Understanding Value-Based Care Contracts

Welcome to part-three of our three-part series on how to implement value-based care (VBC). Phase Three is the critical stage where the planning and assessments from the previous phases come to life. This phase focuses on understanding  value-based care contracting, choosing the right partners, and negotiating contracts that align with your organization’s goals. By carefully selecting and negotiating value-based care contracts, healthcare organizations can optimize financial arrangements, set clear performance metrics, and ensure compliance with regulatory standards. This phase is essential for translating strategic goals into action, paving the way for a successful transition to value-based care.

Making decisions that will set your organization up for success depends on understanding value-based care contracting and its nuances. Value-based contracts, which range from shared savings models to full-risk arrangements, dictate how providers are reimbursed and incentivized. Each type of contract comes with its own set of financial risks, rewards, and performance metrics, requiring a deep understanding to navigate effectively. For healthcare leaders, comprehending these nuances is essential for making informed decisions that align with organizational goals, optimize patient outcomes, and ensure financial stability. By mastering the intricacies of these contracts, organizations can strategically position themselves to succeed in value-based care, achieving both clinical excellence and economic viability.

Below is a summary of the different types of value-based care contracts in the marketplace today.

In one-sided risk agreements, providers share in the savings they generate for the payer by delivering more efficient care. The shared savings are based on the difference between the actual healthcare costs incurred by a population of patients and a predefined spending benchmark or target. If a healthcare provider or organization manages to deliver care at a cost lower than this benchmark while meeting quality performance standards, they share in the savings generated with the payer, such as a government program or an insurance company. The savings are typically divided between the provider and the payer according to an agreed-upon percentage, incentivizing the provider to deliver efficient, high-quality care that reduces overall costs. Typically these agreements includes quality benchmarks that must be met to qualify for savings.

Pros: Less risky, exposed to potential gains from cost savings without the immediate threat of financial penalties.

Cons: Shared savings isn’t guaranteed, and depending on the agreement the fee-for-service component available may be less than a traditional fee-for-service agreement. Also, depending on the contracting entity it can take a long time to receive the shared savings payment. While the lack of a downside is a pro, it can also be a con because it may not sufficiently incentivize significant changes in care delivery. Providers may not be motivated to make the substantial investments or systemic changes needed to achieve long-term cost reduction and quality improvement. Also, setting appropriate spending benchmarks can be challenging, especially if the risk adjustment for patients isn’t accurate. If the benchmark is too low, it may not accurately reflect the potential for cost savings, leading to unfair disadvantages for providers.

Under two-sided risk sharing agreements, providers share in both the savings and losses with the payer. This type of value-based care contracting encourages careful management of patient care to avoid unnecessary costs, as those costs could end up resulting in the provider having to come out of pocket to cover them.

Pros: Taking downside risk generally results in the potential for a higher percentage of the shared savings pool as well. Risk-sharing agreements can also fund pilot programs or experimental interventions that may otherwise lack financial support. Providers have more freedom to innovate and implement new care models or technologies that can improve care efficiency and effectiveness. Additionally, these agreements foster better collaboration between providers and payers.

Cons: The obvious downside is that providers may face financial losses. Variability in patient needs and healthcare costs can make financial outcomes unpredictable. Risk-sharing agreements can also be complex to administer, requiring extensive data tracking, reporting, and performance monitoring. Crafting a fair risk-sharing agreement requires extensive negotiation, which can be time-consuming and complicated. Risk-sharing arrangements may not always account for variability in patient populations, leading to challenges in achieving consistent outcomes across diverse patient groups.

Under bundled payment models, providers receive a single payment for all services related to a specific treatment or condition over a defined period. This encourages coordination and efficiency across all providers involved in a patient’s care. Examples of these agreements include the Bundled Payment for Care Improvement (BCPI) Advanced Model and the Comprehensive Care for Joint Replacement (CJR) Model.

Pros: With bundled payment models, providers have a predictable revenue stream. The financial reward can be substantial and is a direct incentive to manage care effectively and cost-efficiently. Successfully managing bundled payment contracts can differentiate providers in the marketplace.

Cons: Because there is no additional revenue to cover unexpected complications, providers assume more financial risk under these payment models. As a result, providers may limit necessary services or avoid treating high-risk patients to stay within the budget of the bundled payment. Managing participation in these models can also be administratively complex. Providers need robust systems to track and report costs and outcomes for each episode of care, which may require significant investment in health IT and data analytics. Clearly defining the scope and duration of an episode of care can be difficult. Variability in patient needs and treatment pathways can complicate the creation of standard bundles, potentially leading to disputes over what should be included in the payment.

Under capitation payment models, providers receive a fixed payment per patient for a defined period, regardless of the number of services provided. This Incentivizes providers to keep patients healthy to avoid costly treatments.

