Value-Based Contracting: A Comprehensive Guide

Value-based contracts are innovative payment models used by pharmaceutical innovators and payers to link coverage, reimbursement, or payment to a treatment's performance. There are several types of value-based contracts, including Accountable Care Organizations (ACOs), bundled payments, capitation and population-based, pay-for-performance, pay-for-quality, and shared savings.

Read to learn more about value-based contracts, the difference between them and fee-for-service contracts, and the types of value-based contracts. You will also learn about the benefits, challenges, and trends of value-based contracts. By the end of this guide, you'll learn how to use MD Clarity to analyze your value-based contracts.

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What Is Value-Based Contracting?

Also called an outcome-based or alternative payment model (APM), a value-based contract or VBC is a written agreement between parties where the payment for healthcare services and goods is tied to mutually agreed upon and predetermined terms that are based on patient outcomes, clinical circumstances, and other specified measures of the effectiveness and appropriateness of the rendered services.

In other words, payment of value-based contracts is not solely dependent on the amount of rendered services but on the value of care delivered to a specified patient group or population.

The majority of value-based contracts are based on three premises:

1. Increasing volume via market share gains, resulting in enhanced customer value
2. Reducing cost by eliminating unnecessary and inappropriate use of services
3. Sharing savings captured through

Common examples of value-based contracts include:

• Global budget agreements or capitation
• Physician and hospital pay-for-performance agreements
• Bundled pricing models
• Hospital and physician shared savings contracts
• Health plans with private labels and payers

The Difference Between Value-Based Contracts and Fee-for-Service Contracts

Traditionally, healthcare providers used fee-for-service contracts, which assign reimbursements based on the services a healthcare provider offers. This encourages healthcare organizations to perform as many high-tech procedures and fill as many beds as possible. As a result, the cost of healthcare skyrockets without improving patient outcomes.

In contrast, in value-based care, reimbursement depends on the quality of care provided and is connected to patient outcomes. Accordingly, healthcare providers are incentivized to provide quality care to patients. Value-based contracts also penalize healthcare providers for mediocre outcomes, increased costs, and medical errors.

How Common Is the Value-based Model Used in Contracts?

The frequency of value-based models in contracts varies depending on the specialty. In general, it appears that they are quite common.

According to a Health Care Payment Learning & Action Network (HCPLAN) 2022 survey that used data from 63 health plans, five states, and Traditional Medicare amounting to approximately 233 million covered individuals, 40.5% of payments were involved in pure fee-for-service contracts. Additionally, 19.5% of payments involved pay-for-quality contracts, 32.6% involved shared savings contracts, and 7.4% of payments involved contracts that were population-based or capitated. This amounts to 59.5% of contracts being value-based.

On the other hand, a 2022 MGMA data report found in 2021 that total healthcare revenue from value-based contracts amounted to 14.74% in nonsurgical specialties, 6.74% in primary care specialties, and 5.54% in surgical specialties.

Types of Value-Based Contracts

There are several types of value-based contracts, including:

Accountable Care Organizations (ACOs)

Introduced by the Affordable Care Act of 2020, Accountable Care Organizations (ACOs) are the second riskiest type of value-based contract for providers. They involve provider groups accepting payment risks for their assigned populations. In return, they receive the chance to share savings when costs fall below an adjusted benchmark.

These contracts exist among all payer types and payers, including traditional Medicare and Medicaid and commercial insurers. The Centers for Medicare & Medicaid Services (CMS)' Oncology Care Model is similar to the ACO model but limited to cancer patients receiving treatment by oncologists.

Pros:

• Relatively few risks for providers
• Higher quality, coordinated care that reduces Medicare spending and improves patient health outcomes
• Improved focus on the patient

Cons:

• Patients can't opt out without changing doctors
• Lack of privacy — everyone in a patient's ACO has access to their personal medical information
• No guarantee of better care
• Providers servicing low-income and minority populations are less likely to participate

Bundled Payments

Bundled payments are the third riskiest valued-based contract type. Unlike fee-for-service contracts, where physicians, hospitals, and post-acute care providers file separate claims for provided services even if they are related to a single care episode, bundled payments align providers' interests by offering a fixed payment for all services delivered during a single care episode. For example, bundled payments offer a fixed payment for all the procedures in knee replacement surgery rather than a separate fee for each.

