Value Based Payment

At the Tipping Point for Assuming More Risk

September 26, 2018 9:45 am

The rapid growth and evolution of alternative payment models (APMs), such as accountable care organizations (ACOs) and bundled payments, have hit a tipping point in health care. Now more than ever, providers are increasingly being pushed toward two-sided risk arrangements. To stay financially viable, they must gain full visibility into their value-based contracts to evaluate, operationalize, and successfully align across payment and care delivery work streams.

The current drivers pushing change

Healthcare providers are accumulating multiple value-based contracts with commercial and public payers. A recent report found that 1,011 public and private ACOs covered 32.7 million lives in Q1 2018—accounting for 10 percent of the U.S. population. a Commercial ACO contracts covered a little more than half of all ACO lives, Medicare contracts accounted for 37 percent, and Medicaid contracts accounted for the remaining 10 percent.

At the same time, increasing pressure from employers and the government is driving the movement toward two-sided risk arrangements. The Medicare Access and CHIP Reauthorization Act (MACRA) creates incentives for clinicians to move away from fee-for-service in favor of APMs that can earn even more financial rewards in exchange for taking on risk related to patient outcomes. Medicare also has recently proposed rules that, if finalized, will create a more expedient glide path for ACOs to take on incremental amounts of two-sided risk. Additionally, there is uptake in the private sector, with more than half of ACOs bearing the same levels of financial risk in their commercial and Medicaid contracts as in their accountable care contracts with Medicare. Major employers are adopting two-sided risk models to control healthcare costs by removing intermediaries and aligning incentives to share savings among employees, providers, and the company.

“It is imperative for providers to get a handle on their payer contracts,” says Bryan Smith, principal performance partner at Premier. “Because payers have traditionally controlled the terms, metrics can be different across arrangements, or worse yet, they may conflict with other outcomes related to health system goals. For this reason, strong relationships with payers and deliberate, data-driven contracting decisions on performance improvement areas are critical for economic survival.”

To help health systems build value-based payment capabilities, Premier has developed a series of leading practices to maximize revenue and regain profitability. The company works with ACOs and other APMs on strategic initiatives to create alignment around contract metrics and terms.

Contract negotiation cycle

“During an initial assessment, the first question we ask is: Are you aware of all your payer contract requirements and their implications?” says Smith. “Due to the historically siloed nature of contract negotiations, many hospital executives are unaware of exactly which metrics are in their contracts, let alone how they are performing against them.”

A practical reality is that metrics will vary from payer to payer, and therefore the providers’ ability to negotiate the underlying calculations may be limited. “We work with health systems to focus their metrics in overlapping or complementary clinical areas, even if the metrics have different definitions, to create greater focus and alignment,” says Smith. These arrangements must be planned and executed strategically and comprehensively for health systems to achieve success.

Ensuring a health system has an effective payer strategy is a continuous process. There are essentially five steps organizations must take (and retake) in every contract negotiation.

  • Evaluate the system’s historical performance with proposed metrics and contract structure, as well as the payer’s performance and payout rates with these types of arrangements.
  • Look for alignment, or misalignment, across other value-based contracts.
  • Model the contract parameters, including the implications for improving. For example, incorporate “volume” implications of “value” improvements to develop a complete financial view.
  • Form a cross-functional team of executives and staff that will be responsible for implementing the contract to review the analysis above and create an aligned performance roadmap.
  • Implement an improvement plan based on key metrics, track progress, and continue to evaluate performance, ensuring feedback is shared with the contract team to create an effective feedback loop.

“Health systems we’re working with have benefitted from creating multidisciplinary teams to evaluate and sign off on value-based contracts,” says Seth Edwards, principal of Premier’s Population Health Management Collaborative. “They then connect the inventory of value-based revenue metrics to the frontlines to ensure staff understand how they align with organizational goals.”

Backed by the data

“Claims data is an incredibly rich source of information, and it’s essential that health systems learn how to use this resource to better care for a population,” says Edwards. “However, there are challenges with retrieving data from commercial payers, including the timeliness of the information received and limitations in making meaningful comparisons to evaluate performance.” It is estimated that less than 20 percent of commercial payers provide fully adjudicated claims data to providers. This is one reason why many health systems use the Medicare Shared Savings Program (MSSP) as an initial foray into risk arrangements.

“CMS provides fully adjudicated claims data for more than 90 percent of MSSP encounters, so ACOs can see exactly what and who is driving the spending,” says Smith. “Likewise, Medicare beneficiaries are heavy utilizers of healthcare services, and there are ample avenues for benchmarking performance. However, this still does not eliminate the need to incorporate clinical data into the analysis. Even simple things, like letting the ACO know when a beneficiary has been admitted, can have a huge impact.”

Premier provides a detailed claims analytics tool and transparent comparative benchmarking reports that run thorough analyses of key data points around spend, quality, and utilization, which health system leaders use to make timely, strategic decisions. Collaborative members receive unblinded reports that compare performance to others and identify specific target areas for improvement. This approach provides insights into prioritizing areas with the greatest potential for return on investment. Premier and participating collaborative members share their best practices with each other, based on metrics of top performers in each category, including the identification of action steps that lead to positive outcomes.

Unique payer insights

“We take the information we get from the payers and hold a follow-up meeting with members to discuss the areas where payers are succeeding and where they could improve,” says Edwards. “That member feedback is shared with the payers, so that they better understand member needs, and both parties go into initial contract discussions with a more effective, aligned approach.”

There’s no question that health systems must be methodical in assessing and negotiating payer contracts to achieve success. Building structured processes for contract alignment and standardization is essential as health systems become better equipped to take on more risk, with the possibility for more reward.

Large-scale healthcare transformation is not easy and making sure value-based contracts are consistent and aligned can be challenging. Premier partners with health systems to understand their strategic success factors and build the capabilities necessary to create and implement effective value-based payment contracts and care delivery models.

About Premier

Premier Inc. is a leading healthcare improvement company, uniting an alliance of approximately 4,000 U.S. hospitals and health systems and approximately 165,000 other providers and organizations to transform healthcare. With integrated data and analytics, collaboratives, supply chain solutions, and consulting and other services, Premier enables better care and outcomes at a lower cost. Premier plays a critical role in the rapidly evolving healthcare industry, collaborating with members to co-develop long-term innovations that reinvent and improve the way care is delivered to patients nationwide. Headquartered in Charlotte, N.C., Premier is passionate about transforming American healthcare. 


a. Muhlestein, D., et al., “Recent progress in the value journey: Growth of ACOs and value-based payment models in 2018,” Health Affairs, Aug. 14, 2018.


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