Chasing the holy grail of value-based healthcare

Patients, healthcare professionals, payers, and other stakeholders can have vastly different views on the value of a particular product, often resulting in a struggle between prioritising access to innovation and optimising costs. Addressing the ramifications associated with misaligned incentives in the fee-for-service payment model has been a driving force in the pursuit of value-based care.

The goal? Strike a balance – ensure patients can access medicines, maintain a sustainable healthcare system, and foster a robust pipeline of innovation that continuously improves treatment options. It’s a delicate dance, where pricing signals guide innovators on where to focus their R&D efforts, shaping the overall investment in healthcare and the expected value of future innovations.

Whereas the traditional fee-for-service model reimburses healthcare providers based solely on the volume of services delivered, value-based care is all about aligning prices with the value a new medicine brings to patients, healthcare systems, and society, compared to the current standard of care. This approach rewards innovation appropriately, prioritises access to the most valuable innovations, and aligns price signals with patient and citizen priorities, maximising the expected value of innovation for a given level of investment.

Dr Codman vs. the golden goose

While the term “value-based care” is relatively new, its spirit can be traced back to the early 1900s and the pioneering work of Ernest A Codman, widely known as the “father of outcome management”. 

Born in Massachusetts in 1869, Codman, a respected clinician and surgeon, believed that medical work was a craft that could be continuously honed and enhanced over time. As such, he made it his mission to systematically follow up with his patients after treatment, meticulously recording their outcomes. By analysing errors and linking them to outcomes, he aimed to prevent similar mistakes in the future, asserting that “every hospital should follow every patient it treats, long enough to determine whether or not the treatment has been successful, and then to inquire, ‘If not, why not?’”

Ernest Amory Codman

Pictured: Dr Ernest Codman as a young man. Credit: Public domain, via Wikimedia Commons

Frustrated by his colleagues’ resistance to adopting his tracking measures, Codman resigned from Massachusetts General Hospital in 1911 and established the ‘End Results Hospital’, where he could fully embrace his pioneering, data-driven approach. At this new facility, he meticulously collected and analysed patient outcome data – a concept he had developed at MGH – and took the groundbreaking step of transparently sharing these findings with patients and publicly publishing the results. The core focus was rigorously evaluating care delivery and openly communicating outcomes, laying the foundation for what is now known as evidence-based medicine.

Unfortunately, Codman’s tenacity for progress was somewhat marred by the more provocative and incendiary methods he adopted in pursuit of his goals. This side of his personality was put on full display when, while hosting a medical meeting in Boston in 1915, he unfurled a 6-foot-tall cartoon of a golden goose with its head buried in the sand, satirising what he saw as his colleagues’ apathy toward healthcare reform.

Unsurprisingly, Codman’s blunt delivery ruffled many feathers in the medical community, resulting in his dismissal from the Massachusetts General Hospital and Harvard Medical School faculty position. Despite initial resistance, his relentless pursuit of outcome tracking and quality improvement laid the groundwork for the value-based care movement we see today. His “End Results System” embodied the common-sense notion that hospitals should follow up on patients to determine treatment success and learn from failures, paving the way for a more accountable and data-driven approach to healthcare delivery.

Medicare & Medicaid: A new way to pay

In the mid-20th century, a seminal framework emerged that would profoundly shape the way quality of care is evaluated and understood. In 1966, Lebanese physician and healthcare administrator Avedis Donabedian first described the three elements of what would become known as the Donabedian Model in his article “Evaluating the Quality of Medical Care”.

Donabedian’s model proposed that quality of care could be assessed through three interdependent dimensions: structure, process, and outcome. Structure refers to the attributes of the settings in which care is delivered, including material resources, human resources, and organisational structure. Process denotes the activities involved in delivering care, encompassing both technical and interpersonal aspects. Outcome represents the effects of care on the health status of patients and populations.

His groundbreaking work emphasised that these three dimensions should not be mistaken for attributes of quality themselves; rather, they serve as classifications for the types of information that can be obtained to infer whether the quality of care is poor, fair, or good.

Lyndon Johnson signing Medicare bill, with Harry Truman, July 30, 1965

Pictured: US President Lyndon Johnson signing Medicare bill. July 1965. Credit: White House Press Office. Public domain, via Wikimedia Commons

Over in the US, another landmark change was in motion with the with the establishment of Medicare and Medicaid in 1965. These landmark programmes, introduced under President Lyndon B Johnson’s administration, aimed to provide comprehensive health insurance to the nation’s elderly and low-income populations, addressing longstanding disparities in the nation’s healthcare system, and paving the way for further reforms in the decades to come.