Pros:

• Relatively few risks for providers
• Decreases healthcare costs for payers
• Discourages unnecessary care for payers and patients
• Strong incentives to avoid readmissions and complications for payers and patients

Cons:

• Difficulty defining separate episodes of care for chronic conditions
• Many ways to "game" the system for payers
• Implementation challenges
• Potential avoidance of required specialty care
• Hospitals caring for vulnerable groups are less likely to get shared savings

Capitation and Population-Based

In capitation and population-based contracts, providers assume financial responsibility for the well-being and health of a given patient population. Under these contracts, members pay an annual premium, which a provider uses to care for the population. Instead of getting reimbursed by payers for each service provided, the providers spend the funds in a way that best serves the population's health. For example, there would be more payments for patients with significant histories of medical issues, which would drive providers to keep individuals healthy.

Pros:

• Encourages clinicians to reduce unnecessary medical services that inflate costs without adding value
• Makes costs more predictable for payers and gives providers a more predictable monthly cash flow
• Makes it easier for providers to use services like telemedicine that aren't compensated under traditional fee-for-service models

Cons:

• The most financially risky value-based contract type for providers
• May restrict patient's choices
• Practices may be incentivized to take on healthier (and thus less time-consuming and more lucrative) patients
• Patients may receive less face time with doctors ⁠— providers seeking to increase profitability will cut down on the time that patients see the doctor

Pay-for-performance

Pay-for-performance contracts are the second least risky contract type. They give financial incentives to hospitals, physicians, medical groups, and other healthcare providers for meeting certain performance benchmarks. They also penalize healthcare providers for medical errors, poor outcomes, and increased costs.

Pros:

• No financial risk for payers
• Focuses on the quality of care for patients
• Allows healthcare providers to focus on certain patient priorities
• Does not require changes to base payment methods

Cons:

• Higher levels of administrative complexities
• May compromise a provider's commitment to quality
• Focuses on clinical process measures
• Does not consider the challenges that may be present in certain patient populations, such as

Pay-for-quality

Pay-for-quality contracts are the least risky contract type. They offer financial incentives to healthcare providers for achieving a quality-related target within a specified time period. These agreements can be implemented in different healthcare settings, targeting a range of healthcare professionals or providers.

The cost-effectiveness and effectiveness of pay-for-quality contracts remain unclear. However, most reliable studies about this contract type reveal that they can create small positive effects on process-of-care indicators. Most studies do not evaluate patient satisfaction and experience, but if they did, these metrics did not improve. Several studies have also suggested that pay-for-quality contracts are less effective than other quality improvement models, such as audit and feedback and public reporting.

Pros:

• No financial risk for payers
• Stresses quality over quantity of care
• Allows payers to redirect funds to encourage best practices and promote good health outcomes
• Focuses on transparency by using publicly-reported metrics

Cons:

• Reduce healthcare access for socioeconomically disadvantaged populations
• Reduces intrinsic motivation and job satisfaction for clinicians and encourages doctors to game the system
• Clinicians are more likely to skew treatments towards payment for performance practices and processes and away from care optimized to meet individual needs

Shared Savings

Shared savings contracts are the third least risky contract type. They involve payers establishing a budget for costs associated with care and delivery. Providers whose costs fall below that benchmark would share the savings. Providers that go over the set budget would have to pay CMS for those costs.

Pros:

• Relatively few risks for providers
• Drives higher profitability

Cons:

• Requires providers to reimburse CMS for failing to meet patient care benchmarks

Value-based Contracting Examples

Here are two examples to help you grasp value-based contracting better:

Rebif VBC

In 2011, Cigna and EMD Serono, Inc. entered into an outcomes-based contract for Rebif, a high-dose beta-interferon for treating patients with relapsing multiple sclerosis. Results are measured by the percentage of emergency room visits and hospitalizations that are avoided via the usage of Rebif. Discounts are tied to event rates and adherence.

Repatha and Parulent VBC

Amgen signed a value-based contract with Harvard Pilgrim for the PCSK9 med Repatha. Like other PCSK9 inhibitors, Repatha lowers LDL or "bad" cholesterol. Sanofi and Regeneron also entered into a value-based contract for Praluent, a PCSK9 inhibitor injection. In both cases, if the drug lowers LDL as demonstrated in the clinical trials, the negotiated rate will hold. Otherwise, the discount will increase.

Benefits of Value-Based Contracting in Healthcare

Value-based contracts provide many advantages, including:

Improved patient outcomes

Value-based contracts can lead to improved patient outcomes through incentives for providers to focus on the quality of care rather than the volume of services. As a result, patients will be healthier and more satisfied.

Cost savings for payers and providers

Value-based contracts also lead to cost savings for payers and providers through incentives to reduce unnecessary or low-value care. That's because they focus on recovery, which results in less spending.

To illustrate, suppose a patient has a chronic condition like cancer, obesity, or diabetes. In a value-based contract, payers only have to pay if the medication produces the desired effects. As such, they don't have to waste money on unnecessary medications. Value-based contracts also help providers save money by eliminating unnecessary diagnoses, medical exams, and other procedures.

