Unlocking the Value in Value-Based Contracts

Ill-conceived or badly executed value-based contracts can come back to haunt healthcare organizations across the value chain, whether providers, payers or patients – they translate into wasteful spending for payers, cause payers and providers to be misaligned on financial incentives, and get in the way of the kind of transformation that the healthcare system desperately needs if it’s to remain sustainable. By contrast, when structured effectively, value-based contracts offer significant benefits for all stakeholders, including and perhaps most importantly, the patients themselves. That said, having analyzed countless such contracts, we’ve found that over 90% of these are ineffective, if not downright deleterious to all parties. There are ways to restructure them that fit much better with specific market needs, that will more effectively operationalize programs, and lead to better communication among the stakeholders. The most effective changes stem from shifts in how decision makers actually see these, changes to development and implementation and the increasing use of advanced analytics to create and operationalize new, mutually beneficial contracts.

Common Pitfalls of Value-Based Contracts, and How to Avoid Them

There are a number of factors that lead to deficiencies in value-based contracts. Some of the most important are:

• Contract creation: The structure most organizations use to create value-based contracts often emphasize a one-size-fits-all approach that makes actions such as tracking and reporting easier. In a nuanced industry such as healthcare, this isn't an effective solution. Finding the most effective and specific metrics, appropriate targets, and risk adjustment considerations is difficult or simply impossible without the right analytics tools in place. Contracts need to be structured individually to address the unique nature of the population served by a given hospital or health system.
• Contract operationalization: Reporting on performance is absolutely critical to the success of a program, yet it is often lacking to the point where it's largely ineffective for providers unless they complete their own analysis—which most aren't equipped to do. While joint operating committees are crucial to the continued success of the contract, they are often viewed as low priority; in reality, they need much more attention, as well as access to in-depth reporting, in order to be successful. Value-based contracts require payers to dedicate staff for effective management, but many health plans minimize this need.
• Payer-provider relationships: To realize results through a value-based contract, providers and payers need to work to better understand each other’s' positions beyond their traditional, often antagonistic relationship within the healthcare industry. For providers, this can mean understanding common payer-side metrics such as medical loss ratio (MLR), and how it drives decision-making tied to value-based contracts. For payers, it can mean understanding a provider’s financial incentive and why they may resist a move toward downside risk. Working together, having both parties engaged and communicating clearly is key to a successful model.

Using Advanced Analytics to Boost the Benefits of Your Value-Based Contracts

Advanced analytics are the true backbone of more effective value-based contracts. Looking first through the lens of contract creation, analytics offer the only way to effectively create and assess models by using scenario development, which is central to the process. A strong contract needs to account for a variety of potential changes in the future and how they could affect key contract elements such as shared savings payments. Without thorough plans for addressing a true variety of possible developments, a contract can quickly become outdated and ineffective. It’s vital to pressure test the contract to ensure it remains relevant.

The next consideration is operationalization: here, analytics can play a unique and vital role in improving and expanding reporting, reaching across stakeholders and joint operating committees. Analytics can also identify pockets of opportunity that might otherwise go unnoticed, and guide effective actions on them. Because opportunities in value-based contracts are often small and specialized, they can be difficult to detect by other means. Strong analytics also improves communication, as payers can easily share information with providers in a relevant, easily understood way that allows them to more effectively work toward and achieve their goals. This is a critical consideration with regard to a provider’s ability to meet contract goals, which can have major financial and patient health benefits for payers.

There is a host of benefits for payers and providers who embrace more effective value-based contracts created through advanced analytics. Payers see lower medical costs, as well as higher margins that correlate with a lower medical loss ratio (MLR). By reducing unneeded utilization through improved value-based contracts, payers can realize substantial gains. Providers, meanwhile, enjoy additional revenue opportunities, potential for higher margins and stronger relationships with payers. This can lead to the funneling of additional patients to provider facilities. More efficient cost and utilization of services also benefit the member—meaning that all three key players in the arrangement win.

Perhaps counter-intuitively, both risk and reward are crucial elements on the provider side. Upside-only contracts that don't incorporate risk for providers are actually a stalling point in many value-based contract arrangements; changes that incentivize providers to accept both risk and reward are a major necessity. Payers that can invest in the process, both by implementing analytics tools and by providing incentives to providers absent any risk, can more effectively navigate the process of reaching the value-based contract's final form of a full-risk contract for providers.

The industry as a whole is moving toward value-based payments, and providers that embrace full-risk, value-based care contracts in the near term will be in a far better position to continue to adjust to changes in the healthcare landscape. Those that don't will surely face getting left behind.

Paul Schuhmacher is a Managing Director in the healthcare practice of AArete, a global consultancy specializing in data-informed performance improvement. He can be reached at pschuhmacher@aarete.com.