Value-Based Contracting: A Comprehensive Guide

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

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.

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.

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.

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:

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:

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.

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.