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


Risk assessment requires simulation of the distribution of outcomes. The provider/ HCM will contract at a target rate or price assuming its performance will achieve a particular outcome level. In **Table 1** this was illustrated as \$2,969 per patient. The question to be addressed in the Risk Assessment phase is: what is the confidence interval around this estimate and how may variation be mitigated by choosing different values of the parameters in **Figure 6**?

Risk mitigation can be illustrated by looking at an example from the Medicare Shared-savings program, assuming that the provider/HCM is considering a contract with both upside and downside risk. The provider will want to maximize its chance of upside gains and minimize the chance of a downside loss (reimburse Medicare). In a recent studies [10, 17] the authors illustrate that even in the absence of an intervention there is a non-trivial risk that a provider will have to reimburse the payer simply because of the stochastic nature of claims, giving rise to the need for **Risk Corridors**, which are parameters between whose limits no gain or loss is payable.

**Figure 7** illustrates this important concept. Note that **Figure 7** illustrates stochastic (claims variability) risk only; in addition, the provider/HCM will be at risk of performance variability as well. **Figure 7** simulates the outcome (calculated savings *assuming no intervention)* of 10,000 samples and shows a relatively wide dispersion around the mean. (The mean is zero in this example because we assume no intervention and therefore no savings effect on the population.) With a corridor, the provider is protected against downside risk at the cost of having to give up the opportunity of a gain on the upside. In the example of **Figure 7**, between 2 and 5% of simulations resulted in losses (reimbursement by the provider/HCM to the payer). The converse is also true: in the majority of cases the imposition of the corridor would have prevented the provider/HCM from receiving a payment despite the HCM having generated savings. If we consider, in addition to the stochastic claims risk, the provider/HCM accepts performance risk as well, the need for sophisticated modeling to understand and mitigate financial risk becomes acute.

One of the biggest challenges for providers/HCMs entering into value-based contracts is population size. This problem has become especially acute in recent years

**Figure 7.** *ACO gain/(loss) distribution: 10,000 simulations.*

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

as providers focus more on specific conditions and sub-populations that may be relatively small or where the condition prevalence results in a small number of target patients. **Figure 7** is an example of a 3,000 life population where a target condition could result in only a few hundred patients being managed. The variance in claims of a few hundred patients is significant; the variance may be mitigated with appropriate truncation and risk corridors but in small samples will remain a major risk to the provider/HCM. A number-needed-to-treat analysis could provide some guidance to the contracting parties regarding their potential variance and risk, but the answer is invariably (except in the case of large insurers) that the provider/HCM will need to manage a much larger population than available to be comfortable with the outcomes. In this case the parties should probably consider an alternative contractual form.

The risk corridor is only one variable that can be modeled; modeling the outcomes using the key variables from **Figure 6** will give the provider/HCM a better idea of the risk that it undertakes and how to mitigate that risk—for example with risk corridors, different attribution definitions, and stop-loss insurance.

### **3.4 Step 4: contract terms and operationalizing the model**

Once the modeling is completed the contract terms will be known and it should be a straightforward matter to prepare a contract. Once the contract is signed, however, it is important that the provider/HMC prepare an implementation and operational plan with appropriate targets, preferably on a monthly basis. Contractors often lose sight of the fact that they are managing a risk contract, often with a one-year term. If the contractor does not adhere to a plan and falls behind, however, it is often impossible to make up patient engagement and cost-reduction numbers later in the contract year. For this reason a projection of the ultimate results and likely reconciliation on a regular basis is important. For some providers/HCMs (particularly those that are publicly traded) an estimate of the final gain/(loss) will also be required because of the need to set up a balance sheet reserve for any ultimate payable or receivable, and to demonstrate revenue recognition.

Operationalizing the contract also may require sophisticated modeling to identify at-risk patients, alert providers to changes in patient status and report on clinical gaps and gap closure. Delivery of programs that rely on clinical resources is also costly and requires that the contractor maximize efficiency. A workflow system incorporating the latest real-time information for providers (if they are managing patients) or patients (self-management) is essential for efficiency and for achieving contracted outcomes. Monitoring the progress of the contract against the plan and reporting on the key performance indicators identified at Step 2 is essential to achieving successful outcomes.

#### **3.5 Step 5: evaluate outcomes**

Some models are relatively simple to administer and reconcile: capitated contracts for example may require no reconciliation because the provider is paid a capitated amount from which the provider derives its margin. Shared savings and bundled payment models, on the other hand, can be complicated to reconcile. One challenge with this type of contract is that reconciliation requires complete data, meaning that run-out claims5 are included in the calculation. Allowing for run-out often imposes

<sup>5</sup> Claims for which services have been rendered but which have either not yet been submitted or, if submitted, have not yet been paid.

a delay of 6 months or more post-contract period before complete claims are available. Reconciliation also requires the application of key contract terms: attribution, services, inclusions/exclusions, truncation and corridors etc.

Because value-based contracts are often very different from contract to contract, payers may need to administer contracts manually. This makes final reconciliation difficult both in terms of actual calculation and payments. Reconciliation payments may be delayed as much as 2 years from contract inception. A provider/HCM will need to plan for this delay in receipt of revenue, and have sufficient capital to carry through to the final reconciliation.
