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Realizing the Promise of Value-based Purchasing

Applying Value-based Purchasing


Vernon K. Smith, Ph.D., Principal, Health Management Associates, Lansing, MI.

The health care marketplace in which value-based purchasing initiatives are being carried out is in constant flux. Over the past few years, many health plans have consolidated and exited the Medicare and Medicaid markets. Consumers have begun to demand greater flexibility and, as a result, are turning away from capitated care arrangements and seeking out "looser," less integrated forms of managed care.

Vernon Smith explored how value-based purchasing principles could be applied to some of these non-capitated, managed care models. He stressed that while current market conditions increase the need to get the most value for the health care dollar, purchasers must adapt earlier value-based purchasing strategies (i.e., selective contracting, performance standards, and incentives) to reflect today's more fluid delivery structures.

A study conducted by Dr. Smith examined one of these more flexible models, Medicaid primary care case management (PCCM) arrangements. Under Medicaid PCCM models, the Medicaid program contracts with primary care physicians (PCPs) to provide primary care services for enrolled Medicaid recipients, and to coordinate (but not assume financial responsibility for) other specialty care.

Many States that operate Medicaid PCCM programs seek to administer these programs as if they were well-managed health plans. This has led some Medicaid administrators to explore the potential of adapting program designs, policies, and procedures found in private sector health plans. Some of these States are now looking to value-based purchasing principles to assist them with meeting the needs of their specific populations.

Dr. Smith highlighted the ways several States have incorporated value-based purchasing principles within their Medicaid PCCM programs:

  • Choices: Beneficiaries are able to choose from among qualified and participating primary care physicians (PCPs), specialists, and hospitals in rural and urban areas.
  • Value-based contracting: Medicaid chooses to contract only with providers who agree to a PCCM contract beyond the Medicaid provider enrollment agreement. This contract contains stringent provider qualifications and requirements for access and specialty referrals.
  • Performance standards: Medicaid monitors performance on quality and patient satisfaction measures. Report cards, surveys, and published reports generate performance feedback.
  • Incentives: Enhanced payment for priority services and recognition in published reports can be given as incentives for good performance, while penalties such as freezing enrollment and forcing disenrollment of PCPs are sometimes imposed on those who do not comply with access requirements.

Incorporating these elements has resulted in better access to care, measurable improvements in quality, and cost savings. Though States should individually determine how to best achieve their purchasing objectives, Dr. Smith stressed that alternative delivery systems such as Medicaid PCCM can successfully integrate value-based purchasing principles.


Smith VK, DesJardins T, Peterson KA. Exemplary Practices in Primary Case Management: A Review of State Medicaid PCCM Programs. Center for Health Care Strategies, Inc., 2000, Jun.

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