Theory and Reality of Value-Based Purchasing: Lessons from the Pioneer

What Are the Obstacles?

What Are the Obstacles?

A number of obstacles are delaying progress in the development of a value-based purchasing system. Some of these obstacles are technical in nature—involving, for example, the difficulty of building a community-wide electronic information system. Others involve community politics and the tradeoffs that inevitably occur between conflicting goals.


A Sense of Complacency

A primary challenge to efforts to measure quality is overcoming the complacency that has set in as a result of the recent moderation in the growth of employer contributions to health care costs, especially for the large employers that are most likely to have the staff and resources to dedicate to this issue.

During the past 4 years, the cost of health insurance has risen an average of 4.0 percent per year, in contrast to increases that averaged 13.6 percent over the 1988-92 period, according to data collected by KPMG Peat Marwick. Some health benefit managers in major corporations report that senior managers in their firms are less willing to devote resources to long-range efforts to improve health care quality and manage health costs because they see rising health care outlays as being "under control," and therefore not an immediate problem.

Yet, health care spending in the future will be driven up by strong pressures from a variety of forces, including:

  • The continuous discovery of new medical technology that promises to extend life and improve its quality.
  • Behavior and lifestyle factors, such as smoking and drug and alcohol abuse.
  • The aging of the population.

Another aspect of employer complacency emanates from divided loyalties. In many cities, purchasers have not been able to bring about a "downsizing" of the hospital system even though all parties agree that there is substantial excess capacity. Corporate leaders sit on hospital boards and their loyalties to such hospitals sometimes exceed their desire to bring about a leaner, more efficient hospital system. Business also fears angering highly valued employees by limiting their choice of providers.

Many employers still fear managed care and believe that it will be strongly resisted by their employees. According to a recent survey of over 600 employers conducted by the Economic and Social Research Institute, 82 percent of employers not using managed care thought that its use would lead to decreased quality of care, as opposed to only 11 percent of employers currently using managed care. Nine out of 10 employers not using managed care believed that it would reduce choices in a way that would displease employees, compared with five out of 10 employers who were offering managed care plans. The challenge to these employers is to devote more resources to measuring quality, if that is really their concern about these plans.

Return to Table of Contents


Lack of Dissemination Mechanisms

Value-based purchasing is currently conducted by a significant number of large corporations with sophisticated human resource and employee benefit managers and staff, as well as by a small group of innovative employer coalitions. These are the pioneers. Far more typical in today's health care marketplace, however, are situations in which employers sign up with one or more managed health care plans and look to them to assure some stability in their premiums. Managed care organizations meet this demand largely by using their clout to extract significant discounts from the hospital industry, which in most areas has substantial excess capacity, and to limit payments to specialist physicians through both fee schedules and gatekeeping.

At the present time employers and coalitions lack a central repository of information about best purchasing practices and lack affordable access to the technical assistance needed to understand and implement the practices of the pioneers. As a result, many purchasers reinvent the wheel because they are unaware of what others have accomplished in different regions of the country. One promising approach to addressing this problem involves the activities of the newly formed Quality Measurement Advisory Service (QMAS). QMAS was established in 1996 to assist State and local health care coalitions, purchasing groups, and health information organizations in their efforts to measure health quality for value-based purchasing and other purposes. QMAS offers educational meetings and guides on quality measurement, provides consulting services, manages collaborative projects, and facilitates information exchange.

Return to Table of Contents


Inadequate Staffing

Business coalitions and corporations are not well enough staffed to accomplish the task of restructuring the health care system based on cost and quality measurement. Human resources and business coalition staffs are often skeletal, particularly compared to the magnitude of the problems they tackle. While some leading corporations have staffs of reasonable size and good quality, many companies are devoting surprisingly few resources to the task of health care quality improvement and cost management, particularly in light of the potential savings. On the other side of the bargaining table, providers and managed care organizations typically have large and sophisticated staffs.