New models emerge

Of course, identifying the best quality treatment for patients is just one piece of the puzzle; to have an impact, a patient has to actually be able to access the medication. By the 1970s, the dilemma of balancing innovation and cost seen in pay-for-service models had become clear. 

As part of efforts to address the mounting cost of medicines, countries like the United Kingdom and the Netherlands began experimenting with alternative payment models that moved away from pure fee-for-service. The UK introduced the Resource Allocation Working Party (RAWP) formula, which adjusted capitation payments (determined by the number of patients served) to general practices based on population health needs. Meanwhile, the Netherlands explored integrated primary care models like the Transmural Care Model, which aimed to improve coordination between primary, secondary, and community-based services.

In the US, paediatrician and healthcare reformer Dr Paul Ellwood coined the term Health Maintenance Organisation (HMO). Dr Ellwood saw HMOs as non-profit organisations offering comprehensive care within a designated provider network in exchange for fixed annual payments. Dr Ellwod envisioned cost containment primarily via preventive medicine, including annual exams, screenings, and immunisations.

The Health Maintenance Organisation (HMO) Act of 1973 Based on Dr Elwood’s ideas, this legislation created a Federal assistance programme supporting the establishment and expansion of HMOs operating under a capitation model.

The Dartmouth Atlas

John Wennberg was an obscure clinical investigator when he began his research at Dartmouth Medical School in the late 1960s. Having noticed a significant variation in tonsillectomy rates between two neighbouring towns, Wennberg embarked on a path that would form the basis of his research for years to come. Wennberg’s research resulted in his being named the founding director of The Dartmouth Institute for Health Policy and Clinical Practice (then the Center for Evaluative and Clinical Sciences) in 1988.

Political campaigning for Bill Clinton

Pictured: Political campaigning for President Bill Clinton. Credit: Public domain, via Wikimedia Commons

Following the election of Bill Clinton in 1992, expectations of healthcare reform were growing. That year, healthcare costs had risen to $838 billion (approximately $3,000 per person), with millions of uninsured Americans unable to afford premium costs. Recognising the opportunity, Wennberg and his research team quickly got to work, using historical Medicare data to create the Dartmouth Atlas of Health Care, which meticulously mapped and analysed the variations in care delivery patterns across different regions and healthcare systems. Published in 1996, the insights gleaned from the Atlas catalysed a national dialogue on the pressing need to redirect the healthcare system towards a value-driven model, one that incentivises providers to deliver high-quality, cost-effective care tailored to individual patient needs.

Subsequent iterations of the Dartmouth Atlas of Healthcare continued to build upon Wennberg’s pioneering efforts.

A moniker for change

The start of a new millennium ushered in a period of significant progress for value-based care, particularly in the UK. 

In 2004, the UK’s National Health Service (NHS) implemented the Quality and Outcomes Framework (QOF), the world’s largest healthcare pay-for-performance scheme at the time. The QOF rewarded general practitioners based on their performance across a comprehensive set of clinical and organisational indicators spanning chronic disease management, patient experience, and practice infrastructure. This value-based payment model aimed to enhance quality and outcomes in primary care. By linking a significant portion of practice income to meeting evidence-based targets, the QOF drove improvements in areas like blood pressure control and clinical data recording. However, it also faced criticisms regarding potential unintended consequences.

Two years later, the movement would be given its official title, “value-based care”, a term coined by American researchers Michael Porter and Elizabeth Olmsted Teisberg in their 2006 book “Redefining Healthcare”. Building on the same concepts established by pioneers, such as Codman and Wennberg, the authors set out to argue for a healthcare system that prioritised value to patients over volume of sales.

Back across the Atlantic, the National Institute for Health and Clinical Excellence (NICE) was laying the groundwork for a landmark move that would showcase key elements of Porter and Teisberg’s proposal. In 2007, the organisation accepted a proposal for a new type of scheme to provide patients with access to Millennium Pharmaceutical and Janssen Cilag’s previously rejected cancer drug Velcade. Under the deal, the NHS would only have to pay for patients who benefitted from Velcade (priced at around $48,000 per patient). Any money spent on individuals whose tumours did not shrink sufficiently would be refunded by Johnson & Johnson.

