**2. Types of value-based contracts**

As noted by Werner et al. in a 2021 study [6] "the complexity of the current suite of alternative payment models" and the variety and lack of standardization of different models make value-based contracting challenging. **Figure 2** illustrates the development and growth of alternative payment models over time. The following discussion of contract types covers a broad (but not necessarily exhaustive) spectrum: new variations are frequently introduced. Over time, models have become more comprehensive and the risk assumed by providers and healthcare management organizations (HCMs) has increased.

**Figure 2** illustrates the two dimensions of risk that are accepted by a provider or HCM: the x-axis indicates increasing degrees of financial risk, from none (pay for performance or pay for quality which represent supplemental payments on top of regular provider reimbursement) to capitation (which represents the potential for significant gain but also losses). The y-axis illustrates the extent of the services at risk

#### **Figure 2.**

*Risk and VBC contract types. \*BPCI: Bundled Payment for Care Improvement; \*\*OCM: Oncology Care Model; \*\*\*MSSP: Medicare Shared Savings Program.*

#### *Value-Based Contracting in Health Care DOI: http://dx.doi.org/10.5772/intechopen.103021*

incorporated in the contract, which may range from a risk limited to a single episode of care only (for example knee surgery) to population risk. Population risk in turn may be limited to certain services only (for example for maternity services those associated with the pregnancy only) to "total cost of care" in which the provider or HCM accepts financial risk for all expenses incurred by the target population.

As we discussed above, the original reimbursement model was fee-for-service: each time the patient received a service from a physician, hospital or pharmacist a bill was generated and then paid by the patient or the payer (or both). As this system began to impose a financial strain on payers, different models evolved, beginning with payment for quality. Payment for quality models addressed the "gaps in care" issue identified in [5], as well as attempting to limit the provision of excess and ultimately redundant services. While these models resulted in improvement in quality metrics (such as HEDIS https://www.ncqa.org/hedis/) they did not lead to significant reduction in healthcare costs. Closely allied to pay for quality models is pay for performance in which physicians are rewarded for patient metrics (such as mammograms for women, eye and foot exams for people with diabetes, etc.).

The big breakthrough in terms of financial risk transfer occurred with disease management programs in the early 2000s. Insurers that purchased disease management programs from vendors needed assurance that the programs would reduce medical cost. Lacking convincing randomized studies, vendors and payers contracted around a financial outcome; initially vendors put a portion of their fees at risk of a favorable financial outcome. Later models allowed vendors to share in actual savings generated (gain-sharing), to the extent that the vendor reduced costs below a target. There are different variations of gain-sharing models, with some being onesided (only positive savings are shared) while others are two-sided (if costs increase relative to the target, the vendor must reimburse some portion of the excess). More discussion of these models and methods for measuring financial outcomes may be found in Duncan [7].

CMS introduced another value-based arrangement with its Bundled Payment initiative in which organizations entered into payment arrangements that included financial and performance accountability for episodes of care. These models aimed to increase quality and care coordination at a lower cost to CMS. Providers continue to bill CMS in the usual way, with a retrospective reconciliation of claims against a previously agreed upon target price. Depending on which of four payment models the provider enters into, the provider receives a payment that covers hospital only or hospital plus physician services. To the extent that the provider is able to manage the financial risk, it keeps the financial margin (in some models the provider is responsible for reimbursing CMS if costs exceeded target prices). See [8] for a description of the different BPCI models and the results of evaluations.

The Affordable Care Act (2010) [9] introduced Accountable Care Organizations (ACOs): provider groups that accept payment risk for their attributed populations in return for the opportunity to share savings when costs are reduced below an adjusted benchmark. In the original model providers only accepted upside risk (shared savings only). In later models providers could achieve a greater share of savings but at the cost of having to share also in losses. More detail may be found in [10]. ACO arrangements exist among all payers and payer types, including commercial insurers, traditional Medicare and Medicaid. CMS's Oncology Care Model is a similar initiative but limited to cancer patients undergoing treatment by oncologists.

All these models involve some sharing of risk between the payer and providers. Full risk transfer is achieved with capitated models. With capitation the provider

accepts full financial responsibility for all costs of a population (or sub-population, for example primary care only).
