Understanding Value-Based Contracting: Step Two - Developing the Contract

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

Understanding Value-Based Contracting: Step Two - Developing the Contract

This is the second 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 discussed preparations to take when considering engaging in a risk-based contract. In this post, we’ll delve into the process of developing the contract and answering the question: How do I design a contract with the right risk/reward profile. 

At our recent webinar on value-based contracting, we asked attendees what they believe to be the biggest challenges in executing value-based care/outcomes contracting. Two-thirds chose contract design, evaluation, and member baseline setting, the most selected response. The result didn’t surprise me since that is the reason most clients come to us for assistance. Contracting continues to be the top challenge for the industry.

If you are going to successfully sell a program to a payer or an employer, you want the program to be straightforward and easy to implement. Most health plans lack the necessary resources to implement a risk-based contract program in a new environment. There are three issues you should consider when designing and developing your contract.

Contract Complexity

One of the reasons risk-based contracts are so difficult to design is because they are so complex. To effectively design and develop your contract, you need to understand and deal with the wide range of parameters including component definitions, provider contractual entity schema, basket of goods, financial performance risk/acuity, program evaluation, quality outcome performance, and risk share and settlement. 

Other key variables to consider include:

  • Attribution: Which provider is going to be responsible for which patient and when?
  • Claims responsibility: Which claims are you going to include in the contract? Which will be left out?
  • Adjustments: How are you going to handle claims truncation and payment trends?
  • Payments: How will you deal with reserving, withholds, and gains/losses and prospective or retrospective payments when it comes to reconciliation?
  • Quality: What, if any, quality components will you include in the contract?
  • Actuarial: What risk adjustment model will you use?
  • Accounting: When will revenue be recognized?

Operational Complexity

A key need is a detailed plan that lays out the steps necessary to achieve the contracted goals. You need to have a process in place to manage the contract and highlight any deviations from the plan in real time, rather than at the end of the contract. Issues that need to be considered include:

  • Who is paying the claims?
  • Will there be reinsurance as part of the contract?
  • If you are a startup, is your venture capital/private equity investor comfortable with the risk?
  • Do you have electronic connections to your coaches and are your coaches trained to address patient needs to ensure you meet the defined financial goals?
  • How are you defining the right patients with whom to intervene? 
  • How do you find those patients?
  • How do you persuade them to engage and be part of the program?

These are all serious operational issues. Part of your plan should be to continually improve operationally to ensure they are all handled correctly.

Ensuring Savings

In my many years dealing with the intricacies of risk-based contracts, I’ve had the opportunity to observe what works and what doesn’t work including why providers often fail at generating the hoped-for savings.

One of the most frequent reasons is that providers often enter into these arrangements without thinking through the fact that identifying and treating at-risk patients results in higher claims. Intervention programs increase claims resulting in a drag on the savings - higher savings are needed to overcome the drag from increased services. 

Another issue is that providers often underestimate how long it takes to initially identify, treat, and then reduce utilization of patient services. Other issues that may lower expected savings include:

  • Inadequate understanding of the program economics
  • “Spreading the net” too widely instead of focusing on high opportunity patients
  • Not focusing on key sources of savings such as inpatient services, expensive therapies, and repeat ER visits
  • Managing patients beyond their savings “sell-by” date (the point at which additional savings cannot be achieved but cost of intervention continues).
  • Lack of timely and complete data access and workflow tools

Once you design, develop, and reach agreement on your contract the next step is creating a process to monitor the contract. We discuss that in part three 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.


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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