Improving Value

Value Based Purchasing

Value-based purchasing (VBP) is a broad term used to describe payment approaches that hold healthcare providers accountable for the cost and quality of care they provide. This ensures that providers are not incentivized to:

  • Provide low-value services that increase spending without improving patient health outcomes, or
  • Reduce costs at the expense of patient health outcomes.

VBP models come in different flavors, varying in the level of provider accountability they entail.1 Two major categories are shared savings programs and shared risk arrangements.

Shared Savings Programs

Shared savings programs can be used in combination with a variety of payment methodologies, like fee-for-service, to reward providers for meeting quality and spending targets. Providers that meet these targets become eligible to share any savings they generate with the payer. Providers that do not meet the targets face no financial penalty. 

Evidence suggests that shared savings program have improved quality of care. Providers participating in the Medicare Shared Savings Program (MSSP) have consistently achieved high quality scores, based on an average across four domains of quality performance. (It is important to note, however, that the MSSP's quality measures have been criticized for being easy to achieve and lacking a focus on patient outcomes.) In the private sector, CareFirst Blue Cross Blue Shield's patient-centered medical home program, which pays providers through shared savings, reduced hospital admissions, length of inpatient stay, readmissions for all causes and outpatient health facility visits.

Some programs, like the MSSP, have also generated modest savings from providers spending below financial targets. In performance year 2016, 56 percent of MSSP Accountable Care Organizations spent less than their targets, with about 31 percent receiving bonuses because their savings exceeded the minimum savings rate. 

Potential drawbacks to shared savings programs include net losses due to failure to penalize providers when they overspend, continued use of fee-for-service payments that incentivize volume over value and financial targets based on historical spending that penalzie high-performing providers that are efficient and have lower levels of spending.2 

Shared Risk Arrangements

Shared risk arrangements are stricter than shared savings programs, in that they penalize providers for overspending, in addition to rewarding them for reducing costs. Evidence suggests that risk-sharing arrangements are more effective at incentivizing change than programs that do not share risk.

Bundled Payments

Bundled payments pay groups of providers a fixed sum for all of the services they provide in an "episode of care." Groups of providers who, collectively, deliver care for less than the set amount (while meeting quality standards) can share in the savings. Groups whose costs exceed the set amount are required to pay the difference, incentivizing them to provide cost-effective care. The evidence with respect to bundled payments is mixed, with some studies documenting net savings with no negative effect on quality of care. The payment strategy has been more effective when applied to surgical episodes, particularly those that are non-urgent and exhibit wide cost variation despite relatively consistent quality. Bundles have generally been less successful when applied to episodes for medical conditions and "complex" patients with co-morbidities. 

Capitation/Global Budgets

Capitated payments and global budgets are similar to bundled payments in nature, but go further by paying providers a single lump sum for all services delivered to a specific patient or patient population during a specified period of time. Studies of Maryland's all-payer rate setting program, which capitates payments for all acure care hospitals in the state, show that the payment strategy has lowered per capita hospital spending growth; reduced potentially preventable complications and hospital admissions; and lowered out-of-pocket costs for Medicare beneficiaries with no negative effect on patient experience and hospital financial performance. However, undesired effects (specifically, increased Emergency Department use) were also observed. 

Value-Based Purchasing vs. Value-Based Insurance Design

Although they sound similar, value-based purchasing is different from value-based insurance design (VBID). VBID is a clinically nuanced approach to insurance benefit design that reduces financial barriers facing consumers for services/medications which evidence shows will improve care quality or lead to better health outcomes, and creates financial barriers for services/medications that appear to provide little benefit. 



1. Plante, Jessica, "What is Value-Based Payment and What Does it Mean for Healthcare?" Christensen Institute (January 24, 2019). 

2. Murray, Roslyn, and Suzanne F. Delblanco, "The Evidence on Shared Savings: Do We Know Enough?" Health Affairs Blog (July 17, 2018). See also: Saunders, Robert, et al., "Medicare Accountable Care Organization Results for 2016: Seeing Improvement, Transformation Takes Time," Health Affairs Blog (November 21, 2017).