The Journey of Value-Based Purchasing: Opportunities and Challenges



Over the past decade, many healthcare payers have sponsored “value-based purchasing” initiatives that directly or indirectly impacted case management programs. Value-based purchasing (VBP) programs are designed and implemented by government agencies, employer groups and others to promote both quality and value. defines value-based purchasing as follows:

Linking provider payments to improved performance by healthcare providers. This form of payment holds healthcare providers accountable for both the cost and quality of care they provide. It attempts to reduce inappropriate care and to identify and reward the best-performing providers.

VBP programs are often geared to “providers” such as hospital systems, but also can be implemented for different types of “payers” such as health plans.

Rather than addressing population health needs based on the status quo, VBP programs are geared to provide a better “return on investment” or ROI. Essentially, VBP seeks to reward excellence in healthcare delivery by linking provider payments to improved performance, sometimes referred to as “pay-for-performance” (“P4P”) initiatives. Clinicians and their practices are rewarded when implementing more effective healthcare interventions with stronger reputations through public reporting, enhanced payments through differential reimbursements and increased market share.

VBP initiatives hopefully also help patients enjoy better “user” experiences and improved clinical outcomes. In addition, employers and benefit administrators can help improve employee health and productivity, and hopefully experience some financial improvement in the company’s bottom line.


Historically, the U.S. healthcare system relied on fee-for-service (FFS) compensation, where reimbursements were provided based on the volume of services regardless of the resulting patient outcomes. Health maintenance organizations (HMOs) were then introduced in the 1970s with the goal of improving quality and lowering costs. HMOs and other managed care arrangements offered an array of tools such as more covered preventive medical benefits, participating provider network requirements, capitation as a payment method, utilization review based on payer “medical necessity” guidelines and other interventions. Unfortunately, managed care’s reputation was not as positive as many policymakers had hoped due to its propensity to ration care and sometimes lower clinical outcomes.

Another ongoing point of contention was the fact that the healthcare dollar has been consuming a larger and larger percentage of the Gross Domestic Product (GDP) over the years (e.g., 1960 = 5% to 2000 = 13.3%). Concerns have been expressed that the larger pool of healthcare expenditures limits funding for essential programs for education, infrastructure, social security and other necessary activities.

As a result of these trends, something new needed to be tried. This call to action in part has been answered by the rapid expansion of value-based purchasing to reward value through improved clinical outcomes, higher patient satisfaction levels and reduced financial costs. Over the next decade, government agencies, employers, accreditation organizations and others have implemented dozens of nationally sponsored P4P programs.

In that spirit, the VBP movement really took off with the adoption of the Affordable Care Act (ACA) in 2008. The ACA has launched a significant number of reforms to improve quality while also reigning in expenses. In 2015, the Medicare Access and CHIP Reauthorization Act (MACRA) further solidified the role of value-based payment in Medicare. Today, the U.S. Department of Health and Human Services is well on its way toward integrating the vast majority of provider payments to reimbursement formulas based on performance and quality.

The tools for implementing VBP initiatives can involve both a carrot and stick in terms of promoting improved performance. For example, some P4P programs rely on a bonus payment methodology to reward certain desired population health management activities. Other programs use the threat of less financial reimbursement by taking a percentage of the providers’ or payers’ reimbursement and only paying back those funds upon successful completion of the VBP goals. In addition, some programs use a mixture of rewards and punishments to effectuate the desired outcomes.


Over the years, the federal government has sponsored a number of VBP Programs. For example, the U.S. Centers for Medicare & Medicaid Services (CMS) has sponsored several initiatives:

  • Hospital Value-Based Purchasing (VBP) Program
  • End-Stage Renal Disease Quality Incentive Program (ESRD QIP)
  • Hospital Readmission Reduction Program (HRRP)
  • Value Modifier (VM) Program (also called the Physician Value-Based Modifier or PVBM)
  • Hospital-Acquired Conditions (HAC) Reduction Program
  • Skilled Nursing Facility Value-Based Program (SNFVBP)
  • Home Health Value Based Program (HHVBP) (reference 1).

On a similar note, the number of states with Medicaid managed care requiring value-based reimbursement as part of the public healthcare program increased from 22 out of 39 states in 2017 to 28 out of 40 states by 2019 (reference 2). Many of these initiatives are using targeted HEDIS measures – among other benchmarking resources.

One of the best known programs is the Hospital VBP Program, which is designed to reward acute care hospitals with incentive payments for the quality of care provided in the inpatient hospital setting. Under this program, CMS encourages hospitals to improve care to Medicare beneficiaries for acute care inpatient stays by reducing patient adverse events, adopting evidence-based care standards, improving the patient experience, increasing transparency and promoting high-quality care at a lower cost to Medicare (reference 3). CMS rewards hospitals based on the performance and quality of care provided to Medicare patients by withholding participating hospitals’ Medicare payments by a percentage specified by law (e.g., 2%) (reference 4).

Hospitals are then scored on several key indicators covering mortality and complications: infections, patient safety, patient experience and efficiency. Each hospital may earn two scores on each designated measure – one for achievement and one for improvement. The final score awarded to a hospital for each measure is the higher of these two scores. Based on the Inpatient Prospective Payment System (IPPS), CMS then adjusts a part of the hospital’s Medicare payments based on a total performance score that reflects, on a measure-by-measure basis:

  • how well they perform compared to all hospitals, or
  • how much they improve their own performance compared to their performance during a prior baseline period.


