episodes of care, and the specialist’s performance during each episode will be integrated into the formula that will be used to determine his or her access to the value pool. Under this new compensation model, high-performing specialists will have the opportunity to do better financially than low-performing specialists and specialists with lower value scores will receive less payment per service than they would in a traditional fee-for-service compensation model.

Hospital Value Pool

Hospital access to the value pool will be measured in much the same way. Quality and efficiency will be measured, as will the appropriateness of admissions and the elimination of preventable admissions, readmissions, and emergency room episodes. Hospital performance ratings will impact the value ratings of admitting physicians, making admission patterns more important than in the past.

Redistribution of Health Care Dollars

Each of these pools initially will be separate and distinct, resulting in a redistribution of payments that will be favorable to providers who perform well according to the expectations of the stakeholders funding health care and potentially unfavorable to those who do not. While all providers will have the opportunity to achieve better financial results than in the past, it is likely that there will be winners and losers. No provider who seeks to maintain “business as usual” by maximizing the benefits of fee-for-service compensation will be able to be successful under the new model.


In the early stages, the concept has been objectively received by providers, who are willing to continue the discussions in an attempt to make the model work. Employers who have been introduced to the concept have been enthusiastically supportive of the idea of trying to hold the increases in health care costs closer to the rate of inflation. Ongoing refinement is necessary as the program evolves to ensure fairness and the ability for all stakeholders to achieve success.

Providers are viewing this approach as reasonable and certainly better than doing nothing and seeing fee-for-service rates cut to an unsustainable level. If that happens, there is a high likelihood that the market will move to a single-payer system that most likely will not be modeled specifically to the needs of a state like Arkansas. Some of the more forward-thinking providers and clinically integrated systems have asked us to offer an accelerated option (similar to the track options in Comprehensive Primary Care Plus [CPC+ Plus]), allowing them to earn a higher level of value payment faster than the strategy assumes. It is likely that we will offer similar options.

Providers also seem to find our new model reasonable because our performance measures are aligned closely with those of the Medicare Access and CHIP Reauthorization Act (MACRA), and because success under these measures likely will relate to success under the Merit-Based Incentive Payment System (MIPS). MACRA clearly states that CMS’s initial goal was to move 30% of Medicare reimbursement to value-based compensation by the end of 2016, with a future goal of 50% by the end of 2018. The fact that most significant market payment methodology changes (e.g., diagnosis-related groups [DRGs] and resource-based relative value scales [RBRVS]) have been driven by Medicare should be a clear indication to the industry that the handwriting is on the wall for the move from volume to value.

This article originally appeared in NEJM Catalyst on October 26, 2017.

Call for submissions:

Now inviting expert articles, longform articles, and case studies for peer review


A weekly email newsletter featuring the latest actionable ideas and practical innovations from NEJM Catalyst.

Learn More »

More From New Marketplace

Hospital Readmissions Reduction Program (HRRP)

Medicare’s Hospital Readmissions Reduction Program was established by the ACA to combat excessive and costly readmissions. Learn about HRRP penalties, criticisms, and strategies to reduce readmissions.

Conceptual Framework for Evaluating Specialty Care Partnerships

How to Engage Specialists in Accountable Care Organizations

Should an ACO insource or outsource specialty care? Here’s a framework to help leadership decide.

Illustrative Examples of Health Policies, Possible Goals, and Relevant Evidence Base

Evidence-Based Health Policy

Having a clear framework for characterizing what is, and isn’t, evidence-based health policy is a prerequisite for a rational approach to making policy choices.

U.S. and Canadian Prices of Some Generic Drugs with U.S. Prices That Recently Increased by 1000% or More

The Price of Crossing the Border for Medications

The health and safety risks faced by the many Americans who cannot afford medications necessitate consideration of alternative strategies to provide less expensive medications.

Economic Investment and the Journey to Health Care Value — Part III: Health Care Purchasers

Early successes suggest that value-based purchasing programs can both transform employer-based health care and have a powerful and lasting impact on the economic strength of U.S. businesses.

Single-Payer Health Care Is the Favored Outcome of Future Payment Reform

Survey Snapshot: Deep Frustration with the Current Payment System

Many NEJM Catalyst Insights Council members are frustrated with the pace of value-based payments and expect single-payer health care to gain traction — though maybe not soon enough.

Value-Based Payment Models Payer-Provider Contracts Value-Based Arrangements

Economic Investment and the Journey to Health Care Value — Part II: Health Care Payers

Payers’ broad scale of investment in value-based arrangements makes a compelling case for the importance of sustained efforts to identify effective value-based payment models.

Four Principles for Navigating Payment Reform

The changes needed in health care are happening way too slowly. Health care stakeholders must insist on value in what they pay.

Economic Investment and the Journey to Health Care Value — Part I: Health Care Providers

Early evidence suggests that value-based payment and care delivery can transform our health care system, but providers must increase the momentum for this positive change.

Shift Toward Value-Based Payments in the Industry and at Organizations Is Accelerating

New Marketplace Survey: What’s Next for Payment Reform?

As health care reform struggles to gain traction legislatively, health care professionals report that payment reforms continue to move forward at a moderate pace, and indeed are essential to achieving the Triple Aim.


A weekly email newsletter featuring the latest actionable ideas and practical innovations from NEJM Catalyst.

Learn More »


Value Based Care

220 Articles

Harnessing Emerging Information Technology for Bundled…

A four-part framework developed by physicians at Partners HealthCare provides a stepwise process for assessing…

From the Commonwealth to Obamacare: Reflections…

The former Executive Director of the Commonwealth Health Insurance Connector — a model for the…

Platforming Health Care to Transform Care…

Health care leaders need to focus less on ownership and control of the delivery process,…

Insights Council

Have a voice. Join other health care leaders effecting change, shaping tomorrow.

Apply Now