Controversy and COVID-19

The 2014 launch of revolutionary Hepatitis C drugs like Sovaldi and Harvoni brought value-based pricing discussions into the spotlight. These highly effective treatments came with eye-watering price tags – in the US, Sovaldi cost $84,000 for a 12-week regimen, while Harvoni was priced at $94,500. Amid intense public backlash, a fierce debate raged as payers and policymakers questioned whether the drugs’ clinical value justified the immense budgetary impact on already strained healthcare systems.

This furore highlighted the complex interplay between clinical value, budget impact, and affordability in value-based pricing models. While the drugs offered superior cure rates and long-term cost savings, their high upfront costs strained payer budgets and limited patient access.

One year later, debates around how to balance innovation with affordability sparked once again in the US when, in 2015, the American Society of Clinical Oncology (ASCO) introduced its Value Framework, a tool designed to provide a standardised approach to assess the value of cancer drugs based on clinical benefit, side effects, and cost. The framework quantified clinical benefits using measures such as survival rates and disease response. It then weighed this against toxicity and treatment costs to calculate a net health benefit score, which could be used to guide treatment decisions.

However, the framework faced criticism for oversimplifying the complexities of patient preferences and quality of life factors. Detractors argued that quantifying elements like personal utilities and risk tolerance was highly subjective. There were also concerns about the framework’s impact on access if payers used it to restrict coverage.

Value-based care initiatives continued to proliferate globally throughout the decade. However, as healthcare systems grappled with the practical implementation of these models, bogged down by challenges – such as segmenting patient populations, establishing standardised outcome measures, deploying the necessary technology infrastructure for data collection, and facilitating the exchange of best practices at scale – it all seemed overwhelming and overly complex.

The arrival of the COVID-19 pandemic swiftly changed this stagnant status quo. Driven by necessity, healthcare systems quickly began to define centralised goals that focused on the outcomes that mattered most to patients. Navigating the urgency of such an unprecedented landscape highlighted the necessity for agile, outcome-driven healthcare delivery, breaking down silos and fostering an environment of cross-sector collaboration. By aligning around patient-centred goals, stakeholders could streamline processes, leverage collective expertise, and drive meaningful progress towards implementing value-based care models at scale.

Post-pandemic progress

Kicking off a new decade, albeit amid an international pandemic, 2020 marked a pivotal moment for value-based pricing initiatives across the globe. The World Health Organization (WHO) introduced pricing guidelines to enhance medicine affordability, highlighting value-based pricing as a critical strategy. Simultaneously, the Centers for Medicare & Medicaid Services (CMS) proposed a rule allowing Medicaid to adopt innovative payment models for promising, curative therapies, while ensuring long-term sustainability.

As the momentum built, China took significant strides towards value-based pricing in 2021 when the National Health Commission (NHC) issued guidelines to standardise the evaluation process for new essential medicines at national and provincial levels.

In 2022, the UK witnessed an innovative agreement between Shionogi and NHS England, implementing a subscription payment model for Fetcroja (cefiderocol). This arrangement saw Shionogi receive a fixed payment based on the drug’s assessed value to the NHS, decoupling reimbursement from usage volume.

Concurrently, Dubai’s Dubai Health Authority (DHA) launched the “EJADAH” programme, restructuring healthcare around value-based principles, rather than volume-based metrics. Japan’s Pharmaceutical Manufacturers Association (JPMA) also proposed a value-based pricing system for innovative drugs, with provisions against price reductions during patent protection unless clinical or scientific value changed post-market entry.

The European Federation of Pharmaceutical Industries and Associations (EFPIA) introduced the “Equity-Based Tiered Pricing” framework, extending upon value-based pricing principles. This framework allows countries to negotiate confidential value-based prices reflecting individual value assessments, with a “best price rule”, ensuring lower prices for less affluent EU nations.

More recently, in 2023, France’s Social Security Finance Act established a legal framework for funding Advanced Therapy Medicinal Products (ATMPs) with a specific focus on value-based pricing, allowing for outcome-based pricing and staggered payments. Sweden’s TLV also proposed updates considering high and low volumes when assessing reasonable costs for value-based pharmaceutical pricing.

It’s been a long journey to get to this point. However, the progress of recent global initiatives underscores the growing recognition of value-based pricing as a means to enhance access, affordability, and sustainability, while rewarding innovation aligned with patient and system priorities.

About the author

Eloise McLennan is the editor for pharmaphorum’s Deep Dive magazine. She has been a journalist and editor in the healthcare field for more than five years and has worked at several leading publications in the UK.

Additional reporting provided by Navlin Daily.

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