Improving Performance


Can value-based purchasing in health care live up to the promise?

By Jerome Connolly, PT, CAE
May 5, 2014

On March 4, 2014, the RAND Corporation released a new report concluding that after a decade of experimentation with reforms that give health providers financial incentives to improve performance—so-called value-based purchasing—relatively little is known about how to best execute such strategies or to judge their success.

The report—authored by Cheryl L. Damberg, Melony E. Sorbero, Susan L. Lovejoy, Grant Martsolf, Laura Raaen, and Daniel Mandel—which was designed to assess the state of knowledge about value-based purchasing programs in health care, found that evidence thus far is mixed about whether using such payment schemes can help improve quality and lower costs.1

Value-based purchasing (VBP) refers to a broad set of performance-based payment strategies that link financial incentives to providers’ performance on a set of defined measures. In this context, “value” is defined as the outcomes achieved divided by the cost or resources used to generate those outcomes.

Most of the research on value-based purchasing has examined the effects of pay-for-performance programs that reward physicians and other health providers for improving the quality of care or reducing costs. Research is needed to understand the impacts of newer value-based payment models, such as accountable care organizations (ACOs) and bundled payments that create stronger financial incentives for change in clinical decision-making, as well as broader delivery systems.

Incentivizing behavior to change clinical decision-making can be called “macro-engineering” intended to effect “micro-modifications.” This was largely the approach taken in the Affordable Care Act (ACA) provisions that created ACOs, bundled payment demonstrations, and the development of the value-based modifier. A simple analogy would describe this type of engineering as manipulation of large gears in order to get small gears turning in the same direction. As explained by former HHS Secretary (and Utah Governor) Michael Leavitt, one cannot move large gears by turning small ones; but by moving large gears, small gears can be put in motion.2

In Crossing the Quality Chasm, the landmark publication of the Institute of Medicine,3 a “system” was defined as the coming together of parts, interconnections, and purpose. While systems can be broken down into parts, which are interesting in and of themselves, the real power lies in the way the parts come together and are interconnected to fulfill some (perhaps bigger) purpose. In this respect, our nation’s health care system consists of various parts—micro-systems, (e.g., clinics, hospitals, pharmacies, laboratories)—that are interconnected (via flows of patients, information, payment) to fulfill a larger purpose (e.g., maintaining and improving the health of our population). The essence of this larger purpose—the macrosystem—is represented by the number and strength of interconnections between the elements of the (micro) systems and the “how” and “why” of those interconnections. For example, a physical therapy private practice can be described as a microsystem as it is small, self-contained, with relatively few interconnections.

In contrast, macrosystems, such as organizational factors, policies, laws, quality measures, and government programs, influence micro activity. Engineering changes to these macrosystem elements were the preferred choice of policymakers when writing the ACA. This is what we are experiencing today as we try to adjust our practices (microsystems) to cope with the changes to the macrosystems. We experience the truth of the adage that reimbursement shapes practice.

But, as RAND is finding, it is difficult to study the effectiveness, or even the effects, of changes to macrosystems. Because micros are easier to study, we know more about them. And herein lies the ambiguity surrounding reports such as the RAND’s dealing with ACOs, the Health Affairs study of patient centered medical homes (PCMHs),4 or the Medicare Payment Advisory Commission investigation of bundled payments.5 In essence, the research is attempting to determine what is occurring at the micro level as (presumably) a result of the macro modifications contained in the ACA and other policy changes embarked upon even before the 2010 enactment of the ACA, which Dr. David Blumenthal, president of the Commonwealth Fund, describes as the most impactful legislation on health care macrosystems in our lifetime.6

One of the many approaches the ACA takes to make health care more efficient is pay-for-performance (P4P) incentives for clinicians. This approach is predicated on the notion that if therapists, physicians, nurses, and physician assistants are judged and rewarded based on the quality of the care they provide and actual patient outcomes, more of the necessary interventions will occur while fewer unnecessary tests and procedures will be performed, saving money and improving the quality of care.

According to R. Adams Dudley, MD, MBA, these new models vary in the degree of system delivery and health care practice change they influence. Some, such as certain ACOs that put health providers at financial risk for spending above negotiated targets, are more consequential.

Dudley was involved in two large, well-conducted trials7,8 that demonstrate that individual providers are “unequivocally improving their outcomes in response to financial incentives, and that even small practices can improve…. But it is also very important as we design incentives, to know what the organization is going to do with it, and to be sure that the incentives make sense in terms of how doctors think about their patients.”

