Thorough assessment of contracting options and specific contracts is essential to succeed under value-based payment.

Transition of the nation's healthcare system toward a value-based business model requires healthcare providers to move toward value-based contracts and care delivery models. Twenty-two percent of hospital and health system leaders anticipate such contracts will constitute 50 percent or more of their payment arrangements within 24 months, up from 7 percent of those leaders six months ago, according to a recent Kaufman Hall survey.

Under many value-based contracts, organizations accept greater financial risk by agreeing to deliver defined services to a specified population at a predetermined price and quality level. Organizations must develop a contracting and corresponding care delivery strategy that involves careful planning, skills development, and a phased approach.

Identifying Best-Fit Contracting Options

Evaluating risk- and value-based payment arrangements involves weighing organizational resources, capabilities, and goals against contract terms, including potential risks and rewards. Executives must be able to articulate the organization's short- and longer-term goals, and its most appropriate role in the emerging population health management environment. Examples include an integrated delivery system suited to be a "population health manager" responsible for the full care continuum, a regional provider best positioned to maintain a clinically integrated delivery network of defined scope as a "population health co-manager," or a community hospital that will be part of a network managed by a population health manager or co-manager.

Healthcare leaders should assess the hospital's or health system's care delivery model and network, and identify the appropriate contracting scope based on how much risk the organization can carry. All forms of risk should be considered, including strategic and operating risk, actuarial or "insurance" risk, financial/asset and liability risk, and comprehensive risk.

Organizations then can narrow down the types of arrangements they should participate in. This is not a one-size-fits-all proposition. Most providers will manage a variety of contracting models based on payers, costs, capabilities, and market dynamics. Models range from traditional fee for service to full risk, in which providers receive a fixed amount per patient per month or a set percentage of insurance premiums, and are responsible for all cost variances. Other options may include pay for performance, bundled payments, shared savings, or shared/partial risk.

Healthcare leaders must consider external market forces and internal resources and capabilities in determining the pace of change. The further along in the value transition a market is, the faster an organization should act. This may be signaled by various factors, including broad physician alignment, successful care coordination across the continuum, or the prevalence of value-based contracts among other providers.

Evaluating Contract Terms

Once a general course is defined, organizations can evaluate how well specific contract terms align with their goals and capabilities. Executives should be alert to the contract's payment methodologies, timeframe, dissolution provisions, and care delivery or quality performance metrics. The latter may influence whether the hospital has the flexibility or need to subcontract certain services. Organizations need to assess what services are carved in/carved out, what support services are required (e.g., pharmacy, post-acute), and what the geographic coverage area is-including demographics and risks associated with specific subgroups, such as the uninsured or dual eligible.

Understanding the contract's financial and clinical implications is critical. Organizations should know the required capital reserves, and financial and operational investments-such as whether additional infrastructure or personnel are needed. Assessment of the organization's current financial position, including credit rating, capital position, debt capacity, and minimum cash position, is strongly recommended. Revenue projections should be conservative. Initial losses may persist for three to five years while initial investments are recouped.

Lastly, executives should consider how to measure the success of new arrangements. Organizations must be able to collect, aggregate, and analyze clinical, financial, and operational data on populations served. This includes analyzing and improving measures of patient satisfaction, consumer engagement, and care quality and costs.

Investing for the Long-Term

Value-based contracts are more complex and demand greater accountability than fee-for-?service contracts, but moving forward with the new model is imperative. Engagement and coordination of all stakeholders is required for long-term success.

Earlier this year, the federal government pledged to tie 50 percent of Medicare payments to quality or value by the end of 2018. A consortium of 20 major providers and commercial insurers followed up with a goal of moving 75 percent of its businesses into value-based arrangements by 2020. Such goals indicate that continued focus on non-value-based arrangements is riskier than exploring alternative payment options.

Healthcare leaders should look at their value-?based contracting plan as a long-term investment, and be aware that achieving success in managing risk takes time and requires major behavioral shifts.

Debra L. Ryan is vice president, Strategy Practice, Kaufman, Hall & Associates, LLC, Skokie, Ill..

Andrew S. Cohen is senior vice president, Strategy Practice, Kaufman, Hall & Associates, LLC, and a member of HFMA's Metropolitan New York Chapter.

Publication Date: Tuesday, June 02, 2015