Improved population health management

Value-based contracts can support population health management by incentivizing providers to address the social and environmental factors that impact health outcomes. Specifically, they can reduce poor habits like excessive alcohol consumption, smoking, and overeating.

For example, in capitation and population-based contracts, members pay an annual premium that providers use to care for the population instead of getting reimbursed by payers for each service provided. As a result, providers are incentivized to keep individuals healthy.

Challenges of Value-based Contracts in Healthcare

However, as with all things, value-based contracts also have drawbacks. These include:

Administrative burden

Value-based contracts come with administrative burdens. In other words, you must create and implement infrastructure for data collection and reporting. According to a recent survey of 18 successful ACOs and clinically integrated networks (CINs) across the U.S., the three-year cost for building the infrastructure to enable value-based contracting ranges from $2.5 million to $15 million.

Increased risk depending on the type of value-based contract used

Depending on the type of value-based contract used, you may also face an increased risk of financial penalties. Specifically, you may face unexpected losses or costs, especially for high-risk contract types like capitation and population-based contracts.

Trends That Are Driving Value-Based Contracting

Despite the challenges associated with implementing and using value-based contracting, many healthcare providers have adopted value-based contracting. The trends driving value-based contracting include:

Price transparency regulations

Price transparency regulations, such as the CMS' price transparency rule, are increasing pressure on providers to adopt value-based contracts. Here's a breakdown of the regulations that promote price transparency:

Hospital Price Transparency Rule

The hospital price transparency rule has required hospitals in the United States to provide clear, accessible pricing data online about the services and items they provide in two ways:

1. In a display of shoppable services in a consumer-friendly format.
2. As a comprehensive machine-readable file with all services and items.

This information makes it easier for healthcare consumers to compare and contrast prices across hospitals and estimate care costs before choosing a hospital.

No Surprises Act and Good Faith Estimates

Starting January 1, 2022, the No Surprises Act has required healthcare providers and facilities to provide self-paying and uninsured patients with good faith estimates (GFEs) of expected charges before giving patients services or items. GFEs are not bills — they contain expected charges for the primary service or item you're offering, in addition to other services and items offered as part of the same scheduled experience.

For instance, if you're furnishing gastric bypass surgery for a self-paying or uninsured patient, the GFE could include:

• The cost of the surgery
• Any tests or lab services
• The anesthesia used for the operation
• Co-facility and co-provider cost information

Transparency in Coverage Rule

The Transparency in Coverage final rule sets requirements for all insurance carriers and group health plans to disclose cost-sharing data on request to beneficiaries, members, enrollees, and their authorized representatives. Specifically, it:

• Requires insurers to make such data available online and in paper format so requesters can guess out-of-pocket expenses and shop for services and items as needed.
• Requires plans to disclose their out-of-network allowed charges, in-network negotiated rates, drug pricing data, and other information in a machine-readable format.
• Amends program rules about medical loss ratio, empowering issuers who offer individual or group coverage to obtain credit for enrollees doing their own shopping for higher-value, lower-cost healthcare providers.

Price transparency rules like the Transparency in Coverage final rule are increasing pressure for providers to adopt value-based contracts because they require providers to disclose the prices they charge for healthcare services.

This increased price transparency can make it more difficult for providers to maintain high prices for services, as consumers may be more likely to compare prices and choose lower-cost options. As a result, providers may be motivated to shift to value-based contracts, which can provide a more stable revenue stream and align incentives with value.

Under value-based contracts, providers are typically paid based on the value they deliver to patients rather than the volume of services they provide. This can incentivize providers to focus on the quality of care and cost-effectiveness, rather than simply providing more services to generate revenue. By shifting to value-based contracts, providers may be able to better manage their costs and maintain their profitability in the face of increased price transparency.

Growth of federal value-based programs

In 2021, CMS established a goal to have 100% of Original Medicare and the majority of Medicaid be on value-based contracts by 2030. Here's a breakdown of CMS' federal value-based programs:

End-Stage Renal Disease Quality Incentive Program (ESRD QIP)

The CMS administers the ESRD QIP to promote high-quality services in renal dialysis facilities. The ESRD QIP is the first of its type in Medicare and changes the way CMS pays for the treatment of people who receive dialysis by linking a part of payment directly to healthcare providers' performance on quality of care measures. It reduces payments to renal dialysis facilities that don't exceed or meet certain performance standards on applicable measures.

Home Health Value-Based Purchasing (HHVBP)

The HHVBP aims to improve the efficiency and quality of home health care across the U.S. to improve patients' experience with care, address health issues before they need emergency room visits, and strengthen their physical functions.

