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The New Normal in Healthcare Delivery and What it Means for Customers and Insurers | Volume 1.2:Value-Based Contracting


Old norm

The cost to provide Americans with healthcare has been rising dramatically for decades. In 1960, total U.S. healthcare costs were $27.2 billion; in 2017, U.S. healthcare costs were $3.5 trillion. That translates to annual healthcare costs of $10,739 per person in 2017 versus $147 per person in 1960.* Over the past thirty years, there has been an ongoing push and pull between providers, managed care organizations (MCOs), individuals, and their employers regarding who should take the risk for the cost of medical care and how much risk to take. In the late 1990s, capitated contracts, which provide fixed, pre-arranged monthly payments received by a physician or hospital for each patient enrolled in a health plan with health insurers, were offered on a per-member, per-month basis. Typically, these arrangements were negotiated with independent physician associations (IPAs) and physician-hospital organizations (PHOs). Unfortunately for the IPAs and PHOs, these contracts were financially disastrous because they were full risk contracts with no stop loss or stop loss purchased from the health plan. As a result, the early 2000s brought a swing back to fee-for-service contracts. 

New norm

The Affordable Care Act (ACA) was passed in March 2010. One of its numerous outcomes was payment reform to incentivize the adoption of more effective care delivery models. As a result, there was a resurgence in providers taking financial risk. The new model involves a combination of shared risk among providers, payors, and patients to enhance collaboration and coordination of care to reduce cost, improve clinical outcomes, and enhance the patient experience. To bolster this effort, value-based contracting was born. Value-based contracting generally includes performance- based payment or reimbursement tied to indicators of value, such as patient health outcomes, efficiency, and quality.

Through value-based contracting, providers now have technology and access to healthcare data—such as statistics on health demographics, improvements/declines in health, and other data to identify the potential for chronic conditions—which they see as a path to increasing income while taking a modest, quantifiable amount of risk. Additionally, payors, such as health plans, use this as a mechanism to shift some risk away from themselves and back to the providers. Overall, payors use incentives to create a more coordinated, patient-centered approach to care that, when executed properly, results in decreased overall costs and an enhanced patient experience.

What it means for customers

As access to healthcare increases, there is a noticeable shift away from silo-based healthcare to a team-based healthcare system with a focus on lower costs and improved outcomes. This shift toward collaboration has resulted in the creation of joint ventures between health systems and health plans, including the clinically integrated network (CIN), the patient- centered medical home (PCMH) and the accountable care organization (ACO).

As these new models evolve, providers have become responsible for management services across the healthcare continuum. While providers may still receive fee-for-service for a portion of their payments, they may also receive a bonus for meeting quality targets and cost efficiencies. Health systems are also required to perform traditional managed care services such as case management, utilization review, and quality measure implementation. Since professional liability policies generally do not automatically cover managed care services, these changes make it necessary to re-evaluate insurance programs to ensure organizations are properly covered for emerging exposures.

MCOs have begun shifting payments in the direction of value-based providers by reimbursing partly on quality
with built-in incentives to control costs. Contracts with providers now include alternative payment methods and stipulate a portion of the provider’s total potential payment is tied to cost-efficiency and quality performance. MCOs are also being pushed to broadly adopt new technology with greater analytics and more robust electronic medical record systems. They may also receive clinical integration fees that are contingent on the provider engaging in practice transformation to build out technology and processes that will shape the way they deliver care.

What it means for insurers

As the market moves from a silo-based healthcare system to a team-based healthcare system and alternative payment methods develop, healthcare with a focus on managed care errors and omissions need to exercise even greater underwriting discipline in several ways, including:

• Carefully reviewing business plans and pro forma financials on all new start-ups

• Performing thorough due diligence on both regulatory and antitrust exposure

• Analyzing the client’s contracts with health plans or other payors whereby the client is reimbursed on a “value basis”— i.e., determining whether the contract involves meeting quality metrics and/or utilizes a case management process

• Understanding whether the organization will receive “shared savings,” and if so, how those payments will be disbursed

• Analyzing any changes to the structure/composition of the provider networks and the development of tiered networks or exclusive provider networks

• Analyzing the investment in IT and data analytics / care management programs

• Carefully drafting policy language to ensure coverage is provided for an organization’s managed care exposure and separately for their direct medical exposure, if any