Pros: This type of payment model provides consistent, predictable revenue streams based on the number of patients, which can simplify budgeting and financial planning. Efficiency is essentially incentivized, which can lead to more cost-effective care practices and reduced unnecessary services. There is also a potential for significant financial upside because providers retain the difference between the capitated amount and the actual spend as profit.

Cons: Providers bear the financial risk of exceeding the capitated amount under this payment model. There is also a risk that providers might cut corners or limit necessary services to stay within the capitated amount. Managing a diverse patient population within a fixed budget can be complex. Accurately adjusting capitated payments to account for patient risk factors can be challenging.

Understanding value-based contracting is one half of the success equation. The second half is choosing the right partner. This process involves not only identifying potential collaborators such as insurers, ACOs, CINs, MCOs, and other risk bearing entities (RBEs) but also carefully evaluating their capabilities, experience, and financial stability. By selecting partners who excel in data analytics, care coordination, and patient engagement, and by negotiating comprehensive contracts that address financial arrangements, performance metrics, and risk management, healthcare organizations can build a strong foundation for achieving their value-based care goals.

• Look for partners among insurers, accountable care organizations (ACOs), managed care organizations (MCOs), and other healthcare entities involved in value-based care. 
• Consider partners with a strong presence in your region or those who have a proven track record of achieving success in value-based care.

• Review the potential partners’ experience with value-based care models. Check their success stories, case studies, and performance data. Look at their reputation within the industry, including feedback from other healthcare providers who have partnered with them.
• Review the revenue model, potential upside, potential downside, and any additional incentives provided.
• Make sure you have a clear understanding of what tools and resources they provide to facilitate success and reduce the administrative burden of participating in the agreement.
• Assess their financial stability and resources.
• Evaluate their capabilities in
  • data analytics – make sure they can provide actionable insights and transparency in performance metrics.
  • care coordination – check their ability to facilitate effective care coordination among different providers and care settings.
  • patient engagement – determine their strategies for patient engagement and support in managing chronic conditions and preventive care.

When negotiating a value-based care contract, there are several key areas to address to ensure that the agreement is comprehensive, fair, and aligned with your organization’s goals. Here are the specific elements to consider:

Financial Arrangement:

• Payment Models: Define the payment model (e.g., shared savings, bundled payments, capitation).
• Incentive Structure: Clarify how financial incentives will be calculated and distributed. For shared savings, determine the percentage of savings that will be shared with your organization.
• Risk Sharing: Decide on the level of financial risk your organization is willing to assume. Discuss upside-only risk versus downside risk (two-sided risk).
• Benchmarking: Establish how financial benchmarks will be set and adjusted over time.

Performance Metrics:  

Quality Measures & Outcomes

• Key Performance Indicators (KPIs): Agree on the specific KPIs that will be used to measure success (e.g., hospital readmission rates, patient satisfaction scores, chronic disease management outcomes).
• Quality Thresholds: Define the quality thresholds that must be met to qualify for financial incentives.
• Measurement and Reporting: Determine the frequency and method of performance measurement and reporting. Ensure clarity on who will collect and analyze data.
  
• Benchmarking: Establish how financial benchmarks will be set and adjusted over time.

Risk Management and Mitigation:

• Risk Adjustment: Discuss how patient risk adjustment will be handled to account for the varying complexity of patient populations.
• Financial Protections: Negotiate any financial protections or stop-loss provisions to limit potential losses.
• Performance Variability: Agree on how performance variability will be managed, including addressing outliers and unexpected events.

Support and Resources:

Partner Support

• Training and Education: Ensure the partner will provide training and education for your staff on value-based care principles and practices.
• Technical Assistance: Negotiate the level of technical assistance and support the partner will offer, such as data analytics support and care coordination tools.
• Resource Allocation: Discuss the allocation of resources for implementation, including staffing, technology, and administrative support.

Compliance and Regulatory Considerations

Regulatory Compliance

• Legal Requirements: Ensure the contract complies with all relevant laws and regulations, such as the Stark Law, Anti-Kickback Statute, and HIPAA.
• Accreditation Standards: Include any requirements related to accreditation standards, such as those set by The Joint Commission or NCQA.

Successfully implementing value-based care requires a deep understanding of the various value-based care contracting types, strategic partnerships, and meticulous contract negotiations. By addressing the financial arrangements, performance metrics, and risk management strategies within your contracts, your organization can align incentives, improve patient outcomes, and achieve long-term financial sustainability. Additionally, ensuring support and compliance throughout the process strengthens the foundation for ongoing success in the value-based care environment. Phase Three: Implement is not just about signing contracts; it’s about forging partnerships and frameworks that will drive better care and better value for your patients and organization.