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Value-Based Purchasing: From small to Extra Large

by Scott MacStravic

There has been a great deal of discussion in recent weeks on the subject of value-based purchasing (VBP) in health care. But the discussions reflect widely varying domains for VBP, ranging from quite small to extra large in scope. All these domains make sense, as does the application of VBP within them, but the applications vary widely from domain to domain.


The truly modest domain for VBP relates to the purchase of a class of prescription drugs that are cost-effective in managing chronic conditions. Payors, in general, have been advised to, and many already employ this approach in their health insurance plans. They eliminate or significantly reduce deductible and co-payment amounts that people covered by their health plans would otherwise have to pay for this special class of drugs, though often only for the generic version thereof, if there is one.

By reducing or eliminating this barrier to patient compliance with drug regimens that are an essential part of managing or preventing chronic conditions, payors can save far more than the drug costs they have to pay. These deliver value to patients, as well, by enabling them to avoid or control diseases that would otherwise reduce their quality of life, to say nothing of their performance at work, if employed.


The medium-sized domain for VBP relates to the application of this same basic logic to health insurance coverage in general, and to decisions made by consumers, as well as by payors. It entails gathering and publishing data on a wide range of treatment options for particular conditions, and a wide range of providers who may offer these treatments. By publishing data on the performance of both, payors hope that consumers will be led to “buy right” when they make their own health care choices. By selecting which treatments to cover and which providers to include in exclusive, preferred and otherwise limited/differentially paid provider networks, payors can increase the probability that consumers will buy right.


The large-sized domain for VDP addresses employers’ overall investment in employee health, including but going well beyond health insurance. A growing number of employers, together with vendors and insurers that serve employer clients, are adding investments that are aimed at maintaining or improving employee (and often dependent) health. By doing so, they anticipate gaining as much a four or five times as much return on their investment as they would if they only managed their health insurance costs.

While chronic diseases are typically the most common targets for managing healthcare costs, a wide range of other health problems tend to be the best targets when total labor costs are included. Common health problems such as allergies, back/neck/head aches, mental/emotional problems, poor sleep, high stress, lack of physical activity and smoking often cost far more in lost productivity and impaired performance than they do in sickness care costs, for example.

By choosing to expand the domain where returns can be found, employers expand both the numbers of people who make sense for targeting interventions (from a small minority to practically everybody), but the range of “balanced scorecard” performance impacts they use in planning, implementing and evaluating their health investments. This large-sized domain is likely to be many times as great, in both investment and in returns, as are medium or small domains.

Extra Large

Once employers begin looking at the overall productivity and performance impacts of their employee health investments, it makes good sense for them to look at all their investments related to workforce productivity and performance, rather than just at health. Training and education programs, pay-for-performance and other evaluation/reward systems, and the overall benefits offered to employees should be included.

Such a wide-ranging effort will cross many “silos” in the organization, but the potential to be gained by integrating, or at least coordinating these silos has led to widespread championing of the idea. While the large and extra large domains of VBP apply only to employers (including governments, healthcare providers, and insurers, since these are all employers), it may promise by far the greatest and most positive returns on investment.