HealthcarePapers 18(3) October 2019 : 29-40.doi:10.12927/hcpap.2019.25928

What “Value” Should We Pay for? A Path Towards Value-Based Payment in Canadian Healthcare Systems

Erik Hellsten and Irfan Dhalla


There is broad consensus that achieving a "value-based" healthcare system requires a shift toward "value-based payment," but less agreement on what this entails beyond moving away from fee-for-service reimbursement. Opinions diverge on the ideal end-state payment model, and the evidence base remains equivocal. We propose a framework for Canadian payers interested in pursuing value-based payment reforms that draws lessons from two widely recognized examples of paying for value in healthcare: the US Center for Medicare & Medicaid Innovation and Canada's own experience using health technology assessment to inform payment policy.

What Value Are We Paying For?

"Paying for value" is all the rage in today's health policy world. But what value are we paying for and how?

The past decade has seen a flood of publications dedicated to defining the concept of value in the healthcare sector (Porter 2010; Porter and Teisberg 2006; The Economist Intelligence Unit 2016a; World Economic Forum 2017). The movement for "value-based care" that emerged out of Harvard Business School professor Michael Porter's influential works has spread across the globe (Porter 2009, 2010; Porter and Teisberg 2006), with recent Canadian efforts now drawing the interest of federal and provincial healthcare leaders (Zelmer 2018).

A deceptively simple-sounding question underlies the hundreds of thought pieces on the topic: What health outcomes we are achieving for the dollars we spend? (Porter 2010).

Although now commonly associated with value-based care philosophy, the idea of a general equation relating health outcomes to healthcare spending predates Porter's work by at least several decades: in 1972, Archie Cochrane suggested that the value of any healthcare activity should be expressed as "the increased benefit that would be obtained if more money were made available" (Cochrane 1972; Mitton 2015). Not long after, methods developed for health technology assessment (HTA) operationalized Cochrane's proposal by quantifying the value of drugs and medical devices in terms of their dollar cost per quality-adjusted life-year (QALY) gained (Drummond et al. 2015).

Across all of these works, the ultimate responsibility for value sits with payers – those responsible for major healthcare spending decisions. The most prominent payers in Canada and other countries with population-wide health insurance coverage tend to be governments and insurers, whereas patients, employers and the public generally pay indirectly for healthcare through taxes and premiums, with some notable exceptions, such as prescription drugs (CIHI 2017a).

The value-based care movement also shoulders payers with chief responsibility for the greatest ill plaguing modern healthcare: our terminally flawed payment systems (Porter and Kaplan 2016; The Economist Intelligence Unit 2016a; World Economic Forum 2017). Recent Canadian voices have echoed this diagnosis, stating that "value is … missing from the incentive structure of our system" (Ontario Chamber of Commerce 2016) and calling for "a fresh, fundamental idealism about how we pay for value in our healthcare system" (Falk 2019).

Value-based payment, it follows, is a necessary condition of achieving a value-based healthcare system.

Value-Based Payment: Common Prescription, Many Formulas

Hearing these calls to action, Canadian healthcare payers might reasonably ask: what is "value-based payment," exactly?

Although now nearly as ubiquitous a term (along with variations such as "value-based purchasing" and "value-based reimbursement") as "value-based care," value-based payment appears to have no consensus definition. Table 1 illustrates some examples of different interpretations.

Table 1. Example definitions of value-based payment and related terms
Term Source of definition Definition or examples
Value-based payment World Economic Forum: Value in Healthcare Project (World Economic Forum 2017) Examples of value-based payment include bundled payments, outcome-based capitation and outcome-based drug reimbursement contracts.
American College of Obstetricians and Gynecologists (American College of Obstetricians and Gynecologists 2018) [In contrast to fee-for-service reimbursement], value-based payment models aggregate services into more complex units of payment, such as a bundled payment for an episode of care or a set amount for care for one or more patients over a specified amount of time, with ties to quality and performance measurement.
US Health Care Transformation Task Force (Health Care Transformation Task Force 2016) [Arrangements that] successfully incentivize and hold providers accountable for the total cost, patient experience and quality of care for a population of patients, either across an entire population over the course of a year or during a defined episode that spans multiple sites of care. Includes global budgets, bundled payments and shared savings.
Value-based reimbursement Michael Porter and Robert Kaplan (Porter and Kaplan 2016) Value-based reimbursement involves either bundled payments or capitation. The unit of reimbursement should be aligned with the unit of value (e.g., discrete episodes for surgeries, a year or more for chronic conditions).
Value-based purchasing United States Center for Medicare and Medicaid Services (Centers for Medicare and Medicaid Services 2018) Value-based purchasing models reward healthcare providers with incentive payments for the quality of care they give to people with Medicare. Their goal is to link provider performance of quality measures with provider payment.
RAND 2014 (Gilman et al. 2015) A broad set of performance-based payment strategies that link financial incentives to providers' performance on a set of defined measures in an effort to achieve better value by driving improvements in quality and slowing the growth in healthcare spending.


