Understanding Value-Based Contracting: Step One - Exploring the Opportunity

This is the first of a six-part series on the steps to demonstrate value for payers when engaging in a value-based contract relationship.

Understanding Value-Based Contracting: Step One - Exploring the Opportunity

This is the first of a 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

Have you asked yourself whether you need to start thinking about value-based contracts? Good question. Consider these facts:

  • In 2022, one of every four (24.5%) U.S. healthcare payments flowed through two-sided financial risk contracts.[1]
  • According to McKinsey research, the number of patients treated by physicians under value-based contracts will double in the next five years.[2]
  • The CMS has committed to transitioning Medicare beneficiaries and most Medicaid beneficiaries to accountable care relationships by 2030.[3]
  • The Healthcare Plan Payment Learning Action Network estimated the amount of premium dollars managed by providers in downside risk arrangements is expanding at a rate of $100 billion a year.[4]

The answer is clear. If you aren’t already engaged in a risk-based contract, you likely soon will be. Now is the time to begin preparing.

What Do Payers Care About

As you consider exploring a risk-based contracting engagement, you need to understand the things payers care about. Secondly, you need to establish the value of your medical management activities. Then you must articulate how your value proposition matches up with payers’ needs.

 In addition to your financial value proposition, payers also care about the impact the program will have on their internal team. Can you engage their staff, or will they be threatened? How much will your program overlap or duplicate existing programs?

From a business perspective, they care whether their members will like the program and that it will increase member persistency and value. They want to know how the program will drive market share and improve their quality measures (HEDIS/STAR). Perhaps most importantly, payers want you to show them how the program will reduce their per member per month (PMPM) cost (Commercial Plans) or Medical Loss Ratio (MLR) (Medicare Advantage Plans) and provide an adequate return on their investment (ROI).

Importance of an Economic Model

It’s important to note that healthcare ROI is calculated differently than other industries. Most businesses calculate ROI by dividing profit of an investment by the cost of that investment. In Healthcare, ROI is calculated by dividing gross savings by program cost.

Addressing payers’ financial concerns requires that they understand the economics of the program. Unfortunately, in my 25 years of working with managed-care programs, perhaps one of the areas that is least understood is the economics. When explaining the economics of your programs, it is extremely beneficial to have an actuarial presence. An actuarial partner can help you understand how to translate the key goal of a program or intervention – PMPM or MLR reduction – into a cost-savings target.  

The credibility of how you demonstrate your ROI measurement is critical when discussing a risk contract.  

Is There a “There” There?

Most importantly, before a payer will consider a risk contract, they want to know if there is a “there” there. In other words, is the program worth the investment? There are three things necessary to get to a “there:” You need either a large volume of patients at medium cost (e.g. diabetes) or a small patient prevalence, but high individual cost (e.g. stage 3-5 chronic kidney disease). The third component is that a program needs to demonstrate quick results – often within a year.

Once you get through the discovery phase and agree to engage in a VBC relationship, the next step is developing the contract. We discuss this in part two of our series.

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 modeling and 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] Investing in the new era of value-based care, McKinsey & Company, December 16, 2022. Click Here

[2] Ibid.

[3] The CMS Innovation Center’s Strategy to Support High-Quality Primary Care,, June 9, 2023. Click Here.

[4] Healthcare Payment Learning & Action Network.


Curious about mastering value-based contracting?

Download our webinar recording, "Value-Based Contracting 101: Avoiding Pitfalls & Exploiting Opportunities", and discover how to ensure your success.

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