Paying for Value NOT Volume

While the US spends more on healthcare per capita than any other developed country, it also drives innovation in healthcare. Most of the R&D in medicine is done in the US, physicians from around the world are trained in our universities, the NIH invests in transformative research and premier academic medical centers are within our borders. However, in terms of payment and delivery we are still using an outdated model, spending our valuable healthcare resources on administrative red tape; non-adherence to medicines; fraud and abuse; and unnecessary services.

It is time that US takes a leadership role in innovating how to pay for and deliver healthcare by paying for value rather than volume.  Our current fee-for-service payment model encourages quantity not quality. Payments for outpatient services, hospital admissions, pharmaceuticals and provision of other healthcare services are based on individual budgets which only take into account cost rather than value and quality.  This approach promotes an environment where decision-makers in one silo have little if any regard for the consequences of their choices on other aspects of healthcare consumption, including outcomes and impact on patient quality of care.  Shifting healthcare spending is like squeezing a balloon – you squeeze one end and the other side pops up. If you inappropriately curtail one healthcare service, inevitably you will cause unintended consequences in others.  For example, policies implemented to reduce biopharmaceutical expenditures have oftentimes led to increasing overall healthcare utilization and costs through increased hospitalizations and outpatient services. In addition, most published research supports the fact that curtailing pharmaceutical access through policies such as inordinately high cost sharing or administrative hurdles increases overall healthcare costs (including a paper that I researched and published investigating the impact of pharmaceutical capitation payments by a national insurer on patient outcomes and healthcare expenditures as a research fellow at University of Southern California).

As policymakers consider payment and delivery reform, a plethora of words, phrases and acronyms such as capitation, bundled payment, pay for performance, ACO or IPU are being thrown about as potential solutions. Each of these is simply an approach that aligns incentives to pay for value rather than volume. But determining the best payment reform approach requires the inclusion of some core principles.

So what are the principles of successful payment reform?  Prioritize patient needs; support and promote sustainable high value care; examine health outcomes over a reasonably long term horizon; provide consumers and providers access to information and interconnected data; and encourage coordination of care. One example of a payment policy reform that did not incorporate these principles is the decision by some national Pharmacy Benefit Managers to remove certain medicines from their formularies without examining how such a decision would impact overall healthcare costs, or the burden on physicians or patient quality of life.  Ideally, payers would instead follow the decision of United Healthcare which recently instituted a bundled payment model for cancer therapy and found out that payments tied to outcomes and physician flexibility to choose the right therapy for their patients resulted in reduction in overall healthcare costs.

Changing the payment scheme towards value-based reimbursement will align incentives and spur growth of new delivery models such as telemedicine, retail clinics and even change when and how physician practices are operating.  Remember when a bank in the 1980’s operated on a Monday through Friday timeline with limited hours? Banks evolved to meet their customers’ needs through automation, changes in location of where customers could do their banking and most recently through technological advances that promote using online services.  Those banks that did not evolve eventually perished. Currently, our healthcare delivery system operates much the same way the banks did in the 1980’s.  In fact, healthcare is the only industry that keeps the fax machine industry alive!

Finally, we must implement payment reform with a “do-no-harm” priority towards innovation, managing the needs of patients who are very sick with hard to treat conditions, and guarding against decisions that are primarily based on short term financial gains at the expense of long term health.  By instituting appropriate quality measures and ensuring availability of interconnected healthcare data we can ensure that we avoid such dilemmas for delivery of healthcare services.

There is risk for the biopharmaceutical industry in moving from a fee-for-service model towards payment reform which rewards the most efficient intervention. However, economic principles also establish that opportunities exist for interventions that produce efficiency in systems.  Innovative biopharmaceuticals over time have proven to be the most efficient intervention in healthcare as their use commonly reduces overall healthcare costs and improves patients’ quality of care and life.

If payment reform fails as it has in the past, the consequences are dire. The only levers left to pull for policy makers to control the increase in healthcare costs will be draconian measures such as price and utilization management through mechanisms like the Independent Payment Advisory Board (IPAB). This approach won’t promote efficiency, value or a reduction in overall healthcare costs. Implementation of effective payment reform that results in new delivery model transformation will.


Robert Popovian is the Senior Director of Pfizer US Government Relations. 

Morning Consult