Can billing based on “value” save money and improve care?

Executive Summary

Health care spending continues to rise in the United States, consuming nearly 18 percent of gross domestic product in 2014—a trajectory that many experts warn is unsustainable. Some say the traditional “fee-for-service” system of reimbursing doctors and hospitals for each service rendered wastes money and even harms patients because it lacks adequate incentives to ensure quality care. A growing number of insurers and employers agree. Led by the federal Medicare program, they are aggressively pursuing alternative models designed to rein in spending and improve care by basing payment partly on “value” and “quality.” In 2014 Medicare made 20 percent of its payments using alternative payment models, up from zero in 2011, and it wants to increase that to 50 percent in 2018. Defenders of the fee-for-service approach, however, question whether payment based on value is workable and cost-effective. Among the issues under debate: Can health care providers operate profitably under new payment systems? Do new systems reward quality care better than fee for service? Can hospitals and doctors measure what matters?

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Goodman, John C., “Priceless, Curing the Healthcare Crisis,” Independent Institute, 2012. A health economist describes problems that he says make health care less efficient.

McGuff, Doug, and Robert P. Murphy, “The Primal Prescription: Surviving the ‘sick Care’ Sinkhole,” Primal Nutrition, 2015. A physician (McGuff) and economist (Murphy) explain the origins of the U.S. health care system and critique the Affordable Care Act from a libertarian perspective.

Moriates, Christopher, “Understanding Value-Based Healthcare,” McGraw-Hill Education, 2015. A physician compiles a primer for doctors who are making the transition to value-based care, where payments are based on the quality of care delivered.


Beck, Melinda, “What Measures Should Be Used to Evaluate Health Care?” The Wall Street Journal, March 22, 2015, A journalist interviews three experts about health care metrics and issues associated with evaluating care.

Carroll, Aaron E., “The Problem with Pay-for-Performance in Medicine,” The New York Times, July 28, 2014, A physician contends that a pay-for-performance approach is not solving the problems that those in the health care system would like it to solve.

Ritchie, Alison, et al., “Shifting Reimbursement Models: The Risks and Rewards for Primary Care,” Medical Economics, April 8, 2014, The authors give advice to primary-care physicians transitioning to pay-for-performance billing and explain how to use the new payment models.

Reports and Studies

“Innovation Models,” U.S. Centers for Medicare and Medicaid Services, undated, accessed Feb. 8, 2016, A federal agency lists the many Medicare and Medicaid alternative payment models and care-delivery systems, and describes their stages of development.

“OECD Focus on Health Spending,” Organisation for Economic Co-operation and Development, July 2015, An economic organization of 34 countries analyzes and compares international health care spending.

Abrams, Melinda, et al., “The Affordable Care Act's Payment and Delivery System Reforms: A Progress Report at Five Years,” The Commonwealth Fund, May 7, 2015, A private foundation that supports independent research on health issues assesses the landmark health care law's first five years.

Berenson, Robert, and Thomas Rice, “Beyond Measurement and Reward: Methods of Motivating Quality Improvement and Accountability,” Health Services Research, December 2015, A physician (Berenson) who is a fellow at the Urban Institute, a Washington think tank, joins with UCLA health policy researcher Rice to discuss creating policies that reward physicians without using financial incentives.

Burwell, Sylvia M., “Setting Value-Based Payment Goals—HHS Efforts to Improve US Health Care,” New England Journal of Medicine, Jan. 26, 2015, The U.S. Health and Human Services secretary outlines her goals for value-based payments in Medicare.

Friedberg, Mark, et al., “Effects of Health Care Payment Models on Physician Practices in the United States,” RAND Corp., 2015, The nonpartisan think tank's report, sponsored by the American Medical Association, shows how alternative health care payments affect physicians' practices and what resources they need to make them work.

Kahn III, Charles N., et al., “Assessing Medicare's Hospital Pay-for-Performance Programs and Whether They Are Achieving Their Goals,” Health Affairs, August 2015, Health policy analysts and staff from the Federation of American Hospitals critique three of Medicare's value-based hospital programs.

Meron, Ashkay, and Manoj Kumar, “Is ‘Fee-For-Service’ A Reverse Incentive In The Health Care Market In The United States,” Internet Journal of Law, Healthcare and Ethics, 2014, Two physicians examine whether fee-for-service is the best payment model.

Song, Zirui, et al., “Changes in Health Care Spending and Quality 4 Years Into Global Payment,” New England Journal of Medicine, Oct. 30, 2014, Health care researchers analyze Blue Cross Blue Shield of Massachusetts' 2009–12 experiment with private-sector global budgets, in which doctors were paid a lump sum for patient care.

The Next Step

Accountable Care Organizations

Alltucker, Ken, “Medicare ‘accountable care’ reforms bring mixed results,” The Arizona Republic, Sept. 25, 2015, Only three of 10 Arizona health systems that participated in accountable care organizations (ACOs)—physician and hospital networks that coordinate services for Medicare patients to reduce costs and improve quality of care—spent less on patient care than what Medicare projected in 2014.

