Benefits of a Value-Based Payment System

Pay-for-performance and value-based purchasing are terms used to describe healthcare payment systems that reward doctors, hospitals, and other healthcare providers for their efficiency, rather than the total volume of services they provide. These value-based systems are also known as alternative payment models, or APMs.

Efficiency is usually defined as providing higher quality for a lower cost, with improved patient outcomes, high patient satisfaction, and reduced per-capita medical spending.

This article will explain how value-based payment systems work, the types of value-based payment systems that are used in American healthcare, the challenges these systems face, and how well-designed value-based payment systems can reduce costs and improve patient outcomes.

Value-based payment models have played a significant role in the healthcare reform debate that's been ongoing in the U.S. throughout the 21st century.

The federal government has spent the last several years implementing a variety of value-based payment programs in the Medicare program. Medicare accounts for more than a fifth of all medical expenditures in the U.S., and private health insurance companies often follow Medicare's lead when it comes to innovations.

The Medicaid program, which is jointly run by the federal and state governments, has also been shifting to value-based payment models under Medicaid managed care programs, in which the state contracts with private health insurance companies that manage the payment of medical claims for enrollees.

As of 2019, 38.2% of healthcare payments in the United States—including 50% of Medicare Advantage payments—were made under alternative payment models.

By 2020, this had grown to about 41%. But if we include payment models that have at least some quality and efficiency components (i.e. Category 2 in this analysis), that number grows to about 60% of health care payments. Nearly 40% of payments in 2020 were made under a strict fee-for-service model, without any quality requirements.

Some value-based payment models have shown success in reducing overall spending on health care while improving or maintaining outcomes and patient satisfaction, but results for others have been mixed. Value-based payment models are much more widespread than they used to be, but they have not proven to be a panacea for the high healthcare costs in the U.S.

Why Adopt a Pay-for-Performance System?

For most of the history of the American medical system, doctors, hospitals, and other medical providers were simply paid for each service performed (ie, a fee-for-service system).

This approach gives healthcare providers a strong financial incentive to perform as many services as possible—sometimes including unnecessary services such as duplicate testing or treatments that aren't recommended by evidence-based medicine. So there are concerns that the fee-for-service payment system, combined with providers' understandable reluctance to expose themselves to potential lawsuits, may lead to overprescribing and overutilization of healthcare services.

Furthermore, some health policy experts believe that the fee-for-service payment system is lacking because it neglects the role that preventive care can play in improving health and reducing healthcare costs. Under a fee-for-service payment model, providers receive more money for treating a patient with diabetes who suffers kidney failure than they would for working with the patient to try to prevent kidney failure through better blood glucose control. This seems backward to many healthcare reformers.

The value-based programs that Medicare has implemented are specifically designed to improve quality and efficiency of care, reduce hospital readmissions, reduce the incidence of hospital-acquired conditions, and generally shift payments away from volume and towards value—ie, financially incentivizing medical providers for health outcomes and efficiency, as opposed to just the volume of work they do.

A value-based pay-for-performance model rewards doctors for providing care that has been proven to improve health outcomes and encourages them to minimize waste whenever possible.

Types of Value-Based Payment Models

Although value-based payment models existed before the Affordable Care Act (ACA), the enactment of that law ushered in a new level of commitment to shifting to value-based approaches to paying for health care.

Medicare has created several different types of value-based payment programs that apply to both hospitals and doctors. There are also accountable care organizations (specifically created by the ACA) and bundled payment models, both of which utilize a value-based approach to payments.

Medicare Advantage plans often use some type of value-based payment system, and some studies have shown that they end up with lower overall costs then traditional Medicare or accountable care organizations. Medicaid managed care programs are also increasingly utilizing value-based payment models as a means of reducing costs while improving patient outcomes.

Challenges to Value-Based Payment Models

One of the challenges in implementing value-based payment systems is getting everyone to agree on quality standards. Quality standards are objective measures used to determine whether providers are offering high-quality care.

For example, one possible quality standard would be for doctors to test A1C levels in patients with diabetes four times a year. In a pay-for-performance system, doctors who meet this standard would be rewarded appropriately.

The problem is that many healthcare providers believe that the practice of medicine is as much an art as it is a science and that boiling everything down to checklists and treatment algorithms would do a disservice to patients.

Also, providers sometimes disagree on the proper course of treatment in patients with the same diagnosis and similar medical histories. But a solid utilization review protocol rooted in evidence-based medicine can help to quantify things like efficiency and quality.

There are also practical obstacles that sometimes make it challenging to switch to a value-based payment model, including a lack of interoperability for electronic medical record systems, the technological challenges involved in reporting everything to the insurer, and concerns among healthcare providers that a transition to value-based care could result in unpredictable revenue streams.​

How Will Value-Based Payment Models Affect Me?

Value-based payment models have been phasing in over the past several years, but because the changes are primarily focused on how physicians, hospitals, and other healthcare providers get paid for their work, they have had a fairly minimal effect on individual patients. Over the long haul, the hope is that with more insurers utilizing value-based payment models, patients may enjoy better healthcare without having to pay more for it.

Summary

Value-based payment models, also known as alternative payment models (APMs), are health care payment systems that reward medical providers for overall efficiency and patient outcomes, rather than paying them for each service they perform.

Value-based payment models are more common than they used to be, but robust APMs still accounted for only 41% of all health care payments as of 2020. Medicare Advantage plans have the highest rate of value-based payment models, with 58% of their payments going through APMs.

A Word From Verywell

As more health insurers and medical systems transition to value-based care, we should see improved efficiency, less waste, and better patient outcomes. This is not an overnight switch, but patients can expect to see these benefits over the coming years, as value-based payment systems become the norm.