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By Ken Yale, Senior Advisor, Strategy and Innovation,
Defense Health Agency

Value-Based Methodologies include any of a number of alternative payment models (APM) adopted over the past twenty years, including accountable care organizations (ACO), clinically integrated networks, pay-for-performance bonus arrangements (e.g. “collaborative care”), shared savings (e.g., alternative quality contract), bundled payments, centers of excellence (COE), advanced primary care/capitation, provider withholds/ performance guarantees, and others. The common theme with all APM is a desire to move away from traditional fee-for-service (FFS) reimbursement based on the number of procedures performed, typically measured by the number of relative value units (RVUs) a doctor can generate. The RVU was developed by Medicare to determine the level of effort a procedure takes, and therefore how much to pay for physician services, so it conveniently translates into a provider productivity formula. The drawback is that it pays more for higher utilization rather than better care, quality, access, or outcomes.

Value-Based Purchasing (VBP) or Pay-for-Performance (P4P) can be defined as a payment or a financial incentive linked to achieving defined and measurable goals related to care structures, processes or outcomes, patient experience, resource use and other factors important to payers and beneficiaries. It often includes some form of risk-sharing by providers, bundled payments and designs that address the total cost of care for a patient or episode.

Why is the Department of Defense and Defense Health Agency Interested?

The Defense Health Agency (DHA) began its value-based journey when the National Defense Authorization Act of 2017 required the Department of Defense to develop and implement value-based incentive programs within the TRICARE program (NDAA 2017 Section 705(a)(1)) and DHA created demonstration projects designed “to reward better health outcomes, enhance the beneficiary’s experience of care, and reduce health care costs over time…to improve health outcomes and reduce cost and risks to the Government.” (TRICARE Operations Manual 6010.59-M, Chapter 29, Section 2.1, April 2015).

The DHA is now expanding their interests in APM, as shown in their draft reimbursement manual update that proposes a “payment approach that incentivizes high quality and cost efficient care through varying levels of reimbursement and risk sharing…and APMs can apply to a specific clinical condition, a care episode, or a population.” (TRICARE Reimbursement Manual 6010.61-M, Chapter 18, Section 2.0, June 1, 2020 – Draft). A significant departure from the past is a new, proposed requirement that contractors have at least 25% of payments made to network providers in some form of APM in the “base year” of operations, expanding to 50% of payments by 2025. (TRICARE Reimbursement Manual 6010.61-M, Chapter 18, Section 4.3, June 1, 2020 – Draft). This is similar to the challenge commercial plans gave their staff in 2012 to encourage adoption of APMs, and when Aetna (now CVS Health) neared that achievement three years later the CEO increased the challenge to 75%.

What is an ACO?

One form of value-based purchasing, the accountable care organization (ACO), originated from research and development in the early 2000s at the Dartmouth-Brookings Institute, was piloted in the Medicare Physician Group Practice Demonstration, and promoted in the Affordable Care Act as a way to give physicians responsibility for the cost and quality of care. ACOs accelerated interest in APMs, which are now at the core of most government and commercial health care benefit plans, although in various stages of development and adoption. Over the past decade, for example, Aetna (now CVSHealth) established more than 220 ACOs including Medicare Shared Savings Programs, 1,700 collaborative care contracts, and five equity joint venture arrangements with providers – evolving through four different generations of ACO models (Yale K, et al. Clinical Integration: Population Health and Accountable Care, 3rd Edition, 2015). The term “ACO” may be used generically to mean any value-based arrangement.