Freyer, Felice J., “Medical groups try to offer better care at lower cost,” The Boston Globe, Dec. 28, 2015, Rhode Island-based Coastal Medical earned the third-highest quality-of-care rating from the Centers for Medicare and Medicaid Services among all U.S. ACOs while saving millions in care costs.

Miller, Naseem S., “UnitedHealthCare partners with Orlando-based ACO,” The Orlando Sentinel, Feb. 15, 2016, National health insurance carrier UnitedHealthCare will offer additional 24/7 medical services and home care to policy-holding patients of physicians in Florida who participate in a statewide accountable care organization.

Affordable Care Act

“Will Obamacare cut costs?” The Economist, March 5, 2015, Some economists have attributed slowing growth in U.S. health care spending in recent years in part to cost-cutting measures introduced by the Affordable Care Act (ACA) in 2010, as well as to doctors' and hospitals' adoption of more efficient medical practices.

Armour, Stephanie, “More People Turn to Faith-Based Groups for Health Coverage,” The Wall Street Journal, Jan. 4, 2016, Membership in health care ministries, which share care costs among people with similar religious beliefs without involving insurance providers, has risen 150 percent since the enactment of the ACA, which allows Americans to avoid fines for not buying insurance by joining eligible ministries.

Sealover, Ed, “Health care payment reform a slow-moving process in Colorado,” Denver Business Journal, Dec. 16, 2015, Few private insurers or practices in Denver have adopted alternative payment measures established by the ACA in 2010, although some that have participated in ACOs or bundled-payment programs have found ways to cut care costs.

Health Care Expenditures

Alcindor, Yamiche, and Alan Rappeport, “Bernie Sanders Releases Details on Health Plan That Would Raise Taxes but, He Argues, Save on Costs,” The New York Times, Jan. 17, 2016, Democratic 2016 presidential candidate Bernie Sanders, a U.S. senator from Vermont, said if elected he would seek to increase in income taxes to fund a program that would provide health coverage to all Americans while saving $6 trillion more in health expenditures than the current system in the next decade.

McCluskey, Priyanka Dayal, “People with mental illness don't see benefits from new health care payments, study finds,” The Boston Globe, Dec. 8, 2015, An alternative payment system in Massachusetts in which providers pay doctors based on care-quality measures has reduced expenditures for treating physical illnesses but not those for mental illnesses, according to Harvard Medical School researchers.

Mershon, Erin, “Reimbursement issues block paramedics from expanded role,” Politico, May 4, 2015, Pilot programs that send paramedics to provide in-home care or coordinate services for patients who frequently request emergency services have saved cities millions in care costs, although most state and federal health agencies still do not reimburse paramedics for such services.

Medicare Hospital Incentives

Feller, Stephen, “New Medicare pay system aimed at lowering drug costs,” United Press International, March 9, 2016, Medicare will introduce new incentives to pay doctors and hospitals more for prescribing medications proven to be effective, an attempt to move away from expensive medications.

Rau, Jordan, “Hospitals' Medicare Quality Bonuses Get Wiped Out By Penalties,” NPR, Jan. 22, 2015, Fewer than half of hospitals that earned bonuses from Medicare in 2014 for providing comparatively high-quality care received any money because they paid higher penalties after too many patients were later readmitted or developed infections or avoidable injuries during their stays.

Weaver, Christopher, Anna Wilde Mathews and Tom McGinty, “New Risks at Rural Hospitals,” The Wall Street Journal, Dec. 25, 2015, Inpatient orthopedic surgeries have risen in recent years at small rural hospitals that receive more money from Medicare for performing such operations, although such surgeries carry greater risks for complications than at larger general hospitals, according to an analysis of Medicare data.


Center for Healthcare Value
3333 California St., Suite 265, Box 0936, San Francisco, CA 94118
A University of California, San Francisco, program that researches health delivery systems and health policy; also trains physicians how to create value.

Center for Medicare and Medicaid Innovation
7500 Security Blvd., Baltimore, MD 21244
Federal agency working with providers on new payment and delivery models for Medicare and Medicaid.

Health Care Payment Learning and Action Network
7500 Security Blvd., Baltimore, MD 21244
A group begun by the Department of Health and Human Services that brings together private, public and nonprofit sectors to explore how to move to value-based care and alternative payment models.

Health Care Transformation Task Force
601 New Jersey Ave., N.W., Suite 450, Washington, DC 20001
Industry consortium formed in 2015 with large payers, patients, providers and purchasing groups that has committed to 75 percent value-based purchasing by 2020.

Oregon Health Transformation Center
421 SW Oak St., Suite 775, Portland, OR 97204
A branch of the Oregon Health Authority working with Coordinated Care Organizations to lower costs and increase quality for Oregon's Medicaid recipients.

Pacific Business Group on Health
575 Market St., Suite 600, San Francisco, CA 94105
Not-for-profit group representing 60 large health care purchasers, whose members share ideas as well as work on innovations in the payment and delivery processes for their employees.

DOI: 10.1177/237455680207.n1