This is part three 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. All articles published in the series can be found here.
Introduction to understanding reconciliation and auditing in value-based care
Value-based care (VBC) models aim to improve healthcare outcomes by aligning provider payments with performance on cost and quality measures. Unlike traditional fee-for-service reimbursement, VBC contracts often involve shared savings, performance bonuses, or penalties based on an organization’s ability to control costs and deliver high-quality care. However, determining the final financial outcome of a VBC contract is not immediate; it requires a detailed reconciliation and auditing process to validate payments.
Reconciliation refers to the process of reviewing financial and claims data to ensure that final payments align with contractual agreements. This includes verifying attributed patient populations, risk adjustments, and cost-saving calculations. Meanwhile, auditing serves as an additional safeguard, helping provider organizations verify payer calculations, detect discrepancies, and ensure accurate compensation. Without a structured reconciliation and auditing framework, providers risk financial miscalculations that could impact revenue and operational planning.
By understanding these key components, provider organizations can better navigate the complexities of post-performance financial reconciliation, ensuring accurate payments and sustainable success in VBC arrangements. This white paper covers auditing, reconciliation, and distributing shared savings payments to individual providers in VBC arrangements.
Auditing VBC contracts
Many VBC arrangements are not fully settled until several months after the performance period concludes, mainly due to the claims lag covered in the previous paper of this series. Once the performance period has ended and claims have been fully adjudicated, the payer typically communicates contract performance results to the provider organization. Because of the delays caused by claims processing, there is often urgency on both sides to reconcile payments and finalize VBC financial settlements. While payers strive to administer settlements accurately, the complexity of many VBC contracts, along with their potentially substantial financial impact, makes audit validation by the provider organization essential to ensuring accurate final payments.
One option to mitigate the impact of these delays is to negotiate a preliminary settlement as part of the agreement. In this case, the preliminary settlement would be provided at the end of the performance period before all claims have been adjudicated, often using claims completion factors to estimate outstanding costs. Then, when the claims are complete, an updated final settlement is produced, and any additional payments to true up the preliminary settlement to the final settlement are made. This enables both parties to get started on the reconciliation process earlier, leading to quicker payment after the settlement is finalized.
Why reconciliation matters in VBC
The level of complexity for payment reconciliation in any VBC arrangement hinges on the payment and quality measurement methodologies used in the contract. The more adjustment factors incorporated into the financial reconciliation formula—such as risk adjustment, healthcare cost trends, quality-based adjustments, and regional modifications—the greater need for transparent data and advanced analytical expertise to accurately validate the final results.
Ensuring the accuracy of the attributed VBC patient panel requires data transparency between payers and providers. The provider organization must have access to the claims data, analytical models, and financial methodologies utilized by the payer to effectively conduct contract reconciliation and confirm payment accuracy.
Challenges in payment auditing
The often-intricate reconciliation process, combined with the reluctance of payers to share proprietary data and financial methodologies due to competitive concerns, can pose challenges for provider organizations attempting to conduct VBC audits independently. A recommended best practice is to engage a trusted third party to handle the reconciliation process and determine final payment amounts. Such a third party can assist the provider organization in ensuring accurate payments, consistent with the contractual provisions, all while preserving the confidentiality of sensitive payer data and methodologies. Furthermore, by utilizing a third party already skilled in value-based contract analytical techniques, the provider organization can avoid the need to recruit specialized personnel and invest in tools necessary for these reconciliation tasks.
Payment distribution for providers
Aligning incentives with quality and cost
After calculating the final payment amount, a provider organization must decide how to allocate any shared savings or losses within the organization, whether to medical groups, departments, or individual physicians. Typically, organizations prioritize funding operational transformation efforts before distributing any remaining incentive payments to departments or clinicians responsible for VBC arrangement. Some VBC arrangements use quality-based payment models, where incentives are distributed based on relative performance in quality metrics. In this model, the provider organization uses the relative performance of quality measures by a department or clinician to decide the payout proportion. While this may simplify payment allocation, many VBC models consider both quality and cost savings. Focusing incentives on only one aspect may not fully align incentives with the overall performance of the VBC framework. Assessing the clinician's impact on costs can be challenging, but ensuring this piece is consistent with methods for increasing the positive financial outcomes of the broader VBC agreement can create the proper incentives for better financial outcomes. It is important that the method for calculating a physician’s contribution to the overall payment amount is aligned with the methodology for calculating performance in the value-based contract.
