A Guide to VBC Contracting with Jeremy Earl & Greg Mitchell (McDermott Will & Emery)
TL;DR: We sat down with Jeremy Earl (Partner) and Greg Mitchell (Partner) to discuss best practices and how-tos related to setting up value-based care contracts. We covered a range of topics, from understanding deal structures to considerations in contract drafting. Below is a summary of our conversation.
Jeremy’s and Greg’s Background
- Partner at McDermott Will & Emery, based in the DC office
- Co-leads the managed care practice group
- Partner at McDermott Will & Emery, based in the New York office.
- Practices in the managed care practice group
Jeremy and Greg’s practice primarily focus on value-based contracting, innovative care delivery, and other innovative arrangements in the managed care field. Their work involves negotiating commercial contracts, joint ventures, and collaborations between payers, providers, and companies in the managed care sector.
Table of Contents
MWE VBC Presentation
- Value-Based Reimbursement Continuum
- Value-Based Contracting by Line of Business
- Payers’ Perspective on the Future of APM Adoption
- Variables to Deal Structure / Contracting Form
- Key Considerations in Drafting
- What MWE Is Seeing
MWE VBC Presentation
Value-Based Reimbursement Continuum
The chart below depicts the continuum of various VBC arrangements. Starting on the left side with pay for performance (quality bonuses) as the easiest and most straightforward arrangement, stepping up in increasing levels of financial risk to the right hand side with global capitation, which may involve significant administrative functions.
The type of company you are will inform where along the continuum you are. For example, digital health companies may find shared savings or pay-for-performance more suitable, while full risk arrangements may not be suitable for digital health companies due to the complexity of actuarial analysis and additional work to develop the models that an early stage company may not be able to support.
Value-Based Contracting by Line of Business
The chart below from the Health Care Payment Learning and Action Network depicts the breakdown of VBC arrangements by line of business. Looking at the data, you can start to see where the focus and opportunities are.
Context: HCPLAN conducts annual surveys of its members gathering publicly available data. HCPLAN's membership represents a significant portion of the healthcare industry, with approximately 75% of all healthcare payments being accounted for by payers who are members or participants in the organization. Given that, looking at the statistics below, such as 83% of payers believing that value-based care models will increase, that is indicative of the broader payer interest in these models.
Key takeaways from the chart:
- Medicare Advantage & Medicare: Medicare Advantage contracts have the highest penetration, followed by traditional Medicare, which is unsurprising due to ACOs and direct contracting reach programs.
- Medicaid: Value-based payment arrangements are about half as prevalent in Medicaid and commercial compared to Medicare Advantage.
Payers’ Perspective on the Future of APM Adoption
The chart below also comes from the Health Care Payment Learning and Action Network and demonstrates where healthcare stakeholders think VBC APM methodology is trending. Note the data is more heavily weighted to the payer perspective.
Key takeaways from the chart:
- VBC contracting is here to stay: 83% of respondents think APM activity will increase
- VBC will result in higher quality care: 96% strongly agree with this sentiment
- VBC will result in more affordable care: 82% strongly agree with this sentiment
Variables to Deal Structure / Contracting Form
Below are the three major distinctions to consider in value-based contracting:
- Vendor vs. provider
- Direct contracting with a payer vs. contracting with an intermediary for sub-delegated risk
- The line of business involved
Vendor vs. provider
The first distinction you’ll run into when handling value-based contracting with payers is working through various considerations depending if you’re on the vendor or provider side. This tends to be one of the biggest issues seen, especially for digital health entities that have more innovative products and/or care delivery models. Additionally, payers tend to struggle to know what bucket to put you in.
- Contracting involves dealing with an MSA (Master Services Agreement) and an SOW (Statement of Work) on the procurement team side, which may have limitations for value-based contracting because procurement teams are generally less knowledgeable about value-based models, but provides more latitude for innovative payment structures and attribution models.
- Contracting may be easier on the provider side as they work with the payer's existing network contracting team, and thus would operate under the participating provider agreement, allowing more flexibility for innovation. Further, the provider network teams tend to be a bit more familiar with the VBC.
- Attribution is estimated using claims data, making it more straightforward and easier to handle.
Direct to payer vs. sub-delegated contracting
The chart below outlines advantages and disadvantages to consider when thinking through the second key contracting distinction: direct-to-payer vs. sub-delegated contracting.
Line of business
Finally, line of business is another significant distinction. Below are the various considerations by each line of business – including Medicare Advantage, Medicaid, and Commercial.
Key Considerations in Drafting
Below is an overview of key questions and considerations the MWE team developed for their clients to help them when negotiating value-based contracts.
Below are the details covered for each category during the live sessions.
- Member Attribution: Clearly define who will be attributed, which can be based on PCP or provider membership, disease state, historical utilization trends, etc.
- Cost of care targets: Determine how the cost of care will be calculated, either through prospective (capitated payment) or retrospective (reconciliation) arrangements. Consider the level of financial risk and the presence of financial protection measures like stop-loss or reserve amounts.
- Services and reconciliation process: Specify the services included or carved out in the contract and establish the timing and dispute mechanisms for performance reconciliation.
- Quality metrics: Include quality components tied to payment, such as eligibility for shared savings or the amount of savings/risk involved. Consider nationally recognized measures like star ratings (e.g., HEDIS, caps) or customized metrics.