However, another report suggests employed physicians, even though satisfied with the employment model, are not integrated into performance improvement, with almost half (49 percent) indicating their organizations lacked financial incentives to promote physician engagement. This finding takes on significant meaning when put in the context of today’s health care landscape in which the move toward value-based payment and population health management has resulted in a resurgence of hospital acquisition of physician practices, a phenomenon that was quite pervasive in the 1990s.9

After a five-year demonstration project with large group medical practices, the P4P model was the first value-based incentive to be widely implemented and served as the precursor to the ACO. Even though the ACO movement is in its infancy, growth of the model has been rapid with public (Medicare) and private entities currently numbering nearly 600 across the nation.

Studies done to date on VBP have been inconclusive, with some showing modest cost savings and quality improvements, and others finding no meaningful changes. In addition, many of the studies about value-based purchasing had design flaws that make it hard to determine whether the intervention had an effect beyond other simultaneous changes that were occurring in health care to cut costs and improve quality. In fact, in the PGP, half of the organizations failed to realize significant monetary savings by the end of the fourth year.10

Nevertheless, the ACA is now law, and these macro changes are being implemented and the effects investigated, if not already being experienced, by therapists, physicians, and other providers. Moreover, in an attempt to depart from the long-embedded fee-for-service payment system, legislation is currently working its way through Congress that would repeal and replace the flawed sustainable growth rate (SGR) formula. The replacement envisions a Merit-based Incentive Payment System (MIPS), which layers pay-for-performance atop a fee-for-service system—the latter being de-emphasized over time.11

The RAND report was developed by assessing value-based purchasing across three dimensions: pay-for-performance programs, accountable care organizations, and bundled payment programs. Design features of each model were described, an account worthy of our attention primarily because of the edification it provides about the innovation emerging and structures evolving.

At the time of the study,5,6 discrete entities sponsored 129 VBP programs, and they fell into four categories of sponsors: (1) CMS, (2) private-sector commercial health plans, (3) regional collaboratives of stakeholders, and (4) states through their Medicaid programs.

In addition, the team reviewed published studies that evaluated the impact of these three dimensions. To complete the assessment, researchers organized a technical expert panel (TEP) of value-based purchasing program sponsors, health care providers, and program evaluators to comment on the evidence to date and to recommend strategies to build the evidence needed to inform the use and design of value-based purchasing programs futuristically.

The report calls for value-based purchasing program sponsors and evaluators to work together to define the list of priority research questions and data that need to be collected to generate the evidence policymakers require to inform program design and implementation.

Measuring Patient Outcomes and Functional Status

The stated objective of VBP is to hold providers accountable for, and financially incentivize their performance, primarily based on measures of health outcomes, but the measurement process is almost as immature as VBP itself. CMS has expressed a desire to move increasingly from process measures toward outcomes measurement to instill accountability, but the agency recognizes that structure and process measures are presently more readily available than outcome measures. This may be true for physicians and hospitals, but not so accurate for physical therapy where functional status measurement has been around for decades and has rapidly matured in the past 10 years.

The TEP members convened by RAND did suggest that functional status/health status is an important, feasible measure and believe that inclusion of these types of measures would shift VBP programs in the direction of incentivizing performance on outcomes. This is where physical therapy, and especially physical therapists (PTs) in private practice, can excel in the emerging paradigm of macrosystem engineering that is fostering ACOs and other innovative delivery models. Our impact on the functional status of our patients must be part of the available evidence.

TEP members pointed to several health care settings and providers that are already measuring functional status on a regular basis: Medicare ACO programs are paid for reporting patient-reported functional imitations, and CMS collects health status information in nursing homes and home health agencies. The study failed to mention the profound steps being taken in physical therapy to report functional status, such as the functional limitation reporting requirement recently imposed by CMS. The Dartmouth Institute is measuring quality-adjusted life years and has built functional status, which is considered a vital sign, into a provider order for life-sustaining care for patients who are at or near the end of life. Other provider representatives stated they are also measuring health status for some conditions. The TEP suggested that CMS could implement the Patient Reported Outcome Measures (PROMs),12 as the National Health Service in the United Kingdom has done, to measure the performance of hospitals regarding the functioning of patients undergoing selected procedures.


