This content has been reviewed for accuracy by Mike Cantor, MD, JD, Chief Medical Advisor for Aeroflow Health. 

The US healthcare system has long struggled to create a fair and efficient payment model that supports the needs of patients and rewards payers and providers for providing high-quality care that results in the best health outcomes.   Accelerating the tension between efficiency and quality is the pressure to slow and reduce rapidly  growing healthcare costs. 

Health insurance as we generally think of it today began in the 1930s with the Great Depression. Previously, coverage was less related to health insurance but would be similar to what we refer to was disability insurance today.  Until the creation of those health insurance models health care was paid for through “fee for service” (FFS) models where providers received payments when they provided services.  Health insurance shielded patients from high and often unexpected health costs, but the lack of incentives to provide comprehensive care led to the development of new approaches.  A good example of this new approach is the  Patient Centered Medical Home (PCMH) model, launched by a group of pediatricians who focused  on meeting the needs of sick children who required coordination in navigating between the various specialists responsible for treating their care. 

In the 1970s the term Health Maintenance Organization (HMO) was coined by Dr. Paul Ellwood. HMOs offered comprehensive care within a designated provider network in exchange for fixed annual payments, a very different approach than the traditional  FFS model. The use of capitated payments created a fixed budget for healthcare expenditures, which incentivized provider network  to coordinate care and deliver preventive medicine.  HMOs delivered promising but variable results in inpatient care cost reduction.

In an effort to contain inpatient costs, another VBC model was popularized: The Diagnosis Related Grouping (DRG). First piloted in New Jersey, the DRG consisted of a bundled payment made to hospitals for an episode of inpatient acute care, regardless of what the episode actually cost to

deliver.  The development of the DRG took into consideration the kinds of care required to produce positive outcomes while avoiding unnecessary costs. This incentivized providers to deliver appropriate level care while minimizing waste. 

The HMO model was adapted to Medicare in 1982 by the Tax Equity and Fiscal Responsibility Act (TEFRA) which established Medicare Part C (now called Medicare Advantage). The following  year  Medicare policy changed to permit  use of DRGs. TEFRA provided new incentives for HMO’s to enroll Medicare beneficiaries on an at-risk basis.

Despite these efforts to manage growing Medicare costs, the 1997 Balanced Budget Act’s (BBA) reduced Medicare rates.  This change, coupled with years of  minimal payment increases, left hospital systems with low margins, physicians facing burnout, and bankruptcies among health management and delivery organizations. As Managed Care Organizations (MCOs) experienced their own “profitability crisis,”  consumer and physician backlash emerged because the general public viewed commercial managed care as responsible for turning physicians into profit-driven entrepreneurs who withheld necessary care  to maximize margin. This backlash caused a sharp decline in HMO plans, and fee-for-service payment models became even more dominant. The result is that instead of payers, providers and patients working together,  misaligned incentives led to ongoing battles.

In 2006, scholars Michael Porter and Elizabeth Olmsted Teisberg coined the term Value-Based Care in their landmark book Redefining Healthcare. They argued that competition in healthcare should be based on value to the patient instead of shifting costs, increasing bargaining power or restricting services, and that patients should  be empowered and remain at the center of health care. 

In 2010, after over 75 years of efforts to increase access to affordable and nearly universal health insurance the Affordable Care Act  (ACA) introduced comprehensive reforms to expand access and promote value-based principles. 

Through the ACA, a new division of the Centers for Medicare and Medicaid Services (CMS) was created, the Center for Medicare and Medicaid Innovation (CMMI), which is  focused on developing and testing new payment methodologies (Alternative Payment Models (APMs)).  CMMI focuses on improving patient experience of care, improving the health of populations, and reducing per-capita cost of healthcare: the Triple Aim. 

Because of their mandate to support innovation and new payment models, CMMI has proposed and tested several innovative models.  In 2011, President Obama began advocating for Accountable

Care Organizations (ACOs) for Medicare and Medicaid.  ACOs are integrated networks of doctors, hospitals, and other medical care providers that work together with a goal of reducing costs and, if the ACO meets certain benchmarks for quality and costs, it could receive bonuses from the government. The model incentivizes providers to collaborate together and rewards success.  ACOs have saved billions of dollars in Medicare costs, and have been adopted by some commercial insurers.  

The evolution of VBC payment models continued in April of 2015 with the signing of the Medicare Access and CHIP Reauthorization Act (MACRA) into law. MACRA introduced the Quality Payment Program (QPP) in 2015. This program incentivizes healthcare providers to prioritize quality and value through the Merit-Based Incentive Payment System (MIPS) and Alternative Payment Models (APMs). MACRA changed the way Medicare physicians are reimbursed and increased funding. It incentivized the use of health information technology by physicians and other providers. 

In 2023, the Biden Administration set an ambitious goal which would mark the 100 year journey of insurance: to transition every individual to a value-based model by 2030. The imminent deadline is rapidly approaching while new models are continuing to grow and evolve. 

One area that has  not changed over the past 100 years is the ebb and flow of incentives among payers, providers, and patients. A clear lesson from this time is that  it is critical to appropriately align financial incentives and  empower patients to make optimal healthcare decisions.  Initiatives that tie health plans and provider organizations together to empower the patient show promising results in improving patient outcomes and delivering true value-based care.