The success of rewarding “value” instead of “volume” in the U.S. healthcare system continues to drive the expansion of value-based contract models between payers and providers. In fact, the Health Care Payment Learning & Action Network (LAN) has set new goals to help advance the adoption of value-based contracts: By 2022, fifty percent of Medicare and Medicare Advantage healthcare payments must be be tied to two-sided risk and quality, and 25 percent of Medicaid and Commercial, with more aggressive goals for 2025, 100 percent and 50 percent, respectively.
Value-based contract (VBC) models take many forms, but all are designed to move provider payment away from traditional fee-for-service (FFS) arrangements. As we all know by now, FFS pays a provider for each individual service, offering a clear financial incentive to increase service volume, but few incentives to improve the quality of care. Equally important, FFS does not reward providers who invest in programs that coordinate patient care or promote population health. By linking payment to quality and value, VBC models are designed to reward providers for high-quality, patient-centered care and address the shortcomings of FFS reimbursement.
Life Cycle of a Value-Based Contract Program
Types of Value-Based Contract Models
The key element in defining a VBC model is the link between provider payment and care quality, cost-effectiveness and patient engagement. The Centers for Medicare and Medicaid Services (CMS) has described a framework for provider payment that outlines types of VBC models that they describe as alternative payment models (APMs) and their attributes, the APM Framework, summarized in Figure 1:
Figure 1. The Updated APM Framework
|1.||Fee-for-Service (FFS) – No Link to Quality & Value||Traditional FFS|
|2.||Fee-for-Service (FFS) – Link to Quality & Value||Payments for improvements to infrastructure, pay for quality reporting, rewards and penalties for performance.|
|3.||Alternative Payment Models (APMs) Built on FFS Architecture||
• Shared savings
• Downside risk
• Episode or “bundled” payment
• Centers of excellence for a condition or procedure
• Global budgets or full percent of premium payments
The third and fourth types of payment models are the value-based models and involve the concept of a provider managing a set of procedures, an episode of care, or all services for individuals in a population. Targets, or benchmarks, are established for both quality and the cost of care. Providers share in any gains or losses relative to those benchmarks. In this way, the value-based model rewards providers based on the value delivered—the quality or outcome achieved at an efficient level of cost. 
Population-based value models rely on a person-centered or population focus, covering all, or a wide range of healthcare services—providing greater incentives for care coordination and health management. Under these models, a payer generally sets benchmarks for quality and cost for all the services necessary to manage a designated population for a set period of time. Population-based models promote the concept of a single payment for each individual patient, covering all of their care.
Value-based models designed around episodes of care, or “bundles”, are patient-centered, with a focus on managing care for a discrete clinical event for a patient or the treatment of a condition or set of conditions. Payment bundles may be defined around surgical procedures, such as the expected services required to deliver a total joint replacement or a back surgery. Bundles for treating specific conditions, such as cancer, cardiovascular, or perinatal care, are other examples.  Similar to population-based payment, benchmarks for quality and cost performance are established for bundles and providers are rewarded based on their performance relative to these benchmarks. Bundled payment models promote the concept of a single payment for the delivery of a procedure or the treatment of a condition—providing incentives for health systems and care teams to improve cost and quality and to coordinate care.
Designing, Implementing and Managing VBC Models
While the concept of transitioning to value-based healthcare payment is well understood; developing, implementing and managing VBC models can be complex for both payers and providers. Payers and their provider partners are faced with a number of important decisions in designing and implementing a VBC and administering these models and their associated contracts. How organizations address these challenges will have a significant impact on their ability to create a sustainable model and achieve program success.
Apervita has developed a blog series designed to help organizations understand and address the key challenges involved in defining and implementing a value-based payment model. These blogs will focus on one of the more prevalent forms of value-based contract models today—population-based models. Each blog topic will describe an issue in the context of designing and contracting under a VBC model and provide illustrative examples and recommendations. It is important to note that each of these blogs will address the inherent complexities and options involved with a specific design component of a VBC model. However, interdependencies exist between model components, requiring issues to also be examined in a more holistic way, assessing the cumulative set of decisions surrounding a VBC and its desired and expected outcomes.
The Blog Series will cover components integral to the specific parameters in the design of a value-based contract model, including:
- Included and excluded services and costs (or carve-outs): Determining the inclusion or exclusion of specific types of care and adjusted benchmarks and budgets to reflect the defined set of services
- Member attribution: Under population-based models, selecting a methodology for attributing plan members to providers/provider groups
- Budget and benchmark approaches: Setting the initial contract budget, including various approaches to setting financial benchmarks for the initial contract year and a budget based on the size and composition of the designated population or mix of patients
- Risk adjustment: Choosing and applying a method to account for the health status of the patients in the value-based models
- Contract settlement calculation: Selecting claims run-out periods, determining settlement frequency, determining timing of risk sharing, and including appropriate charges
The Impact of COVID-19
COVID-19 has had a significant impact on the world and has changed many businesses’ priorities, particularly the healthcare industry. Unfortunately, this pandemic will also impact value-based contract models, the management and settlement of the active contracts and the use of the current data to determine future budgets and trends. Subsequent blog topics will include more detail regarding the potential impact of COVID-19 on each specific area.
What other value-based contract model topics would you be interested in learning about? Let us know your thoughts!
 Health Care Payment Learning & Action Network, What Is the Health Care Payment Learning & Action Network? http://hcp-lan.org/workproducts/HCPLAN-Overview.pdf
 Health Care Payment Learning & Action Network, APM Framework, Refreshed for 2017. https://hcp-lan.org/workproducts/apm-refresh-whitepaper-final.pdf
 Examples of value-based models (APMs) currently in operation include the Medicare Shared Savings (MSSP), Primary Care First Model, the Medicare Bundled Payments for Care Initiative (BPCI), the NextGen ACO Model, Vermont Medicare ACO Initiative, and the advanced population-based Alternative Quality Contracting (AQC) model adopted by the Blue Cross Blue Shield of Massachusetts.
 Population-based models can cover an entire population or a subset, such as patients with diabetes, end-stage renal disease (ESRD) or cardiovascular disease
 State of Ohio Medicaid Program, 2016. http://www.medicaid.ohio.gov/PROVIDERS/PaymentInnovation/Episodes.aspx. State of Arkansas Health Care Payment Improvement Initiative, 2016. http://www.paymentinitiative.org/episodesOfCare/Pages/default.aspx