Unlocking the Potential of Value-Based Procurement for Payors

Editor’s Note: This is the third installment in a four-part series exploring the challenges and opportunities of adopting value-based procurement (VBP) in healthcare. 

In our first article, “Value-Based Procurement: What’s in it for Provider Supply Chains?,” we considered the need for a more holistic approach to the strategic contribution the procurement function can play in reducing costs and improving efficiency and patient care. In our second article, “Are Suppliers, Vendors Fit for a Value-Based Procurement Future?,” we focused on the changing healthcare environment and its potential impact and opportunities for suppliers. We recommended suppliers be more vested in pursuing a long-term partnership approach that would deliver financial return, rather than pursuing unsustainable short-term, profit-driven strategies. We further explained how the adoption of a true value-based procurement approach can deliver financial, efficiency, patient, and environmental benefits across patient pathways. 

So, if the concept of value is such a persuasive argument for change in healthcare, why isn’t value-based procurement and value-based healthcare the go-to approach for single-payor or multi-payor health systems? In our view, value must be translated into tangible and measurable benefits that health systems are prepared to invest both time and money into changing the way they work. Given that some of the drivers and aims of single-payor and multi-payor health systems are different, it is important to ensure the specific value-based procurement arrangements are structured in such a way as to yield benefits that resonate with the respective payor system. Whether we like it or not, money talks. This is why we believe payors in both nationalized and privatized health systems have a key role to play. 

Single- and multi-payor health system commonalities

There are several key shared characteristics between single- and multi-payor systems, also referred to as nationalized and privatized health care systems, respectively, that create a need for a value-based procurement approach—resource scarcity, thirst for innovation, and payor-provider relationship dynamics. 

Both systems have a need to allocate financial resources to improve care delivery and the patient experience in the face of limited human and financial resources because of dwindling labor pools and rising operating costs, driven by supply shortages, a growing number of critical supplies on backorder, inflation, and geopolitical upheaval. 

There is an increasing thirst for innovation -- which will only speed up with advances in AI -- to ensure payors and providers are maximizing opportunities to eliminate unnecessary cost and deliver improved patient care, efficiency, and cost benefits across the total patient pathway. 

Despite some areas of commonality between single-payor and multi-payor systems, there is one major difference that requires a more nuanced approach to value-based purchasing; who is the central target of value? In a single-payor system the most likely central figure is the government payor, whereas the care delivery organization is the more likely central figure in a multi-payor system. 

Given that both types of payor systems are reliant on global medical device and pharmaceutical manufacturers, a value-based procurement model that is unique to each type of payor environment is likely to have negative implications for healthcare globally. For example, assume a multinational medical device company is working with the NHS in the U.K., various health systems in the U.S., and at a provincial or country level in Canada. If each of those entities pursued a VBP program that is unique to them, it would be overwhelming for the device manufacturer to manage the multitude of VBP arrangement, let alone benefit from them. Having said that, each payor system has its own reasons and motivations to consider new approaches to delivering value, regardless of the central figure, so there is nothing wrong with allowing some autonomy in devising VBP arrangements. 

How can payors take the lead? 

Prior to the COVID-19 pandemic, nationalized and privatized health systems were straining under the weight of increased demand for services, spiraling costs, and dwindling budgets and profit margins. This situation was exacerbated by the pandemic. Like providers, payors are motivated to find solutions that lead to cost reductions and more affordable and easily accessible healthcare. This must be done while also ensuring patient outcomes improve. As such, payors ultimately need to incentivize value realization along the healthcare value chain, not just at the point of care. Payors can, in turn, reduce insurance premiums for patients and employers, offer improved contract terms to providers, provide incentive gain share payments for healthcare partners and suppliers to support the delivery of long-term system goals like the skins game referenced in our second article, and/or, in the case of a purely commercially enterprise, maximize shareholder value. 

What could that look like? Instead of continuing to perpetuate a common procurement approach of standardization and aggregation with the hopes of product price savings, discounts, or rebates—which are often modest at best—payors should incentivize healthcare providers to think more broadly by focusing on targeted reduction in total procedure costs. The resulting financial benefits would be considerably more than the realized savings on specific supplies and materials needed for a procedure. Further, reducing total procedure costs is likely to have tangential benefits including increased efficiency and improved patient care, which are likely to cascade into long-term savings for payors. 

Our assertion is that there needs to be a co-creation of value that involves a three-way collaboration between payors, providers, and suppliers wherein they work together to identify areas of opportunity and deliver efficiencies across the entire patient pathway from diagnosis to treatment and promote engagement across the entire healthcare supply chain. Given each party’s common need to address financial challenges, payors in both types of health systems are uniquely positioned to influence the adoption of value-based practices. The path forward is payors setting the strategic direction for healthcare by establishing a R.E.W.A.R.D. plan. 

R.E.W.A.R.D.

Reimburse – Follow the money and look at financial flows throughout the patient pathway. Ask whether payment/reimbursement strategies incentivize improved efficiency and patient care or if there are unintended real or perceived negative consequences of creating system-wide efficiencies. Determine how reimbursement strategies and tactics can be better aligned to achieve enduring value-based goals. 

Enlighten – Payors need to enlighten both internal and external partners to the benefits of a VBP approach and secure their commitment to the value journey. Value-based terminology has permeated healthcare language, books, and seminars since the early 2000s, much in the same way quality was a buzzword of the 1990s. As such, payors will need to approach VBP pragmatically with a focus on pathways/care continuums and partnerships to deliver the improved outcomes espoused by the value-based healthcare movement. 

Who, What, When, Where, and Why? – This is a technique used by journalists in their craft. Use this as the basis for creating your own story towards VBP. Who needs to be involved? What pathway should you focus on with providers? When will you do it and over what time frame? Where will it be done? Why are you on this VBP journey? After soundly answering these questions, a payor will be in a much better position to communicate the benefits of VBP. 

Act Now – Start with small-scale projects that demonstrate the benefits of a focus on value for your stakeholders. Pilot studies can create momentum to accelerate broader adoption, and they are highly effective in payor environments that are more risk adverse. 

Results and Reward – Determine at the outset of the value-based project the results you need to demonstrate that your objectives have been achieved. Also determine how the players in the system will share in the rewards resulting from the value creation. Establish a robust contracting framework and management plan that is supported by simple, effective, and tangible metrics that are visible to all stakeholders. 

Danger – Single- or multi-payor systems need to “wake up and smell the coffee” and recognize there is real danger in doing nothing. Health systems are crumbling under the weight of delivering population health while recovering from the financial strain of the COVID-19 pandemic and facing healthcare worker shortages and continued supply chain disruptions. 

Summary

Value-based procurement and value-based healthcare are not magic wands that will cure all the ailments in privatized and nationalized healthcare systems. However, they do offer an approach that can facilitate waste reduction in processes, services, and labor utilization in the healthcare system. Further, value-based arrangements have inherited accountability components to foster triadic partnerships between suppliers, providers, and payors that ensure each is working in the best interest of patients and the healthcare ecosystem.