ACOs and bundled payment programs that embed clinical quality measures have only recently emerged and are just now being tested and evaluated. There is currently very limited evidence regarding the impact of these programs and whether they can be successfully implemented or can endure. The few ACO evaluation studies that have been published have been of relatively short duration (i.e., 1–2 years), making it difficult to know whether the results are real and can be sustained. These studies also suffer from methodological weaknesses as seen in the VBP literature. The published studies show some improvements in cost and quality; however, several of the ACO studies reported cost savings compared with expected year-over-year trend in spending, as opposed to comparing the intervention providers’ experience against a matched comparison group of providers.

Nevertheless, these macro changes appear to be permanent and should be considered as such for many reasons, not the least of which is they are being adopted voluntarily by the private sector where they are not required, but have been influenced by, the law.

Moreover, some health care thought leaders, such as Dr. Ezechiel Emanuel, predict these ACO models will replace or at least transform the American private insurance model by the year 2025. As each ACO becomes responsible for a large population of patients, it will pool the risk of patients who have higher-than-average costs with those with lower costs. With the end of fee-for-service payments, insurance companies will no longer be needed to handle complicated billing and claims processing, nor will they need to be paid a fee for doing so. Payments can flow directly from an employer, Medicare, or Medicaid to the ACO. According to Emanuel, these entities will require enhanced information systems to track patients and figure out how to deliver more effective care, but this analytic capacity will be directed at improving health outcomes, not at imposing barriers to those seeking treatment.13

So, to adjust to macro changes that have taken place, private practice physical therapists must continue to engage in all of the sound business practices that have led to success to date, but we must emphasize the value equation represented by our interventions. Measuring outcomes and demonstrating return on investment from physical therapy is becoming increasingly critical to our success and our collaboration with ACOs and other emerging health microsystem entities. As more studies of ACOs and other VBP models take place, physical therapy and the value it brings to the delivery system and its patients must be part of this evaluation.


Jerome Connolly, PT, CAE, is a registered federal lobbyist whose firm Connolly Strategies & Initiatives has been retained by PPS. A physical therapist by training, he is a former private practitioner who throughout his career has served in leadership roles of PPS and APTA. Connolly also served as APTA’s Senior Vice President for Health Policy from 1995 – 2001.

Follow your lobbyist and legislative activities on Twitter: @TherapyPolicy.


1. Damberg CL, Sorbero ME, Lovejoy SL, et al. Measuring Success in Health Care Value-Based Purchasing Programs: Findings from an Environmental Scan, Literature Review, and Expert Panel Discussions. Rand Corporation website. Accessed March 2014.

2. Leavitt, remarks, National Quality Forum annual meeting, February 2014, Washington, DC.

3. National Research Council. Crossing the Quality Chasm: A New Health System for the 21st Century. Washington, DC: The National Academies Press, 2001.

4. Reid R, Coleman K, Johnson E, et al. The Group Health Medical Home at year two: cost savings, higher patient satisfaction, and less burnout for providers. Health Aff. 2010; 29: 835–43.

5. Medicare Payment Advisory Commission. Post-acute care providers: Shortcomings in Medicare’s fee-for-service highlight the need for broad reforms, Report to Congress, March 2013. and Accessed March 2014.

6. Blumenthal remarks, National Quality Forum annual meeting, February 2014, Washington, DC.

7. Bardach NS, Wang JJ, DeLeon SF, et al. Effect of pay-for-performance incentives on quality of care in small practices with electronic health records: a randomized trial. JAMA. 2013; 310: 1051–9.

8. Petersen LA, Simpson K, Pietz K, et al. Effects of individual physician-level and practice-level financial incentives on hypertension care: a randomized trial. JAMA. 2013; 310: 1042–50.

9. Johnson C. Survey shows growing approval and acceptance of integrated, employed physicians. Physician Executive Journal. March/April 2014.

10. Centers for Medicare and Medicaid Services. Medicare Physician Group Practice Demonstration, Office of Research, Development, and Information, July 2011.

11. SGR Repeal and Medicare Provider Payment Modernization Act of 2014, S. 2000 and H.R. 4015, 113th Congress.

12. Patient Reported Outcome Measurement Information Systems (PROMIS), Northwestern University Department of Medical Social Sciences, Accessed March 2014.

13. Emanuel says traditional health care companies obsolete by 2025, The Daily Princetonian, February 24, 2014.

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