Value-Based Contracting in Healthcare: What Is It and How Can It Be Achieved?

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Dynamics that guide the branded consumer market—market price, available income and expected benefits – break down in healthcare where the inherent characteristics of healthcare goods and services prevent patients from comparing marginal value against price. Specifically, information asymmetry and health insurance cause healthcare markets to not function like other consumer markets. Given this, we asked the question of how the delivery and financing of healthcare can be reorganized such that healthcare utilization decisions would mimic the decisions of a sufficiently knowledgeable consumer paying the full price of care. Presently, efforts to link payment and value are hampered by the fragmentation of the U.S. healthcare system. We argue that value-based contracts must incentivize the clinical decision maker, usually the physician, to allocate treatment based on both price and value. In such an allocation, the patients with high expected benefit from treatment would be treated even at a high price and the number of treated patients increases as price drops, mimicking a demand curve in the market for consumer goods. Our review of the existing healthcare system suggests that changing certain elements in the financing system could create an environment for successful value-based contracting without having to reform the entire system.