In the public and private sectors alike, concerns about quality of health care are intensifying as purchasers of health insurance shift from traditional indemnity plans to managed care. With plans’ increased focus on controlling the skyrocketing costs of health care benefits, there are concerns about the value of the health benefits purchased. As a result, several large private purchasers have begun to examine “value-based purchasing.” Key to value-based purchasing is the measurement of health plan quality using different types of quality-related data to hold plans accountable and encourage improvements. Lessons learned from the experience of large purchasers may be applicable to the Health Care Financing Administration (HCFA), the nation’s single largest payer for health care. HCFA administers the Medicare program, which provides care for about 38 million beneficiaries, over 5.5 million of whom are currently in health maintenance organizations (HMO). It purchases health care coverage for almost all of the nation’s elderly population and more than 4 million disabled beneficiaries. Like purchasers in the private sector, the federal government has looked to managed care as a way to help contain costs associated with providing health care to Medicare beneficiaries. At the same time, the agency wants to ensure that the beneficiaries currently enrolled in health plans and those who enroll in the future are receiving high-quality care. With the passage of the Balanced Budget Act of 1997—a major piece of legislation affecting the Medicare program—HCFA will have more plans and more types of plans to monitor for the quality of care provided to beneficiaries. In an effort to curb the double-digit inflation in health care costs of the 1980s, large purchasers increasingly turned to managed care. The rise in managed care enrollment has been swift. From 1987 to 1996, enrollment in managed care provided through private employers nearly tripled. According to a 1997 survey of health benefits offered by firms with 200 or more workers, only 19 percent of employees are still enrolled in indemnity programs, which allow a free choice of providers and reimburse physicians and hospitals with limited or no review of the appropriateness of services rendered. In addition, traditional indemnity coverage uses a fee-for-service payment mechanism to reimburse providers. The remainder of employees with health insurance receive care through a variety of health plans. These can include (1) HMOs, (2) preferred provider organizations (PPO), and (3) point-of-service (POS) plans. HCFA has also seen a rapid increase in managed care enrollment in Medicare. However, unlike the private sector, the vast majority of Medicare beneficiaries still receive care through fee-for-service arrangements. In the early 1970s, the Congress encouraged commercial and Medicare use of HMOs by authorizing federal standards and oversight to ensure reasonable care and service. Between 1994 and 1997, enrollment in Medicare HMOs increased by 75 percent. There has also been a dramatic increase in the number of plans Medicare contracts with. Currently, HCFA contracts with close to 400 health plans to provide health care to over 5.5 million beneficiaries, about 14 percent of the total Medicare population. With the passage of the Balanced Budget Act, even greater growth in Medicare beneficiary enrollment in managed care can be expected. The act permits contracts between HCFA and a variety of different managed care entities, including PPO and POS plans, which are similar to HMOs but are directly controlled by groups of providers. The Congressional Budget Office (CBO) projects that as a result of the passage of the act, all types of managed care organizations will account for 25 percent of Medicare enrollees in 2002, 38 percent in 2008, and about 50 percent by 2030. With increased use of managed care, public and private purchasers must consider strategies to monitor plans and ensure the quality of the care they provide. The Institute of Medicine has formally defined quality of care as “the degree to which health services for individuals and populations increase the likelihood of desired health outcomes and are consistent with current professional knowledge.” In evaluating plans, one or more of the following dimensions of quality can be measured: Appropriateness: Are providers giving patients the care they need? Technical excellence: How well are providers using medical science and knowledge to deliver care to patients? Accessibility: Are patients able to obtain care when needed and within reasonable proximity to where they live or work? Acceptability: Are patients satisfied with the care they receive? Since the concept of quality is multidimensional, experts describe the importance of using different types of measures to evaluate care. For example, the Foundation for Accountability (FACCT)—a forum for consumers and purchasers, including HCFA—argues for the importance of balancing the use of quality measures to reflect (1) the results of care, (2) whether patients are satisfied with the care received, and (3) whether the appropriate processes have been followed. Performance indicators are used to measure the various attributes of quality. For example, for clinical attributes, they can measure appropriateness and technical excellence—that is, providers’ actions and the outcomes of those actions. Process-related indicators refer to clinical interventions, such as the diagnostic tests performed by a physician when