Navigating the Key Components of Value-Based Contracting

By Chris Bethell
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During the value-based contracting process, health plan executives should be prepared to do all of the following: evaluate risk options and terms, effectively manage and negotiate better contracts, and address the value levers that have the biggest impact on utilization, cost, and quality.

In this blog, we’ll take a look at three critical phases in the value-based contracting process, along with the technical components and expertise that health plans need to create effective contracts.

Three Core Phases in Value-Based Contracting

Successful value-based contracts are created and managed through a well-defined process. It should be data-driven and give the entire contracting lifecycle—from contract modeling to negotiations to development to implementation to reconciliation—structure, simplicity, consistency, and transparency.

1. Contract Negotiations

It’s no secret that negotiating a value-based contract can be an arduous process. It’s crucial for a health plan to explore various options based on the historical performance of their providers and market benchmarks. This positions them to make strategic decisions on how to model different contract scenarios and what type of contract to offer (pay for performance, shared savings, or capitation).

A core component of this process is identifying and analyzing the value levers that have the greatest impact on quality and financial performance, incorporating them into contract models, and developing a plan with the provider to address them within the contract parameters. Here are examples of important value levers and how they impact contract performance:

  1. Avoidable emergency department (ED) expenses—Focusing on ways for patients to get care from a PCP instead of using the ED, and helping patients that leave the ED get the right follow-up treatment, can reduce costs and improve performance significantly.
  2. Preventable inpatient visits (admissions/readmissions)—As with avoidable ED expenses, preventable inpatient visits waste time, money, and resources.
  3. Network leakage—Health plans and providers can lose hundreds of millions in avoidable expenses a year from patients going out-of-network. Payers and providers need to work together to make sure that patients have access to all levels of care within their network.
  4. Increasing the use of generic drugs—Providers can reduce costs significantly by prescribing less costly generic medications. For example, using generic drugs instead of their brand-name equivalents could have saved the Medicare Part D program approximately $3 billion in 2016, according to data from HHS.
  5. Medication non-adherence—Medication non-adherence results in up to 125,000 deaths and $290 billion in medical costs annually.
  6. Quality-driven metrics—Hundreds of quality measures, such as annual visit completion rate, are used for tracking quality performance in value-based care arrangements.
  7. Risk adjustment improvement—The HCC risk adjustment model is used to calculate risk scores to predict costs. More than 50% of a plan’s revenue comes from HCC codes and more than 30% of HCC codes do not pass the CMS validation process.
  8. Skilled nursing facility (SNF) expenses—The yearly average cost of skilled nursing care is $85,776 per year for a semi-private room and $97,452 per year for a private room. In-home care averages $59,040 annually.
  9. Addressing SDOH in VBC Contracts—Researchers estimate that SDOH issues influence 80-90% of patient outcomes.
2. Contract Tracking

A systematic, technology-driven approach to value-based contracting enables health plans and providers to track performance on a regular basis. The value levers can be tracked quarterly and both parties can explore opportunities for improvement. At mid-contract, if health plans are not seeing expected results, there is time to course-correct. Quarterly reconciliation of the contract will also enable both parties to make adjustments as needed.

3. Contract Reconciliation

The health plan can use the original model to do final reconciliation and settle the contract. For provider groups, the health plan might produce a reconciliation report. Provider groups can check their numbers against the health plan’s reconciliation reports and distribute incentives to group members.

Frequent reconciliation is also critical. For most value-based contracts, the shared savings/losses are due at the end of the year. No one likes surprises though, so frequent reconciliation enables you to gather feedback throughout the year to improve performance on an ongoing basis.

Key Components Needed to Create Successful Value-Based Contracts

To be successful in value-based contracting, health plans must leverage modern technology and value-based care best practices to manage the complexities of contract modeling, development, and implementation. The following key components of value-based contracting enable health plans to maximize their opportunities in value-based arrangements:

  • Market Definition: Define market and business line. This allows payers to model quality-based incentives, shared savings, total cost of care, medical loss ratio (MLR), and primary care capitation contracts in commercial, Medicare (including Medicare Advantage), and Medicaid lines of business.
  • Provider Group Definition: Define provider groups to isolate their performance.
    Attribution: Leverage attribution models that combine both plurality-based algorithms and voluntary alignment.
  • Quality Measurement: Access to an available library of clinical quality measures with national benchmarks (HEDIS, MIPS, eCQMs) enables payers to select appropriate measures for their network.
  • SDOH Integration: Considering the impact that SDOH have on member health, payers should be able to integrate SDOH contracts with CBOs and providers into their value-based arrangements.
  • Evaluating Value Driver Quarterly: Analyze value drivers on a quarterly basis based on budget and other predetermined benchmarks.
  • Building High-Performance Networks: Work toward creating high-performance networks, including determining a common measure set, quality benchmarks, cost benchmarks, and anchor them to contracts.
  • Execution and Payout Modeling: Reconcile financial payouts against budget and performance against value levers on a quarterly basis to improve performance.

The objective of value-based contracting is to improve quality and lower costs. The ability to knowledgeably and effectively negotiate, implement, and manage value-based contracts in collaboration with your providers is the foundation for successfully meeting that objective.

This blog post is based on our SpectraMedix eBook titled “Value-Based Contracting: A New Guide for Health Plans”. This post covers the later portion of the eBook. You can read the previous post to get the full picture here.

Tags: payers, Health Plans, Value-Based Care