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The value-based contracting playbook webinar outlines 5 steps for effective risk management

Written by Emily Rappleye

As providers think about population health management, they must approach value-based contracting arrangements carefully. These payer-provider contracts can be the key to targeting specific market segments and geographic regions when executed effectively. However, if they are not carefully designed, value-based contracts may not be sustainable and could have a negative financial impact on provider organizations.

In a recent webinar hosted by Becker’s Hospital Review and Miami-based healthcare consulting group BDC Advisors, Bill Eggbeer, managing director of BDC Advisors, and Jackie Macias, senior advisor at BDC Advisors, discussed the pros and cons of different types of arrangements, strategies for success, how to define risk and what safeguards should be in place to mitigate contract risk. Here is a summary of their value-based contracting playbook in five steps as discussed in the webinar.

1. Get started

Entering a value-based contract requires a couple shifts in focus, according to Mr. Eggbeer. First, these arrangements call on provider organizations to look at the longitudinal performance of their care plan. It calls for a focus on the triple aim of reducing costs, increasing access and improving the continuum of care. Second, organizations are required to shift the financial focus of the contract. A value-based contract has additional terms wrapped around the core of the contract regarding the delivery of services, quality measures, reporting and defining risk and incentives, Mr. Eggbeer said.

“All of these terms have to be thought about and covered in the contract in a way that protects the provider as well as the payer,” he said.

In contracting, the ultimate goal is to balance cost reduction with reduced utilization rates, and according to Mr. Eggbeer If a provider lets costs exceed payments — because costs for services are too high, too much care is provided or quality performance is not successful enough to earn payments — it will be at risk financially. However, if a provider is too effective in creating value, in that it isn’t sharing enough risk to capture its own value creation, the value will accrue to the payer. “What is needed,” said Mr. Eggbeer, ” is to have an appropriate amount of risk that enables the provider to gain an appropriate share of the value created.”

2. Choose a contract

While there are many types of value-based contracts, most partnerships are structured around a few types of arrangements that are customized based on market position, network design and affiliations, pricing and other factors, according to Mr. Eggbeer.

Ms. Macias outlined the pros and cons of four common arrangements along the risk continuum, ranging from little downside risk to global capitation.

Pay-for-performance First, the most popular arrangement is the pay-for-performance contract, which offers providers incentives retrospectively based on quality and cost metrics, according to Ms. Macias.

“It’s a good starting point to begin deeper engagement between providers and payers,” she said. The pay-for-performance contract is also quick to implement, shields providers from downside risk and can offer providers additional revenue they may not see otherwise, she said. Plus, it can be used in conjunction with other payment models like fee-for-service or bundled payments.

However, from a provider perspective, this type of contracting hinges on choosing the right quality metrics, because they won’t see payments until they are able to accomplish quality and cost goals, she noted. It can also present challenges in data sharing between the parties involved.

“When we are trying to move the needle on the cost of care, [pay-for-performance] will lower some of the costs, but it may not have a significant impact on the overall cost of healthcare,” Ms. Macias said. “It is somewhat effective, but limited in the sense that incentives have to be big enough and the patient panel has to be large enough to make an impact on cost.”

Shared savings Second, Ms. Macias outlined shared savings arrangements, which provide savings to both the payer and provider based on cost-reduction metrics. Not only does this model align payer and provider incentives for cost reduction, but it also offers both parties added benefits. Payers find shared savings attractive because they would not normally see this money, Ms. Macias says, and providers find it attractive because they are shielded from catastrophic risk and have more control of patient experience and engagement.

The downsides to shared savings contracts for providers are that payers have the opportunity to benefit without any of the outlays, it requires high volumes of patient membership, there is a notion of diminishing returns as costs can only be reduced so far, and the timing of reconciliation occurs after a performance period so revenues are delayed.

Capitation and global budget Next, Ms. Macias outlined capitation and global budget contracting, which set a flat per-member per-month price for certain or all services. The advantages for providers include owning all upside risk, improving cost predictably, improving provider-payer engagement and improving member engagement and control. On the flipside, these arrangements mean providers must also own all the downside risk, develop sophisticated data management and reporting capabilities, have a high volume of patients and receive delayed payments due to the timing of reconciliation. Capitation, especially full capitation, is usually used in large health systems. According to Ms. Macias, “The more volume in these arrangements, the better.”

