6 considerations before signing a value-based payment contract

As hospitals and health systems consider value-based payment contracts, they must weigh the effects such models will have on the revenue cycle, as well as how the models will help them take care of the health needs of people in the communities they serve.

Below are takeaways from Rhonda Medows, MD, executive vice president of population health at Renton, Wash.-based Providence St. Joseph Health and CEO of Providence-launched population health company, Ayin Health Solutions, about the steps healthcare organizations can take before signing value-based contracts to prevent revenue cycle challenges later.

1. Understand the population. Value-based contracts, such as bundled payments and shared savings, pay hospitals based on patient health outcomes. Therefore, hospitals must understand their patient population before signing on the dotted line, according to Dr. Medows. "It may sound basic, but this is where many hospitals have become stagnant," she said. "They don't understand the populations in their communities and across care settings. They don't understand the risk or the disease burden of the population."

2. Assess size of patient population. Value-based contracts include alternative payment models with risk-based revenue. When adopting these models, it is crucial organizations consider the minimum number of patients needed within the targeted population for the contract to be worth the risk, said Dr. Medows. She noted that the goal with value-based contracts is to reduce costs while improving quality, but hospitals must also ensure they are maximizing their revenue to be sustainable long term. "A sufficient population size is needed to offset investments in quality improvement and to support significant value-based reimbursement," added Dr. Medows.

3. Understand the provider network. Hospital networks typically consist of clinics, medical groups, ambulatory surgical centers and/or urgent care facilities. With that in mind, Dr. Medows said hospitals considering value-based contracts need to understand how these providers perform and work. "Before you agree to go into a value-based contract and accept risk, how are you performing in terms of quality, consumer experience and appropriate utilization? That's where the costs come in. How well do you know your provider network? What are your healthcare cost trends? Then you take the information learned about both the patient populations and about providers, and that's what informs your contract strategy," she said. For hospitals adopting alternative payment models with risk-based revenue for the first time, she recommended focusing on quality improvement and incentives first. This involves determining how much quality of care can be improved under the contract.

4. Limit the maximum claim denial rate. Dr. Medows said value-based contract terms should include a maximum amount of claim denials allowed under the agreement, as well as other guardrails. Since contracts vary by payer, she recommended that hospitals considering value-based contracts know and monitor denial rates to assess whether the contract will be financially beneficial for the organization. Dr. Medows explained: "A payer with maximum denial rates above 5 percent means the hospital is about to lose a lot of money." She also recommended that hospitals look at contract terms related to timely data sharing, reconciliation processes, and how the payer will attribute patients to the hospital before finalizing a contract deal.

5. Understand the differences between payers and the hospital's payer mix. Medicaid generally pays at a lower rate than commercial insurers and Medicare. Therefore, hospitals need operational efficiency to be successful with value-based contracts for Medicaid reimbursement, Dr. Medows said.

6. Assess the hospital's current patient care, services and interventions. She advised hospitals to ask themselves, "Is this the best care today? In the best setting? Is care coordination well managed?" She said organizations should identify where gaps exist and then address those gaps through select investments, ambulatory care networks, and new and existing partnerships.


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