This is the first part of a four-part white paper series examining the life cycle of value-based care models from the provider's viewpoint, focusing on essential factors for provider organizations involved in these arrangements. 

Introduction

Increasing healthcare costs to patients, employers, and the government in the United States has created the need to rethink how care is delivered and reimbursed. Traditionally, providers have been paid directly for services provided, known as fee-for-service reimbursement, leading to a system where more services lead directly to more revenue. While this structure is good at ensuring providers are compensated for their time, it is often misaligned with the outcomes that the healthcare system is striving for—better patient outcomes, and lower costs to patients and payers.

Value-based care (VBC) aims to better align the incentives in the system by shifting reimbursement to reward outcomes rather than more activity. As the healthcare industry continues to shift in this direction, it is important for providers to understand how these arrangements differ from traditional fee-for-service and what considerations are important to drive success in value-based agreements. This four-part series covers key considerations for provider groups entering or participating in VBC contracts. This first white paper looks at types of VBC arrangements and the risks providers should consider. It also reviews critical elements in determining organizational fit.

Types of VBC Arrangements

VBC encompasses various types of arrangements, and the initial step for any provider organization is to understand these options. Broadly, VBC contracts can be classified into three categories as defined by the Health Care Payment Learning and Action Network (HCP-LAN¹):

1. Fee-for-service with a link to quality and value (FFS with quality)
2. Alternative payment models built on fee-for-service architecture (APM with FFS)
3. Population-based payment

FFS with quality

In a traditional FFS with quality model, providers receive incentives solely based on achieving cost reductions, quality improvements, or both. These models maintain the existing reimbursement structure, while offering potential additional payments if specific cost and/or quality benchmarks are met. Basic FFS with quality agreements focus on quality measures; if a provider surpasses an established standard, they may be awarded a flat bonus on top of their baseline reimbursement or a higher FFS rate.

APM with FFS

The next step up in complexity are the APMs with FFS, starting with one-sided shared savings models. These are arrangements in which a provider can earn additional payment if expenditures are lower than a target benchmark and can be applicable either to total cost of care or specific disease/specialty costs. In the event expenditures exceed the benchmark, there is no additional settlement in a one-sided model. These models often integrate quality measure adjustments to ensure that both cost and quality incentives are balanced. Many provider organizations start with FFS with quality or one-sided APMs built on FFS architecture models as an initial step toward VBC contracts, since these models facilitate necessary operational changes without incurring downside risks.

The most advanced forms of a VBC model require the provider organization to assume direct financial risk, either through potential repayments or fixed reimbursements. Two-sided shared savings models are APMs built on an FFS architecture, similar to the one-sided shared savings models. However, in a two-sided model, expenditures exceeding a benchmark may require the provider to compensate the payer for shared losses.

Population-based payment

Population-based payment arrangements include predetermined payment methods such as capitation and bundled payments. In a standard capitation model, providers receive a fixed per-member per-month (PMPM) payment for a designated population and are responsible for all necessary healthcare services for that group. In a typical bundled payment model, a provider receives a set fee to cover all required care related to a specific condition or treatment episode.

Types of VBC risk

There are several types of risk that providers are exposed to in VBC arrangements:

• Performance risk
• Statistical credibility risk
• Contracting risk
• Measurement risk
• Insurance risk

Performance risk

Two-sided risk and population-based payment models hold providers accountable for not meeting the performance metrics defined in VBC contracts, often referred to as performance risk. This is based on the idea that a primary care physician or managing specialist has a degree of direct control over a patient’s healthcare expenditures. While providers can often influence the management of a patient’s care, they lack control over services that happen outside of their practice or group. This can expose the provider participating in a VBC arrangement to the risk of other practitioners’ practice patterns.

Statistical credibility risk

While some degree of performance risk appears to be under the provider group’s control on the surface, statistical credibility risk can increase performance risk for providers. Statistical credibility risk is the risk that the patient sample size is too small to accurately reflect the practice patterns of the provider. Many value-based arrangements rely on the idea that over a large enough sample of patients, the natural variation in patient morbidity and service mix will even out and performance metrics will reflect actions of the provider. However, for smaller provider groups or specialty providers, patient volumes are not always sufficient to achieve this.

