How a Hospital Quality and Efficiency Program is Key to Successful Clinical Integration

How a Hospital Quality and Efficiency Program can lead to ACO success

Many providers are preparing for the new world of healthcare that will reward the value and not the volume of healthcare services provided. As a result, many clinically integrated networks and accountable care organizations have been developed over the past three-to-five years. However, many networks have failed to generate the results key decision makers were hoping for during the planning and development cycle due to 1) the lack of payer receptivity to move toward mutually beneficial value-based contracts and 2) insufficient physician engagement resulting from the absence of meaningful program initiatives and subsequent incentive payments. One strategy to address these challenges while maximizing cost containment opportunities is the implementation of a Hospital Quality and Efficiency Program.   

Agreement description and focus areas
A HQEP is a contractual agreement between a health system and a CIN/ACO to achieve quality improvements and cost reductions within the inpatient setting and/or employee population. The benefit of a HQEP is that it aligns performance and quality improvement efforts between the health system and CIN/ACO, provides a value-based contracting opportunity in the absence of commercial shared savings contracts and creates an immediate shared savings pool to help fund CIN/ACO development costs and the physician incentive pool.  

The HQEP contract specifies initiatives that the CIN/ACO will provide to drive quality and efficiency improvements and typically include the following categories (a detailed list of potential initiatives can be found in Exhibit A):

  • Quality and safety (e.g., reducing hospital acquired events, readmissions, etc.)
  • Resource utilization (e.g., reducing implant costs, pharmacy spend, advanced imaging, etc.)
  • Operations (e.g., improving effective rounding, timeliness of tests, discharge planning, etc.)

The value of structuring the HQEP contract between the health system and the CIN/ACO is that it allows the agreement to take advantage of ACO waivers and additional protections provided to CINs to directly incent the network to drive down high-cost areas that historically have been prevented from inclusion in traditional hospital and physician alignment vehicles (e.g. co-management agreements). The ACO waivers also provide flexibility for the physician distribution model to reward individual physicians more directly for the value that the physicians create.

Exhibit A

To move beyond quality and cost improvement opportunities within the inpatient setting, HQEP agreements often include the management of the health system's employee health benefit costs. With this component, the CIN/ACO would be paid either a fixed per-patient-per-month amount or a percentage of savings generated from their efforts to reduce the overall health spend of the health system while maintaining quality. Including this component allows the CIN/ACO to hone its population health management capabilities on a defined population that creates a tangible financial benefit to the health system while also building the case that the CIN/ACO can take ultimately to payers and employers to support contract negotiations.

HQEP rationale and demonstrated results
Starting with a HQEP is a critical first step in markets where commercial payers and/or employers are not ready to move toward mutually beneficial value-based payments arrangements and in situations where the CIN/ACO has not developed or demonstrated the capabilities necessary to successfully perform under full risk contracts. Implementing a HQEP achieves the following:

  • Achieves financial and clinical alignment between the CIN/ACOs and health system to support quality, safety, patient experience and efficiency improvement efforts
  • Increases physician engagement by enabling physicians to be rewarded for the efforts in driving meaningful quality and efficiency initiatives
  • Increases hospital performance in nationally measured and publicly reported outcomes
  • Creates a learning-lab to hone population health management capabilities for a defined population that is typically large enough to measure results
  • Provides a funding mechanism to support CIN/ACO infrastructure and operating costs

Exhibit B outlines the benefits that four health systems and their partner CINs/ACOs have been able to achieve within the first one-to-two years of the program.

Exhibit B


Achieving financial alignment through the compensation model
Any CIN/ACO contract must ensure that the HQEP's compensation model meets regulatory standards. That is, total compensation to the CIN/ACO and ultimately to each participating physician must fall within fair market and commercially reasonable guidelines. Beyond that, the contract should specify predefined initiatives with a set minimum and maximum performance and payment thresholds prior to executing the agreement. Properly designing the maximum payment thresholds will ensure that at least 50 percent of the cost savings remain within the hospital and physicians are rewarded for their performance and not just their time commitment regardless of the outcome. 

To ensure that the agreement achieves the key tenants of the triple aim and that the health system maximizes the agreement's potential the following should be considered:

  • A large portion of the agreement should fall under a variable compensation structure to reward the value that is created through the agreement and not simply the activity of physicians.
  • Initiatives should be selected where there is an opportunity to increase quality, improve outcomes and decrease waste as evidenced by historical data and national standards.
  • ACO waiver opportunities should be evaluated to align incentives to reduce high cost areas such as implants and length of stay.
  • Initiatives should be weighted based on the potential cost, quality and efficiency opportunity vis-à-vis other initiatives (e.g. ,implant  pricing/utilization opportunities often drive a large portion of the cost savings and should therefore have a higher compensation potential versus other smaller opportunities).
  • Compensation pools should be created and access to the majority of the compensation available from each pool should be limited to the physicians who directly influence quality, cost and efficiency improvements in that specific area.
  • A portion of the compensation potential from each initiative should be carved out for program reinvestment and to fund a global pool where all physicians can benefit from their collective efforts.
  • The distribution methodology should be structured in a manner that does not reflect the volume or value of referrals.
  • Compensation to individual physicians should also be capped to ensure that the financial opportunity from cost savings does not inappropriately incent physicians to withhold necessary care.
  • Each year initiatives should be reviewed to ensure that the contract rewards continuous improvements in areas that provide meaningful value to patient care.
  • The health system should regularly monitor acuity, payer mix, referrals and outcomes to verify that HQEP does not cause care rationing, cherry-picking of healthy patients, referral pattern changes or premature discharges.

A HQEP is an alignment vehicle that allows a health system to immediately contract with the CIN/ACO to drive cost and efficiency gains within the walls of the hospital and to begin gaining experience managing populations. HQEPs also provide a structure for physicians to be rewarded for their efforts for driving cost and quality improvements. Properly designed, a HQEP creates greater financial alignment than traditional management agreements as physicians are able to be more directly rewarded for their individual efforts in certain domains that have been prohibited in the past. As providers consider innovative structures to achieve the triple aim while bringing new life to their CIN/ACO, the implementation of a HQEP could be one thoughtful place to begin.

Dennis Butts Jr. is a director in Navigant’s Payer and Provider Strategy Practice and can be reached at

Vivek Gursahaney is a managing consultant in Navigant’s Payer and Provider Strategy Practice and can be reached at

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