November 2001 (Vol. 2, No. 11)
Challenges for Healthcare Value Purchasing
By: David A. Kindig, MD, Ph.D.

Health care value purchasing in the United States is a young, diverse, and growing movement in which both the private and public sectors have invested considerable Financial resources and human energy. Leaders of these purchasing initiatives hope to accomplish through a variety of strategies what unmanaged market forces and regulation have failed to do: maximize the benefits of our health care system at a reasonable cost.

Value purchasing was initially defined in a 1997 report published by the federal government titled “Theory and Reality of Value Based Purchasing: Lessons from the Pioneers” (1). This report explained the premise that “buyers should hold providers of health care accountable for both cost and quality of care,” in contrast to more limited efforts to “negotiate price discounts, which reduce costs but do little to ensure that quality of care is improved.” In simplest terms, value purchasing means “getting the best care for the best price.”

The Milbank Memorial Fund in 2001 published seven case studies (2) that showed how, during the past decade, value purchasing pioneers have made significant progress in developing and implementing strategies aimed at improving health care quality and efficiency. Among the examples: In Minnesota, the Buyers Health Care Action Group created a system where providers compete on price and customer satisfaction scores. This resulted in some beneficiary migration to higher-performing care systems. In Orlando, the Central Florida Health Care Coalition has for nearly 15 years used performance data to drive provider and plan improvement and is now launching a unique pay-for-performance model that could revolutionize health care purchasing. General Electric has made performance criteria a fact of life for contracting health plans, which are at risk for a significant portion of their administrative fees if they fail to meet agreed-upon improvements. Also, the Massachusetts Medicaid program has incorporated quality standards and improvement goals into its contracting procedures. These examples and others elsewhere around the country, including the Employer Healthcare Alliance Cooperative (The Alliance) in Madison, Wisconsin, demonstrate the progress in this new approach. However, to be a major driver for cost and quality improvement, these efforts must become sufficiently pervasive. A number of challenges might impede this development.

1. Despite this activity and accomplishment, there is no standard conceptual or operational definition of health care value. Typically, definitions of value center on some relationship between the cost of care and the quality or outcomes of care. A major barrier to reaching consensus on a definition for value is the lack of consensus on a definition for quality. Literally thousands of outcomes measures, indicators of care, and performance benchmarks have been developed to quantify and compare health care quality. The Institute of Medicine and the corporation-led Leapfrog Group are working to create incentives for reducing medical errors. These efforts are an important initiative in technical quality. Still, many stakeholders prefer to evaluate quality in terms of service and customer satisfaction, which are relatively easy to understand and measure, while others focus on the more elusive technical and clinical aspects of quality.

Cost, the other major component in the traditional definition of value, is not as clear-cut a concept as it may appear. Numerous questions relate to cost. For example, what should a purchaser reasonably expect to pay per beneficiary for a defined benefit package? Does value purchasing imply lower absolute costs for health care services or willingness on the part of the purchaser to accept some standard rate of increase? What are the relative costs of different levels of quality?

For an emerging field, such wide variation in the underlying concept poses challenges to public understanding. The field may advance through ongoing efforts to 1) seek consistent measures that will allow evaluation of efforts, 2) clarify what is meant by value, and 3) develop a typology of different value definitions from which purchasers could choose and explicitly adopt.

2. Most value purchasing activity is targeted at reducing costs and to some degree improving customer satisfaction, with mixed attention to technical quality or outcomes. Despite the previous concerns, cost is easier to approach than quality. Purchasers know how to measure and evaluate basic healthcare costs and they can get data on costs much more readily than they can on amorphous quality measures. This partly explains why the AHCPR report found that only a “limited number” were acting in a “bold and innovative manner” to improve quality, with a few “cautious first-step dabblers” (1). The majority, however, were doing virtually nothing to incorporate quality considerations into their purchasing activities. With premiums rising at double-digit levels after several years of single-digit growth, purchaser interest in costs may increase accordingly, at the expense of quality.

3. The “business case for quality” has not been made. This term primarily relates to the impact of healthier workers on employer productivity. Many believe that the empiric literature in this area is quite weak and underdeveloped, although more is beginning to appear (3). Tangible return on investment from measuring and reporting on quality is not often seen. These factors inhibit many purchasers from considering quality more seriously in purchasing.

4. We do not know how to structure effective incentive and penalty mechanisms to ensure or improve quality. Several initiatives have explored the use of incentives and penalties, with mixed results. GE, for example, puts 10 to 25 percent of a plan’s administrative fee at risk for performance. Better performance results in higher payment, and failure to perform can cost a plan millions of dollars. In Massachusetts Medicaid, where little can be done with payment levels in managed care contracts due to regulatory issues, volume of patients assigned seemed to be effective for one major provider: ". . . we take their quality improvement goals seriously....if we get high scores, we get more members. We want to grow our membership so we have a built in incentive to do well." But many have noted that the amounts that most employers are currently allocating to measuring or to rewarding quality is a miniscule part of health care budgets and not sufficient to create strong incentives. GE’s Medical Director has written that "purchasers must take their market position seriously and work with and demand from health plans a financing structure that rewards high quality provider organizations" (4). Other challenges and concerns for providers, plans, and purchasers include the following:

5. Providers and plans face multiple reporting requirements and maintain concerns about data credibility.

6. Public sector purchasers face legislative and administrative restrictions or regulations that may impede their ability to make purely value- or market-driven decisions.

7. Few purchasers command enough volume on their own within a given market to be effective value purchasers.

8. As providers typically participate in multiple health plans, a single health plan may not be the effective or logistically practical organizational level for value purchasing; purchasers and consumers may require data on individual hospital or physician practices.

9. Comparisons based on selected measures of quality or costs often invite resistance among providers, who may not agree with the measures or their interpretation.

These challenges and barriers may be overstated. These initiatives are still in their very early development and may need more time to mature. Could a decade of improvements in measurement and standardization, combined with new lessons from additional performance improvement experiments, change the picture of value purchasing? The Institute of Medicine and the Leapfrog Coalition have brought significant public attention to patient safety and medical errors. Could this spill over into other quality and outcome areas as well? Could a “tipping point” be achieved in which paying for health care performance becomes the norm? Could creative use of the Internet, advances in reporting and consumer education foster a new generation of consumers equipped to be their own value purchasers?

We spend vast resources on health care. The successes and barriers in value purchasing exemplify the substantial challenges that remain as we seek to improve health outcomes and enhance accountability for that spending.


1. AHCPR 1997. Theory and Reality of Value Based Purchasing, USDHHS 98-0004, Rockville MD.

2. Milbank Memorial Fund 2001. Value Purchasers in Health Care: Seven Case Studies. New York.

3. J. Occup. Environ Med. 2001. Special Issue on Health, Productivity and Occupational Medicine, 43 (1).

4. Galvin, R. 1999. An Employers View of the US Health Care Market. Health Affairs 18(6): 166-170.

This Issue Brief is a condensation of the introductory chapter of the Milbank Memorial Fund 2001 monograph identified above. The full text can be found on the Milbank web site.