Partnerships and Value

Strategies for Successful Value-Based Partnerships

October 2, 2017 11:15 am

A report from HFMA’s ANI 2017 Executive Experience Session

The healthcare industry continues to undergo major change in 2017. Amid issues surrounding legislative policy uncertainty, competition, innovation, technology, consumerism, and changing payment models, health care’s future will be shaped by today’s leaders.

In June, HFMA’s inaugural ANI Executive Experience, sponsored by EY, created a kind of workshop laboratory to help facilitate problem-solving dialogue among a diverse cross-section of thought leaders in finance, clinical medicine, and health plans. This year’s theme was “Strategies for Successful Value-Based Partnerships.”

The program was facilitated by leaders with GE Healthcare Camden Group: Daniel J. Marino, MBA, MHA, executive vice president; David DiLoreto, MD, MBA, senior vice president of population health; and Carlos Bohorquez, MHA, vice president.

Summarizing the Executive Experience, this report covers:

  • Key financial trends facing the healthcare industry
  • How to lay the foundation for successful value-based partnerships
  • Three case studies relating to the negotiation of value-based contracts

Pressure to Reduce Costs, Improve Value

Some of the most vexing challenges facing health care today, Marino said, are largely due to a convergence of trends, including pressure to reduce the total cost of care while improving quality. The industry, Marino said, is conflicted between short-term and long-term strategies, creating uncertainty about how to approach risk contracting while fee-for-service remains in place.

Key Forces Driving Change in Health Care

“The government is unclear in terms of what direction to go in,” Marino said. “Health plans are struggling with how to make themselves financially sound while moving into value-based care. Hospitals and health systems are struggling to bring down costs.”

This uncertainty is driving the need for better collaboration among healthcare stakeholders.

“Never in health care has collaboration been so important as it is now,” Marino said. “If we are truly going to reduce the costs of care, we have to be transparent in the information we share. We have to collaborate on the care that we’re delivering, and we have to be open to the result of providing high-quality care while reducing cost.”

Innovation means transforming the care model, and payment and contracting will have to support transformation. “If we don’t have the right incentives, and we are not all aligned to those incentives, then we are not going to achieve all of those goals,” Marino said.

Getting Into Risk Management

To address cost and improve outcomes, many organizations are focused on high-risk populations.

Population Health Management


But the real opportunity is to focus on the rising-risk population so that people and providers better understand how to manage chronic conditions to save costs for the long term.

Organizations should consider entering risk arrangements in a phased approach, Marino explained.

Phase 1 involves developing the structure:

  • Build the organizational infrastructure
  • Establish quality programs, incentive models, and outcomes tracking
  • Develop care management infrastructure
  • Enter into limited risk-based contracts

Phase 2 is about establishing partnerships:

  • Leverage infrastructure with providers in new markets
  • Develop products
  • Partner with health plan(s) to gain a larger provider network, access to membership, and direct-to-employer contracts

Finally, Phase 3 entails managing risk:

  • Become a full-service provider of population health services
  • Offer insurance products directly to the market or partner with major health plans to manage professional or global risk
  • Commoditize products and services
  • Establish direct full-risk contracting with employers
  • Establish advanced benefit designs

“There is a maturity that we have to go through to prepare for this level of risk-based contracting and this level of value-based care,” Marino said. “It’s a culture of transition. It’s making sure we have the right infrastructure in place.”

So while the industry faces pressure to move into two-way risk, a tremendous amount of organizational planning and execution are necessary to be successful in that model.

Contract Negotiations

Negotiations between hospitals and health plans traditionally are considered adversarial, DiLoreto said. Each side may fight to gain a little bit of ground one year, only to lose that ground during the next contracting period.

“Contracts are not all about rates and utilization anymore,” he said. Quality metrics are becoming increasingly important, especially as they relate to improved performance.

“The reality is that a sustainable contracting process in the future will truly require greater collaboration between financial and clinical leaders because they can impact outcomes in significant ways,” DiLoreto said.

Another common issue is a lack of care coordination and management. These elements should be addressed during the contracting phase.

Key considerations include whether the organization can create value through care management activities, and how that value is captured in terms of payment. And how is the value measured?

Another factor is the extent to which care transition teams are truly engaging patients, and the methodology for gauging their effectiveness. Readmissions is among several metrics that are currently used to determine the effectiveness of such programs in a population health management framework.

Other metrics will be needed and can be developed by considering the following questions:

  • What is the role of the population health management program in improving outcomes and reducing expenses?
  • How can we ascertain that the care managers understand their role in positively influencing these metrics?
  • What are the redundancies or inefficiencies in the current system?
  • Are we adding allied health professionals simply to do more clerical work? Are they, instead, operating at the top of their licenses? Similarly, are physicians spending too much time on administrative tasks?
  • Are our clinical performance goals linked to financial performance?

Sidebar: Attendee Feedback: How to Develop Value-Based Partnerships

The Financial Vision

For hospitals and health systems, the financial administration of health care has been an extremely difficult environment, Bohorquez said.

With respect to value-based contracting, he said, “The biggest risk that we see across the country is that healthcare organizations are moving too fast or not moving at all.”

