How to Manage Risk in Value-Based Contracts

In his June 8th blog, Chris Emper alluded to provider survey results that revealed a significant level of concern regarding downside risk in their ACO agreements. He explained CMS’s response that assured participants they would not be financially harmed by the pandemic. As providers turn their attention to commercial contracts, they would be well advised to pursue opportunities to manage risk during these particularly uncertain times. Following are some approaches to consider.

Review Your Contracts
If there is not already a “force majeure” clause in your contract, that might be the first thing to consider. A force majeure clause is a “contractual provision which excuses one or both parties’ performance obligations when circumstances arise which are beyond the parties’ control and make performance of the contract impractical or impossible.”¹ While potentially helpful these clauses are no guarantee as the precise language is unique to each contract and they offer varying degrees of enforceability across states.²

A related issue is to ensure that there is a clear process for dispute resolution. While it’s important to have precise language in the contract regarding details of the financial terms and quality measures, it is likely that situations arise where the parties either interpret the language differently or particular circumstances are not anticipated in the contract. In that case, a sound dispute resolution process can go a long way toward helping manage risk and build trust.

Narrow Your Risk
Narrowing your risk corridor is a straightforward, but blunt force approach to mitigate risk. This would involve a symmetric reduction to both your upside opportunity and downside exposure within a given contract. Another option would be to lower your threshold for stop loss.  While that protects you from an unexpected rise in high cost claimants, it also lowers your upside potential to the extent that there may be significant cost savings opportunities among high cost claimants.  

A more targeted approach to the same issue would be to exclude certain categories of costs that you have the least control over.  For example, if your group has no OB/GYN or neonatology, your ability to manage high risk newborns would be very limited. In that case, it would be wise to exclude in-hospital newborn care from your budget.   

Reassess Quality Clause
In contrast to anticipating and excluding targeted areas, you might also consider a couple of more indirect ways to lower risk. One is to reassess the quality clause in your contracts. Even though it is typical for quality measures to be clearly specified in the contract, it may be worth reviewing what is measured, how the targets are set, and whether quality is just a gateway measure or if it is more directly tied to your upside and downside risk.  Depending on your organization’s strengths and strategy, there may be an ability to both reduce risk and increase opportunity in this arena. 

Reexamine Attribution 
A final aspect of the contract you may want to reexamine is its attribution specifications. You should get credit for all of your patients for whom you’re driving value, and not penalized for patients over whom you have no control. The method, timing, validation, and adjustments to your attribution should all align with those goals.

As the federal government has demonstrated a commitment to value-based care, so too must commercial insurers. In order to ensure those commercial strategies are sustainable, providers will need to be vigilant and apply adequate time and resources to keep each contract aligned with their strategy.

^1,2.https://www.akerman.com/en/perspectives/the-coronavirus-and-force-majeure-clauses-in-contracts.html