Across all of these definitions, the single consensus element is what value-based payment is not: fee-for-service reimbursement.

Fee-for-service reimbursement has long been vilified by health policy leaders for contributing to out-of-control spending, fragmentation of care and low-value services. This sentiment is especially prominent in the United States, where fee-for-service payment systems dominate nearly all types of healthcare services and there is fierce competition between providers for volume (Miller 2009). Porter and colleagues advocate redirecting these misaligned incentives into "value-based competition on results" (Porter and Teisberg 2006).

Although such arguments are enticing, Canadian payers may wish to pause for some self-reflection before rushing to adopt these tenets. The payment landscape in Canadian healthcare is very different from that in the United States: whereas most Canadian physicians continue to be reimbursed through fee-for-service payment (with some provinces, such as Ontario, now having shifted many primary care physicians toward capitation and other alternative payment systems), hospitals and community organizations are largely paid through fixed global budgets (Sutherland et al. 2013; University of Ottawa 2015). Competition between health plans and service providers – an integral part of American healthcare and a key plank in the value-based care philosophy – is virtually non-existent across much of Canada (Ronayne and Audas 2016).

Canadian payers might also ask: if fee-for-service reimbursement is what everyone agrees we should shift away from, what is the payment system we should shift toward?

There is no consensus here. The ideal value-based payment system differs depending on the author(s): prescriptions include bundled payments for episodes of care (Porter and Kaplan 2016), population-based capitation (James and Poulsen 2016), pay-for-performance systems linked to quality measures (Centers for Medicare & Medicaid Services 2018) and even payments tied directly to health outcomes (Dunbar-Rees 2018).

The empirical evidence is similarly equivocal. There is no question that how we pay for healthcare matters: a large body of international research demonstrates that changing payment mechanisms can have significant impacts on the way care is delivered (Flodgren et al. 2011). But to date, this literature does not offer convincing evidence to suggest the absolute superiority of any one payment approach over others.

Rather, the literature suggests that different payment models are associated with trade-offs across competing policy objectives (Deber et al. 2008). Although the volume incentives in fee-for-service reimbursement are frequently criticized for encouraging overutilization, they can also serve as useful tools when access challenges are a concern: some provinces have successfully combined fee-for-service physician payments with activity-based funding for hospitals to reduce wait times for targeted elective surgeries (MacLeod et al. 2009). In contrast, salaried physicians and globally budgeted hospitals are favoured by many payers for controlling costs but are also commonly associated with long wait lists and inefficiency (Robinson 2001; Sutherland et al. 2013).

A Portfolio Approach to Value-Based Payment Reform

For Canadian payers, this equivocacy in theory and evidence suggests two things. First, the "best" value-based payment system likely depends on the relative value that payers assign to achieving particular policy objectives (Deber et al. 2008). Second, rather than plunge into universal adoption of one particular payment method or another, payers would do well to consider a more measured, evidence-informed approach that involves experimenting with a portfolio of different models. Some have suggested that payers consider a "menu" of different payment models that ranges from making incremental value-based adjustments to existing fee-for-service schedules all the way to piloting transformative new models, such as bundled payments and integrated population-based funding (Conrad 2015). Ultimately, the preferred payment method for any particular scenario may depend on multiple factors, such as the nature of the target patient population or the organizational structure of providers involved (Conrad 2015; World Economic Forum 2017).

Regardless of the mix of payment models in their portfolio, payers require a framework to evaluate their investments. Such a framework should support a transparent, evidence-informed approach to decisions on whether to scale up, scale down or modify particular models and, ideally, assist in depoliticizing an area of decision making that is often politically perilous.

To this end, we propose that Canadian payers interested in pursuing value-based payment agendas can draw a useful set of principles from two globally recognized models of paying for value: the US Center for Medicare and Medicaid Innovation (CMMI) and Canada's own experience using HTA to inform payment decisions.