Private-label product Lastly, Ms. Macias outlined the private-label product, which is a joint-product development activity between payer and provider that aims to attract customers to the provider system. “The advantages can be basically summed up in that the provider is not going it alone,” she said about the private-label product contract. The new product is supported by a recognized payer brand and eliminates the need for large capital investment and infrastructure that would be required by a provider without such a partnership. However, it also presents providers with downside risk. Data analytics and reporting challenges may impede the provider’s ability to manage the population timely and effectively. In addition, increased membership and medical spend projections should be monitored carefully, as expectations related to steering current patients into new products or engaging entirely new patients with the health system may take longer than anticipated.

3. Find a recipe for success

To make the transition from fee-for-service to value-based care successfully, providers should prioritize superior care management, strong physician alignment, disciplined financial management and enhanced consumer experience.

To promote superior care management and shift to a mindset of prevention and wellness, leaders must rapidly embrace and lead change. It is crucial to give physicians a voice in the governance process as well, as they champion change on a clinical level through network design, best practices and operational excellence. Incentives should be aligned between physicians and the hospital to support collective contract negotiations.

“Implementation factors require a top-down view of risk, management buy-in and commitment across all levels of the organization. It’s really a change of culture or mindset,” Ms. Macias said. “Utilization becomes an expense; it’s not a revenue anymore…so it’s really important to build a culture around that mindset.”

To effectively manage finances and employ segmented analytics and predictive modeling within these new partnerships, it is important for health systems to employ actuarial expertise, according to Ms. Macias. Providers and payers need to have a strong sense of their market position and financial strength while making decisions about risk during the contracting process.

“The most important item is to really understand the current cost of services and of any downstream partners the health system would have. Without understanding this, there is a real risk for over- or under-pricing things like bundled arrangements,” she said.

Success can also hinge on how well providers understand the consumer-based model of care. Within these arrangements, patients are making more decisions and driving more aspects of their care. “Consumerism is at the forefront,” Ms. Macias said.

4. Enter at your own risk

Defining risk and creating value can generate conflict between payer-provider partners. Providers will focus on pricing, asset employment, patient mix and procedure selection, while payers will focus on product design and reimbursement and utilization rates. “We are finding this conflict is being overcome,” Ms. Macias said. When evaluating risk, understanding this conflict as well as understanding the need for a differentiated value proposition and the cost of people, process and systems is important, according to Ms. Macias.

Organizations must think about both the risk of execution, or how an organization will implement infrastructure, governance, data analysis and other parts of the contract, and the risk of estimation, or the actuarial risk. “The key message is that pricing and payment must be competitive in the market for both the payer and provider to win and move their market position,” Ms. Macias said.

As a provider, you may find yourself thinking, “‘Life has been pretty good under fee-for-service contracts and we are doing well as a system. How much risk do we take for ourselves and how much do we threaten the success we’ve experienced under a fee-for-service environment in moving to a value-based model?’ You really have to answer that in the context of how fast you think the market around you is moving,” Mr. Eggbeer said. If an organization is in a market that is quickly developing value-based care delivery systems, it will be more imperative to take on more risk quickly.

“It’s hard to change the culture with small steps. You have to put enough at stake to get people’s attention and be able to change the way that you operate,” Mr. Eggbeer said.

Organizations can start with low risk options, such as the Medicare Share Savings Program, or even more immediately, with their own employee health plans, according to Mr. Eggbeer. “Thinking about the employee base as a population, and thinking about how to manage that population, is a great way to start with minimal risk to the organization,” he said.

5. Safeguard your contracts

In implementing these new types of arrangements, organizations should incorporate anti-steerage language and mechanisms into the contract to protect against volume shifts among members, Ms. Macias noted. Organizations should narrow the scope of the contract so there is not an effect on current contracts and it doesn’t cannibalize existing successful business.

“Some of these arrangements can focus specifically on populations, products or geographic areas, so cost concessions or arrangements can be narrowed so there is not an impact on existing contracts,” she said. Organizations should also take steps to understand the terms and protective clauses of the contract and lay out plans of action for implementation, such as how data and analytics will be used. “This is not easy and an exploratory year is even used in some of these arrangements until providers really find out how to nail down some of the contracting,” Ms. Macias said.

Despite these challenges, Mr. Eggbeer noted that there are early examples of success out there. “If you put the pieces together, it is indeed possible to put together a partnership that benefits the provider system, the payer and the consumers,” he said.

To view the webinar on YouTube, click here.


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