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Value-Based Contracting 101 - Knowing Your Terminology

The US healthcare landscape is changing. Traditional fee-for-service (FFS) payment models have proven to be financially unsustainable and ineffective at addressing patient needs, a trend that has only been exacerbated by COVID-19 and rapid inflation. The pressure from regulators, patients, and market disruptors to move away from FFS is pushing the market to reconsider how contracts should be structured to best align payer and provider incentives for improving quality of care, enhancing patient experience, and reducing cost of care.

Value-based care (VBC) and the notion of compensating providers based on the quality of treatment they deliver, is framed as the path towards a more financially sustainable, equitable, and effective healthcare system. Value-based contracting arrangements can seem complex, but understanding the core mechanisms underlying value-based contracts will help demystify the not-so-overwhelming world of value-based contracting. Here, we will outline some common terminologies used in value-based contracting, while breaking down the types of alternative payment models available in value-based payment arrangements.

What is a value-based contract?

While a value-based contract can take on many forms, it is centered around a reimbursement arrangement under which the magnitude of a provider’s compensation (or lack thereof) is tied to the health outcomes of the patients they treat, thereby aligning provider incentives with payers’ goals of achieving high quality, cost-effective outcomes. This is in contrast to traditional FFS payment models where providers are reimbursed based on the volume of services performed. Value-based contracts shift some of the financial risk in healthcare spending, traditionally held by insurance companies, employers and government payers, to providers. As a result, value-based contracts hold providers accountable for the patient care that they deliver, but also give providers the opportunity for upside gain in the form of bonus performance payments, which are not available with FFS. Table 1 shows the different types of value-based payment models and the degree of financial risk to the provider associated with the respective models.

Table 1 | Definitions of value-based payment models

Degree of financial risk to providerExamplesWhat provider should consider this model?Upside risk onlyPay-for-performance

The provider is eligible for bonuses based on quality and efficiency outcomes

[e.g., bonus payments for quality performance - readmission rates, HbA1c levels, etc.]

Providers with capabilities to track and report on quality metrics, but lack the tools and resources to influence total cost of care

Shared savings (also known as upside-only contract)

The provider is incentivized to reduce healthcare spend for an attributed patient population by being paid a percentage of net savings achieved (e.g., reduced medical spend compared to benchmark).The payer retains any losses (e.g., increase in medical spending).

[e.g., Medicare Shared Savings Program BASIC Level A/B1]

Providers with clinical resources to reduce cost of care and operational capabilities to adjudicate value-based contracts, but are averse to downside financial riskLimited downside risk

Bundled payment

The provider is paid a single payment for all the services performed to treat a patient undergoing a specific episode of care. An “episode of care” is the care delivery process for a certain condition or service delivered within a defined period of time (e.g., knee replacement).

[e.g., Bundled Payments for Care Improvement (BPCI)]

Specialty providers targeting specific episodes of care who can influence cost / utilization within the episode (e.g., site of service shift)

Shared risk (also known as upside-downside contract)

Similar to shared savings, the provider is incentivized to reduce healthcare spend for an attributed patient population. However, in this model, the provider and payer agree to share in any savings or any losses generated under the contract.

[e.g., Medicare Shared Savings Program ENHANCED1]

Providers with robust clinical and operational capabilities to execute their clinical model and adjudicate value-based contracts, with the scale to take on downside financial risk (e.g., Accountable Care Organizations, digital health providers)Full risk

Global payment / capitation

The provider is paid a fixed fee for all the healthcare services a patient may receive during a specific period of time.

[e.g., Per Member Per Month (PMPM) payment, percent of premium]

Large-scale provider systems or integrated health networks with the clinical capabilities to address the patient’s entire care journey and operational experience with taking on full financial risk

1 Providers in MSSP BASIC Level A/B models share 40% to 50% of upside savings, but do not share in any losses. Providers in MSSP Enhanced models share 75% of upside savings, and share 40%-75% of losses.

Common terminology and mechanism of value-based contracting

Now, let’s dive into the mechanisms (Table 2) that make up these value-based contracts.

Table 2 | Summary of VBC Contracting Terminology & Definitions

Solution cost

the upfront revenue the provider collects for providing the solution (e.g., for each engaged patient, or on a PEPM basis)

Upside sharing %

if total annual gross savings is above solution cost and there is net savings, % of savings shared by the provider (paid by the payer to the provider)Upside sharing cap %maximum savings that the provider can receive (as a % of solution cost)Downside sharing %if total annual gross savings is below solution cost and there are net losses, % of losses shared by the provider (paid by the provider to the payer)Downside sharing cap %maximum losses that the provider can be liable to pay (as a % of solution cost)Performance paymentthe payment transaction between the payer and provider upon measurement and evaluation of provider’s gross savings performance under the terms of the contract

First, the obvious, a benchmark is the target against which any shared savings or loss calculations are made. It is often set using a metric related to medical cost such as total cost of care or the cost associated with a specific service. In many risk-based contracts, a hurdle rate is set, which is a percentage based corridor around the benchmark. When actual provider performance exceeds the corridor, then shared savings or losses are calculated and distributed.

The solution cost is the upfront revenue the provider collects for providing services to the members. This can be collected based on engaged patients, or monthly fee (e.g., Per Employee Per Month (PEPM), PMPM). In a pay-for-performance arrangement, the provider receives an incentive payment on top of the solution cost, if performance goals outlined in the contract (e.g., cost of care reduction) are met.

Actual provider performance is compared with the benchmark to calculate the gross savings that the provider achieved. The amount of gross savings, compared to the solution cost, is the net savings achieved and is the basis upon which shared savings or losses are calculated.

Next, a shared savings rate or upside sharing % is the percentage of any generated savings that is paid to the provider and often an upside sharing cap is placed to define the maximum amount of savings that the provider is eligible to receive. Conversely, a shared losses rate or downside sharing % is the percentage of any generated losses that is paid by the provider to the payer if savings are not achieved. And similar to an upside savings cap, there is a downside sharing cap to set the maximum amount that the provider can be liable to pay.

FFS-Shared Risk Comparison outline

*for illustrative purposes only

Comparison between fee-for-service and shared upside / downside contract. In this example, a solution cost of $500K is paid to the provider in both FFS and Shared Risk contracts. However, in the Shared Risk contract, a percentage of any generated savings is paid to the provider with the maximum amount being 25% of the solution cost (upside sharing cap). The provider also takes on risk by paying the payer a percentage of any generated losses with the downside sharing cap set at 10%.

Value-based contracting powered by Accorded

At Accorded, we recognize that the journey to adopt value-based contracts can be challenging for payers and providers alike. From translating clinical value into financial outcomes to configuring value-based contracts that best align with business objectives, we have purpose-built our product suite to help make value-based contracting a frictionless process. Then, once the value-based contract is implemented, Accorded measures actual savings performance using our proprietary performance monitoring technology through member claims and engagement data.  

It is evident that providers of novel care models need a novel payment model so they can be rewarded for the value and savings they deliver. For employers and payers, value-based contracts ensure that providers they partner with are incentivized to deliver on the return on investment that they promised.Accorded is an end-to-end solution that provides customers with the tools to reduce friction in the value-based contracting process and brings providers and payers together on the journey to improve patient care and reduce cost of care.

Interested in learning more about how your organization can have a smoother transition to value-based contracts and alternative payment models? Let’s chat about how Accorded can help →

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