Hospital Acquired Conditions Reduction Program (HAC)

The HAC Reduction Program encourages hospitals to reduce the number of conditions people experience during hospital stays, such as hip fractures after surgery and pressure sores. It applies to all general acute care hospitals, excluding the following hospitals and hospital units:

• Critical access hospitals
• Rehabilitation hospitals and units
• Long-term care hospitals
• Psychiatric hospitals and units
• Children’s hospitals
• Prospective Payment System-exempt cancer hospitals
• Veterans Affairs medical centers and hospitals
• Short-term acute care hospitals located in U.S. territories (Guam, Puerto Rico, the U.S. Virgin Islands, the Northern Mariana Islands, and American Samoa)
• Religious nonmedical healthcare institutions

Hospital Readmissions Reduction Program (HRRP)

HRRP encourages hospitals to improve communication and care coordination to better engage caregivers and patients in discharge plans. This, in turn, reduces avoidable readmissions.

HRRP is important because it improves healthcare by linking payment to quality. The better hospitals do on communication and care coordination, the more payment a hospital receives.

Hospital Value-Based Purchasing Program (VBP)

The Hospital VBP gives acute care hospitals incentive payments for the quality of care provided in the inpatient hospital environment. It adjusts payments to hospitals under the Inpatient Prospective Payment System based on the hospital's quality of care.

Medicare Advantage (Part C)

Medicare Part C is a Medicare health plan choice that patients might have as a part of Medicare. They are also called Medicare Advantage Plans or MA Plans, and are offered by Medicare-approved private companies. Under these plans, Medicare pays a fixed amount for a patient's care every month to the companies providing Medicare Advantage Plans. These companies must adhere to Medicare rules.

Merit-Based Incentive Payment System (MIPS)

The MIPS is the program that determines Medicare payment adjustments. The system uses a composite performance score to determine whether eligible clinicians may receive a payment penalty, a payment bonus, or no payment adjustment.

Physician Value-Based Modifier Program (PVBM)

The PVBM aims to financially reward physicians who provide high-value and low-cost healthcare. The formula is a system where performance is assessed in two dimensions (quality and cost), with payments going to physicians who have above-average performance in both dimensions. Physicians who choose not to be involved and perform worse than average will be paid less, while physicians with average performance will not experience changes.

Patient consumerism and the demand for value

Consumer demand for value is also driving the shift towards value-based contracts. Due to the rise of consumer transparency tools and online reviews, healthcare consumers will become more proactive about receiving low-cost and high-quality care. As a result, healthcare providers will be pressured to use value-based contracts to provide the care that consumers want and deserve.

4 Ideas To Increase Provider Participation in Value-Based Care

According to a University of Pennsylvania study on value-based payments, there are several ways to increase provider participation in value-based care, including:

Reduce the allure of fee-for-service contracts

First, CMS can increase the voluntary adoption of value-based contracts by reducing the allure of fee-for-service contracts. CMS can do this by:

1. Re-evaluating the current physician fee schedule, which undervalues primary care, overvalues certain specialty procedure codes, and is biased against procedures
2. Reprice the most used billing codes based on value and adjust payments based on actual work done
3. Rebalance fees paid for medical supplies and inpatient hospital diagnosis-related groups

These reforms will pull providers to value-based contracts and improve the ability of private payers to engage in value-based contracts with physicians and health systems.

Require use of value-based payment models

Second, CMS should require mandatory participation in value-based payment models. It should work with conveners and providers to implement mandatory participation whenever feasible.

Simplify the administrative process and reduce burden

CMS should also simplify the administrative burden of value-based models. Specifically, it should:

• Lock in providers with attractive multi-year commitments — yearly commitments to value-based models can be ineffective and burdensome,
• Identify and implement technical changes in value-based model structures to encourage adoption,

Standardize value-based goals across payers

Finally, CMS should align value-based goals across payers to encourage adoption. CMS and the federal government can lead this standardization by aligning value-based payments in public programs with those in private programs receiving federal subsidies. These include the Veterans Health Administration, Medicare, TRICARE, and commercial plans sold on ACA Exchanges.

Know Which Contracts Are Performing with MD Clarity

As you can see, value-based contracts can be challenging to understand, especially when you have hundreds or thousands of cases. To gain a better understanding of your managed care agreements, consider  MD Clarity's Contract Analytics tool. Reliable, accurate, and user-friendly, it empowers you to:

• Know how your insurance agreements are performing
• Compare and contrast performance across payer contracts and renegotiate terms from a position of strength
• Project contract changes' cash flow impacts

Interested in experiencing the MD Clarity difference? Schedule a demo today.

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