Value-based insurance design: Putting a price on healthcare quality

As employers struggle with the burgeoning costs of healthcare, cost-sharing initiatives seem to be everywhere. But how exactly should costs be shared? Healthcare benefits and copayments historically have been distributed equally among employees. This arrangement is arguably fair. But is it effective?

Value-based insurance design (VBID) suggests that it makes more sense to address healthcare costs based on the value to individual patients rather than as a "one-size-fits-all" solution. VBID is a system of cost sharing that tailors copayments to the evidence-based value of specific services for targeted groups of patients. Currently, cost sharing is nearly always based on the expense of the service or medicine and rarely is related to its potential benefit to a patient.

The pressures created by skyrocketing healthcare costs make VBID very timely. The approach can help mitigate some of the downsides of cost sharing, such as the creation of barriers to critical medical services and medicines for the patients who most need them. While everyone is anxious to address rising healthcare costs, no one is served if diabetics, for example, do not take their medicine or get regular eye exams because their copayments are too high. Ignoring chronic problems when they are still treatable will likely require more expensive treatments in the future. VBID encourages the use of services when the clinical benefits exceed the costs.

According to Michael Chernew, a professor of healthcare policy at Harvard University who developed the VBID concept along with Drs. Allison Rosen and Mark Fendrick of the Division of General Medicine at the University of Michigan in Ann Arbor, "There is understandable concern that if you just charge people more money, you’ll get negative outcomes. Employers want to control costs and provide quality healthcare benefits. Value-based insurance design allows them a way to minimize the deleterious consequences to straight-up cost sharing."

Bringing VBID to life

While the idea behind VBID has been around for nearly a decade, today's advances in disease management and data-sharing technology are paving the way for real-world applications.

At its simplest, a VBID program can target clinically valuable services for copayment reduction. This approach focuses on the service, rather than targeting benefits to individual patients. As Chernew and his colleagues outlined in a recent Health Affairs¹ article, Pitney Bowes currently reduces copayments for all drugs commonly prescribed for diabetes, asthma, and coronary heart disease.

In its most advanced form, VBID considers both the patient’s condition and the available treatments. A program of this type targets patients with select clinical diagnoses and lowers copayments for specific high-value services. All treatments are considered, and those with more 'value' are given a higher priority.

The municipality of Asheville, N.C., and the University of Michigan have implemented programs that reduce copayments for selected medications for employees with diabetes.

But accurately determining the value of services is not always straightforward. It calls for using a blend of clinical judgment, health economics, and actuarial techniques. And adjusting copays appropriately requires robust actuarial analysis. Several groups provide useful guidance on how to rank services and structure payments. In the United Kingdom, for example, the National Institute for Health and Clinical Excellence (NICE) publishes recommendations on public health, clinical practice, and health technologies within the National Health Service. VBID principles are also being promoted in the United States through the National Business Group on Health and the National Business Coalition on Health.

VBID programs also face a number of challenges to implementation, among them human relations concerns, as some employees might object to others paying less for certain services. In the case of the University of Michigan, Chernew reported that its program received overwhelming employee support through numerous e-mail testimonials. Clear communication surrounding VBID initiatives can help muster this kind of employee enthusiasm.

Other concerns include higher administrative costs, the potential for fraud or for attracting patients with targeted diseases, and data issues. While these are potential barriers for implementing VBID initiatives, many of these challenges have been successfully met. For instance, current wellness and disease management programs conduct claim searches through administrative data and help provide high-value services. In fact, companies may find that these types of programs can lay the groundwork for an effective VBID initiative.

Disease management programs and current VBID programs tend to focus on diseases such as diabetes, in which patients can be easily identified using specific data sets. Advances in technology will continue to improve the ability to collect and share electronic medical records and health assessment data, which are critical steps for implementing VBID programs that address a wider range of diseases.

VBID programs are feasible today. For companies considering targeting costs based on the clinical value of services, sound financial forecasting will help determine the scope of their programs. As with other benefits programs, VBID can be crafted to achieve any cost target, including budget-neutral programs created with an actuarially equivalent design.

VBID offers a more nuanced approach to delivering healthcare benefits, something that many employers are looking for as they seek to both improve their delivery systems and control costs. A study conducted by Chernew and his colleagues shows that, currently, there is little connection between quality-improvement initiatives and the financial structure of benefit plans. "Value-based insurance design allows companies to reach that synergy," he said.

DAVID MIRKIN is a principal and healthcare management consultant with the New York office of Milliman. A family practitioner with 25 years experience in medical management, he assists clients in areas including traditional utilization management, provider profiling, disease management, length-of-stay management for hospitals, and clinical data analysis. He serves on the advisory board of the University of Michigan Center for Value-Based Insurance Design, where Drs. Chernew, Rosen, and Fendrick serve as faculty members.

1 Michael E. Chernew, Allison B. Rosen, and A. Mark Fendrick, "Value-Based Insurance Design," Health Affairs, January 30, 2007, http://content.healthaffairs.org/cgi/content/abstract/hlthaff.26.2.w195.