Value-Based Purchasing in Medicare


Value-based purchasing (VBP) is a strategy used by Medicare and other purchasers of health care services to measure and reward high quality and cost-effectiveness in health care delivery. VBP consists of different methods. Some approaches use financial incentives to reward providers for desired activities or outcomes. Others use financial or other incentives to encourage consumers to choose high-performing providers. In practice there are challenging implementation issues for a strategy that rewards higher quality with higher payment. Evaluation of value-based payment initiatives on Medicare spending and the quality of care requires timely data, large enough rates of beneficiary participation to yield valid estimates of a program’s impact, and well-matched comparison groups.

The Center for Medicare & Medicaid Innovation, established in 2010 by the ACA, tests new ways to deliver and pay for health care services, including VBP strategies. In 2016, the Congressional Budget Office estimated that the center’s activities will reduce federal spending by about $34 billion from 2017 through 2026 (based on $45 billion in reduced spending on Medicare minus the cost of the center).

Incentives directed at providers—as a rule, provider incentives are tied to payment. For example, those who demonstrate high quality and efficiency would receive bonus payments and those who perform poorly would be subject to penalties, such as denial of scheduled payment increases.

The ACA included several VBP strategies, most of which were intended to improve the value of Medicare through provider incentives. In 2015, the Administration set the goals of tying 30 percent of Medicare spending in the traditional Medicare program to quality or value by the end of 2016 (a goal that was met earlier in the year) and 50 percent by the end of 2018. CMS aims to meet these goals with a variety of programs. These include VBP strategies established by the ACA, strategies developed and tested by the Center for Medicare & Medicaid Innovation, and a new payment system for physicians and other health care professionals established by the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA). One challenge is designing tools that measure a provider’s performance in order to determine what qualifies as high performance. These tools must address such issues as geographic variation in practice, the need for risk adjustment, attribution (that is, the method used to determine which patients and services to include in measuring an individual physician’s or other provider’s performance), and financial benchmarking.

Incentives directed at beneficiaries—one example of a consumer incentive would be the establishment of different cost-sharing levels to steer beneficiaries to specific provider networks’ beneficiary or medical services.

Because Medicare has little experience with such incentives, if Medicare is to include these incentives, it must take several steps to ensure that the implementation of incentives does not adversely affect beneficiaries.

First, the design and implementation of incentives should be evidence-based. For evidence to be applicable in benefit design and useful in patient and clinician decisionmaking, it must be clear under what circumstances and to which patients this evidence applies. Evidence that supports the incentive must be disclosed to patients and providers, including when and to whom the evidence applies.

Second, the potential and actual effects of consumer incentives on beneficiaries must be carefully considered. Consumer incentives must produce high-quality, safe, and efficient care. They should not create barriers to care or to provider access, or deter individuals from obtaining services. CMS should monitor consumer incentives to protect beneficiaries from adverse effects. CMS should also assess the effects on vulnerable beneficiaries, such as beneficiaries who are frail, in the oldest age groups, racial and ethnic groups that have experienced discrimination, as well as those with cognitive impairments or with poor health-literacy or decisionmaking skills.

It is important to assess how incentives that steer individuals to high-performing networks affect beneficiaries’ decisions. Incentives can have a positive effect by encouraging healthy behaviors or the selection of clinicians known to provide high-quality care. But incentives may also have negative effects, impeding access to care, making a particular service unaffordable, or leading to a poor outcome. In addition, some patients may be unable to make effective choices due to cognitive impairment or poor health-literacy or decisionmaking skills.

Third, achieving the desired response to appropriately designed incentives requires educated consumers and clinicians. Consumers need information to make informed decisions and manage their care, including information that compares providers and practitioners, within and across health care settings. To help beneficiaries differentiate high- and low-performing providers and institutions, the information must be valid, reliable, and easily understood by the diverse Medicare population. Therefore financial incentives aimed at them (or their intermediaries) should be phased in gradually.

