On Capitol Hill, there’s a growing chorus of support from both sides of the aisle to move the focus of health care payment incentives from volume to value. Earlier this month, legislators introduced proposals that would have fixed the sustainable growth rate in Medicare, as well as made other changes, including allowing for clinical nuance in Medicare benefit designs. The Centers for Medicare and Medicaid Services, too, is embracing this trend, recently asking for partners in a demonstration project to used value-based arrangements in benefit design. These efforts of policymakers and agencies to innovate Medicare’s benefit design are crucial both for the health of seniors and to ensure value in the Medicare program.

The concept of clinical nuance, implemented using value-based insurance design (V-BID), is a key innovation already widely implemented in the private and public payers. It recognizes two important facts about the provision of medical care:  1) medical services differ in the amount of health produced, and 2) the clinical benefit derived from a medical service depends on who is using it, who is delivering the service, and where it is being delivered.

Today’s Medicare beneficiaries face little clinical nuance in their benefit structure. Medicare largely uses a “one-size-fits-all” structure that does not recognize that some treatments, drugs or tests are more important to health than others. Not only does it create inefficiencies in the health system, it can actually harm the health of beneficiaries.

Some discussion of economics explains why. The concept of moral hazard, which posits that individuals over-consume when they are not on the hook for the cost of their behavior, is well established in health care. It is used to explain why those who are insured use more care than they might need to remain optimally healthy.  But, that’s only half the story. There are lots of beneficial medications or services that we wish people would use—and for some treatment adherence is low. So what gives?

Recently, three economists — Katherine Baicker, Sendhil Mullainathan and Joshua Schwartzstein — coined the term “behavioral hazard.” They use it to refer to suboptimal choices that people make based on their own behavioral biases. For example, a diabetic patient might feel fine and choose to forgo regular eye exams, only to have their disease progress. Here, higher levels of cost sharing worsen the problem. A beneficiary who faces both financial and behavioral obstacles to treatment adherence is less likely to behave in a way that ensures optimal health.

That brings us back to the concept of clinical nuance. Clinically nuanced insurance designs recognize both moral and behavioral hazard, and seek to shape incentives to minimize their impact. When patients’ incentives are aligned with evidence-based medicine, it improves outcomes, helps patients and, in some clinical situations, lowers costs.

To date, because of the inflexibility of current Medicare regulations, millions of beneficiaries who could benefit from a clinically nuanced design structure cannot do so. Within fee-for-service Medicare, program administrators are limited in their ability to lower cost-sharing levels for specific services recommended for certain patient populations identified in clinical guidelines. Moreover, the program is unable to use benefit design to encourage beneficiaries to use high-value providers, such as those providing patient-centered medical homes. Within the Medicare Advantage program, there is more flexibility, through the tools of network formation, provider incentives (i.e. quality bonuses) and utilization management programs. Still, due to concerns about adverse selection, MA plans are not permitted to add clinical nuance to benefit select beneficiaries.

There is growing momentum to improve some of the longstanding issues in Medicare, including CMS’ recent request for value-based insurance design demonstration projects.  This effort is important for three key reasons:

Clinical nuance enhances coverage for beneficiaries who need it most. Within Medicare, more than two-thirds of beneficiaries have multiple chronic conditions; this group accounts for 93 percent of spending. However, CMS has historically viewed plans that charge different beneficiaries varying amounts for the same service as inconsistent with anti-discrimination provisions of the Social Security Act. This prevents Medicare or MA plans from using clinical information, such as a patient’s diagnosis, to enhance coverage for those with chronic conditions who drive high Medicare spending.  In essence, the requirement precludes Medicare from using the latest science, which shows that offering better access to services for those with chronic conditions can improve health outcomes and offer value to the Medicare program.

Clinical nuance encourages providers to participate in quality initiatives. Current Medicare regulations do allow for some flexibility in MA plans based on service category (i.e. inpatient hospital services) or facility setting (i.e. diagnostic imaging services), but do not recognize quality of a specific provider group. Allowing flexibility to reduce cost-sharing for providers who have shown a commitment to quality, perhaps through the establishment of patient-centered medical homes or other quality metrics, can encourage the proliferation of these practices.

Clinical nuance helps steer beneficiaries to appropriate care. Behavioral hazard posits that in some types of high-value medical care, beneficiaries may need all the encouragement they can get. Lowering or even eliminating cost barriers to high-value treatment has a huge potential to improve population health.

Importantly, creating a more flexible benefit structure need not cost more. A number of studies have shown that increased medication adherence costs can be offset by decreases in emergency room use and hospitalizations. In recognition of this, the Congressional Budget Office changed its scoring for programs that increase medication adherence, crediting each 5 percent increase in adherence with a 1 percent cost decrease. This change is one of the rare instances in policymaking in which enhancing benefits has real dollar offsets in other aspects of the program.

Medicare now is shackled by anachronistic regulations that prohibit it from taking full advantage of the most recent economic and medical innovations. Policymakers can change that by embracing the concept of clinical nuance. Value-based insurance design should be part of the solution to enhance the efficiency of Medicare spending and improve the health of our most vulnerable Americans.