After years of talk, fee-for-service payment models are finally being challenged in a real way. With value-based care, providers are reimbursed based on patient health outcomes rather than the number of patients they see, which has begun to pass the burden of cost from insurers and employers to providers and patients.
Fundamentally, value-based care requires vendors as well as providers to operate differently, but new revenue models and a new approach to hiring deserve special consideration. In this article, we’ll cover the state of value-based care, how vendors are being required to accept outcomes-based contracts, and how to overcome the associated challenges with hiring executives.
Value-Based Care: Continuing to Gain Momentum
Change is rarely, if ever instantaneous. This iteration of value-based care has been around for over a decade, but like any new force set to reshape an industry, change is slow (and slower still in healthcare). However, ten years later, the impact of these fundamental shifts are increasingly difficult to ignore.
In 2017, 34% of U.S. healthcare payments, representing approximately 77% of the covered population, flowed through Alternative Payment Models and Population-Based Payments. According to a 2019 Change Healthcare report, the last five years saw a seven-fold increase in the number of states implementing value-based reimbursement programs; 48 states now have value-based programs.
Accelerating these shifts, the Centers for Medicare & Medicaid Services (CMS) introduced new payment models to overhaul primary care, kidney care, and Medicare Advantage and Part D plans in 2019, aiming to propel value-based care even further. This year, CMS also updated Medicare Advantage (MA) to reimburse for benefits that address social determinants of health—such as meal delivery or rides to the grocery store. Since, there have been numerous announcements of states, payers, and providers working to address social determinants in different ways—from affordable housing to GED assistance.
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Value-Based Care Requiring Vendors to Accept Outcomes-Based Contracts
Value-based care is forcing healthcare vendors (healthcare IT, healthcare services, and digital health vendors) to think differently about many aspects of their business, but especially about their revenue model as it relates to value-based care. In the last two years, provider-sponsored risk-bearing entities (i.e., health plans, ACOs, etc.) and Medicare Advantage plans have begun requiring outcomes-based contracts, where vendors are required to share in potential downside risk, as well as upside potential.
This is a regular occurrence for Evolent Health. With Lee Health in Florida, after the first 5% savings, Evolent receives a 20% share of the upside savings, but with downside risk, the company must contribute 50% up to the first 5% of benchmark and then 90% thereafter.
“Organizations are using stop-loss insurance at the individual member level to protect themselves from this downside risk,“ according to Sean Wieland, Equity Analyst at Piper Jaffrey. “Through its Lumeris partnership, Cerner is also entering contracts where it is expected to put skin in the game.”
In certain arrangements, vendors may also be expected to commit capital to an arrangement, in addition to participation in downside risk. These types of contracting arrangements are not isolated to large vendors. More and more frequently, medium and small vendors are also being asked to consider outcomes-based contracts.
Going forward, healthcare IT, healthcare services, and digital health vendors should consider:
– The value of a deep understanding of the company’s revenue model and cost structure: While this may seem obvious, the value in understanding unit costs, customer acquisition costs, and customer lifetime value, timing of cash flows, etc. is the first step to bearing risk. Without this information, a company cannot fully understand the implications of bearing risk on the business and should proceed with great caution.
– A healthy balance sheet: The ability to fund risk requires capital. While all vendors will hope for success with 100% of their contracts, they need the ability to fund less successful endeavors, and clients will want to see that vendors have the capacity to do so.
– The value of stop-loss insurance: Stop-loss insurance provides protection against catastrophic or unpredictable losses, and as vendors move into outcomes-based arrangements of any meaningful size with significant downside potential, stop-loss insurance should be a consideration.
– Data and analytics capabilities (organically or through a partner): A vendor will require the ability to validate a benchmark as well as track and evaluate outcomes, at an absolute minimum. Ideally, an organization would have some (at least minimal) capability internally, so as to be able to validate any data received from a client or partner, but partnering is also a viable solution.
Not all organizations will be sophisticated enough or have pockets deep enough to successfully win and then execute outcomes-based contracts, and so continued movement towards outcomes-based contracting will expedite industry consolidation and partnerships as those vendors look for ways to remain relevant.
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What Value-Based Care Means for Hiring
Finding executives who can build businesses in this new value-based care world is difficult. As more companies are structuring outcomes-based deals based on both upside and downside risk, executives who understand the intricacies behind these models are a very hot commodity (and even hotter if they can show that they have had success executing mutually beneficial risk-based contracts in the past).
Consider the following when hiring healthcare IT, healthcare services, and digital health executives who understand the value-based care ecosystem:
– Identify what makes this role truly unique: The healthcare vendor landscape in most sub-sectors is dense and noisy, so it’s vitally important to understand how your organization fits into the value-based care environment and how it is differentiated. Many firms first choose to work with a partner to help define or clarify the company’s value proposition, as it requires deep expertise in the healthcare technology and services sectors and the broader macro competitive landscape. The organization can then layer in why this particular role is a great opportunity for the candidate.
– Be prepared to pay market compensation: Many companies aren’t prepared to invest at the level high-quality executives require. Some star candidates are making considerable salaries as well as strong incentive plans, and companies are having to guarantee a bonus in the first year to incent star candidates into new positions. This can be disruptive for current executive teams whose expertise is aligned to fee-for-service healthcare models, but it’s important to recognize that highly competitive compensation packages are the new reality for executives with expertise in value-based care.
– Act quickly: Excellent executives are hired within weeks. When companies delay the hiring process, candidates are presented with offers they can’t pass up elsewhere. Get your ducks in a row early on in the process because you’ll need to be prepared to move through your search and make decisions quickly with great candidates.
In the new world of value-based care, healthcare IT, healthcare services, and digital health vendors need to be self-aware on a personal and organizational level. That information must be used to then prepare for the movement to outcomes-based contracting and hire the best talent to assist the organization down the path to success.