Value-Based Purchasing: Can Medicare Be the Spark?

“Value-based purchasing” is being used by a number of employers, business consortia, and public purchasers as a way to improve quality of patient care. It is based on the premise that purchasers can use their market power to drive quality improvement. The majority of purchasers are not active participants, however, and there is little evidence to date that activities of the purchasers who are involved are achieving any real impact.¹ Some argue that only when enough large employers and large public purchasers get involved with the value-based purchasing movement will any real change be possible. For example, several health policy experts in the November/December 2003 Health Affairs write “Decisive changes will occur only when Medicare, with full support of the administration and Congress, creates financial incentives that promote pursuit of improved quality.” ²

While Medicare has been involved in various health care quality initiatives (e.g., Nursing Home Compare), the program has been historically neutral toward quality in payment as a purchaser. There are significant barriers to Medicare adding quality into its payment structure, including the fact that payment policies are determined by statute and require Congressional action to change. It appears the tide could be turning this way. On March 1, Mark Miller, Executive Director of the Medicare Payment Advisory Commission, presented an overview of the commission’s new report to Congress, emphasizing that quality of care is a highlight of the year’s report. The report states that “although the Medicare program is working to improve quality, current efforts are largely grafted onto a payment system that is neutral or negative toward quality. The Commission has concluded that it is crucial for the Medicare program to build incentives for improving quality into the payment system.”³ Senator Max Baucus (D-MT) announced the next day that he plans to offer legislation that would implement specific quality recommendations detailed in the report.

If Congress does allow Medicare to factor quality into its payment structure, the experiences of purchasing models already underway could prove to be useful. Organizations like the Pacific Business Group on Health (www.pbgh.org) and the Buyers Health Care Action Group (BHCAG) (www.bhcag.com) are just a few of the groups that actively pursue value-based purchasing. Only a few studies have been done that gauge the impact of these initiatives on quality of care.⁴ Broad surveys have been undertaken to assess the extent to which purchasers are considering quality, and how. Goldfarb et al. conducted a literature review that identified six key strategies used in purchaser initiatives¹:

1. Collecting information and data on quality of care provided by health plans and providers;
2. Selective contracting with high-quality plans or providers;
3. Partnering with plans or providers to improve quality;
4. Promoting “Six-Sigma” quality, an industry-based model for minimizing errors and waste;
5. Educating consumers on quality issues; and
6. Rewarding or penalizing through incentives and disincentives.

These strategies assume that providing accurate, publicly available quality performance information motivates providers and plans to improve their scores by squeezing them in two directions: 1) increasing consumer understanding and response to quality information; and 2) establishing financial incentives encouraging providers/plans to provide higher quality. Research is mixed on whether the underpinnings of these approaches hold true.

At the most nascent level, the availability, credibility, and relevance of quality performance information makes comparing information across plans and providers difficult.⁵ Most of the research on provider and consumer behavior in response to quality information seems to suggest that this approach can and does sometimes work, but under very specific circumstances. Through a HCFO-funded project, for example, Hibbard et al. found that making hospital performance information public stimulates quality improvement activities in areas where performance is reported to be low if: 1) the report containing performance information is widely disseminated in the community; 2) the hospitals know that a future public report will be produced and disseminated again within a year or two; and 3) the public report itself is highly readable and easy to understand.⁶

HCFO also has supported three broad-based evaluations of the impacts of the BHCAG initiative in Minnesota. Roger Feldman, Ph.D., and Jon Christianson, Ph.D., both at the University of Minnesota, examined the effectiveness of BHCAG’s annual “quality award” in raising consumer awareness of quality and increasing their use of quality information when selecting a care system. Early results indicate that while there is a low level of employee awareness regarding the quality information, employer communication strategies have a large effect on the probability of quality information awareness. Distributing booklets to all employees or making booklets available on request have the largest impacts (a similar result to Hibbard’s study). Early results do not provide empirical evidence either to support a link between quality information and switching behavior, or between perceived health plan satisfaction and switching. However, switching is influenced by changes in premiums and whether an individual has an existing relationship with a health care provider. Consumer behavior is very complex, and clearly more research is needed to tease out under what circumstances consumers act on quality information.

While the idea of Medicare paying for quality seems sound to some, others caution that “Medicare’s and most other payer’s track record in changing providers’ behavior through explicit reimbursement incentives is decidedly mixed . . . Providers’ behavior is complex and influenced by a variable set of factors, which payment incentives don’t always counterbalance.”⁷ There is a clear need for more systematic research that gauges the impact of different value-based purchasing strategies individually, or as part of broader initiatives, on quality of care.