The key is to build a roadmap that guides the transition, then determine the appropriate speed of adoption.

“Most healthcare systems need a roadmap that meets the vision and mission of the organization” and that is within the organization’s financial capabilities, Bohorquez said. “We cannot spend more capital than we can afford.”

This approach will require budgets and benchmarks to ensure that the organization stays financially viable along the way, Bohorquez said. The roadmap will determine how quickly or slowly the organization moves. “It’s about articulating the roadmap, how we are going to get there, and what bumps in the road exist,” he said.

Sidebar: EY Leader: Executive Experience Session Showcases Potential for Collaboration

Case Study 1: Contracting With a Commercial Health Plan

Executive Experience attendees provided insights on three hypothetical case studies involving value-based contracting. The first scenario involved a newly formed clinically integrated network (CIN) that was seeking to engage in a value-based contract with a commercial health plan.

The health plan proposed a three-year contract term, which attendees agreed was the minimum needed to obtain sufficient data on performance effectiveness. Some attendees also said the contract should add downside risk in the third year.

Others urged a longer contract period, noting that the providers should ensure in advance that they understand the population and are capable of managing the high-risk segment.

Key provisions. Among the needed contract provisions are performance guarantees on the part of the health plan partner. For example, the contract should specify penalties for the plan if data is not given to the provider as agreed upon. The contract also should include financial penalties for provider organizations that fail to meet requirements.

One key point for provider organizations in such arrangements is to understand that health plans will drive volume to them in exchange for a lower per-unit cost. Financial incentives and accountability in the contract thus should aim to ensure that the expected volume increase materializes. Provider organizations should be willing to accept lower payments if the health plan enrolls more young and healthy lives to diversify the risk.

Contracts also need to address how patient attribution will be defined. For example, would patients be attributed to a provider organization based on geography or on demographics? Provider organizations need to understand the methodology in advance, and the contract needs to clearly spell it out.

Another key point of negotiation is the performance benchmark that will be used and whether the provider’s performance will be compared to the local market or on a national scale. The preferred approach probably will depend on the type of patient population. For instance, Medicare managed care plans might present different opportunities than commercial plans.

Contracts also need to define quality, almost as a proof of concept, and describe the data that will be tracked to measure quality. The case study contract should include a care coordination payment (CCP) at an established per member per month (PMPM) rate for attributed members, with an opportunity for the provider to receive bonus payments based on performance in seven measures tied to HEDIS standards.

In the second year of the contract, the CCP and bonus payments would be replaced with a shared savings structure that establishes a PMPM based on an annual medical-expenditure budget for all attributed members.

Attendees agreed that such contracts should include some type of case management or care management fee—especially when the agreements involve accountable care organizations or CINs, which are able to circumvent some antitrust barriers to such payments.

Under the proposed contract, the CIN would be responsible for half of any surplus or deficit in the shared savings pool. The health plan would withhold 10 percent of its fee-for-service payments to the CIN to cover a potential deficit.

Another key provision would provide up-front capital to help the provider organization create the needed infrastructure, instead of requiring the provider to wait 18 months into the contract term for incentive payments.

Potential pitfalls. Top pitfalls or concerns include the viability of the health plan from which the provider organization is counting on receiving ongoing payments under the contract.

To avoid the risk of being locked into a partnership with a deteriorating health plan, some providers include language stipulating that the contract will be terminated if the plan’s financial health deteriorates to the extent that ratings agencies place the plan at a specified level of risk. Likewise, some contracts require that the provider make its quarterly financial statements available to the plan.

Failure to engage physicians in the contracting process and the negotiation of metrics could impact the degree to which they buy in to the agreement.

Another risk is that provider organizations will enter into a contract without grasping what they are accountable for because they did not delve into the contract to understand each party’s goals.

Case Study 2: Entering Into a Risk-Bearing Relationship

A second case study focused on a hypothetical CIN consisting of approximately 1,200 providers. The CIN participated in various upside-only contracts that covered approximately 250,000 lives.

A commercial health plan then approached the CIN about moving into a two-way risk contract that would eventually transition to a full-risk (i.e., capitation) model.

For 2017, the plan proposed using the current fee schedule with a 2 percent cost-of-living adjustment. Ten percent of payment would be held in reserve, with a semiannual reconciliation period. The plan hoped to move to full capitation within a few years.

Attendees first discussed the ideal duration of the risk-bearing contract. One discussion group suggested a three-year contract, with the first year limited to shared savings and the second year transitioning to shared risk as long as the number of covered lives reached an agreed-upon minimum.

Another group settled on five years as a viable duration, with shared savings and shared risk in effect the whole time.

After three years, either party could renegotiate or opt out of the contract. If both sides thought the partnership was working as envisioned at that time, they could move to a capitated model.

Both sides should easily be able to initiate discussions and negotiations around any issues that arise in the partnership, with monthly joint-operating committee meetings proposed as one way to make sure each side is getting what it expected out of the relationship.

Key provisions. Points that should be addressed in a shared-risk contract include data sharing and patient attribution. Regarding data, one suggestion was to ask the health plan to provide three years of past-performance data on the patient population up front.

Ensuring that a certain number of attributed lives are in place is critical when a provider accepts downside risk, Marino said. “The last thing we want to do, even if [the CIN is] performing well, is have 500 lives go from shared savings to downside risk in Year 2,” he said.

Once the full-risk portion of the contract begins, the health plan should also agree to set benefit levels in a way that deters members from going out of network. In-network referral guidelines should be negotiated as well.

A target medical-loss ratio could be another point of negotiation. And given that the target could shift every year based on characteristics of the attributed patient population, it should probably be up for renegotiation annually.

Another idea was to include contract language that establishes a shared data warehouse using claims data and electronic health record data, with a lag time of no more than 90 days.

A tool called Division of Financial Responsibility (DOFR), used in shared-risk contracts to define which side is financially responsible for which services, also was mentioned as a focus of negotiations. The provider might be responsible for inpatient and outpatient services but not for transplants, for example. These details are crucial to lay out in the contract, whether via DOFR or another approach.

Most of the points came back to ensuring that goals and incentives are aligned among all parties. For example, one way to get physicians on board would be to assure them that the relationship will lead to improvements in protocols such as preauthorization, thereby allowing them to spend more time with patients.

Potential pitfalls. The parties in any type of risk arrangement should be aware of what may be carved in and out of member benefits by employers, discussion participants noted. For example, care for mental illness or substance abuse may not be covered for certain members.

In a tumultuous political environment, the CIN and health plan also would need to keep apprised of regulatory developments that could affect some provisions—even in the case of a commercial contract.

Smaller providers, especially, may not be equipped to participate in an arrangement with full cost allocation. Depending on certain diagnoses or comorbidities that may occur in the patient population, a provider’s cost risk could go up considerably in the second year. Providers may have a hard time gauging the actuarial value of the risk they are taking on.

A possible solution, Marino said, would be to negotiate separate PMPM fees based on risk stratification, in the same manner as many arrangements specify for care management.

“Then you’re thinking about the population cohort slightly differently, with incentives wrapped around that,” he said.

Case Study 3: Cobranding a Product for a Large Regional Market

In this scenario, a large regional Medicare Advantage (MA) plan with 60,000 members and $550 million in annual revenue approached a CIN with an offer to create a cobranded MA product. The MA plan would need approval from the Centers for Medicare & Medicaid Services to expand its services into the new market.

The plan offered exclusive-provider-network rights and was willing to create two cobranded primary care clinics that would cater to senior care.

Key provisions. Network adequacy, access, and the ability to deliver the continuum of care would be critical elements in this sort of an arrangement.

On the financial side, one key would be to provide contractual detail about finances with regard not only to premiums but also to healthcare services, including how primary care physicians, specialists, and other components of the CIN would be compensated in alignment with the payment model.

The ability to capture hierarchical condition categories (HCCs) would be critical because HCCs allow providers and health plans to identify high-cost, high-risk patients who would benefit from care management.

Capturing HCCs also allows the parties to quantify the actuarial value of the risk pool and, in turn, to appropriately set premium rates.

Based on patient relationships, the provider should be the side that is responsible for capturing HCCs. The MA plan should contribute its expertise, perhaps by training physicians on coding and HCCs and on aligning those tasks with their work flows. The plan has access to claims data that, with the right analytics, providers can use to drill down into population health trends.

“The key is to have that collaborative relationship,” Marino said, “so you’re supporting the HCCs, supporting the infrastructure, supporting the care management, and having sort of a clear, defined idea as to how those roles need to be combined and work together.”

Shared risk—both upside and downside, and as described in a DFOR—is critical. Clearly defined care management responsibility is a bedrock as well, and the details should be established in a way that is actionable and that makes clear who’s doing what and when.

Infrastructure with respect to both data and care management also is vital, as are provisions that ensure high-quality actuarial work to understand what’s occurring within the MA population, given the likelihood of significant variation. Deciding on the stop-loss threshold is another important step.

Potential pitfalls. Lack of experience in population health management would be a hindrance in any type of shared-risk arrangement, but especially in one this advanced.

Given that the regulatory overhead associated with MA is significant, a cobranded product in which one of the parties does not perform optimally in pro forma requirements could lead to a breakdown of the partnership.

Finally, any semblance of financial instability on either side could doom the partnership, given the likelihood in such an arrangement of having to “weather storms,” in the words of one attendee.

About EY’s Global Health Sector

Across the world, healthcare systems and entities are under unprecedented pressure. Spiraling costs, exacerbated by aging populations and emerging market growth, are bringing newfound focus on value and outcomes. Mobile health and data analytics promise to revamp care delivery but are also bringing in competitors from other sectors. For governments, payers, and providers, these trends create a host of challenges: extracting insights from “big data,” partnering in new ways, boosting operating efficiencies, and more.

EY’s Global Health Sector brings together a worldwide network of more than 4,000 sector-focused assurance, tax, transaction, and advisory professionals with a range of healthcare and business backgrounds. Our wide-reaching network allows us to rapidly share leading practices and solutions around the globe and deploy diverse delivery teams to meet your needs.


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