The basic construct behind most value-based arrangements is measuring quality, and using methodologies to link higher quality to higher payment. The goal of these APM is to change provider behavior so they focus on objectives other than higher utilization. Anecdotal evidence suggests, however, that unless a significant portion of a provider workload (greater than 20%) uses APM it is unlikely to achieve significant behavior change because if 80 percent or more of a doctor’s revenue is based on volume, then “you get what you incentivize.” Moreover, most providers are paid by multiple health plans using different metrics and defining value differently, resulting in a cacophony of potentially conflicting objectives (Envisioning the Future of Value Based Payment: A Health Affairs Forum, May 17, 2016,

To help coordinate the wide variety of value-based approaches, advance the development and use of quality measures – some of which are still rudimentary, and increase the proportion of APM-based individual providers, the federal government Centers for Medicare and Medicaid Services (CMS) collaborated with public and private sector payers to establish the Health Care Payment Learning & Action Network (HCP-LAN, or LAN for short, LAN is an active group of leading public and private health care organizations dedicated to providing thought leadership, strategic direction, and ongoing support to accelerate adoption of APMs. Other models have also been established, such as the Catalyst for Payment Reform (

And now DHA is considering use of the LAN framework to help define acceptable APMs for the Military Health System and TRICARE program (T-5 Draft RFP Section H.X, page H15, at, see also

How Common are Value Based Methodologies?

After two decades of testing, value-based and alternative payment arrangements are now common in commercial and government programs (including Medicare, Medicaid, and Federal Employee Health Benefits), and continue to evolve as medicine and reimbursement change. Because of their early adoption of VBP, and willingness to experiment with different designs, CMS offers a wide range of value-based programs ( Current CMS programs evolved from prior demonstration projects – for example the ACOs evolved from the Medicare PGP demonstration – and they continue to change with new developments in healthcare delivery and finance.

Most organizations that purchase healthcare benefits, such as employers, CMS/Medicare, and state Medicaid programs, rely on their contracted health plans and managed care organizations to implement alternative payment and value-based arrangements. Health plans and managed care organization implementation of APM fall on a continuum from highly prescriptive (where most or all aspects of VBP design are specified by the purchaser) to highly flexible (where they have flexibility to implement any approach). In the commercial market, independent vendors have developed networks of COE capable of offering innovative episode designs inclusive of critical quality measures and cost and service guarantees. These providers may be leased to managed care organizations seeking the benefits of COE. Under a fully-insured, capitated model, any savings from the VBP model are generally retained by the health plan/managed care organization or shared with the purchaser through lower future-year premiums. In situations where the benefit purchaser is self-insured, and the provider network is predominately fee-for-service, savings may be more easily shared with the benefit purchaser. Experience has shown that success requires close alignment between value-based methodologies and provider network strategies since any change in reimbursement will impact provider contracts and networks. (Mercer, Defense Health Board Discussion Document: TRICARE Transformation, August 2020).

The Defense Health Agency is currently considering APMs to reimburse network providers, and a draft RFP proposes making TRICARE Managed Care Support Contractors accountable for developing and implementing APMs. The draft (here: is interested in a variety of payment approaches to incent delivery of high-quality, cost-efficient care. They are open to APMs that apply to specific conditions, care episodes, populations, different kinds of providers and facilities, and other variations that could work.

Do Value-Based Methodologies Work?

ACOs have met with mixed success in the commercial market and a growing minority (21%) of employers are providing ACO options (2018 National Business Group on Health Large Employers’ Healthcare Strategy and Design Survey). Other than Clinically Integrated Networks, most provider organizations are not yet integrated across a wide enough range of clinical and operational areas necessary to deliver consistent value – and those that do, such as Advocate Health, still require constant vigilance to pivot as the drivers of quality and value change with new practice patterns (Yale K, et al. Clinical Integration: Population Health and Accountable Care, 3rd Edition, 2015). Most health plans have ACOs in their networks, but few are delivering consistent savings and most still have upside-only risk arrangements with health plans. One example of a successful episode-based payment model is TennCare, the Tennessee Medicaid program. Major health plans collaborated with TennCare on the methods, metrics, and money necessary for a successful APM, and in CY 2018 estimated savings were $38.3 million, with quality metrics improved or maintained for most episodes (

In summary, value-based methodologies are alternative payment arrangements that link payment for healthcare services and products with value and performance on certain metrics, and move the healthcare system away from fee-for-service payments by individual procedure.

This blog has been reprinted in its entirety with the permission of the author. See more of his insights here.



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