HCFO has funded a significant body of research that directly informs these issues:

HCFO funded three grants that examine the Buyers Health Care Action Group (BHCAG):

Title: Second-Generation Evaluation of Buyers Health Care Action Group (BHCAG) Grantee Institution: University of Minnesota
Principal Investigator: Roger Feldman, Ph.D.
Grant Period: October 2001 – September 2003

What is the effectiveness of the Buyers Health Care Action Group's (BHCAG) efforts to promote employee consciousness of quality differences among care systems? Can the BHCAG model can be exported to other communities?

Title: Evaluation of the Buyers Health Care Action Group (BHCAG) Initiative Component Three: An Assessment of the Impact of the Initiative on Health Care Delivery
Grantee Institution: University of Minnesota
Principal Investigator: Jon B. Christianson, Ph.D.
Grant Period: March 1999 – June 2000

What effects has the Buyers Health Care Action Group (BHCAG) had on purchasing behavior? Under this grant, researchers at the University of Minnesota supplemented their analysis of the Buyers Health Care Action Group (BHCAG) initiative underway in Minneapolis/St. Paul.

Title: Evaluation of the Buyers Health Care Action Group Initiative
Grantee Institution: University of Minnesota
Principal Investigator: Jon B. Christianson, Ph.D.
Grant Period: August 1997 – July 2000

How does direct purchasing of health care from physician groups, rather than relying on employers to purchase these services, affect consumer decision-making, utilization, and costs and quality of services received? Researchers at the University of Minnesota (with subcontractors at Johns Hopkins University) conducted a broad-based evaluation of the impacts of the Buyers Health Care Action Group Initiative in Minnesota.

Several publications have resulted from these three studies:

Christianson J, Feldman R, Weiner JP and Drury P. Early experience with a new model of employer group purchasing in Minnesota. Health Affairs, March 2003, 18(6).

Feldman R, Christianson J, and Schultz J. Do Consumers Use Information to Choose a Health Care Provider System? The Milbank Quarterly, March 2003, 78(1).

Lyles A, et al. Cost and Quality Trends in Direct Contracting Arrangements. Health Affairs, January-February 2002, 21(1), 89-102.

Christianson JB, Feldman R. Evolution in the Buyers Health Care Action Group Purchasing Initiative. Health Affairs, January-February 2002, 21(1), 76-88.

Schultz J, Call K, Feldman R, and Christianson J. Do Employees Use Report Cards to Assess Health Care Provider Systems? Health Services Research, July 2001, 36(3).

Other Projects:

Title: Assessing the Impact of a Public Report on Hospital Quality: A Controlled Experiment in the State of Wisconsin
Grantee Institution: University of Oregon
Principal Investigator: Judith Hibbard, Dr. P.H.
Grant Period: September 2001 - August 2004

How do hospitals react to public reports of their quality and how do such reports influence consumers’ perceptions of hospital quality? This study, conducted by researchers at the University of Oregon, will assess whether public reports of quality lead to improvement efforts within hospitals. The researchers also are studying whether the public reports create a general impression among consumers about the quality and safety of hospitals in the community. Hibbard and her colleagues are working with The Alliance, a large purchasing group based in Madison, Wisconsin, that will disseminate the public report. The researchers are conducting a controlled experiment in which hospitals will be assigned to one of the following three groups. Hospitals in The Alliance, 25 in the region surrounding Madison, will be included in the public report. The remaining 100 hospitals in Wisconsin will be separated by size (large and small) and randomly assigned to either the other treatment group or the control group. The second treatment group will receive a report of their own performance compared with other hospitals that will not be made public. The control group will not receive any reports. The objective of the study is to assess whether public reporting of hospital quality motivated improved behavior and performance and how public reporting affects consumer perceptions of hospital quality.

Hibbard JH, Stockard J, Tusler M. Does Publicizing Hospital Performance Stimulate Quality Improvement Efforts? Health Affairs, March/April 2003, 22(2): 84-94.

Title: State Health Care Purchasing Practices
Grantee Institution: JSI Research and Training Institute
Principal Investigator: James H. Maxwell, Ph.D.
Grant Period: December 2001 – August 2003

What are the purchasing practices of state employers and what are the implications for employees and future purchasing? This study will continue their earlier HCFO-funded work looking at purchasing among Fortune 500 employers and build on earlier HCFO work conducted by Bryan Dowd. Specifically the researchers will pursue five objectives. They will: 1) document the health care purchasing practices among state employers; 2) explore the relationship between health care purchasing and procurement for other goods and services; 3) study the effects of public sector unions and collective bargaining on health benefits; 4) compare the results from this study to the findings from the Fortune 500 study; and, 5) examine innovation in purchasing among state employers. The objective of the study is to provide state executives and other decision makers with more information about the purchasing behavior of state employers.