Return to Table of Contents


Credibility of the Information

Another obstacle that is impeding progress toward the use of quality measurement in a value-based purchasing system involves employers' concern about the credibility and relevance of the information. This concern takes several forms.

First, employers are concerned that they are obtaining mainly indirect measures that do not necessarily represent clinical quality. Most employers and coalitions beginning to measure health plan quality, for example, are using HEDIS indicators. These indicators provide employers with a useful checklist of the extent to which primary and preventive care services are being provided by plans. But they are less useful in telling them whether the appropriate followup measures are taken when preventive screening reveals a danger signal, or whether the care resulted in positive outcomes. (However, future versions of HEDIS will provide this kind of information.)

Moreover, while there are many data available on physician practice patterns and use of services, employers also need to learn whether health care procedures are performed skillfully or result in good patient outcomes. Research efforts have resulted in a steady build-up of knowledge about such topics as the appropriate time to begin administering an antibiotic prior to surgery, given the patient's medical profile; how much tissue to remove in certain types of surgery; how invasive surgery should be; and indeed, whether surgery is called for at all, given that alternative therapies might rely, for example, on prescription drugs. But information regarding the use of best clinical practices is rarely made available to the purchaser community.

Second, employers are concerned that much of the information on quality emerges from surveys of health care consumers. In their ratings of health plans, consumers are very concerned about out-of-pocket costs and whether their family physician is participating in the plan. These are valid concerns, but they may not have much to do with the actual quality of care. Satisfaction surveys also rely heavily on whether health plans are "user-friendly." Do they offer evening and weekend hours? Is the telephone answered quickly? Are appointments easily made? All of these issues tend to affect access to care more than the quality of the care that is delivered.

The CAHPS® survey has been designed to address many of these issues. Along with its questions on access, CAHPS® has items in domains such as:

  • Communication and interaction (e.g., to what extent does the consumer feel involved in medical decisions?).
  • Continuity of care (e.g., how often does the consumer's provider have a knowledge of his or her medical history?).
  • Administrative burden (e.g., how often has the consumer had problems with claims processing?).

It also asks about use of services, health status, and demographic characteristics.

Several other factors also contribute to the credibility of this new survey instrument. In addition to field-testing their instrument, the researchers conducted cognitive testing to determine whether people understand the questions. This testing enabled them to ensure that the survey measures what it is intended to measure. The reputation of the participants also lends credibility to this effort. Finally, the fact that the survey was developed by an objective body (AHCPR), focuses on consumers, and will be administered by independent venders rather than health plans is expected to make the results more believable in the marketplace.

Third, business efforts to build quality into health care purchasing are handicapped by the slow development of community-wide information systems, which is due to technical limitations, a lack of financial resources, and—in many cases—insufficient political will. Most communities, moreover, lack sufficient standardization of data elements to support fair comparisons of providers and plans. To the extent that there is activity in this area, it is initially focused on the transmission and payment of claims, not on the development and dissemination of quality-related information. Community-wide information systems are under development in a few communities, such as Minneapolis-St. Paul, but progress is slow and laborious. Obstacles include getting all physicians' offices plugged into a common software system and the lack of networked and secure computer systems.

Return to Table of Contents


Information Not Being Used to Drive Change

Another obstacle to the development of a value-based purchasing system involves the fact that even if employer purchasers have the information they need, and believe it, they do not necessarily use it. In order to make data collection and analysis worthwhile, employers must build the data into their purchasing strategies and bring about changes in the behavior of employees and their families, health plans, and most important, providers in order to make a difference.

Some employers have collected information on the comparative performance of hospitals but failed to exclude those with poor records from networks made available to their employees and to steer workers and their families toward hospitals with the best records. This discourages providers from making the investment in quality improvement. If employers are going to be successful in quality-based purchasing, they need to both identify good quality and reward it. While efforts to educate all providers and help them all improve are laudable, the reality is that some will out-perform others. Employers will need to resist community pressures to ensure that there will be no "losers" if they are to build quality into health care purchasing.

