**1. Introduction**

At its most fundamental, health risk (either clinical or financial) is a combination of two factors: **amount of loss** and **probability of occurrence**. For the purpose of this chapter we define a loss as having occurred when an individual's post-occurrence state is less favorable than the pre-occurrence state. Financial Risk is a function of Loss Amount and Probability of Occurrence, or in actuarial terminology, frequency and severity of loss. In the United States health risk has historically been the responsibility of payers (insurers, government programs and employers). Healthcare payers have traditionally managed risk by a combination of pricing, underwriting, and reinsurance, together with claims management.

<sup>1</sup> Clinical risk represents the responsibility that clinicians assume for the health outcomes of their patients. This chapter covers financial risk, or the cost of care for patients.

With the enactment of the HMO Act of 1973 (42 U.S.C. § 300e), **Managed Care** developed in the 1990s as a series of initiatives designed to better manage the health of covered individuals and reduce unnecessary medical claims costs. The original approaches included **network management** (identifying and contracting with preferred providers who offered either lower fees or lower utilization of services and steering patients to them, either through benefit design or by requiring referrals) and **utilization management** (pre-authorization or concurrent review of hospital admissions). In a quest for savings these models devolved into restriction of services and denials of care. Because of consumer reaction to the perceived restrictions and denials that resulted from these interventions, managed care plans began to seek other solutions to contain rapidly increasing costs. Techniques that were favored for managing utilization include the implementation of programs that encourage members to take responsibility for their own health, or that aimed to educate physicians in the most cost-effective, evidence-based treatments (Chronic disease management and case management).

The chronic disease management (DM) programs of the early 2000s were implemented by payers and aimed to identify high risk or high need patients, particularly those that were not compliant with their treatments or who had gaps in care. Patient management was usually performed externally, often by telephone, by nurses employed by large disease management organizations. Although attempts were made to involve the patient's providers, providers were not party to the payer contract. This model reached its peak with a number of Medicare Coordinated Care and Support demonstration programs between 2005 and 2008 [1, 2]. Because of the growth and importance of chronic disease management programs, the Centers for Medicare and Medicaid Services (CMS) of the US Dept. of Health and Human Services (HHS) established a major demonstration project, the Medicare Coordinated Care Project to evaluate 15 different models of care coordination [2, 3]. Although the demonstration program showed some improvement in the quality of care delivered to patients, the lack of demonstrated savings led to a decline in the type of vendor-based disease management programs popular up to that time, and an interest in programs that involved contracting directly with providers to take risk for patient outcomes.

By the end of the first decade of the 21st Century two things began to become clear: first, that these programs were not containing medical trend<sup>2</sup> and second that the solution to rising costs had to include providers. As a result, CMS's attention shifted to alternative payment models incorporating providers directly and focusing on a combination of cost, quality and patient satisfaction, an objective expressed by Berwick and others [4] as the "Triple Aim" in a heavily cited article. This shift was a reaction to the quality of care delivered within the US Healthcare system. A 2003 study [5] found that adults in the United States receive the generally accepted standard of preventive, acute, and chronic care only about 55% of the time. Quality of care "varied substantially according to the particular medical condition, ranging from 78.7 percent of recommended care to 10.5 percent of recommended care for alcohol dependence." Pay for quality was intended increase the frequency of these

<sup>2</sup> "Healthcare Trend" (Trend) is defined as the proportional increase in the cost of care per member per month (PMPM). Trend is a combination of several factors, including medical inflation (increase in the cost of the basket of services); increased units of services consumed; increased intensity of services and enhanced technology.

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

measures by rewarding physicians for their achievement of evidence-based quality measures (such as screenings, tests for patient populations or adherence to prescriptions). The theory was that closing gaps in care and identifying health issues earlier would lead to reduced utilization of more expensive healthcare services later. The achievement of reduced cost of care in exchange for incentive payments made this a value-based initiative.

Following the failure of the disease management model to demonstrate financial success, Congress has passed a number of laws promoting different value-based initiatives, in addition to initiatives introduced by the Center for Innovation at CMS:


In addition, CMS has introduced a number of alternative payment models (APMs). In these models, providers agree to accept a portion of their reimbursement, often in the form of a share of savings, based on achievement of certain goals, including improved quality, reduced utilization and reduced cost. APMs include Accountable Care Organizations (ACOs) as well as models aimed at specific conditions or provider organizations: Bundled Payments for Care Improvement (BPCI), Comprehensive Care for Joint Replacement, Comprehensive Primary Care, Comprehensive End-stage Renal Disease model, Kidney Care Choices model, and the Oncology Care Model (OCM). CMS's stated objective is to move the entire health care market toward paying providers based on the quality, rather than the quantity of care they give patients.3

The Health Care Payment Learning and Action Network (HCP-LAN) is a group of public and private health care leaders launched by the U.S. Department of Health and Human Services (through CMS) in March 2015. HCP-LAN aligns public and private sector stakeholders in shifting away from the current fee-for-service, volume-based payment system to one that pays for high-quality care and improved health. HCP-LAN has published estimates of value-based contract penetration in different payer segments. **Figure 1** illustrates a study published in 2019 predicting that as much as 100% of care will be delivered via a value-based contract by 2025.

The HCP-LAN 2020 survey of payers indicated that 40.9% of U.S. health care payments, representing approximately 238.8 million Americans and 80.2% of the covered population, flowed through HCP-LAN Categories 3&4 models (shared-risk and population-based payments).

<sup>3</sup> https://www.cms.gov/Medicare/Quality-Initiatives-Patient-Assessment-Instruments/Value-Based-Programs/Value-Based-Programs.


**Figure 1.**

*Estimates of value-based contract growth in different payer segments.*