CMMI and HTA: Different Contexts, Common Principles

Although working within different policy contexts, CMMI and Canada's HTA experience both provide concrete examples of what a value-based approach to informing healthcare payment decisions looks like. Both have been internationally lauded: CMMI as a model for Canadian payers to emulate (Advisory Panel on Healthcare Innovation 2015; Bazemore et al. 2018) and HTA as a key Canadian asset supporting value-based care (The Economist Intelligence Unit 2016b).

CMMI was established in 2011 through the Affordable Care Act to spearhead the US national value-based payment reform agenda. To date, CMMI has launched over 40 new payment model demonstrations involving more than 200,000 clinicians and 18 million patients. CMMI supports the design and implementation of new payment models and evaluates them using a standard set of decision criteria (Kaiser Family Foundation 2018).

Canada's institutional experience with HTA began in 1989 with the establishment of what is now the Canadian Agency for Drugs and Technologies in Health (CADTH), followed by provincial HTA agencies, such as Health Quality Ontario and L'Institut national d'excellence en santé et en services sociaux in Québec. HTA offers Canadian government payers a scientifically defensible decision-making framework to assess and compare the value of health services, including tests, drugs and medical devices. The analysis and recommendations produced by Canadian HTA organizations routinely inform government decisions over which healthcare services should be paid for (or not paid for) with public funds (Menon and Stafinski 2009).

CMMI and Canadian HTA organizations share several core principles in their work. First, they explicitly define a perspective for assessing value. Second, they establish a consistent set of measures for assessing and comparing value across interventions. Third, they emphasize prespecified, rigorous evaluation designs. Finally and most importantly, they establish clear criteria for assessing value and linking the results to payment decisions.

We examine each of these principles in detail in the following sections.

Principle 1: Define the Perspective for Assessing Value

Different actors define value differently: patients may prioritize improving their experience of care and minimizing waiting times and out-of-pocket costs, clinicians may value technical effectiveness and hospital administrators may value increasing their operating margins. Whereas Porter points to better health outcomes as patients' top priority (Porter 2010), a recent US survey asking patients what they value most generated some surprising results: respondents put more importance on out-of-pocket affordability and the friendliness of staff than they did on health outcomes (Pendleton 2018). Given these potentially divergent views, payers should be explicit in defining the perspective used for assessing the value of payment models.

CMMI's perspective on value is prescribed in its legislated mandate: it must consider the impacts of new payment models on Medicare and Medicaid program spending and their health impacts on a set of patient-centred outcomes and patient-centredness criteria (Shrank 2013). Canadian HTA agencies similarly use the government healthcare payer perspective as their default case for considering the costs of health technologies (CADTH 2017; Health Quality Ontario 2018). CADTH's perspective on health outcomes considers all "meaningful health effects for patients and their informal caregivers" (CADTH 2017).

Similar to the CMMI and CADTH perspectives, Canadian government payers are likely to be most interested in the cost impacts of payment models on their healthcare program spending. Assessing value-based payment models requires a comprehensive, cross-sector view of these costs: many innovation models, such as bundled payments, incentivize substitution of less expensive care settings, such as replacing inpatient care with home and community care. Some payers may wish to adopt even broader perspectives: an employer-sponsored health plan may wish to consider the costs of a patient's time away from work, whereas governments may wish to consider the impacts of new models on non-healthcare public spending, such as social programs or justice services (Jonsson 2009).

Principle 2: Establish a Core Set of Measures for Assessing Costs and Outcomes

Regardless of the perspective adopted, assessing value requires measures of health outcomes and costs that enable payers to quantify, evaluate and compare impacts across payment models.

CMMI quantifies the cost impacts of new models by estimating their attributable savings (or additional costs) through fee-for-service billings. Under value-based models such as bundled payments and accountable care organizations, participating providers continue to issue fee-for-service claims that are later reconciled against spending benchmarks to determine whether target levels of savings have been achieved. CMMI then compares claims measures between model participants and controls (United States Government Accountability Office 2012).

To measure impacts on health outcomes, CMMI selects from a set of 70 core measures that enable comparisons across models on outcomes such as hospitalization rates and patient experience. In addition to these core measures, CMMI engages patients to provide input on patient-relevant measures that are unique to each model, including patient-reported outcomes such as changes in functional status. CMMI has also stated its intent to collect measures related to population health and social determinants of health to examine the impacts of payment models across socioeconomic and demographic groups and to monitor for health inequities (Shrank 2013; United States Government Accountability Office 2012).

