What we pay for in healthcare is the real question

Year after year, the problem of how we pay for healthcare continues to dominate the public discourse. But for all the discussion around the future of the ACA or its alternatives as a method to reduce out-of-control healthcare spending, the powers that be are focusing our attention on how much we pay for insurance without similarly acknowledging what we pay for and how much those individual pieces cost are equally, or perhaps, even more important, since those are what drive the cost of insurance in the first place. As in manufacturing, you cannot get the final product cost down if you cannot reduce the costs of the parts that go into it.

To influence the cost of insurance we must focus on something called value-based reimbursement. Value-based reimbursement, or paying for outcomes, is an about-face from the “fee-for-service” way Americans have paid for healthcare over the past several decades. With every new technological advance, new medication, and medical device, healthcare costs have risen.

Patients believe having "more" procedures, treatments, and care will lead to better outcomes and healthier lives. The more expensive the care, the higher quality it is assumed to be—even when there’s evidence to the contrary. In the fee-for-service model, hospitals and physicians are paid based on how many procedures or treatments they provide. Because treatment practices are haphazard across the country, performing true apples-to-apples price and quality comparisons of providers, hospitals, devices, and therapies is nearly impossible.

Whether a treatment, medication, or surgery works or not, the provider (and hospital) get paid for delivering care. Combined with the erroneous belief that higher quality costs more, the fee-for-service model has contributed to escalating healthcare costs without a commensurate improvement in patient outcomes.

Value-based reimbursement is a critical step toward fixing this problem. Most people understand that value depends partly on price and quality. But the essential component most people miss is that value also relies on patient outcomes. An analogy can be made with automobiles. Given two vehicles with the same safety profile or crash-test ratings (outcomes), specifications (quality), and cost of ownership (price), the less expensive car would be the better value. But if the more expensive car has the best safety profile possible while the lower-priced vehicle fails the same tests, the better value would be the more expensive car. The same type of calculus can be made for nearly all aspects of healthcare.

Instead of the volume-based fee-for-service model that currently drives healthcare costs, we need care and payments to be based on value: Did the patient get better? Which pacemaker performs the best in patients with a particular heart problem? Which hospital or surgical group are hardwired with best practice guidelines, with the goal of 100% compliance? Identifying what constitutes an optimal-value practice is beyond the reach of most patients.

Providers, health systems, insurance companies, and even the federal government similarly struggle to make the kinds of comparisons necessary for value-based care and payments. Historically, this has been the result of a lack of data. But in the current data-driven environment, it’s a matter of measuring outcomes and processes so that data analysis can provide the answer. A wide variety of stakeholders are taking on this challenge, from individual hospitals and health systems, to organizations like the Health Transformation Alliance, a group of more than 40 corporations including companies such as American Express, Verizon, and IBM.

Geisinger Health System (GHS) is one system with a longstanding interest in healthcare value. In 2007, GHS launched ProvenCare, a program for patients needing coronary artery bypass graft surgery. The program had three main components: 1) identifying best practices; 2) a fixed price for all relevant patient care within 90 days; 3) increased patient engagement. Compared to patients treated conventionally, ProvenCare improved trends in length of hospital stays, discharge to home, and other clinically-relevant outcomes while decreasing mean hospital charges (Casale et al., 2007). On the heels of that success, GHS has since implemented the ProvenCare system for more than a dozen indications ranging from bariatric surgery and diabetes to rectal cancer and total hip replacement, with plans for continued expansion of the program.

Pharmaceutical companies are also beginning to consider value-based pricing schemes for medications. Though new oncology treatments that work by tricking the immune system into targeting cancer can come with sky-high prices, they also offer the promise of sustained remission, or even a cure. Novartis has taken the unusual stance of offering a money-back guarantee for patients who do not go into remission within a month after taking Kymriah, a leukemia treatment with a price-tag of $475,000.

Amgen is offering a similar deal for its cholesterol-lowering PCSK9 inhibitor, Repatha, a drug which can cost nearly $15,000 per year. Amgen even struck a deal with Boston-area insurer Harvard Pilgrim, where the company will refund the full cost of the drug if the patient ends up hospitalized with either a stroke or a heart attack, despite taking the medication for the prior six months. Both the Kymriah and Repatha money-back guarantees are relatively recent, so it’s unclear whether other pharmaceutical manufacturers will follow suit or if more insurers will start to expect similar deals for new, very expensive medications. Nevertheless, these deals demonstrate that value-based pricing is expanding beyond providers and hospitals.

Pundits and health analysts have often pointed to other countries’ lower per capita healthcare costs and suggested the U.S. apply similar cost-controlling measures. In these countries, healthcare costs can be controlled more effectively through the use of single-payer, government-run health systems and they have substantially greater bargaining power with manufacturers and providers consequently, than is possible in the U.S.

For example, in the United Kingdom, the value of new procedures, drugs, and diagnostics is assessed through organizations like the National Institute for Health and Care Excellence (NICE). NICE uses evidence to develop recommendations for physicians and public health practitioners, including the National Health Service. Their work includes assessing the cost-effectiveness of health technologies, procedures, and drugs. Failure to get a positive review by NICE means a company’s product won’t be covered by the NHS—a potential loss of millions of dollars or more.

But narrowly focusing on the budgetary impact is also wrong: inexpensive treatments that may be no better than placebo (or worse, can do harm) can still get a pass because they are cheap. Value-based reimbursement seeks to change this. By analyzing the data from clinical studies, we can reduce unnecessary treatments, surgeries, and therapies while focusing healthcare dollars on what actually works.

Though the U.S. has similar organizations like the U.S. Preventive Services Task Force (USPSTF) and the Agency for Healthcare Research and Quality, their recommendations are not always followed. A case in point is the USPSTF evidence-based recommendation for biennial screening mammograms beginning at age 50, in stark contrast to many insurers’ coverage of the test for women yearly beginning at age 40. However, because there is no central agency determining coverage and payment for any given intervention in the U.S., manufacturers rarely have to negotiate their pricing as dramatically as in other countries. Further, absent substantial quality and/or outcomes data, it’s likely a push for value-based reimbursement will be reduced to simply choosing the least expensive intervention—even when another option could be better for patients in the long run.

Value-based reimbursement approaches are just starting to take traction in the U.S. Continued expansion will take a concerted effort on the part of insurers and healthcare providers to educate patients, who will understandably, though erroneously, equate low-cost with low-quality. Evidence-based comparative outcomes studies will become more important as physicians rely on the results to guide patient care, health systems use the information to standardize patient care and restructure clinical workflows, and insurers use the data to modify and create coverage policies.

Health systems, like Geisinger, Kaiser, and Intermountain Health Systems, should serve as examples to other organizations moving toward value-based reimbursement by leveraging data and rethinking how patients are cared for. Pharmaceutical companies, often excoriated in the press for the high costs of drugs, may see value-based pricing as a way to stand apart from competitors and emphasize the value and patient outcomes associated with their treatment, rather than the costs.

The federal government, as the largest payer, through both the Centers for Medicare and Medicaid Services and the Department of Veterans’ Affairs, is further uniquely positioned to tie payments to outcomes. But until a greater number of providers and health systems routinely collect data on patient outcomes and staff performance, optimizing and standardizing healthcare practices will remain largely out of reach. Successes gleaned from those health systems and insurers at the cutting edge of value-based reimbursement can serve as templates for others, for some of the most common treatments or therapies to start. If all insurers were forced to consider cost-effectiveness and patient outcomes using evidence-based comparative analyses, healthcare costs could be substantially minimized through the reduction of payments for low-value care.