Contracting risk

Additionally, there is a danger that the VBC contract’s terms, definitions, and methodologies might not be properly structured, known as contracting risk. Ensuring the methodologies are appropriate and able to be influenced by the provider group is critical to creating a mutually beneficial VBC arrangement. For example, an attribution model that relies on a single service to attribute a patient and then puts a provider at risk for total cost of care could create an issue. In this scenario, it is possible that the attributed provider only sees the patient once, and the care is actually being managed by a different provider or group. Ensuring that terms such as patient attribution, risk adjustment, and benchmark development are fair to all parties is key to a successful agreement.

Measurement risk

The chance of errors in healthcare risk management, including miscalculations related to risk adjustment, patient attribution, or data quality, is referred to as measurement risk. Many agreements include elements such as risk adjustment and nuanced patient eligibility and attribution criteria. If these are not applied appropriately, the settlement may not reflect the true performance under the agreement. In addition, data quality and availability can introduce measurement risk. If the available data is incomplete or inaccurate, the settlement calculations could be incorrect. Ensuring that all necessary data will be available in a timely manner and that both parties can validate the measurement can be critical to mitigating measurement risk.

Insurance risk

Furthermore, these models reassign some of the impacts of random fluctuations or systemic trends in healthcare costs to providers—typically risks borne by payers in the U.S. healthcare system. This is known as insurance risk. Providers should take these additional risks into account when assessing and negotiating VBC arrangements, and should thoroughly understand each risk within the specific contract under consideration.

Evaluating organizational fit

When evaluating whether a particular VBC model is suitable for a provider organization, numerous factors must be considered. However, we frequently identify competitive positioning and organizational readiness as the two most critical elements.

Competitive positioning

Competitive positioning is a critical factor when selecting the appropriate VBC model for a provider organization. In less competitive markets, providers might transition more gradually to VBC arrangements due to higher FFS reimbursements and reduced pressure from payers. Conversely, in highly competitive markets, payers might push risk-transfer agreements more aggressively, necessitating participation from provider groups to maintain patient steerage and avoid reductions in FFS reimbursements. Finding robust payer partners is also beneficial; irrespective of the competitive environment, partnering with an engaged payer who is willing to share data and collaborate toward mutual benefits can make the difference between the success or failure of a VBC model.

Another key component of competitive positioning is the identification of the right model type to join. This could be deciding between multiple commercial payers with different types of offering or between available Medicare models, such as the choice between Medicare Shared Savings Program (MSSP) and ACO REACH (Realizing Equity, Access, and Community Health). These decisions can be critical for provider groups, as different models leverage different benchmark methodologies and incentives. Using data to understand the impact on projected performance and benchmark development under different models can give providers a leg up in determining which models are most advantageous for their organization.

Organizational readiness

Assessing organizational readiness is crucial to determining the appropriate type of VBC arrangement for a specific provider organization. Several factors must be considered when evaluating an organization's preparedness for various VBC models. For instance, how adaptable are current workflows and processes? Are there existing care management and ancillary functions to support VBC, or do they need to be developed? How do technology solutions like billing systems and electronic medical records (EMRs) facilitate or obstruct different VBC payment models? Does the current physician compensation structure align with or contradict VBC incentives? Are there advocates for VBC across different organizational domains—clinical, operational, and financial? Addressing these questions will better position a provider group to evaluate suitable models for success and identify actionable initiatives to enhance performance in VBC models. Establishing a formal readiness checklist can help provider organizations objectively assess these factors during their evaluations.

Forecasting performance in VBC contracts

Predicting performance in a new VBC arrangement can be daunting yet vitally important. A provider organization must understand the spectrum of possible outcomes, identify the most probable ones, and determine the key performance indicators and contract terms driving those outcomes. Utilizing a pro forma financial model is recommended to aid contract negotiation teams, helping them decide which terms to prioritize, the extent of their negotiating efforts, and to identify any potential deal-breakers in the VBC contract. Often, a comprehensive understanding of the mechanics of any VBC contract is unattainable without the use of a pro forma financial model and scenario analysis.