Maxwell J, et al. Health Care Purchasing Among State Employers. District of Columbia: National Health Care Purchasing Institute, 2003.

Title: Methods to Present Quality Information to Assist Consumers to Make Health Plan Decisions
Grantee Institution: University of Oregon
Principal Investigator: Judith Hibbard, Dr. P.H.
Grant Period: January 1999 - March 2001

How can information on health plan quality be most effectively presented to consumers? Researchers at the University of Oregon used laboratory studies to examine how consumers process and integrate information in making choices about health plan. While there are many health plan "report cards" available to consumers, little is known about how consumers actually use the information they are given to make decisions. Consumers in a cognitive laboratory situation were presented with different types of information on health plan quality, in different formats, and asked about how they use the information in their decision-making process. The researchers also assessed how specific pieces of information are used and weighted in decisions. The objective of the study was to help determine how best to present information on health plan quality so that it is valued and understood by consumers, and so that consumers can make the maximum use of information on quality when choosing a health plan.

Hibbard JH et al. Strategies for Reporting Health Plan Performance Information to Consumers: Evidence from Controlled Studies. Health Services Research, April 2002, 37(2), 291-313.

Hibbard JH, et al. Is the Informed-Choice Policy Approach Appropriate for Medicare Beneficiaries? Health Affairs, May/June 2001, 20(3), 199-203.

Hibbard JH, et al. Making Health Care Quality Reports Easier to Use. The Joint Commission Journal on Quality Improvement, November 2001, 27(11), 591-604.

Title: The Transformation of Corporate Health Care Purchasing
Grantee Institution: JSI Research and Training Institute
Principal Investigator: James H. Maxwell, Ph.D.
Grant Period: October 1998 – May 2001

How widespread are innovations in health care purchasing by large employers? The researchers built on their prior study of fourteen large U.S. companies to develop a better understanding of how and by whom health care is purchased within large, Fortune 500, firms. The study focused on the use of procurement practices such as competitive bidding, benchmarking and quality standards as well as on the organizational arrangements used to implement them. The objective of this project was to identify "best practices" among the companies and analyze the consequences and implications of changes in practice for firms, employers, and public policy.

Maxwell J, Temin P. Corporate Management of Quality in Employee Health Plans. Health Care Management Review, January-March 2003, 28(1), 27-40.

Maxwell J, et al. The Benefit Divide: Health Care Purchasing in Retail Versus Other Sectors. Health Affairs, October 2002, 21(5), 224-233.

Maxwell J, Temin P, and C Watts. Corporate Health Care Purchasing Among Fortune 500 Firms. Health Affairs, May-June 2001, 20(3), 181-188.

Title: Evaluating the Use of Performance-Related Information and Financial Incentives in Employer Health Care Purchasing
Grantee Institution: Economic and Social Research Institute
Principal Investigator: Jack A. Meyer, Ph.D.
Grant Period: August 1997 – March 1999

What impact does the dissemination of report cards of health plan performance or linking reimbursement to plan performance have on consumer selection of health plans? Researchers conducted the second phase of an evaluation of "value-based" purchasing efforts, where purchasers attempt to measure and compare providers and health plans and hold them accountable for achieving cost and quality goals. The first phase of this project was completed under a prior HCFO grant, Evaluating Business Initiatives in Health Care Purchasing. The project expanded beyond private employer coalitions to include state government purchasing and to evaluate the use of performance-related information and the impact of financial incentives. The researchers assessed five purchasing initiatives which provide report cards to consumers or tie reimbursement to performance, selecting a combination of initiatives by private business coalitions, states as employers, and state Medicaid programs. The objective of the project was to help public and private policymakers better understand the effects of disseminating performance information to consumers and of tying payments to plan performance.

Title: An Evaluation of the Current and Potential Impact of Consumer Survey-Based Report Cards on the Health Care Market Place
Grantee Institution: Institute for Research and Education
Principal Investigator: Jinnet B. Fowles, Ph.D.
Grant Period: June 1996 - March 1998

How do consumer-based report cards affect institutional behavior in the health care market? This study was designed to complement work currently underway to evaluate the impact of consumer information on consumer choice. Through a series of case studies and structured interviews, the researchers studied a natural experiment in Minneapolis and St. Paul where one group of employees receives a consumer survey-based report card during annual health plan open enrollment while another group of employees, with the same health plan benefits and choices, does not receive report card information. The objective of the study was to provide further information on how consumer information affects behavior in the health care market.

