Understanding Value-Based Contracting: Step Two - Developing the Contract

This is the second of our six-part series on the steps to demonstrate value for payers when engaging in a value-based contract relationship.

By Ian Duncan, PhD FSA MAAA, Chief Actuary at Arbital Health

In the first post of this series, we discussed preparations to take when considering engaging in a risk-based contract. In this post, we’ll delve into the process of developing the contract and answering the question: How do I design a contract with the right risk/reward profile. 

At our recent webinar on value-based contracting, we asked attendees what they believe to be the biggest challenges in executing value-based care/outcomes contracting. Two-thirds chose contract design, evaluation, and member baseline setting, the most selected response. The result didn’t surprise me since that is the reason most clients come to us for assistance. Contracting continues to be the top challenge for the industry.

If you are going to successfully sell a program to a payer or an employer, you want the program to be straightforward and easy to implement. Most health plans lack the necessary resources to implement a risk-based contract program in a new environment. There are three issues you should consider when designing and developing your contract.

Contract Complexity

One of the reasons risk-based contracts are so difficult to design is because they are so complex. To effectively design and develop your contract, you need to understand and deal with the wide range of parameters including component definitions, provider contractual entity schema, basket of goods, financial performance risk/acuity, program evaluation, quality outcome performance, and risk share and settlement. 

Other key variables to consider include:

• Attribution: Which provider is going to be responsible for which patient and when?

• Claims responsibility: Which claims are you going to include in the contract? Which will be left out?

• Adjustments: How are you going to handle claims truncation and payment trends?

• Payments: How will you deal with reserving, withholds, and gains/losses and prospective or retrospective payments when it comes to reconciliation?

• Quality: What, if any, quality components will you include in the contract?

• Actuarial: What risk adjustment model will you use?

• Accounting: When will revenue be recognized?

Operational Complexity

A key need is a detailed plan that lays out the steps necessary to achieve the contracted goals. You need to have a process in place to manage the contract and highlight any deviations from the plan in real time, rather than at the end of the contract. Issues that need to be considered include:

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