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-effective health care delivery. VBP strategies use different methods. Some 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 a higher payment. Evaluation of the effects of VBP 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, or CMMI, established in 2010 by the Affordable Care Act, 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 would 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 receive bonus payments. Those who perform poorly would be subject to penalties, such as the denial of scheduled payment increases.

Incentives directed at beneficiaries: An example of a consumer incentive would be the establishment of different cost-sharing levels to steer beneficiaries to specific provider networks.

Because Medicare has little experience with such incentives, if Medicare is to implement them, it must first ensure that they do 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 decision-making, 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 it applies.

Second, the 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 provider access or deter individuals from obtaining services. The Centers for Medicare & Medicaid Services (CMS) should monitor consumer incentives to protect beneficiaries from adverse effects. CMS should also assess the impact on vulnerable beneficiaries, such as those who are frail, those in the oldest age groups, historically disadvantaged groups, as well as those with cognitive impairments or with poor health-literacy or decision-making skills.

It is essential to assess how incentives that steer individuals to high-performing networks affect beneficiaries’ decisions. Incentives can have a positive effect. They can encourage healthy behaviors or the selection of clinicians known to provide high-quality care. But incentives may also have negative consequences, 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 decision-making 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 also Private Health Plans: Managed Care for more information about VBP).



Alignment of the health care system

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

Medicare and the private sector should implement incentives that are consistent with the National Quality Strategy.

Provider incentives

Medicare should focus on 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 they 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 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 to improve quality and assist patients in adopting healthy lifestyles.

Beneficiary incentives

Policymakers should employ the selective use of incentives for evidence-based services in Medicare to encourage beneficiaries to seek high-quality, efficient, safe, and equitable care. The incentives should result in reduced or eliminated cost-sharing.

Beneficiary incentives in Medicare should neither reduce access to health care nor create barriers to care by imposing unaffordable cost-sharing charges.

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 widely disseminate educational materials for consumers. They should ensure materials are sensitive to the linguistic and cultural needs of the target population as well as their health-literacy and decision-making skills. 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.

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

The Centers for Medicare & Medicaid Services (CMS) should evaluate the impact on beneficiaries and program resources to determine if consumer incentives achieve expected outcomes. Medicare should not alter cost-sharing charges to encourage beneficiaries to seek care from high-performing providers and practitioners unless there strong evidence that the quality of care provided will improve and an indication that savings will result either immediately or over time. A reasonable transition period should be allowed for beneficiaries to demonstrate their ability to use and act on comparative information.

Protections and safeguards

Medicare should not use incentives to discriminate based on a beneficiary’s health status, lifestyle, or behaviors. Health status or failure to achieve specified outcomes should not trigger higher premiums, increased cost-sharing, or other charges.

Cost-sharing measures should encourage appropriate use of high-value prescription drugs (whether brand-name or generic) 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.

CMS should ensure that differential cost-sharing designed to encourage particular behaviors is working as intended through improved quality and reduce costs. They should actively and routinely monitor performance as well as beneficiary impact. 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 value-based purchasing is implemented among all population groups. This should include members of historically disadvantaged groups, people with low incomes, and members of other vulnerable subpopulations. If unintended consequences are identified, CMS must take immediate action to stop them.