One common challenge for providers in creating an effective pro forma financial model to support contract negotiation is data availability. While provider organizations typically have a strong understanding of the services and costs within their own facilities, many VBC arrangements expose providers to risks associated with services rendered at external facilities. This is often referred to as patient leakage, when the provider organization offers those services, but their patients are receiving them elsewhere. Providers can use several strategies to mitigate these data limitations.

One approach to mitigating the risk from services at external facilities is to work with the payer to develop a narrow network product. In a narrow network, the plan design is used to limit the providers a patient can see in-network, helping ensure they are directed to higher-value providers. While this requires more up-front work to establish, it can materially reduce the risk to providers in value-based arrangements.

Another method to manage unknown costs at other sites of care is to collaborate with the payer to access comprehensive claims data for patients linked to the provider organization under the VBC arrangement. This historical view can offer the provider insight into past performance, and highlight opportunities for cost reduction and quality improvement both inside and outside of their facilities. However, this typically requires a strong, high-trust relationship with the payer, as many are reluctant or refuse to share claims data from other providers due to concerns about revealing contractual arrangements or competitive intelligence. To mitigate these issues, providers might request utilization data with payment details removed and reference pricing (e.g., a percentage of Medicare) applied. Another approach could be for the payer and provider to agree on a trusted third party that receives detailed data from the payer, aggregates it appropriately, and furnishes valuable insights to the provider while maintaining confidentiality.

An alternative method involves using third-party reference data to analyze cost and utilization trends within the local market for a sample patient cohort. Although developing financial insights for a specific provider can be challenging, access to complete reference data can enable relatively accurate provider-level projections. In the absence of quality data access, local market trends allow providers to assess the proposed VBC contract terms based on market average performance data. Additionally, it enables sensitivity testing to identify key performance drivers and potential opportunities within the VBC model. This is particularly crucial in VBC models that incentivize providers to outperform market trends, as understanding market performance is essential for reimbursement negotiations.

Ideally, providers would possess both longitudinal claims data on their patients and benchmark data to assess how their experience stacks up against those of others in the market. However, this is not always possible. In such cases, leveraging available data combined with informed actuarial assumptions from experts familiar with the specialty and market can guide providers effectively.

Risk mitigation options

Although numerous VBC contracts shift cost and quality risk to providers, several strategies exist to help providers manage this risk. Aside from incorporating risk mitigation clauses in the VBC contract—such as capping downside shared losses in a two-sided shared savings model—providers can also mitigate their risks by purchasing stop-loss insurance and/or setting up financial reserves specifically for the VBC contract.

Provider organizations can opt for stop-loss insurance to cover financial losses that exceed a specified limit, known as an attachment point. This insurance mechanism aims to mitigate the risk associated with unusually high-cost patients under a VBC contract. Although many VBC contracts have built-in stop-loss provisions for individual high-cost patients, the existing stop-loss structure may still expose providers to more financial risk than they are comfortable with, making private stop-loss insurance an option to further reduce exposure.

Provider organizations can leverage financial reserving to mitigate liquidity risks associated with VBC contracts. In risk-sharing agreements, providers often need to repay shared losses to payers or address billing and attribution errors. Reserving entails setting aside capital reserves in advance to ensure adequate cash flow to cover any potential financial losses or payer recoupments. Actuaries typically determine reserve funding amounts based on the projected contract performance and the risk tolerance of the provider organization.

Conclusion

The ongoing expansion of VBC arrangements among both government and private insurers underscores the importance for provider organizations to comprehend these models and their risks, and how to excel within them to stay competitive. Implementing a deliberate and strategic approach to joining these agreements can position providers for success in the shifting reimbursement framework.

Related insight

Read the other papers in this series at the following links:

• Financial monitoring and revenue recognition in value-based care
• Value-based care reconciliation: Auditing and payment distribution
• Opportunity identification and implementation in value-based care

¹ APM Framework 3 - Health Care Payment Learning & Action Network https://hcp-lan.org/apm-framework/.