Return to Table of Contents


Employers Mainly Concerned With Cost Reductions

The pioneers identified in this report are among the leaders who are genuinely pursuing improved quality of care and better health outcomes. Part of their motivation for trying to improve quality is a strong belief that better quality ultimately translates into long-term cost control, in health care as in the rest of their business. But they are not following a value-based purchasing strategy purely as a short-term cost control device—their interest in improving quality has a life of its own. It is part of a sense of overall corporate responsibility for attracting and retaining high-performing workers and contributing to their health and productivity.

Nevertheless, the majority of employers around the country—particularly smaller firms—are mainly concerned with cost control. Their major emphasis is placed on obtaining assurances from health plans that their premium increases will be held to a minimum—or even that premiums will decline. How that is achieved is of little interest to these employers.

Furthermore, many employers are achieving health cost control in part by shifting a significant portion of the health care bill to their employees. According to data collected by KPMG Peat Marwick, from 1988 to 1996, employees' contributions to the premiums of HMO plans increased from $50 to $179 per month. Copayments and deductibles have also risen sharply. Many employers are cutting back on retiree health benefits.

The challenge facing the employer community is to both further refine the "best practices" now in the marketplace and develop dissemination and transfer mechanisms that spread these practices to more payers. Until this occurs, the gap between theory and practice will remain.

Return to Table of Contents



The pioneering employer purchasers can point to number of accomplishments:

  • Innovative employers have used HEDIS measures to compare the quality of health plans; some companies have used subsets of the HEDIS measures in which they have the most confidence. Digital, which helped create HEDIS, has its own comprehensive set of HMO performance standards that it distributes to HMOs and updates every two years; Digital sets goals that "stretch" HMOs to continuously improve their performance.
  • Some employers and coalitions have combined HEDIS measures with information from employee satisfaction surveys to develop more comprehensive indicators of plan performance.
  • Employers are working with plans to identify weaknesses (based on their scores on performance indicators), set goals, and develop quality improvement plans.
  • Coalitions are cooperating with State agencies to establish information on performance that can be used consistently by public and private employers.
  • Employers are creating financial incentives for employees to select plans that score well on composite quality indicators; in some cases, this takes the form of a "defined contribution" to a "benchmark" plan, charging employees more to enroll in plans with less satisfactory quality records.
  • Employer coalitions are creating financial incentives for health plans to collect and report quality indicators; this effort will eventually link financial incentives to the actual performance of the plans, as measured by these indicators.
  • Coalitions are collecting standardized, provider-specific outcomes data for certain health services (e.g., coronary artery bypass grafts, cesarean sections). The goal is to feed information on comparative performance to providers to stimulate quality improvement, as well as to work with providers to develop critical pathways or practice guidelines. The Dallas-Ft. Worth coalition has identified five services believed by its members to be most in need of this type of data measurement. They are starting by working with both hospitals and physicians to develop risk-adjusted indicators reflecting outcomes related to pregnancy and childbirth.
  • Employers and coalitions plan to use measures other than HEDIS (e.g., FACCT, Joint Commission on Accreditation of Healthcare Organizations [JCAHO]) to supplement their information set.
  • Employers are recognizing the important connection between improvements in the health of their employees, improved productivity, and reduced absenteeism. This is particularly important in behavioral health (for example, Pacific Bell).

Table 1 summarizes the employer initiatives described in this report.

Return to Table of Contents


Research Agenda

This section develops a preliminary agenda for further research on quality measurement. We outline several possible research strategies that have emerged from our work on this project. Clearly, other research issues can be added to this preliminary list. This section is meant to begin a dialogue on some of the most interesting research and policy questions.

