Value-based contracts - Creating win-win partnerships for health systems and suppliers

Value-based contracting is an important consideration in advancing value-based care.

However, the adoption between medical device companies and healthcare systems has been slow due to a lack of standards and norms for shared performance, the lack of stakeholder alignment, the evolving regulatory environment, and industry’s difficulties measuring and tracking performance. A strategic partnership between health systems and suppliers based on innovative approaches can pave the way for a new model for value-based contracting.

A rising trend
There is a growing interest among health systems in value-based care. As a result, there’s also an increased interest in value-based contracts, as health systems strive to improve clinical outcomes, reduce costs and enhance the patient experience – and support these goals.

Therefore, many providers are looking to their strategic partners for value-based contracting options. Due to the most recent decision of Centers for Medicare & Medicaid Services (CMS) to move toward a voluntary approach to bundled payment models, there is an opportunity for providers who were outside of the mandatory geographies to opt in and accept additional risk and opportunity for reward.

What is value-based contracting and why is it important to the adoption of value-based care?
Value-based contracting generally encompasses performance-based payment or reimbursement tied to indicators of value, such as patient health outcomes, efficiency and quality. Value-based contracting is a tool for aligning incentives among stakeholders such as health system and a supplier, manufacturer, employer or payer. These goals are typically defined in terms of improved patient outcomes, experience, and quality of care, enhanced population health, or operational efficiencies.

More broadly, value-based contracting can be defined as shared performance or risk-sharing aimed at achieving mutually beneficial goals. It is important to the adoption of value-based care because it creates a mutually binding agreement between the parties to achieve important performance goals and collaborate on delivering on these goals in practice, sharing the benefits or adhering to the penalties if the goals are not achieved.

The concept of risk-based or value-based contracting is broadly accepted, and health systems in general indicate interest in advancing value-based contracting as a tool to improve their performance. Some health systems are further along than others, but there is a general commitment to advancing the field.

There is also a growing interest in value-based contracting to improve population health management, where health systems and accountable care organizations (ACOs) take responsibility for populations of patients – not just individual patients – and aim to deliver value for the broader continuum of care across inpatient and outpatient settings. The goal here is to go beyond the acute episode of care, including wellness, prevention, early intervention and chronic disease, to reduce overall cost and improve health.

However, adoption has been slow as there are not yet any value-based contracting industry standards, norms or consensus -- nor are there broadly accepted best-practice models. General alignment is needed between health systems and suppliers, among others, on how to create value-based contracts. Furthermore, the regulatory environment and industry compliance standards currently present challenges to allowing for more value-based structures.

Critical success factors for value-based contracting
There are several important critical success factors for value-based contracting:

The ability to measure value: If you want to implement performance-based or risk-based contracting, there must be a baseline reflecting the current performance to be able to track and report on key metrics. This is a foundational requirement for adoption of value-based contracting, because the information and data is necessary to accurately define and isolate outcomes tied to specific products or capabilities.

Access to data and analytics: Having access to the right data and analytics to define, isolate and measure outcomes is critical to the success of value-based contracts.

Stakeholder engagement: Ensuring clinicians and other stakeholders are engaged in the process of defining the objectives for performance improvement in terms of both clinical and financial goals can help ensure alignment about the way process improvements are delivered, measured and ultimately rewarded.

Alignment around objectivity, transparency and accountability: The way outcomes are measured must be objective and transparent to all stakeholders involved to ensure that they understand, accept and buy-in to the measures for improvement. This provides the foundation for alignment around clear goals and mutual accountability for all parties involved.

Trust between parties: A successful value-based agreement must be mutually beneficial and lead to a win-win situation for both parties, or it will not be sustainable. Trust between the parties is important to ensure both parties share the benefits and risks proportionally.

Barriers and opportunities in the adoption of value-based contracting
What will it take to get there? There are several key considerations to accelerate the adoption of value-based contracting:

Industry consensus: Industry can seize the opportunity to develop standards and consensus on how to define value and outcomes pertaining to products, procedures and capabilities -- defining and measuring what constitutes value and outcomes in value-based care.

Culture change: Value-based contracting represents a significant shift in the business model from traditional fee-for-service to performance-based risk arrangements. While these benefits in principle could be generated for all stakeholders – patients, health systems, healthcare providers, public and private payers, employers and the community – there may be concerns among some stakeholders of the risks involved in these arrangements, since there is a limited tradition for multi-stakeholder collaboration.

The expectation among some health systems that evidence of positive outcomes is delivered before negotiations about a value-based contracting have started often limit the ability to develop and co-create innovative contracting models.
There are no best practice models for value-based contracting, and all health systems are different in size, structure and focus. As a result, it will take time to gain insights about models that are working most effectively.

There is the opportunity to foster a culture of multidisciplinary partnerships within health systems and between health systems and suppliers, to further the development of value-based contracting across the entire continuum of the Triple Aim.

Regulatory environment and industry compliance: The regulatory environment is ripe for change. Value-based contracting requires hospitals to think differently about contracting with their vendors, including medical devices companies. However, existing laws and regulations are limiting the more rapid growth of the role of manufacturers as a partner in risk. Further, the environment makes investing in capabilities and solutions that improve operational efficiencies and patient outcomes more challenging than it could be. Suppliers and providers can collaborate to help advance legislation and regulatory modernization that expands the ability for supplies and providers to effectively make investments aimed at lowering the costs of healthcare, and improving quality of care, clinical outcomes and patient satisfaction.

The future model for value-based contracting: Shared experimentation
So how do we, providers and suppliers, solve this conundrum to create opportunities?

It starts with us getting on the same side of the table and looking for joint value creation, which will ultimately benefit the U.S. healthcare system as a whole. There is a great opportunity for strategic alignment between providers and suppliers, as we identify and build upon the core strengths each stakeholder possesses and augment those areas where gaps exist.

In a perfect world, the process should start with a discussion between the health system and supplier to determine what the pain point is for the health system before the negotiation about a contract starts. This will enable the supplier to look at how it can help the health system move the needle and address this pain point, whether it is with the help of a product, a procedure, data or capabilities.

This is a new frontier, where health systems and suppliers commit to co-creating the conditions for a successful value-based contract. Broader stakeholder engagement and alignment will also ensure that value-based contracting connects with broader interests within the hospital ecosystem.

The future holds promise, but there is still a way to go until value-based contracting is fully realized. For value-based contracting to move from being a vision to an integral part of continued process improvement, all parties must come together to create an environment for mutual goal setting, performance measurement and ongoing adjustment based on shared experience and learning. The promise is an environment where improved patient outcomes, increased efficiencies and advanced care delivery innovation can thrive.

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