Contracting: Assuring value

Contracting: Assuring value

Contracts are a powerful and often under-utilized way to shape healthcare delivery. They must be adapted, depending upon the level of coordination and the outcomes being sought. New contractual arrangements can drive a more patient- and outcome-based approach, as providers have little alternative but to comply. Once a health system is oriented toward patient-centered outcomes, contracts can help to sustain this approach, by incentivizing the desired behavior to reward activities that create value, rather than simply reimbursing costs. Contract discussions should not be adversarial, and present an opportunity to align the values of payers and providers, and keep expenditure under control.

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In integrated systems, payments start to cross organizational boundaries. Purchasers such as insurance companies, commissioners or government agencies could agree to payment, based upon a set of outcomes for a given population. For chronic conditions, this may be a fixed sum per patient per year (assuming outcomes are met); for elective care, the payment would be episode-based. Primary care professionals, on the other hand, could receive a fixed sum per enrolled patient, partly subscription-based, but also partly based on the measured health outcomes for these patients.

Toward value-based contracting

As performance-based contracts start to replace traditional fee-for-service contracts, healthcare organizations are now looking to introduce contracts that reward value.

By rewarding action, case-based payments can generate unnecessary interventions in order to increase income. Primary care in particular, population-based payment, or capitation, is an alternative and potentially more appropriate way to maximize preventive care, with the added advantage of a fixed cost that eases budgetary planning.

Capitation is most effective when a system measures its outcomes. Without such monitoring, physicians may feel they can spend the entire allocated budget by referring the most costly patients to other types of care – rather than focus on high quality primary and community care. Capitation also puts a lot of pressure on providers to work within a finite budget, which could be challenging when treating high-risk conditions such as cancer.

An innovative example of contracting is alternative quality contracts, developed by Blue Cross Blue Shield Massachusetts in the US, which align the incentives of hospital providers with primary care doctors, to halt the growth in medical expenditure (see below).

Providers are rewarded by retaining a share of any savings for achieving quality and efficiency targets. Since the contracts were introduced in 2009, providers have delivered higher quality improvements and cost savings.

The UK Bedfordshire musculoskeletal program (see Patient engagement ) also involved capitation-based funding (producing a fixed budget), with contractors taking a share in the gains or risks, based upon patient outcomes and cost savings. Some of the project measures include innovative use of technology, quality of patient experience, level of integrated care, and annual reports including stakeholder feedback and improvement plans.

The danger of changing too quickly

A sudden shift from fee-for-service to bundled services could result in local health providers receiving significantly lower incomes, placing entire clinics or hospitals at risk. Given the unfamiliarity of new reward systems, a transitional period of 1-2 years should enable providers gradually to reduce unused capacity and adjust to the new model. During this period, income would remain stable.

Case study - The power of new contracts: Blue Cross Blue Shield Massachusetts and Harvard Vanguard Medical Associates, US

Through the introduction of an alternative quality contract (AQC), physicians and hospitals entered into a voluntary global payment model where financial incentives are linked to clinical quality, patient outcomes, and efficient use of resources. These doctors and hospitals were also responsible for the full continuum of care, including cost and quality, across all settings.

The contracts, which included a per-patient global budget, may be solely with physician groups or could also include hospitals. The AQC applied only to members of certain health insurance plans with primary care organization Harvard Vanguard Medical Associates.

An adaptive approach

This arrangement encouraged primary care physicians to seek the same quality hospital care at lower-cost. As the main contractor, Harvard Vanguard hired part-time specialists that could perform small interventions within the primary care center (preventing unnecessary referrals), and selected referral partners based upon their outcome to cost ratio, which helped to break up hospital monopolies that had pushed up prices.

The availability of treatment and outcome variations stimulated a change in behavior, while the long-term nature of the contracts encouraged investment in the partnership. In future, new insurance products will emerge that incentivize members to choose high-value care, and actively participate in discussions with doctors. Critically, spending levels were not reduced immediately but brought down over time, enabling providers to adjust to the new regime.

Low-cost, high-quality care

Quality has improved significantly, while the rate of cost increases are set to halve within 5 years, all without abolishing fee-for-service payments. Any share of surpluses in budgets will be dependent upon performance quality.

Lessons learned:

  • the system covers patients in every care setting, encouraging primary care physicians to seek the lower-cost hospital care without sacrificing quality
  • five-year contracts stimulate long-term partnerships between providers and payers.

Case study - Promoting true value: HealthSouth, US

HealthSouth, a provider of inpatient rehabilitation services based in Birmingham, Alabama, US, was perceived to be more expensive than its competition (predominantly skilled nursing facilities). However, management believed that its standardized care management protocols actually delivered superior outcomes. To prepare for the move to value-based contracting, the organization wanted to calculate the total cost and outcomes of care, including pre-operative, inpatient and post-operative programs.

A clearer picture of value

Gathering data from multiple health plans and clinical sources, HealthSouth demonstrated that its overall cost of care was less than other providers, and is using these findings to build its relationships with health plans, and improve financial performance through better contracting arrangements. Readmission rates are half of competitors, and acute bed days are considerably lower, bringing considerable savings.

Lessons learned:

  • it is critical to communicate value in a clear, understandable way
  • existing data may be inadequate, so organizations may need to invest in data mining and analysis.

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