iProtean—Value-based Contracts

Moving to risk-bearing, performance-based contracts may be outside the current experience of many hospitals.  But given the changes today and on the horizon, providers must reduce their reliance on fee-for-service payment and begin to take on value-based contracts.  “ . . . all hospitals and health systems must prepare for the rapidly approaching transformation. Status quo is no longer an option in any market,” wrote Ken Kaufman and Mark Grube in their recent paper, “Driving the Transition to Value-based Care.”  (This blog continues the information presented from the Kaufman Hall Point of View paper in last week’s blog, “Transitioning to Value-based Care.”)


Mr. Kaufman and Mr. Grube recommend the four steps below to prepare for the change to value-based contracts:


Assess the healthcare environment and the organization’s readiness for value-based contracting.  This assessment includes gaining an understanding of:

  • The local and regional market
  • Organization issues related to infrastructure, risk tolerance, capital and human resource requirements
  • Financial, operational, legal and implementation considerations


Identify the range of value-based options. Options exist in many markets, depending on the payers, providers, costs and sophistication.  In some cases, providers can try value-based contracting under the current fee-for-service model through pay-for-performance and other incentive arrangements.  Hospitals may be able to work with payers to begin incrementally, with upside risk only, moving to full risk as they gain experience and infrastructure.  However, it’s clear that national payers want shared risk arrangements and see these as “the only way to drive results,” Mr. Kaufman and Mr. Grube said in their paper.


Develop a defensible value proposition and bring that proposition to payer(s), employers and the community.  Payers must be convinced that the hospital/system can deliver on lower costs and better outcomes.  The organization’s value proposition offered to payers must show strength in the following areas:

  • The primary care physician network and its geographic and service coverage
  • Infrastructure for data sharing with patients, payers and other providers
  • In many cases, the inclusion of a tertiary/quaternary facility or academic medical center


Mr. Kaufman and Mr. Grube noted that hospitals/systems must reduce costs in a way that helps payers reduce their costs while improving quality and service levels.  “Providers need to be willing to exchange a lower base rate with the opportunity to earn up to and beyond current rates when they meet and exceed quality, service, and efficiency goals,” they wrote, and “long-term winners will likely be those entities that partner with the best primary care physicians, who have a proven record of success in delivering preventive, effective, and efficient care.”  The organization that can show experience and capability in managing populations and costs will be best prepared for negotiating success.


Understand that achieving success in managing risk takes time.  Value-based care and risk contracts will require significant investment, and the new model will take time to show positive financial results.  Organizations should develop and consistently update their best-, expected- and worst-case scenarios while undergoing the transition.  Mr. Kaufman and Mr. Grube noted that organizations “should be prepared to sustain initial losses for three to five years . . .”


During the transition period, one standard of care is mandatory.  “Moving to value is the right thing to do, and while payment is likely to lag care delivery improvements, all patients should benefit from the enhanced quality, outcomes, access, and efficiencies achieved by healthcare organizations.”


We recommend that iProtean subscribers read the full Kaufman Hall Point of View paper, “Driving the Transition to Value-based Care.” (December 2012)  The article is available under the Resources tab in the advanced courses, Transforming Your Organization into an Integrated Delivery System, Value-based Purchasing & Accountable Care Organizations and Financing Considerations for Integrated Delivery Systems.



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