  • What factors distinguish companies and coalitions that are innovative and bold in pursuing value-based purchasing from those that are not?
  • What features of the purchasing initiatives that we studied make them stand out from the rest of the pack?
  • What is the payoff from employer investments in quality improvement?
  • What are the most important barriers that prevent employer purchasers from getting started on value-based purchasing?
  • What impediments keep employer purchasers who have taken some first steps from advancing to more sophisticated levels of activity?
  • What proportion of employer purchasers nationwide are using up-to-date tools and techniques (e.g., how many are using HEDIS 3.0)?
  • What factors need to be addressed to make value-based purchasing work on a community-wide basis, as opposed to each payer working in isolation to control its own costs?
  • What type of technical assistance and infrastructure are needed to help the value-based purchasing movement gain acceptance?

A number of research techniques could help answer these questions. We believe that a sensible approach would work sequentially, starting with relatively straightforward methodologies and then, based on what is learned, moving forward to more sophisticated approaches.

A useful starting point would be a nationwide survey of employer purchasers. This could include large, medium, and small employers, as well as business coalitions. This survey, which would be focused on a randomly drawn sample of employers, would uncover what employers are doing in the area of quality improvement, and if they are not doing much, why not. What would it take to interest them in these activities? Are they being held back by a lack of knowledge or by other factors such as a perception that such activities are too costly, or lack an expected payback over a reasonable time frame? What are the most common approaches? What are employers' views about the relative value of pursuing cost management on their own, using carriers and plans, or working through business coalitions?

Another promising approach involves running a separate series of focus groups with employers and employees. These focus groups could elicit more in-depth information about the reasons underlying employers' and workers' attitudes. They could lead to an understanding of what it would take to turn the value-based purchasing movement from a set of activities undertaken largely by an elite group of leading pioneers to a more broadly based movement.

Yet another promising research strategy would involve a comparative study of several market areas, some where employers have consolidated buying power and engaged seriously in quality measurement, and some where there has been much less activity. In fact, it would be interesting to compare an area where public and private buyers are working together to measure quality (e.g., Twin Cities, St. Louis, Northern California); an area where private employers have combined forces but are not working with State and local governments; and areas in which there has been little meaningful consolidation and quality measurement.

Return to Table of Contents


Project Staff

This report was prepared by: Jack Meyer, New Directions for Policy; Lise Rybowski, The Severyn Group; Rena Eichler,Agency for Health Care Policy and Research. Irene Fraser, Agency for Health Care Policy and Research, was the editor of the report.


About the Authors

New Directions for Policy (NDP) is a Washington-based firm that assists business, purchasers and providers of health care, and government through policy research and analysis, strategic planning, and program evaluation. NDP's purposes are to promote more effective operation of the health care system, and to aid the development of sound public policy on health care and welfare reform issues. NDP analyzes the forces driving health care spending, designs innovative strategies to improve financing and delivery systems, and evaluates major reform proposals. NDP also develops new policies to reduce unemployment and improve the social welfare system.

Jack A. Meyer, Ph.D., is President of New Directions for Policy. He is a health economist who has written widely and conducted extensive policy analysis in the area of health system reform. Dr. Meyer is also President of the Economic and Social Research Institute, a nonprofit research organization in Washington, DC.

Lise S. Rybowski, M.B.A., is Founder and Principal of Severyn Healthcare Consulting, a health care research and communications firm based in Fairfax, VA. She specializes in research on innovations in the purchasing and delivery of health care, including such topics as employer and coalition purchasing initiatives, Medicare managed care, and the measurement and reporting of health care quality.

Rena Eichler, Ph.D., is an Expert Appointee/Health Economist for AHCPR in the Center for Organization and Delivery Studies. She specializes in research on and implementation of market-based health reforms that include realigning payer, provider, and patient incentives and managed competition in developed and developing countries. Other research has focused on the behavior of nonprofit 

Page last reviewed November 1997
Page originally created September 2012
Internet Citation: What Are the Obstacles?. Content last reviewed November 1997. Agency for Healthcare Research and Quality, Rockville, MD.