In Canada, CADTH has established national guidelines for assessing costs and outcomes related to health technologies, including standardized methodologies for estimating costs across different healthcare settings and the use of the QALY as a composite measure for quantifying the health impacts of technologies on patients' quantity and quality of life. Although CADTH also recommends reporting condition-specific health outcome measures for each technology, QALYs provide a common metric that enables comparisons across different technologies. Typically, QALYs are then combined with measures of cost to produce an estimate of the cost per QALY gained – essentially, a summary estimate of value in terms of cost-effectiveness (CADTH 2017).

Canadian payers should consider CMMI's approach of defining a common set of measures across models while engaging patients to provide input on meaningful outcomes unique to each payment model. In addition to measures of mortality and morbidity, relevant outcomes may include measures of patient experience and patient-reported outcomes. Although currently Canada-wide efforts are under way to begin standardized reporting in these areas (CIHI 2017b), many patient-relevant measures are likely to require new data collection. In addition to clinical health outcomes, payers should also consider that many patients value timely access to care and unrestricted choice of provider – particularly relevant outcomes when assessing payment models that steer patients to select participating providers (Eggbeer and Morris 2013).

Finally, payers interested in evaluating and comparing the cost-effectiveness of payment models may also want to consider the use of composite measures such as QALYs. Although previously the domain of traditional HTA, QALYs are now being increasingly used to examine the cost-effectiveness of value-based payment models (Garner et al. 2018; Hsieh et al. 2015; Pandya et al. 2018).

Principle 3: Prespecify a Rigorous Evaluation Design for Every New Model

Program evaluation is too often treated as an afterthought in healthcare, particularly in relation to new payment models, where "gold standard" randomized trial designs are frequently not feasible. Evaluative studies of payment reforms are often only designed and conducted well after the implementation of policies. Retrospective evaluation has significant limitations: evaluators do not have the opportunity to introduce new data collection or prospective controls, and without a prespecified design, they can run the risk of being accused of "fishing" for significant findings that may in reality be spurious results (Thompson and Panacek 2006).

Ideally, evaluation designs for new payment models – including subjects, comparators, outcome measures and analytical methods – are specified in advance as part of the overall program design plan. At CMMI, evaluation specialists are closely involved in the design of every new payment model and provide guidance on key evaluation-related parameters, such as the minimum sample size necessary, which then informs participant recruitment strategies (Shrank 2013).

Evaluation designs for new payment models must balance methodological rigour with a host of practical considerations. Although randomized trials are often impossible, particularly when participation in models is voluntary, there is a wide array of quasi-experimental study designs that, when appropriately specified, can yield good-quality evidence: stepped wedge, difference-in-differences and interrupted time-series designs are but a few examples. The existence of a well-matched control group is a key asset: statistical techniques such as propensity score matching can be applied to create quasi-experimental comparison groups and control for bias. These methods have all been successfully used in previous CMMI evaluations and are also used in many non-randomized studies in the HTA context, where cohort and observational studies can often be very useful for answering specific types of questions (Dreyer et al. 2010; Howell et al. 2015).

Although quantitative studies form the bulk of the value-based payment evidence base, CMMI also makes extensive use of qualitative methods to interview health professionals participating in innovation models. This information provides insight into the context and drivers behind the quantitative results and helps identify structural characteristics and organizational strategies that are associated with success or failure among model participants (Shrank 2013).

Regardless of the study design used, transparency is crucial. In the world of clinical trials that form the evidence base for HTA, public posting of study protocols on websites such as is now required practice. CMMI similarly follows a practice of posting proposals for new payment models along with their evaluation designs and seeks feedback from a broad range of stakeholders (United States Government Accountability Office 2012).

Finally, a noteworthy point of distinction is that whereas HTA traditionally focuses on summative evaluations concluded following the end of clinical trials, CMMI makes extensive use of formative evaluation, where process- and implementation-related findings and interim summative results are gathered, analyzed and reported back to both model participants, who can use comparative performance information to adjust their strategies, and decision makers, who can identify and address potential problems in the model design (Shrank 2013).

Principle 4: Set Clear Criteria for Linking Value Assessments to Payment Decisions

Even the most thoughtfully designed evaluation is purely an academic exercise without a clear link to decision making. Payers require clear criteria for using evaluation results to determine success: what constitutes a "high-value" payment model? How will success or failure be translated into payment decisions?

CMMI has explicit statutory criteria for determining value: for an innovation model to be extended or expanded past its initial demonstration phase, the model – based on the aforementioned measures and prespecified evaluation design – must either reduce spending without reducing quality of care or improve quality of care without increasing spending. Models must also not deny or limit the coverage or provision of any benefits to Medicare enrollees. The chief actuary of the Centers for Medicare & Medicaid adjudicates these criteria by reviewing the results of each CMMI evaluation and certifying whether a model would be expected to satisfy these criteria if expanded beyond the scope of the demonstration (United States Government Accountability Office 2012).

In contrast to CMMI's value framework, HTA organizations in Canada and elsewhere typically apply less fiscally restrictive criteria and accept that many effective, high-value new technologies will also result in increased net costs to payers. Unlike some other jurisdictions, Canadian payers have not articulated explicit willingness-to-pay thresholds in the form of a maximum number of dollars spent per QALY gained, although it has been estimated based on previous policy decisions that the implicit Canadian threshold for reimbursement of new drugs ranges between $50,000 and $80,000 (CDN) per QALY gained (Jaswal 2013).

Canadian payers face a fiscally driven choice here in their value criteria: similar to CMMI's approach, should only payment models that are found to be either cost saving or cost neutral be scaled up? Or, similar to their criteria for funding drugs and devices, will payers consider investing incremental dollars in new payment innovations to buy health gains, as long as cost-effectiveness criteria are met?

Finally, payment decisions are multifaceted: whereas funding decisions for new technologies are driven primarily by data for clinical efficacy and cost-effectiveness, Canadian HTA organizations also consider other, less quantitative criteria, such as the feasibility of implementing new technologies and their alignment with patient preferences (Health Quality Ontario 2018). Processes and methodologies for formally incorporating these additional factors into health technology decision making are still evolving, with little international consensus on best practices at this time (Hailey 2017). Canadian payers will need to experiment with different approaches to considering these non-quantitative factors in their payment model decisions.

Regardless of the criteria selected, adopting a transparent, explicit framework for linking value assessments with payment decisions has the advantage of providing some insulation for payers' decisions from popular and political pressure. Both CMMI and Canada's HTA organizations have had some success in this regard: CADTH's recommendations have provided cover to provincial drug plan officials in making negative drug reimbursement decisions (Grant 2018), whereas CMMI's work appears set to continue – with a few inevitable course corrections – under the Trump administration (Reid 2018).

Conclusion: Crafting a Canadian Value-Based Payment Agenda

Beyond simply adopting "value-based payment" as an attractive slogan, CMMI and the Canadian HTA experience offer some rich lessons on how we can truly move toward paying for value in Canadian healthcare systems.

The principles offered here – illustrated by two real-world models of evidence-informed, value-based payment decision making – can serve as guideposts along an evolving journey toward paying for higher value care. By adopting a systematic, evidence driven approach to guide decision-making on new payment models, Canadian payers can go beyond making one-off assessments of individual demonstration projects and utilize the knowledge gained to inform a broader transformation agenda (Casalino and Bishop 2015).

A potential first step for Canadian payers seeking to build momentum is to articulate overall goals for their value-based payment agendas. CMMI's efforts were boosted into national visibility with the widely repeated announcement that by 2018, 90% of Medicare fee-for-service payments would be linked to new value-based payment models (Muhlestein et al. 2017). After establishing similar goals and a framework for assessing new payment models, Canadian payers can begin soliciting ideas for new payment demonstrations from clinicians, administrators, patients and the public and preparing for a multiyear, iterative process of experimentation and reform.

As important as recognizing the value of healthcare payment models is recognizing their inherent limitations: although an integral piece of the puzzle to improve value in healthcare, a shift to value-based payment must work in tandem with other crucial pieces of transformation, such as reorganizing delivery systems, enhancing health data infrastructures and realigning professional culture. Ideally, value-based payment models serve not as an end in themselves but as a catalyst for driving higher value across all dimensions of a healthcare system.

About the Author

Erik Hellsten, Manager, Quality Standards, Health Quality Ontario, Toronto, ON

Irfan Dhalla, MD, MSc, Vice President, Evidence Development and Standards, Health Quality Ontario, Toronto, ON


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