examining a patient. In contrast, outcome indicators measure the results of providers’ activities, such as mortality and morbidity. Outcome measures are critical to evaluating the quality of care, but experts recognize that these measures are not fully developed. A number of questions have been raised about the reliability and validity of certain measures and the data sources for performance indicators. For example, data from computerized administrative databases maintained by managed care plans and from individual patient medical records kept in providers’ offices may be inaccurate, incomplete, or misleading. This is because most administrative databases were designed for financial—not clinical—purposes. In addition, providers may enter incorrect information in medical records or not document certain interventions. In an earlier report, we expressed concerns about the reliability of satisfaction data, since most people lack the knowledge needed to adequately evaluate the appropriateness of the care that they receive or do not receive. We also noted in the report that plan-reported data on access-related measures, such as what constitutes a sufficient provider network, do not necessarily ensure that access to care is received. Such data must be checked by independent and systematic monitoring efforts that go beyond plan-reported, paper-based indications of compliance. Despite problems in measurement, some large companies—concerned with absenteeism and reduced productivity from illness—have begun to apply value-based purchasing concepts when purchasing health plan services. For example, these companies have considered information about quality to assess, rank, and select health plans and to monitor ongoing plan performance against standards and negotiate rates based on these standards. In addition, these companies are providing information on plan performance to employees to help inform their selection of health plans. Large purchasers have spearheaded several initiatives as they search for credible tools to help them identify and demonstrate to others the “value” resulting from premiums paid to managed care plans. For purchasers, standardized measures can help them to set desirable goals or “benchmarks” for health plans in different areas of interest or concern to the purchaser, provide feedback to plans on the results of such performance, and monitor the progress of plans against these goals. In the early 1990s, a committee of health plan representatives and corporate purchasers began to work on a set of standardized performance measures, which were later revised by the National Committee for Quality Assurance (NCQA)—a nonprofit institution that reviews and accredits health plans. The result of these efforts, the Health Plan Employer Data and Information Set (HEDIS), is now in its third generation and currently covers the following categories: effectiveness of care, access and availability of care, satisfaction with the experience of care, informed health care choices, descriptive information on health plans, the cost of care, health plan stability, and the use of services. Another major effort by purchasers, with participation by HCFA and other government agencies, was the creation of FACCT to develop standardized outcome measures. In 1996 and 1997, FACCT endorsed comprehensive measurement sets for asthma, diabetes, breast cancer, major depression, as well as other areas; some of these indicators focus on outcomes. Now FACCT is coordinating efforts with NCQA and others to create comprehensive measures for children’s health, HIV/AIDS, end-of-life care, coronary artery disease, and alcohol misuse. FACCT has also developed a “consumer information framework” for purchasers, which emphasizes the importance of a consistent and understandable framework for presenting quality-related information to consumers. One example of this information is the ability of health care organizations to maximize functioning and quality of life when a consumer faces chronic, incurable illnesses, such as diabetes and asthma. Despite the involvement of some major purchasers in the development of quality-related measures, surveys conducted by the Watson Wyatt consulting firm with the Washington Business Group on Health (WBGH) in 1996 and 1997 concluded that cost still prevails as the principal concern when most employers evaluate a managed care plan. The surveyed employers noted, however, that they are beginning to look more closely at issues such as plan coverage and access in judging health plan value. And a significant number of employers are requiring plans to report HEDIS data, with some making it a prerequisite for health plans that wish to contract with them. They also view accreditation as providing assurance that a health plan is attempting to manage the quality of care. While employers are beginning to make increased use of quality-related data in screening plans with which to contract, they may not necessarily be using it throughout the purchasing and monitoring process to the extent desired by proponents of value-based purchasing. A recent mapping of activities by individual employers and business coalitions concluded that only a limited number are actually implementing the principles of value-based purchasing. The Chairman and the Ranking Minority Member of the Senate Special Committee on Aging asked us to study how large corporate purchasers use quality-related information collected from health plans and the applicability of purchasers’ experiences to HCFA.