The Centers for Medicare & Medicaid Services (“CMS”) recently announced that, beginning January 1, 2017, Medicare Advantage plans in Arizona, Indiana, Iowa, Massachusetts, Oregon, Pennsylvania and Tennessee will be permitted to offer what are known as “value-based insurance design” (“VBID”) plans. Medicare Advantage plans have been unable to take advantage of VBID designs due to a federal prohibitions against varying benefit designs within a plan based on health status or other enrollee characteristics.  To overcome this obstacle, CMS is pointing to its authority under the Affordable Care Act to test innovative health care payment service delivery models.

Generally, VBID plans structure enrollee cost-sharing and other plan characteristics in a way that encourages the enrollees to utilize high-value health care services that are likely to improve their health status. Such plans are structured around certain clinical categories — typically chronic diseases — and have designs that are meant to reward the use of specific therapies or services by individuals falling in those clinical categories.

The VBID plans offered by Medicare Advantage carriers will be targeted at diabetes, congestive heart failure, chronic obstructive pulmonary disease (COPD), past stroke, hypertension, coronary artery disease, mood disorders, and combinations of these categories. CMS has indicated that certain other chronic conditions may be added in the future.

CMS will permit organizations to design their own interventions for each targeted population, but will require that plan benefit changes fit into four broad categories:

1. Reduced cost sharing for high-value services;

2. Reduced cost-sharing for high-value providers;

3. Reduced cost-sharing for enrollees participating in disease management or related programs, and

4. Clinically targeted supplemental benefits.

Organizations participating in the plan can change benefit design by reducing cost-sharing and/or offer additional services, but cannot reduce the benefits afforded to enrollees or require enrollees to pay higher cost-sharing than other enrollees.

CMS will require that organizations propose a methodology for identifying high-value providers for each target population. In its announcement, CMS encourages organizations to rely on independent, external metrics when determining whether a provider is high-value, pointing to examples such as whether a primary care practice is a NCQA certified medical home or whether a hospital has American Heart Association advanced certification in heart failure.  It will be interesting to see how plans identify high-value services in the first category. The CMS announcement provides nearly no guidance on identifying high-value services, requiring only that the services be identified along with a justification of their clinical appropriateness in the target population.

In theory, the characteristics of a VBID plan act as a counter-balance to the impediments posed by cost-sharing in insurance. Michael E. Chernew et al. succinctly describe the theoretical underpinning of VBID, and its connection to cost-sharing, in their highly-cited 2007 paper “Value-based Insurance Design“:

The motivation behind the use of cost sharing to allocate medical services and contain costs follows standard economic theory, which presumes that consumers will use only those services whose benefit exceeds the cost to them. By increasing costs at the point of service, moral hazard can be reduced and value increased. The optimal amount of cost sharing reflects a balance between the risk and income-transfer effects of insurance against the moral hazard costs.

VBID relaxes the questionable assumption that when faced with cost sharing, consumers will balance costs and clinical value optimally. The underuse of valuable clinical services when a person is faced with even modest copayments likely represents a range of information issues, including how people understand their medical care, how they make decisions amid uncertainty, and how they make trade-offs over time.

The theoretical benefits of relaxed cost-sharing in VBID plans appear to be bearing fruit in real life. While new to the Medicare Advantage market, VBID has been used by commercial carriers and other plan sponsors. A 2014 study by a team at Brigham and Women’s Hospital and CVS Caremark studied the pharmacy benefit characteristics of 76 VBID plans to gauge effectiveness. The team found that medication adherence rates increased by approximately 4 to 5 percentage points in certain VBID plans. Plans with the greatest improvement in long term medication adherence had certain characteristics, including more generous cost-sharing reductions, the targeting of high-risk patients, and limiting the plan to only medication ordered by mail.

Unlike the high costs associated with implementing other health reform initiatives, including accountable care organizations, the VBID characteristics in the plans analyzed in the above study are, as the team points out, low cost and highly effective. While only focused on the pharmacy benefit side of VBIDs, the Brigham/CVS study suggests that VBID design in the Medicare Advantage space may evolve from a demonstration project to a commonly-used strategy. However, the lack of guidance or requirements for identifying high value services in the CMS announcement illustrates that certain VBID strategies will depend, at least in part, on continued efforts in comparative effectiveness research.