It is preferable to establish these trusted third-party relationships at the outset of the VBC agreement. Given that both payer and provider organizations must agree on the chosen third party, the contracting process can be lengthy and should not be deferred until the end when both parties aim to conclude the performance period promptly. Having this relationship set from the beginning allows the provider organization to utilize the same third party for analytical support, allowing for monitoring during the performance year and identifying opportunities throughout the performance period. These interventions can include broad-based interventions like emergency room or inpatient utilization reduction through care management or disease-specific interventions such as biosimilar substitution for high-cost drugs.
Risk adjustment methods for fair payment
Assessing the cost of care at the clinician level adds another layer of complexity beyond organizationwide reconciliation. While there is some inherent variation in organization-level outcomes due to patient attribution to the VBC panel—referred to as "insurance-risk" in the first paper of the series—this variation becomes more pronounced when focusing on specific departments or individual clinicians because of the smaller sample size of the panels. With fewer patients assigned to a clinician, the results can be more significantly influenced by individual patient outcomes that are beyond the clinician's control, even after adjusting for known case acuity differences.
There are multiple methods to evaluate clinician-level impact on VBC performance that address these limitations:
- Risk adjustment
- Statistical techniques
- Simulation modelling
Risk adjustment
Risk adjustment can mitigate the effect of comorbidities on cost of care variations within a clinician's panel. Since many VBC agreements incorporate risk adjustment into payment structures, aligning clinician-level risk adjustment with contract is often beneficial. Nevertheless, even in arrangements without organizational-level risk adjustment, employing this method for assessing clinician performance remains valuable. Risk adjustment ensures proper recognition of the complexity of a clinician's patients, which varies across different clinicians' panels.
Statistical techniques
Secondly, statistical techniques can be combined with risk adjustment to gain insights into a clinician's actual performance in a VBC arrangement. One such technique, actuarial credibility, examines the distribution and variability of outcomes within a clinician’s panel relative to the entire organization’s VBC panel. This analysis is then used to adjust the clinician's results based on the probability that they were influenced by clinician actions rather than uncontrollable variance.
Simulation modeling
Ultimately, provider organizations need to acknowledge that these methods are all probabilistic estimates, as there is no foolproof way to definitively gauge an individual provider's performance. One method to address this challenge is by using simulation or probability-based approaches alongside the previously mentioned techniques to estimate the potential range of outcomes influenced by clinician behavior. Payments can then be allocated according to the likelihood that a clinician contributed to a positive result. This method typically includes more clinicians in the payment distributions and fosters a greater sense of fairness, thereby reducing organizational resistance when distributing VBC earnings.
Properly assigning credit at the clinician level requires expertise in risk adjustment, statistics, and probability. Provider organizations must assess whether recruiting individuals with these skill sets is beneficial or if outsourcing to specialized consultants provides a more cost-effective solution. Well-structured compensation models that align with VBC payment structures improve organizational success, whereas poorly designed or activity-based earnings distribution can be counterproductive to the organization’s VBC goals.
Integrating both statistical expertise and clinical leadership in the design of physician compensation models can help ensure both strong alignment to organizational performance objectives while fostering buy-in from the physicians administering care. Regardless of the approach, securing provider buy-in before VBC contract implementation is a best practice to ensure that incentives are aligned for all parties involved and avoid dissatisfaction over settlement fund distribution.
Conclusion: Optimizing payment reconciliation in VBC
Reconciling VBC arrangement results and effectively distributing payments within an organization can be challenging, as it requires data transparency, risk adjustment methodologies, and independent audit validation. Provider organizations can improve payment accuracy by engaging reliable third-party advisors with the requisite expertise to address these issues.
Engaging a third-party auditor early in the process ensures a streamlined reconciliation process and allows providers to optimize financial performance throughout the VBC contract life cycle.
Related insight
Read the other papers in this series at the following links: