Advancing Contracting Strategy in a Complex Environment

January 17, 2018 11:27 am

Hospitals should consider crafting language into contracts that prohibits narrow networks or tiering without the provider’s consent.

Providers face an increasingly complex set of contracting challenges as the industry seeks to reduce the continued rise in healthcare costs across Medicare, Medicaid, and lives insured by commercial health plans. While the debate in Washington continues, many health plans have pulled out of the Affordable Care Act (ACA) marketplaces, calling their sustainability into question in many regions. Without clarity as to what the government may do to stabilize or overhaul the non-group market, additional uncertainty exists.

At the same time, many states are already considering ways to manage their Medicaid spend, anticipating current funding levels will not continue. For example, Governor Kasich of Ohio, who was a supporter of the Affordable Care Act (ACA), recently stated that he would be willing to rollback expansion over time, while other state leaders such as Governor Hutchinson of Arkansas are taking steps to change Medicaid eligibility requirements.

Providers, in anticipation of increased pressure from government payers, plus potential increases in uninsured patients, are readying to sustain their missions with less funding. Historically, providers could offset these reductions with increases in commercial rates. This channel, however, is increasingly unavailable, with commercial managed care organizations (MCOs) and employers demanding a clearer demonstration of value and improved affordability.

Meanwhile, in the quest for cost containment, government and commercial payers alike are exploring alternative approaches to contain spend, including myriad payment models and products, which introduce significant complexity for providers navigating evolving MCO relationships and managing a diverse set of arrangements.

Within this context, providers should approach their contracting portfolios holistically, with the intent to drive value creation across all payers and products. Two challenges arising from these transitions are narrow networks and tiering and compartmentalized value condition, a situation in which providers are managing varying contract types that have competing financial incentives.

Narrow Networks and Tiering

In many markets, MCOs are increasingly evaluating and deploying narrow network products that exclude high-cost providers; and/or tiering the network to strongly dissuade utilization of high-cost providers in both Medicare Advantage and commercial product lines. This push on pricing from MCOs is reinforced by the rise in consumerism and pricing transparency, driven by increases in premiums and a rise in high-deductible health plans.

Providers may not agree with the basis of narrowing or tiering, but it may happen to them nonetheless. For example, payers may form networks on metrics that offer an incomplete picture of performance, such as networks formed primarily on low unit cost or episode cost, with less consideration for the longitudinal total cost of care, which is more difficult to measure.

Horizon Blue Cross Blue Shield of New Jersey’s (Horizon BCBSNJ) OMNIA Health Plan is a recent example of an MCO building a tiered network where there is substantial patient incentive to utilize “top-tier” hospitals and providers. Top-tier hospitals and providers commonly receive from health plans lower cost sharing and or richer benefits through the members certificate of coverage. In this case, Horizon BCBSNJ initially created the OMNIA Health Alliance hallmarked by several large systems and selected providers who had entered into value-based arrangements for patients who carry individual insurance under the health plan. They then included these Health Alliance providers as the exclusive top-tier network and relegated other contracted providers to a second tier. While controversy surrounds the OMNIA Health Plan’s tiering methodology legally and legislatively, the insurer has announced that 234,000 individuals signed up for the tiered product in 2016 and enrollment statewide is up 25 percent for 2017.

MCOs often embed language in contracts or, of more concern, in provider manuals or certificates of coverage that contractually permit them to exclude providers from current or future network designs. Many MCOs crafted this language relatively recently as a contingency to the uncertainty surrounding the ACA, to provide the option of narrowing or tiering networks should the need arise.

Providers can take the following steps to manage these contract provisions.

Include specific language in contracts. Providers should consider a thorough review of existing contract terms that specifically call out narrow, tiered, or preferred networks or products. Providers should also carefully review language in provider manuals and, if available, certificates of coverage that permit exclusions of specific providers as noted above. Providers who do not find language or provisions that fit these criteria should consider crafting their own language aimed at prohibiting the MCO from taking such action without the express written consent of the provider upon the next contract renewal.

Match contracting strategy to competitive position. Moreover, as providers consider strategic changes to their enterprise (e.g., enhanced clinical services, acquisitions, formation of accountable care organizations/clinically integrated networks) they should ensure their contracting strategy reflects their current competitive position and is capturing the commensurate value they create in the market.

Be aware of market environment. At the same time, providers should keep a careful eye on their market environment to minimize the threat of being excluded from a network and/or tiered into an eroding MCO patient base. The historical drivers of scale, geographic distribution, brand, and unique services are still important; however, they must now be viewed through the context of “relative value” to competitors across these dimensions as well as relative price and affordability.

Managing Competing Incentives

While markets and individual providers range considerably in the prevalence of value- and risk-based models, at this point, most provider contract portfolios now contain a mix of fee-for-service and performance-based products. Providers with such a wide array of commitments may find that their disparate contract types offer competing financial incentives such that clinical and operational drivers of success in one contract could be detrimental within another; as a result, providers are increasingly exposed to the “compartmentalized value condition.”

For example, a provider has five MCO contracts all offering commercial, Medicare, and Medicaid products. The provider’s second largest revenue producing MCO contract, ABC Health Plan has value-based payments and models for the commercial HMO and Medicare Advantage products. The provider identifies that a 5 percent reduction in avoidable admissions would produce a shared savings result in both products, leading it to invest and institute revised clinical pathways and operational designs that produce a marked reduction in avoidable admissions, beating its target and consequently sharing in the savings generated within the two products.

Yet clinical pathways and operational designs revolve around the condition, or the patient, not the MCO or the MCO product. Consequently, the interventions impacted not only the two products with ABC Health Plan, but also all remaining contracted products with ABC Health Plan and all the other MCOs where there was no mechanism to capture portions of the value created.

To mitigate this risk, providers should consider the following actions.

Incorporate the financial impact of achievement in each value-based contract. To understand the totality of planned value created within and across products and contracts (e.g., What would a 2 percent reduction in avoidable admission mean for each of my contracts’ revenue performance?), rewards for quality improvements and achievements should be included in each plan.

Review specific initiatives for quality outcomes. Providers should consider the specific initiatives, clinical and operational, that it aims to deploy to increase affordability of care and negotiate aligned financial incentives both within its value-based contracts and also across its fee-for-service contracts such as quality or utilization pay for performance.

With these and other new complexities in the care delivery and payment environment, increased integration of clinical and operational processes with contracting and finance functions will be necessary to create appropriate alignment—as will the elevation of contracting to a truly strategic role within the enterprise.

Steve Prosser is contracting specialist, The Chartis Group.


Discussion Starters

Forum members: What do you think? Please share your thoughts in the comments section below.

  • Have you had any success in avoiding narrow network or tiering contracts with health plans?
  • Have you  written any quality outcomes into contracts? If so, please describe the terms.


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