Value-Based Reform

Cochran THCBThe U.S. Department of Health and Human Services’ recent announcement to move the Medicare program toward value-based payments is among the most promising recent developments in health care.

While changing the way we pay for care will not be easy, we believe that shifting away from fee-for-service to value-based payments could be a catalyst to a better, more affordable health care system in our country.

Three Benefits of Paying for Quality
There are numerous potential benefits to paying for quality rather than quantity, including the three we want to focus on today.

  1. We believe this payment shift has the potential to accelerate progress toward achieving the Triple Aim – defined as better individual care, better population care, and lower cost.
  2. We believe the payment shift by Medicare will accelerate the transition to value-based payments among commercial insurers – a major benefit to employers in terms of improved health for employees and greater affordability.
  3. We believe value-based payments have the potential to help slow – and possibly reverse – the epidemic of physician burnout in the United States, particularly among primary care doctors.

Payment Reform and the Triple Aim
The Triple Aim has become the Holy Grail for countless health care organizations throughout the country, yet fee-for-service payment systems militate against all three of the aims.

  • Fee-for-service incents physicians to increase the volume of care for individual patients.
  • It does not reward physicians for excellent population care – for keeping patients healthy. Fee-for-service does not pay for what people want most: health.
  • It surely does not help drive down costs.

There is a widespread belief among health care stakeholders that fee-for-service is inherently wasteful; that by its very nature it expands the volume of care and can lead to unnecessary and inappropriate care.

Estimates of wasted funds range from 10 to 30 percent of health care spending in the United States. (During a recent Institute for Healthcare Improvement session, IHI president emeritus Don Berwick, MD, said it might be as high as 40 percent.) Clearly, waste of health care resources is antithetical to all three aims. (One indication of the waste calculus comes from a comparison between spending in the United States versus Switzerland, which has an excellent health care system. Between 1980 and 2010, the cumulative difference in health spending between the two countries was $15.5 trillion.*)

Payment reform and employers
Payment reform can also change the way employers think about health care. Under fee-for-service, employers spend huge sums of money for sick care for their employees. Under value-based payments, provider groups would have a financial incentive to keep employees as healthy as possible.

According to The National Business Coalition on Health, a nonprofit organization of “purchaser-led health care coalitions … dedicated to value-based purchasing of health care services through the collective action of public and private purchasers,” the impact would be significant. The coalition takes this position:

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.

When employers shift to focus on maintaining workforce health and preventing illness, all parties benefit.

Payment Reform and Physician Morale
Widespread burnout among physicians in the United States, particularly primary care doctors, is well documented. Increasingly, physicians seek liberation from the constraints of fee-for-service in order to focus on the overall health of their patients. Value-based payments allow doctors to do exactly that.

Payment reform leads to a redistribution of work among the team of caregivers to leverage the training and licensure of every member, including nurses, behavioral health specialists, medical assistants, clinical pharmacists, and others. Physicians lead the team managing populations of patients. Physicians are also freed to focus on the particular challenges complex patients present; patients requiring the diagnostic skills only a physician can provide.

At Kaiser Permanente we have being working under a value-based payment model for 70 years, and it has enabled investment in tools, teams, and templates that are built and maintained by our physicians.

This may well be the tipping point in our nation’s complex, often difficult, health care journey. Our nation is benefitting from thoughtful, decisive leadership from Health and Human Services and the Centers for Medicare and Medicaid Services. Secretary Sylvia Matthews Burwell; Assistant Secretary for Health Karen DeSalvo, MD, head of the Office of Health Reform; Meena Seshamani, MD; and Patrick Conway, MD, CMS chief medical officer who leads the Centers for Medicare and Medicaid Innovation; are providing the kind of thoughtful vision and leadership our country needs at this time.

The new Learning and Action Network they are creating is an opportunity for many innovative health care organizations to come together to share innovative ideas and forge a path toward the Triple Aim. Our team at Kaiser Permanente is ready to help.

 Jack Cochran is the President of the Permanente Foundation.

