We draw from our experience at Mass General Brigham, a large northeastern health system serving more than 1.7 million patients yearly and participating in multiple risk-based ACO arrangements (commercial, Medicare, and Medicaid). In the past decade of its VBC journey, our system has used care management as a core component of its population health strategy and developed a suite of care management programs to serve patients on a multidimensional continuum (Figure 1 and Table 2). “At its core, value-based health care should be highly data-driven,” Chan says. He adds that health systems and insurers need to improve their ability to collect data, measure outcomes, and optimize for this to truly drive cost reduction while improving care.

At the outset, it is important to distinguish between “cost” and “price.” In a February 2021 Bulletin article, cost and price were described as two sides of the same coin.12 Price is defined as the amount paid for a good or service. Cost refers to the amount of material and human resources required to deliver a particular good or service. To sustain an economically viable business of any type or size, a reasonable profit margin over and above cost is necessary. A potential pitfall of value-based care is that high-risk patients could be turned away. Similar to actuarially based insurance, doctors would need to outweigh a high-risk patient with enough healthy ones, Dr. Jorgensen explains.

Understanding Value-Based Pricing

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• For example, luxury automakers solicit customer feedback that serves to quantify customers’ perceived value of their experiences driving a particular car model.
• In other words, they are rewarded for volume — they are paid more if they deliver more services, even if they don’t achieve desired results.
• VBM would provide him or her with the information to quantify and compare the value of alternative strategies and the incentive to choose the value-maximizing strategy.
• It resulted in a 124 percent increase in value over the harvest strategy, worth more than $450 million.

The first principle in compensation design is that it should provide the incentive to create value at all levels within an organization. Compensation for the chief executive officer—though a popular topic in the press—is something of a red herring. Managers’ performance should be evaluated by a combination of metrics that reflects their organizational responsibilities and control over resources (Exhibit 6). Further analysis revealed that the number of delivery trips per transaction was very high. Whenever there were errors in an order or goods proved defective, multiple deliveries had to be made to a single customer. The retailer found that it was making an average of 1.5 trips per transaction, compared with a theoretical minimum of 1.0.

Value-Based Care: What It Is, and Why It’s Needed

“Health care needs to continue adding measurement and analytics capabilities to accelerate value-based care,” he believes. Measuring health outcomes is not as complex as it is often perceived to be. Routine clinical practice does not dictate, nor can it support, the voluminous health outcome measure sets used in clinical research. Instead, clinicians need to focus on measuring the outcomes that define health for their patients. Those outcomes cluster by patient segment—the outcomes that matter most to patients with congestive heart failure are strikingly consistent while also markedly different from the outcomes that matter most to women who are pregnant.

The Blueprint8 argues for the need for core competencies, formalized partnerships, data sharing, and learning collaboratives to improve collaboration among entities. Success also requires financing models and administrative support, which can be created via collaborative arrangements. Similarly, payers, policymakers, and health systems may consider requiring care management programs to report whether their care managers have assumed roles of coordinating the coordinators or designated care management leads. To better understand the potential benefits of value-based care, stakeholders in the public and private sectors have tested a variety of approaches. The Centers for Medicare and Medicaid Services (CMS) has taken a leading role, testing several voluntary and mandatory programs with hospitals, physician groups, health plans, and other health care entities.

What is value-based care?

Care that improves outcomes in all 3 of these dimensions creates a better experience for patients. Moreover, capability, comfort, and calm describe outcomes that result from the efficacy and empathy of health care, rather than its hospitality. As with any major program of organizational change, it is vital for top management to understand and support the implementation of VBM. At one company, the CEO and CFO made a video for their employees in which they pledged their support for the initiative, declared that the basis of compensation would shift at the end of the year from earnings to economic profit, and gave examples of what VBM meant.

These programs offer the promise of improving patient outcomes while decreasing health care utilization and costs. However, as these programs proliferate in number and specialization, the field of care management is increasingly at risk of fragmentation, inefficiency, and failure to meet the core needs of the patient. Efforts to improve health equity aim to reverse practices and policies that have made it difficult for historically marginalized groups, especially people of color, to access and receive high-quality care. Until recently, many value-based programs did not prioritize outcomes related to equity, such as requiring care providers to measure and reduce health disparities by race and ethnicity.

What is value-based pricing?

As the price level is going to be higher than a cost-plus strategy, the perceived value needs to be strong. This can cause implementation costs to be more with value-based pricing, as extensive research must be done to arrive at a pricing decision. Also, differentiating the product from value based definition similar competing products may require a substantial investment. Value-based pricing may not always be the best pricing strategy for a company, and implementing it can come with several obstacles. It can be very difficult to evaluate the perceived value of a product or service.

The value stick is a visual representation of a value-based pricing strategy’s different components. At the top of the stick is the value that’s been captured by the end consumer, called customer delight. At the bottom of the stick is the value captured by the firm’s suppliers, called supplier surplus. You can apply a factor rule to the rate definition,
rate contributors, or both. For example, you can define rate contributors
to calculate hourly values based on salary and bonus. You can then
apply a factor of 1.0 or 100 percent to the salary balance contributor
and a factor of 0.5 or 50 percent to the bonus balance contributor.

Raise Prices

However, beyond addressing utilization and cost, care management can improve health outcomes by optimizing clinical care and addressing the relevant social determinants of health for a given patient. How health and hospital systems and individual clinicians are paid can depend on how well they perform on measures of quality and safety, such as death rates or patients’ ability to access timely care, as well as measures of equity and cost. To gauge providers’ performance at one moment or over time, public and private sector health care entities and regulators collect and analyze data on specific measures. The APMs can also promote rigorous evaluation by delineating patient-centered outcomes as national standards for care management programs to measure. Other APMs may similarly incentivize both the measurement of patient-centered outcomes and the process implementation to achieve these goals.

Gross margin, in turn, is determined by gross margin per transaction and the number of transactions (which can be themselves further disaggregated if necessary). Warehouse costs are a function of the number of retail stores per warehouse and the cost per warehouse. Finally, delivery costs are determined by the number of trips per transaction, the cost per trip, and the number of transactions. What is important is that these key value drivers, although only a small part of the total business system, have a significant impact on value, are measurable from month to month, and are clearly under the control of line management. To be useful, however, value drivers need to be organized so that managers can identify which have the greatest impact on value and assign responsibility for them to individuals who can help the organization meet its targets. Company X failed to manage its balance sheet because of its emphasis on the wrong performance metric—return on sales.

VBM in action: Managing the balance sheet

For example, he recalls a physician he knew who had trouble diagnosing a patient. The patient returned three times before he was able to get it right, and the doctor was paid all three times. Compete based on the unique, measurable value of medical devices, pharmaceuticals, services, and supplies. Focus on ways to improve employee health and wellness and contract with centers of excellence for complex care when appropriate. Participate actively in managing personal health, and, when faced with care and treatment options, seek assistance in understanding the expected outcomes. Value-based pricing can be applied to a wide range of products, but two of the most common are luxury fashion items and consumer staples such as milk.