Private purchasers also are supporting VBP programs by developing report cards and implementing other measurement tools. A prime example is the work supported by the National Alliance for Healthcare Purchasing Coalitions (reference 5). The National Alliance is providing a forum to review the emerging evidence and establish a new vision of how purchasers can be more successful, especially in an age of healthcare consumerism. The group has tackled a wide range of topics, from mental health parity to hospital price transparency (reference 6).

The U.S. Agency for Healthcare Research and Quality offers a nice summary of several private sector programs on its website. Here are several examples:

  • GTE provides its employees and their families with financial incentives to enroll in “exceptional quality” plans (those with high ratings on quality measures and satisfaction surveys). Employees receive report cards on plans so that they can choose a plan based on cost and quality.
  • General Motors blends several measures of healthcare quality into one amalgamated quality measure and draws from direct indicators of quality from HEDIS, employee satisfaction measures, accreditation status and impressions gained from site visits.
  • Digital Equipment Corporation emphasizes value (which it defines as the sum of quality of care and consumer satisfaction, divided by costs) in its healthcare purchasing decisions. Using information yielded from its performance reporting requirements, Digital identifies the best plan in each region as the “benchmark” plan and bases its contribution to the cost of health coverage on the premium charged by that plan.
  • The Pacific Business Group on Health requires HMOs to set aside 2% of the premium dollar and allows plans to keep that money only if they attain the performance standards set in customer service, quality, data collection and other areas (reference 7).


Many VBP programs rely on case managers to help implement the targeted intervention(s) to promote the improved clinical and financial outcomes. As a result, case managers are front and center to help coordinate targeted population health strategies. P4P programs often cover length of stay (LOS) parameters, readmission prevention, transitions of care and complex condition management, which are often centered on case management support.

For instance, several VBP programs have been designed to penalize hospitals for preventable re-admissions where discharge planning has failed. Clearly, case managers with their skill sets can make a difference in these types of programs. The ability of case managers to coordinate care for patients is also essential when the healthcare dollar is stretched thin when bundled or case rates reimbursement methodologies are used. Because case managers often support the patients through various healthcare settings and treatments, they are also often in the best position to monitor core clinical and performance measures.


Although steady progress has been made in defining and implementing VBP programs, many different standards exist depending on what delivery system or market segment is being targeted. Unfortunately, inconsistent standards sometimes make it difficult to create meaningful comparisons to evaluate performance and establish effective feedback loops to optimize provider or payer operations across the U.S. healthcare delivery system. Some provider and payer groups have also complained about the sheer number of VBP initiatives that their respective organizations have to respond to. In the quest for some level of VBP standardization, several key challenges remain:

  • Benchmarking. Historically, most benchmarks used to assess quality performance have been “process” and “structure” measures. Moving forward, identifying the right “outcome” measures will become a more common requirement.
  • Measurement Consistency. Promoting inter-rater reliability between VBP participants is important. Various stakeholders need to ensure the data points are consistent to ensure a level playing field.
  • Fragmentation. Addressing any confounding variables or variances associated with the populations served, provider delivery systems in play, health plan types being offered, applicable regulatory requirements and other factors is an essential priority.
  • Statistical Validity. The actual performance measures must be statistically valid to ensure meaningful feedback loops.
  • Comparative Effectiveness. Promoting comparative effectiveness demands data transparency, data sharing and data aggregation to create meaningful benchmarks.

AHRQ has come up with a series of recommendations that might be worth considering to move the VBP ball forward:

  • Coordination. Develop a comprehensive plan for implementing quality measurement, data collection and reporting standards to ensure the widespread public availability of comparative information on the quality of care furnished by all sectors of the healthcare industry.
  • Priorities. Establish measurement priorities that address the national aims for improvement and that meet the common information needs of consumers, purchasers, policymakers, public health officials and other stakeholders.
  • Core Measures. Periodically endorse core sets of quality measures and standardized methods for measurement and reporting.
  • Future Research. Make recommendations regarding an agenda for research and development needed to advance quality measurement and reporting, and sponsor research and development activities if resources are available.
  • Education. Develop and foster implementation of an effective public education, communication and dissemination plan to make quality measures and comparative information on quality most useful to consumers and other interested parties.
  • Technology Innovation. Encourage the development of health information systems and technology to support quality measurement, reporting and improvement needs (reference 9).


With healthcare expenditures now at 19.7% of the GDP (a threefold increase since 1960), obviously more work needs to be done on the cost front. Many of the VBP programs have been successful in promoting real improvement in the targeted areas. VBP initiatives certainly have assumed an important role in slowing down healthcare inflation and are not going away anytime soon.

In many scenarios, case managers will continue to be the center point for many VBP initiatives. Case managers must remain vigilant as they support their patients – along with the provider systems they either work for or interface with. Their perspectives as to what is working and not working related to VBP programs remain critical to optimize the clinical and financial outcome impact of such programs.

garry carneal

Garry Carneal, JD, MA, is president and CEO, Schooner Strategies/RadSite.


  2. “More States Require Value-Based Reimbursement in Medicaid,” by Samantha McGrail, Revcyle Intelligence (Oct 23, 2019).
  5. The National Alliance of Healthcare Purchaser Coalitions is the only nonprofit, purchaser-led organization with a national and regional structure dedicated to driving health and healthcare value across the country. Its members represent private and public sector, nonprofit and Taft-Hartley organizations, and more than 45 million Americans, spending over $300 billion annually on healthcare. Source:
  8. This section is based off an issue brief, entitled The Need to Standardize Network Value-Based Purchasing Requirements, that the author drafted for the American Association of Payers, Administrators and Networks (AAPAN), which was published in 2015. Please email the author if you would like a copy: [email protected]
  9. Ibid reference 7.



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