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Building Blocks of Success for Two-Sided Risk Models: Value-Based Contracting

Qualitative Considerations for Two-Sided Risk Contracts

In an on-going blog series on building two-sided risk models, Premier experts are providing insight on how to ready your health system for a successful transition. In the last post, we focused on setting financial targets in the era of value-based contracts. In this post, we continue the conversation and explore qualitative factors that must be weighed when determining rates in value-based contracts.

Once you have clarity on the margins needed and revenue goals for each commercial contract, you can begin to incorporate the “value-based” component of the contract. The first step is to prioritize the list of payers with whom to take risk. This is especially important for providers that are relatively new to value-based contracting, or interested in expanding (or narrowing) that number of contracts and amount of organizational risk.

Five Key Questions to Consider

  1. What is the relative size of the revenue at risk?
    The ideal payer candidate is not necessarily the one with the greatest revenue. The ideal amount of revenue to risk will vary based on whether your organization is contemplating upside only arrangements or two-sided risk. And, most providers have not negotiated a significant number of value-based contracts and need more experience under their belts before assigning a significant portion of revenue at risk.
  2. What is your capacity to manage risk?
    Value-based contracts carry significant cultural, financial, and operational implications for practices, and providers need to be onboard for this change. For most organizations just entering into their first two-sided risk arrangement, a smaller payer may be a better partner
  3. What quality metrics are being used and how do they align with other contracts and institutional goals?
    A practical reality is that metrics will vary from payer to payer and providers’ ability to negotiate the underlying calculations may be limited. Strive to focus metrics in overlapping or complementary clinical areas, even if the metrics have different definitions, to create greater focus and alignment.
  4. What is the likelihood of achieving the revenue target for a particular payer without a value-based component?
    Do you have to put any of the revenue at risk or can you achieve the previously set goals without it? Is the reward worth the risk?
  5. Can your organization be successful under this arrangement or are there too many barriers?
    Often the targets are too high or change too quickly to be achievable. As an example, many payers are promoting Minimum Loss Rate (MLR) contracts. Under typical MLR arrangements, the provider is incentivized to lower expenditures to meet a threshold set at a percentage of that year’s premium. But, there are three challenges with this type of contract:
  • The target spend adjusts annually with the premium. It takes time and effort to reduce utilization and much of the reduction may come from lowered utilization for the health system. Providers should have 2-3 years to recoup their investments rather than having targets set annually.
  • Providers have no control over the premium. If the payer decides to lower the premiums in order to gain more market share, the provider could face an unattainable target.
  • The targets rarely take into consideration the provider’s current performance.There are enlightened payers willing to create bonuses for partial achievement, but that’s not common practice.

At this point, you’ve set a range of revenue goals for each contract (refer to this accompanying blog post). You’ve identified the high-priority payers. The final step is to determine the target reimbursement rates. Relative success would be base rates that, at current volumes, meet the moderate target revenue with potential bonuses reaching the high end of the range. For providers new to value-based contracting, at a minimum, base rates must be sufficient to meet the low-end revenue targets and with achievable bonuses, enough to achieve the target revenue.

As your health system gains more experience with value-based contracts, additional tools and processes can be applied to this same methodology to better equip your organization to take on more risk, with the possibility for more reward.

For additional questions about transitioning to a risk-based arrangement, download the Ready, Risk, Reward: Building Successful Two-Sided Risk Models white paper.

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