Value-based pricing requires more definition

By | October 31, 2017

Historically, the pricing of medicine has not been defined by the value it brings. On the provider side, whether the provider is a facility such as a hospital, or a person such as a doctor, payment is based on delivering a service regardless of the outcome of that service. Unless there is a guarantee, we pay for various other services in the same way. For instance, if my air conditioner breaks down, regardless if it’s fixable or not, I pay for the attempted repair. Furthermore, if I receive an unsatisfactory haircut and am unhappy with the results, I pay for the service. However, in the future, I might take my business somewhere else.

Therefore, as I attempt to consider an analogous model of “pay for value,” a comparable example is the airline industry. Barring an “act of God,” I pay to fly from point A to point B, and if that does not occur, frequently, I am not responsible for the cost. When a flight gets canceled, albeit not necessarily on the same day as my original departure, I am either placed on a different flight or my payment is refunded if I decide not to take the trip. Thus, the value is getting to point B, and my payment is completely tied to it.

At present, there is much discussion about moving to value based payments in medicine. Currently, we have not defined what that value is, nor to whom receives that value. For instance, is the value living longer, a lower per unit cost to a payer, or some other defined outcome? Or, is it an individual value or a societal value? Value has best been defined as having three components, quality, cost, and service. However, as a society, we still need to spend time defining “who” is receiving the value. If I consider the value as an individual, the metrics might be Healthy Days as the quality indicator, a net promoter score as the service indicator, and total cost to me as the cost measurement. Yet, if I consider the value from a societal perspective, the metrics might be different. For instance, net promoter score might be for service, yet the quality might be Quality Adjusted Life Years and the cost is one that is societal focused. Finally, if the value deemed is for the payer of the risk, the metrics will appear completely different. In this situation, quality would be a measure of something more finite related around a disease indicator, and service might be the same, or it could be an indicator of activation or engagement, and the cost would be the total cost of care held by the risk bearer.

Thus, creating clarity of definition of the different components of the value equation is paramount to success. Presently, we all attempt to deliver on value through the lens we hold.