Not Quite Ready to Abandon Value-Based Purchasing

Milbank State Leadership Network State Health Policy Leadership Health Care Consolidation

The pursuit of value over volume remains an epic quest in health care. Motivated to discourage overutilization of services, and by the importance of improving health outcomes through incentives for prevention and evidence-based care, purchasers continue to experiment with value-based contracting models.

Into this context comes an article in The Milbank Quarterly by Scott Greer and colleagues that argues strategic purchasing of health care services is doomed to fail. The authors reason that insurers cannot succeed because of asymmetry in four ways: insurers lack sufficient information to distinguish “value” among providers; the political system protects low-performing providers and undercuts market discipline by propping up those providers; insurers lack power at the local level to move volume to high-performing providers; and purchasers’ financial power is weak and lacks adequate clout to change providers’ behavior.

The authors conclude that rather than rely on insurers to improve health system performance, it is better to return “to the long-standing foci of health care policy studies: professionals, hospitals, voters, and politicians.” But I’m not quite ready to give up on strategic purchasing in the United States.

Let’s start with the obvious: as a higher percentage of individuals age into Medicare or enroll in Medicaid than enroll in commercial insurance, governments themselves have turned to insurers as proxies to impose discipline on providers’ utilization patterns and delivery of quality care. Administrators of governmental programs—hired by voters and politicians—long ago recognized their limited ability to contain costs when disgruntled providers enlist legislators or other elected officials to contravene those administrators’ actions.

That’s why, at least in the United States, the clear trend is to outsource those accountabilities to private entities. Yes, strategic purchasing might not pay providers different rates for the same service based on perceived quality, but strategic purchasing can mean value-added (and strategic) blocking and tackling through efforts like prior authorization and credentialing.

But there’s an even deeper issue: we can’t declare strategic purchasing ineffective without defining the value proposition we’re evaluating in the first place. The authors define strategic purchasing as “active, evidence-based engagement in defining the service mix and volume, and selecting the provider mix in order to maximize societal objectives” (emphasis added).

Thus, before pronouncing strategic purchasing ineffective, we need to define the objectives we’re trying to maximize. I’ll follow the authors’ lead and focus on Medicare.

Quality, Supplemental Benefits, and Take-Up in Medicare Advantage

As measured by the STAR rating system, which is a proxy for quality and includes metrics related to evidence-based care, member satisfaction, and members’ perception of their health status, strategic purchasing in the Medicare Advantage program is consistently improving over time, with the percentage of individuals enrolled in plans earning four or more stars growing from 62% to 78% between 2015 and 2020:

In addition, Medicare Advantage members receive numerous supplemental benefits not offered in original fee-for-service Medicare, and many of these benefits, such as oral health, food, fitness and gym memberships, and in-home support for disabilities, are correlated with avoidance of unnecessary medical services.

Not surprisingly, with better quality and supplemental benefits, take-up in Medicare Advantage has grown, from 13% of all Medicare beneficiaries in 2005 to 36% of beneficiaries in 2020:

In short, if the goal of Medicare Advantage plans as a strategic purchasing tool is to maximize quality, supplemental benefits, and perceived value as measured by enrollment decisions, then Medicare Advantage has been successful.1

“Choice” as a Societal Objective

For better or worse, one of the societal objectives that US health policy promotes is choice. Individuals want options, and not just among providers, but also among insurers. Medicare Advantage was designed to offer choice and encourage consumers to discern among the options based on benefits, STAR ratings, provider networks, and other factors. The average Medicare beneficiary now can choose from among 28 Medicare Advantage plans. If success is measured by choice, Medicare Advantage is an unequivocal success.

It is this degree of choice, perhaps more than anything, that confounds strategic purchasing:

  • Insurers offer plans intended to attract membership (i.e., produce sales), which can mean broad, open networks that impede discipline on delivery of evidence-based care because low-performing providers with strong brands might be retained to help sell the product.
  • Choice adds complexity and more confusion for consumers, and increases the administrative costs at the Centers for Medicare and Medicaid Services to evaluate and approve the various offerings.
  • The effectiveness of evaluating outcomes over time is complicated by a continuously changing enrolled population; insurers and providers often debate at the end of a period whether positive or negative results tied to bonuses or shared savings were driven by the provider’s performance, or by a shift in the mix of member acuity (or heath needs) over time.

Insurers and Providers Converging

In most strategic purchasing discussions, a key goal is to obtain provider “buy-in.” Various strategies are used, including shared savings and quality incentives, so the provider has “skin in the game.”

We’ve seen that not only do providers increasingly accept these goals, but they also want to displace insurers and directly hold the contracts with payers (i.e., government agencies and employers). Simultaneously, insurers want to become providers and drive outcomes directly, rather than through arms-length contracts with independent providers. This has resulted in provider-sponsored plans; providers and insurers merging (e.g., CVS/Aetna); and insurers buying providers (e.g., UnitedHealthcare’s growth in its Optum unit). Although these consolidations sometimes increase overall costs, they often better align incentives as well.

Greer and colleagues set up a somewhat false dichotomy between insurers and providers—as buyers and sellers of medical services, respectively—but these distinctions are losing their meaning. That, in itself, is evidence that strategic purchasing is succeeding, to better align and integrate insurers and providers.


It all comes back to what we mean when we talk about “societal objectives.” If the goal is better health, are we making progress? On that score, the results are mixed.

For one thing, it’s clear that health is dictated by many factors outside of medical care: social and environment factors, health equity and disparities, individual behavior, genetics, and poverty collectively impact health more than any clever purchasing scheme. The coronavirus pandemic has demonstrated the profound importance of public health and health equities on health.

We shouldn’t judge insurers as deficient for failing to “strategically purchase” solutions to health equity or poverty from providers. So, if Greer and colleagues’ thesis is that we should attend to the political and social power framework to focus more on public health and equity, and less on insurance, then perhaps we’re in agreement after all.

Charles Milligan is a former Medicaid director in two states and former CEO of UnitedHealthcare’s Community Plan of New Mexico.


1The same trends in expansion of managed care, value-added benefits, and attention to quality and outcomes are also true in Medicaid. See Hinton E, Rudowitz R, Diaz M, Singer N. 10 Things to Know About Medicaid Managed Care. Washington, DC: Kaiser Family Foundation; 2019. Accessed August 6, 2020.