31 replies »

  1. “Sorry should say fee for service has NOT done particularly well…”

    Capitation has done worse. But that should not be the issue that divides us. The important issue is that the patient is free to choose which one type of insurance is best for him. That requires the insured to have control of the tax benefit. I am sure that if free choice prevailed that would improve both systems. Today so called FFS is not voluntary and the insurers are providing insurance of the type permitted by government instead of what the patient wants.

  2. Sorry should say fee for service has NOT done particularly well…

  3. Peter I hear you though the premise is not to make life better for docs — it’s to improve individual care, population care, reduce cost, and to make professional life more meaningful/rewarding for docs. The goal is the Quadruple Aim, defined by Dr. Tom Bodenheimer. When you combine the IHI inspired Triple Aim with Bodenheimer’s addition of physician/staff satisfaction you have a clear goal that decisions along the way can be measured against. Fee for service has done particularly well at advancing any one of those goals never mind all three. So trying capitated payments, bundled payments, reference pricing, etc. Here is a link I suggested above — worth taking a look at. Not perfect, of course, but clearly moving in the right direction re quality/cost in global payment contract.



  4. “We believe, We believe, We believe.”

    Yes, but will it reduce prices and lower costs? When the premise is to make life better for docs I don’t think we’re talking less money.

  5. Whatever value is, it has got to do with hospitals and nurses and labs and pharmacies and imaging and insurers and Medicare intermediaries, and waiting times and hours of operation, and parking facilities, and costs and forms and fifty other factors,. too. Not just docs and patients.

    To rearrange payment schemes for only the MD component of the above does not make any sense.

  6. Aside from the reality that a “free market” is a charming fiction, there’s an intractable “No True Scotsman” problem with Libertarians. At their most extreme and vocal they deny the very existence of a Commonwealth. There IS no such thing as “society,” just an endless aggregation of economically autonomous transacting dyads.

    Again, fatuous.

    “I don’t believe that a market based on voluntary exchange between a provider and a purchaser suggest suspension of the rule of law.”

    Show me where I claimed that to be the case. Talk about “Straw Man.” The fact that many a “voluntary exchange” transaction goes perfectly well does not imply that they all do. The empirical evidence to contrary is rather lengthy and voluminous. I’m all for maximal “freedom” and minimal “government,” but “minimal” is necessarily rather large, relatively speaking, in a world of 7 billion people.

  7. Bobby,

    I like the Starbucks example.

    Bobby and Cisisivus….re your thoughts about free markets are straw man arguments….I don’t believe that a market based on voluntary exchange between a provider and a purchaser suggest suspension of the rule of law. I much prefer my arrangements with my lasik provider, my dentist, my architect, my plastic surgeon (should I want a face lift) and my attorneys than one in which I have to enroll with a medical provider whose pricing model is similar to your Starbucks example.

  8. The problem arises when the values are in conflict, and where the power to resolve those conflicts rests. If value is loosely defined and perspective based, the payment system will continue to feed those who hold the most power to influence the definition. So far, this is based on consolidation. As long as patients remain fractured and atomized, as they are in our current system, they will remain on the short end of the stick while the giants battle it out.

  9. Agree.

    There’s no such thing as “free markets.” Human affairs get regulated one way or another, given that we disagree about nearly everything all the time, and interpersonal power dynamics (and ethics) are intractably asymmetric. “Private markets” require, at the end of the day, rational independent regulation backed by the force of law, lest they descend into the inevitable Gresham’s Dynamic swamp, a lesson we seem to never fully learn (Uber and its kin being the current poster children).

    Libertarian theory could not be more fatuous.

    “If there were only one man in the world, he would have a lot of problems, but none of them would be legal ones. Add a second inhabitant, and we have the possibility of conflict. Both of us try to pick the same apple from the same branch. I track the deer I wounded only to find that you have killed it, butchered it, and are in the process of cooking and eating it.

    The obvious solution is violence. It is not a very good solution; if we employ it, our little world may shrink back down to one person, or perhaps none. A better solution, one that all known human societies have found, is a system of legal rules explicit or implicit, some reasonably peaceful way of determining, when desires conflict, who gets to do what and what happens if he doesn’t.”