(See this chapter’s section Health Care Coverage: Private Insurance—Private Health Plans: Managed Care for more information about VBP.)

Value-Based Purchasing in Medicare: Policy

Alignment of the health care system

In this policy: Federal

Medicare should work with purchasers and payers in the public and private sectors to reach agreement on how to align their respective incentive programs to ensure that the entire health care system is focused on the same quality, safety, and efficiency objectives.

AARP encourages Medicare and the private sector to implement incentives that are consistent with the National Quality Strategy.

Provider incentives

In this policy: Federal

Medicare should focus on provider incentives that financially reward providers and practitioners who improve care, allocating higher payments when they achieve high quality or demonstrate improvement, and consider penalties when providers and practitioners fail to meet specified minimum performance criteria.

Medicare should use objective evidence to inform provider incentives. As knowledge accrues, incentives should be updated and refined to enable Medicare to target incentives to achieve desired health outcomes.

Medicare should encourage clinicians to ensure that patients receive support services to achieve healthy behaviors and successfully manage their conditions.

Medicare should offer clinicians the tools and technical support needed so they can improve quality and assist patients in adopting healthy lifestyles.

Beneficiary incentives

In this policy: Federal

To encourage beneficiaries to seek high-quality, efficient, safe, and equitable care, AARP supports the selective use of incentives (in the form of reduced or no cost-sharing) for evidence-based services in the Medicare program. Medicare should use incentives to encourage and help beneficiaries pursue healthy behaviors, undertake self-management of their conditions, and adhere to recommended regimens.

The use of beneficiary incentives in Medicare should neither reduce access to health care nor create barriers to care by imposing unaffordable cost-sharing charges on Medicare beneficiaries.

Medicare should educate beneficiaries to understand that quality and resource use vary by provider and that quality can be measured and improved. Educational information should be designed in conjunction with the dissemination of comparative information available at That data compares provider performance in several different settings, demonstrates quality differences between and among providers and practitioners, and helps beneficiaries make more informed decisions based on providers’ quality, safety, and efficiency.

Medicare should continue to improve and disseminate educational materials for consumers. It should conduct outreach to help beneficiaries understand their role in improving health care quality and efficiency and the importance of adopting healthy behaviors, such as using evidence-based support tools and consumer engagement.

Consistent with other communication initiatives, these programs must be sensitive to the linguistic and cultural needs of the target population and take into account the health-literacy and decisionmaking skills of beneficiaries.

Before implementing differential cost-sharing for consumers, Medicare should give adequate notice to beneficiaries of its intention to do so.

Medicare should not alter cost-sharing charges to encourage beneficiaries to seek care from high-performing providers and practitioners unless there is strong evidence that the quality of care provided to beneficiaries will improve, an indication that savings will result either immediately or over time, and a reasonable transition period for beneficiaries to demonstrate their ability to use and act on comparative information.

Protections and safeguards

In this policy: Federal

AARP opposes discrimination based on a beneficiary’s health status, lifestyle, or behaviors. It also opposes penalties in the form of higher premiums, increased cost-sharing, or other charges based on a beneficiary’s health status or failure to achieve specified outcomes.

AARP supports cost-sharing that encourages appropriate use of high-value prescription drugs (whether brand-name or generic) that is based on the clinical benefits achieved.

Cost alone is an inadequate measure of performance and must not be used as the sole determinant of value.

To ensure that differential cost-sharing designed to encourage particular behaviors is working as intended (i.e., to improve quality and reduce costs), CMS should actively and routinely monitor performance. CMS should look for any unintended consequences (e.g., barriers impeding access to care, barriers to accessing care from high-performing providers, or inability to afford care due to high cost-sharing charges) that may arise when VBP is implemented among all population groups, including racial and ethnic groups that have experienced discrimination, low-income people, and members of other vulnerable subpopulations. In the event that such unintended consequences are identified, CMS must take immediate action to stop them.

CMS should evaluate the impact on beneficiaries and program resources to determine if consumer incentives achieve expected outcomes.