Knutson DJ et al. Impact of Report Cards on Employees: A Natural Experiment. Health Care Financing Review, Fall 1998, 20(1), 5-27.

Title: Evaluating Business Initiatives in Health Care Purchasing
Grantee Institution: Economic and Social Research Institute
Principal Investigator: Jack A. Meyer, Ph.D.
Grant Period: April 1995 – September 1996

Are voluntary, employer-based purchasing coalitions an effective means of controlling health care costs while maintaining quality of care? Researchers at the Economic and Social Research Institute evaluated the effects of health care purchasing coalitions on health care costs, utilization, and quality. This grant supported the first two phases of what is likely to be a three phase project, including: 1) a process evaluation; 2) an assessment of intermediate outcomes; and 3) a quantitative impact evaluation. During phase one, the researchers assessed the purchasing activities of six coalitions across the country, including how they have been implemented, and how they compare to past purchasing practices. The objective of this research was to give employers and policymakers more information on the effectiveness of community-based efforts of business coalitions and individual companies to reform the way health care is purchased.

Title: Research on the Governance and Management of Collective Purchasing Arrangements Under Managed Competition
Grantee Institution: JSI Research and Training Institute
Principal Investigator: James H. Maxwell, Ph.D.
Grant Period: March 1995 – April 1997

What makes large corporations such aggressive purchasers of health care and what impact are they having on the health care market? Researchers at the JSI Research and Training Institute examined managed competition purchasing arrangements in large and multi-state corporations and identified what makes them such aggressive purchasers of health care. This study comprised seven case studies of diverse companies that have implemented managed competition in various ways, including Xerox, GTE, Digital, and General Electric. They also conducted case studies of three firms that have not adopted managed competition. The objective of this study was to document systematically how each firm implemented managed competition, including criteria used for choosing health care plans, whether financial incentives were applied, if there was participation with business coalitions, and whether there were procedures for monitoring the quality of, and patient satisfaction with, and health care delivered to employees.

Maxwell J et al. Managed Competition in Practice: “Value Purchasing” by Fourteen Employers. Health Affairs, May-June 1998, 17(3), 216-226.

Title: Health Insurance Purchasing Cooperatives: Analysis of Existing Data
Grantee Institution: University of Minnesota
Principal Investigator: Bryan E. Dowd, Ph.D.
Grant Period: November 1993 - December 1995

How do large public employers go about purchasing health plans? What effect do those practices have on premiums? This project was designed to study large public employers' health plan purchasing practices as prototypes of health insurance purchase cooperatives (HIPCs). The researchers inventoried current health plan purchasing practices and estimate the effect of those practices on premiums. The study gathered data regarding: (1) employers' decisions to offer multiple plans; (2) standardization of benefit packages among health plans; (3) information provided to employees during open enrollment periods; (4) risk adjustments among multiple plans; and (5) methods for determining employer premium contributions. The objective of this research was to provide information which will assist policymakers as they design and implement HIPCs.

Dowd BE, Feldman R. “Employer Premium Contributions and Health Insurance Costs," in Managed Care and Changing Health Care Markets. Michael A. Morrisey, ed. AEI Press: Washington, D.C. (1998) 24-54.

Maciejewski M, Dowd B, and Feldman R. How Do States Buy Health Insurance for Their Own Employees? Managed Care Quarterly, Summer 1997, 5(3), 11-19.

Dowd BE, et al. The Effect of Tax-exempt Out-of-pocket Premiums on Health Plan Choice. National Tax Journal, December 2001, 54(4), 741-756.

¹ Goldfarb NI et al. “How Does Quality Enter into Health Care Purchasing Decisions?” The Commonwealth Fund Issue Brief, #635. May 2003.

² Berwick D et al. “Paying for Performance: Medicare Should Lead.” Health Affairs, November/December 2001, 22(6): 8-10.

³ The Medicare Payment Advisory Commission. Report to the Congress: Medicare Payment Policy (March 2004).

⁴ Frasier I, McNamara P. Employers: quality takers or quality makers? Medical Care Research & Review, 2000, 57 Suppl. 2: 33-52.

⁵ Eddy DM. Performance Measurement: Problems and Solutions. Health Affairs, 1998, 17(4): 7-25.

⁶ Hibbard JH, Stockard J, Tusler M. Does Publicizing Hospital Performance Stimulate Quality Improvement Efforts? Health Affairs, March/April 2003, 22(2): 84-94.

⁷ Vladeck, B. “Ineffective Approach.” Letter to the Editor. Health Affairs, March/April 2004, 23(2): 285-286.