    Friedman, David D. (2001-07-02). Law’s Order: What Economics Has to Do with Law and Why It Matters (p. 3). Princeton University Press – A. Kindle Edition.

  10. In reflecting on this post two things become increasingly clear. First, value is in the eye of the beholder. Whether it be patient, care-giver, physician, health plan or government – we are on a path to define what we, collectively, want in from our healthcare system. This is a path we at KP have been on for quite sometime. Secondly, learning and informed innovation are a critical and important first step.

  11. Catch wise, Paul – the legal profession and its ffs model is dissolving as you type – the model is as untenable there as in medicine.

    “Free markets” ideologues are the worst sort of delusional frauds. Ignore them. Ridicule them. They deserve it.

  12. Margalit on Value-Based Payment.


    “Whether you like it or not health care financing is transitioning from payment for discrete services to global payment for value. Whether you agree with this trend, or comprehend its meaning, if it has one, is largely irrelevant in the short term. The government of the United States, the Chamber of Commerce, both political parties, all health care stakeholders, and even your own medical associations are fervently supporting, and actively promoting, paying you for value instead of work.

    Value is defined by a set of statistical metrics calculated across the spectrum of services you provide, and some that you don’t. So for example, if Starbucks were to be paid for value, they would get say, $2 for a venti latte, plus a fluctuating amount based on the average temperature of their lattes, the ratio of espresso to milk, the percent of air in the foam, the time from door to latte, etc., over a representative period of say 90 days in year one and maybe 12 months in subsequent years. To enable latte valuation, all espresso machines would be fitted with special monitors interfaced to local cash registers and to centralized centers of value. The exact value-based bonus would be calculated by analyzing the statistical distribution of metrics across all coffee shops in the country, adjusted for regional and demographic variation of their clients…”

  13. Peter thank you — a vy good question. Jack and I believe a shift to value based payments is most valuable for patients first and foremost. One study is not definitive of course, but a Harvard Medical School team looked at the Alternative Quality Contract created by BCBS MA and found an improvement in quality and affordability. Their article published in NEJM stated that “Compared with similar populations in other states, Massachusetts AQC enrollees had lower spending growth and greater quality improvements after four years.” Here are a couple of links — first to a summary of the study findings and second to youtube of authors discussing the research.



  14. Agree with much of the replies on burnout and the payment system. FFS is not so much the issue as is the disparity built within it, and the lack of acknowledgement of many of the numerous services Primary Care physicians provide. Unless a value based system vanquishes much of the administrative harassment, it will not help physicians or patients. The PCMH made similar promises about burnout and physician quality of life…and we see how that is going.

  15. “Physicians lead the team managing populations of patients. Physicians are also freed to focus on the particular challenges complex patients present; patients requiring the diagnostic skills only a physician can provide.”

    Yes, the old “simple patients to the NP, complex ones to the doc.”

    Nothing will improve physician morale more than a schedule filled with demented, febrile 90 year old patients from the nursing home with 17 med refills, 12 chronic problems, 4 new concerns, and six pre-auths.

  16. From the February MIT Bioinnovation conference panel discussing payment models:
    “Five years after the passage of The Patient Protection and Affordable Care Act, designed to change the way health care is delivered and paid for in the United States, accountable care organizations remain an unproven approach to tying payments to lower costs and quality care. Then again, the model hasn’t been disproven either. Growth in the number of organizations was significant. Results have been mixed.”
    “It’s no secret that you need a large amount of capital to go after something like this appropriately,” Dunkelberger said. “One of the things I constantly preach is that you can’t be cheap going down this route.”

  17. And, by the way, is it the “fee for service” system that’s burning out doctors?
    According to Medscape the way docs are being paid is less important than all the efforts (EMR, PQRS,MU, now ICD-10) they have to put forth to get paid.
    Are any docs at KPH burned out?

