National Academy of Medicine

Payment Reform for Better Value and Medical Innovation

By Mark B. McClellan, David T. Feinberg, Peter B. Bach, Paul Chew, Patrick Conway, Nick Leschly, Greg Marchand, Michael A. Mussallem, and Dorothy Teeter
March 17, 2017 | Discussion Paper

Over the past 50-60 years, biomedical science and technology in the United States have advanced at a remarkable pace, allowing Americans to live longer, healthier lives. And while we have gained tremendous benefit from continuous medical innovation, health care delivery has simultaneously become more complex, expensive, and, in some ways, less patient-centric. In 2015, US health care spending grew 5.8%, totaling $3.2 trillion or close to 18% of GDP, and it has been estimated that upwards of 30% of health expenditures may not contribute to health improvement. In tandem, health indicators and outcomes in the US are lagging, including measures of access, efficiency, equity, and quality. And while these trends could be attributed to myriad factors, ultimately, how we pay for care strongly influences how care is delivered. With fee-for-service (FFS)—the longstanding, traditional payment model used in the U.S.—health care services are paid for individually and aggregate payment is driven by the volume of services rendered. In an effort to reign in health care costs, increase clinical efficiency, encourage greater coordination among providers to better meet the needs of patients, and provide value for true engagement of patients’ and family members’ care decisions, payment reform efforts are focusing on value-based models of care delivery. These models aim to incentivize providers to keep their patients healthy, and to treat those with acute or chronic conditions with cost-effective, evidence-based treatments.

Value-based payment strives to promote the best care at the lowest cost, allowing patients to receive higher-value, higher quality care. Payment reform, with the goals of shifting provider payments and incentives from volume to value, is a health policy issue that has bipartisan support. Consistent with these goals and building on early, successful payment reform models carried out in the public and private sectors, provisions contained in the Patient Protection and Affordable Care Act of 2010 (ACA) set in motion several initiatives that seek to reform how health care is paid for and delivered more broadly. Through these provisions, the law uses a multi-pronged approach to instituting reforms, focusing on: testing new payment and care delivery models that aim to increase care coordination, quality, and efficiency (e.g. patient-centered medical homes and accountable care organizations); shifting the provider reimbursement system orientation to outcomes rather than services; and investing in methods to improve health system efficiency, such as issuing grants to establish community health teams to support a medical home model.

Payment and delivery reform, alongside related legislative and regulatory changes, has the potential to make transformative models of health care delivery more sustainable, with the promise of better outcomes, lower costs, and more support for investment in new treatments that are truly valuable. Simultaneously, the potential for medical innovations to improve the patient care experience, produce better health outcomes, and reduce health cost seems greater than ever. This includes new treatments for unmet needs, new cures, innovations in digital health, much larger data analytics, and team-based care that is much more prevention-oriented, convenient and personalized. As with most transformative change, transitioning to value-based models of care delivery and payment has been met with some challenges. While payment reforms have shown some promising results, overall impacts on spending trends have been modest and critical obstacles remain to successful implementation, including inadequate performance measures, regulatory barriers, insufficient evidence on successful models, and limited knowledge of the competencies required for providers to succeed within this new paradigm. Policymakers will need to address and mitigate these and other challenges as they chart the next steps of payment reform. This discussion paper seeks to highlight payment reform initiatives underway, underscore pressing challenges in need of attention, and provide recommended vital directions to advance reform and better ensure its success.

About the Vital Directions for Health and Health Care Series

Vital DirectionsThis publication is part of the National Academy of Medicine’s Vital Directions for Health and Health Care Initiative, which called on more than 100 leading researchers, scientists, and policy makers from across the United States to provide expert guidance in 19 priority focus areas for U.S. health policy. The views presented in this publication and others in the series are those of the authors and do not represent formal consensus positions of the NAM, the National Academies of Sciences, Engineering, and Medicine, or the authors’ organizations.
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Suggested Citation

McClellan, M. B., D. T. Feinberg, P. B. Bach, P. Chew, P. Conway, N. Leschly, G. Marchand, M. A. Mussallem, and D. Teeter. 2017. Payment Reform for Better Value and Medical Innovation. NAM Perspectives. Discussion Paper, National Academy of Medicine, Washington, DC. doi: 10.31478/201703d


Disclaimer: The views expressed in this paper are those of the authors and not necessarily of the authors’ organizations, the National Academy of Medicine (NAM), or the National Academies of Sciences, Engineering, and Medicine (the National Academies). The paper is intended to help inform and stimulate discussion. It is not a report of the NAM or the National Academies. Copyright by the National Academy of Sciences. All rights reserved.