Understanding Value-Based Contracting: Step Four - Improving the Contract
This is the fourth of our six-part series on the steps to demonstrate value for payers when engaging in a value-based contract relationship.
By Ian Duncan, PhD FSA MAAA, Chief Actuary at Arbital Health
In the first post of this series, we discuss preparations to take when considering engaging in a risk-based contract. Our second post deals with the ways to design the contract. The third post talks about how to manage your contract. The fourth post offers suggestions on ways to improve contract performance. Each of these steps is crucial for achieving successful reconciliation and avoiding disputes. This post will focus on the reconciliation process and answering the question: How do I further ensure contracts are paid out accurately and timely?
As we’ve discussed in our previous posts, successful reconciliation of a risk-based contract hinges on careful modeling and continuous monitoring throughout the entire contract duration—waiting only until the adjudication phase is simply too late. When a contract is properly managed from the start, reconciliation should come without surprises—the goal of a risk-based relationship. However, there are several challenges to accomplishing a dispute-free reconciliation.
Contract Complexity
Some VBC models are relatively simple to administer and reconcile. Capitated contracts, for example, may require no reconciliation. The provider is paid a set amount of money to cover the predicted cost of all or some of the health care services for a specific patient over a certain period, from which the provider derives its margin. Disputes may arise, however, even in capitated contracts if attribution and contract terms aren't precisely defined. This is particularly relevant as Medical Loss Ratio guarantees, which are increasingly common in Medicare Advantage contracts, share similar challenges.
Shared savings and bundled payment models, on the other hand, can be complicated to reconcile. One challenge with this type of contract is that reconciliation requires complete data, meaning that run-out claims (those for services rendered but not yet submitted or, if submitted, not yet paid) are included in the calculation. Allowing for run-out often imposes a delay of six months or more after the contract period before complete claims are available. Run-out should also be handled carefully when a contract requires comparison between baseline and contract period costs. If baseline claims aren't evaluated with the same run-out period as contract period claims, it is possible for the baseline to be relatively high due to the extended run-out.
Time Delays
With value-based contracts, the final reconciliation often takes place several years after a program begins. That’s too late to determine whether you are going to meet the requirements of the contract and get paid for the risk. This is another key reason why you need to demonstrate success as the program unfolds. If you have an efficient operational model as we’ve described in previous posts, you are much more likely to meet the mutual goals you have established. Having a partner like Arbital, with a platform that can crunch the data, add estimated run-out claims, essentially estimate the final reconciliation, and improve that estimate over time as you get closer to the end of the contract, streamlines the reconciliation process and accelerates payment.
Accounting Risks
A recent financial standard called ASC 606 applies to revenue recognition and promises to be a significant factor in risk-based contracting. In value-based contracts, revenue is variable, with many agreements allowing payment amounts to be retroactively adjusted based on results. The lack of certainty in the final value of a contract is an issue under ASC 606, which requires revenue to be recognized only when it is probable that there will not be a significant reversal once the final reconciliation is completed.¹ This makes ongoing monitoring throughout the contract - not just trying to adjudicate at the end of the program - imperative so that payers and providers can remain in compliance with ASC 606. Again, accomplishing this goal requires a comprehensive platform to continuously ingest and analyze the data to ensure timely, accurate, dispute-free payment.
Contract reconciliation is the culmination of a value-based contract program. If you ingest data correctly, understand the economics of the relationship, design the contract appropriately, implement ongoing monitoring, and improve and optimize the contract during its duration, then you are more likely to achieve the goals through the reconciliation without dispute.
The essential foundation of a risk-based contract is the data. In our final post coming soon, we will discuss the importance of collecting and ingesting the accurate, timely data that is an absolute necessity to succeed in value-based contracting.
How Arbital Can Help
Arbital Health is a technology company focused on accelerating the healthcare industry's transition to value-based care. The company’s platform for value-based contract adjudication enables secure data sharing and contract adjudication among employers, payers, point solution vendors, providers, and Accountable Care Organizations that serve members within a value-based care arrangement.
¹ Ready for ASC 606? BDO white paper, 2018. Click Here.
Curious about mastering value-based contracting?
Download our webinar recording, "Value-Based Contracting 101: Avoiding Pitfalls & Exploiting Opportunities", and discover VBC strategies to ensure your success.