  18. As Peter pointed out, this should be about the patient’s perceived “value”, no?
    In the good old days, patients voted with their feet if they didn’t like the doctor. Now with third parties paying the bill, and narrow networks, patient’s choices are limited. What happens if a patient likes a doc and has a good relationship, but the doc can’t make all the “quality measures” because the patient simply chooses not to, as is their choice.
    I had a patient years ago I would see at least 2-3 times a year for bronchitis. He and I had a good relationship and liked to joke with each other. I continued to encourage him to quit smoking every time he came in.
    Once he asked “Doc, how long am I going to have to come in here several times a year to pay to see me for my bronchitis?”. I said “John, I’ve been telling you the smoking is not helping this”.
    –” But doc, I like smoking, and I’m not going to give it up!”
    –“OK then, you can plan on seeing me regularly several times a year for bronchitis, and hopefully that’s the worst that will come of your smoking.”
    The patient had made his choice, but he and I got on well about many other aspects of his health, so why would either of us fire each other because the patient did not choose to quit smoking?
    At what point do the “quality measures” and documentation become more important than the patient’s wishes?

  19. “At Kaiser Permanente we have being working under a value-based payment model for 70 years”

    So KP enrollees are allowed to adjust their premiums based on the perceived value of the medical care they receive?

    One would assume what is good for the goose is good for the gander . . .

  20. The greatest beneficiaries are the consulting firms (including EHR implementation consultants), the HHS bureaucrats and the legions of lobbyists who try to shape things in DC…..the “value” movement has been laying golden eggs for these players since 2008….and it will continue to do so for years to come.

    Fee for service (including variations where the provider bundles services) have worked for all the other professions….all based on a voluntary exhange between a professional and a willing purchaser….and it has worked in health care where high deductible plans are linked to health savings accounts.

  21. Value based: Tell us how to judge quality. You can’t unless you can put it into a check box.

    Capitation incents physicians to deny necessary care, certainly a lot more dangerous for the patient than fee for service. But, the profits can be very large for those that profit off of capitated care. In a capitated system delay in care means profit. A sick patient that dies prematurely mean profit.

    “At Kaiser Permanente we have being working under a value-based payment model for 70 years”

    Have you? Why does Kaiser insist so many settled cases against them are sealed?

  22. In order to not appear illogical, proponents of value based purchasing should also promise the following:

    1. To lead political efforts to replace the ICD-10 by a markedly simplified value based-fee schedule, similar to DRGs or capitation or other bundling schemes that you favor. Give us your ideas here.
    2. To propose studies that would scientifically compare value-based purchasing, as in Kaiser, with fee for service plans, similar in all other respects. These studies should compare length of stays, disease incidences, survivals, costs of common clinical illnesses.

    Indices of quality and cost are to be included in these studies.

    3. You should also promise to push value-based purchasing in pharmacy, hospital services, PT, OT, and dentistry for the more diagnoses.

    Thus we really do not have to guess about the value of value-based purchasing of medical services. We can discover its superiority without guessing; let’s make it evidence-based.

  23. I worked at KP not so long ago.

    The tensions between unions and management were a fact of life, and a major cause of stress. The docs were caught in the middle in the battles between management and the nurses and PAs.

    If I can’t hand something off to somebody on my team (I get the team concept), I don’t get how this is going to work ..

  24. Charlie

    A follow up. A lot of physicians may ask about the “and this make you (the doctor’s) life easier ” part. As a matter of fact, I was on the phone this morning with a doc at another system and this post came up.

    His reaction was “Really? You’re making my life easier? Prove it.” He went on to say, “What they’re doing is making the system’s life easier.”

    I get this is part of the master plan. Can you talk a little bit about how this works? How can quality programs make a doc’s life easier on the front lines? What sort of plans does KP have in place to transition to more team-basd care topics. This might be a good topic for a future post.

  25. The impact that value-based payment systems will have on health care quality and costs will depend on some things like valuable to whom, who defines value, how is value measured, and will payment be enough to support valuable care.

    These details are key – but not even mentioned in this article.

    As far as I am concerned, any discussion of the potential impact of value-based payment on health care and patients (it’s supposed to be about them, remember?) that does not start with explicit information about quality for whom, defined by whom, and how measured is – without quality.

  26. Yup, simply look at the scanning in the magnet and CT donut that gets done on members of Congress and the Executive offices to confirm the quality based initiatives!

    What is good for the goose is good for the gander, no?