- Regulatory & licensing:
- Medical loss ratio (MLR) standards: Understand how payments will be reported for MLR purposes, which may affect potential rebates.
- State licensure: Determine licensing and oversight requirements for non-billable services and delegated administrative functions across different states.
- Anti-Kickback Statute: Consider the arrangement's compliance with safe harbor provisions and address any anti-kickback concerns in Medicare Advantage and Medicaid managed care.
What MWE Is Seeing
Below is an overview of five themes that the MWE team is consistently seeing across their work with companies in the VBC space.
- AKS/ Stark statutes have provided flexibility and protection, leading to the structuring of arrangements with physicians to manage referrals and provide incentives.
- Interest in downside risk among payers is growing. As a result, companies making arrangements with some measure of downside risk are becoming more compelling compared to shared savings or quality bonuses alone. Clients are seeing more success when they are willing to enter into downside risk arrangements.
- Increase in sub-group contracting. Efforts to segment out populations based on disease states (e.g. kidney care, oncology, etc.) or high utilizers and allocating risks to companies that are most equipped to handle and manage those populations.
- Growing interest in MSSP & ACO Reach. MSSP (Medicare Shared Savings Program) and ACO REACH (Accountable Care Organization Realizing Equity, Access, and Community Health) participation is generating significant interest, both for companies interested in becoming ACOs themselves and downstream vendors to ACOs.
- Geographic dispersion of value-based care arrangements is expanding beyond states like Florida and California, as investment dollars and attention shift to states with more green space and less competition.
Q1: Do you see excitement or momentum from the bigger payers in the commercial markets trending towards moving more towards risk versus Medicare, Medicaid, and your reflections on the public companies’ general posture there?
- There is an interest in a shared savings model and risk arrangements in commercial healthcare. However, there remains a challenge of actuarial underwriting due to lack of built-in risk adjustment methodology.
- Potential solutions here include using a commercially available solution like Milliman’ or Optum’s offerings.
- Depending on the health plan, there are varying degrees of comfort for health plans to pass value-based costs to self-funded ASO employers
- Our payer clients working on improving employer contracts for flexibility in passing value-based costs through
- The most successful commercial arrangements are ones that either internally have, or brought in experienced actuarial teams. Additionally, they tend to build in those material adverse change provisions to ensure accurate numbers.
Q2: Are data exchanges established in these risk sharing arrangements? How have you seen adding teeth to this or something that's at least amenable for both the vendor as well as the contracting individual?
There are two elements to approaching data obligations in contracts:
- Determining the data requirements to build into the contract.
- Establishing consequences for failure to provide the agreed-upon data.
For small companies dealing with large payers, the payer may provide a standard report and consider additional data requests on a case-by-case basis, depending on the feasibility and automation. It is recommended to include an exhibit in the contract specifying the reports and data elements, including file format and frequency.
Meanwhile, larger companies may have more leverage to demand customized reporting in their contracts.
It’s important to be aware that it can be challenging to build teeth into the contract. A few recommendations and best practices for doing so include the following:
- Consequences for failure to provide data can be established through a grace period, where consecutive missed data submissions are considered a material breach of the agreement.
- Some companies take a more aggressive approach by including a provision that requires payment equal to the financial injury suffered from not receiving the data. Of course, getting payers to agree to such provisions can be challenging, but framing negotiations with the importance of data and its impact on the company's operations can communicate its significance.
Q3: Obviously, payers are mostly focused on claims adjudicated closed and open claims as the primary data source in risk arrangements. Have you seen or explored utilizing like real world feeds, specifically EHR data as a complement to and claims for building out that subgroup risk analysis?
- Subgroup contracting often relies on the payer providing historical population data for the past few years for underwriting purposes. With that said, MWE clients typically do not use broader EHR data or commercially available data for this type of underwriting.
- Despite the push for value-based contracting coming from payers, they remain hesitant to share the necessary data for value-based contracting, despite advocating for it.
- Using prepackaged data provided by payers can facilitate smoother discussions and negotiations.
- Real-time analysis of EHR data could be beneficial for identifying subpopulations, but it may raise concerns related to data security and information sharing.
- One of the primary challenges with subgroup contracting is the difficulty of achieving desired outcomes within certain populations, such as kidney care or oncology, where the MLR (Medical Loss Ratio) can exceed 100%.
- Clients tend to feel more comfortable with assuming risk or investing in programs when they have robust historical data from the payer.
Q4: How do you establish a contracting time frame? Further, what level of input does the vendor have into that process with the payer to start establishing timelines that are more relevant to the problems that they are solving?
The default performance periods for contracts are typically 12 months. Of course, some programs may not yield results until the end of year two or the start of year three.
- Typically, clients will insist on a three-year minimum contract with the first two years being upside-only and transitioning to risk in year three.
- Full two-year reconciliation plans are not commonly successful due to annual funding and bookkeeping preferences.
- Creative structuring can ensure rewards in year three while allowing for early termination without cause before that point.
- It's important to consider the timing of patient attribution and quality measurements.
- Excluding patients attributed in the last two or three months of the year from quality measurements can allow for a ramp-up period to show the effects of interventions and prevent unintended consequences of late attribution.
Q5: What are best practices for drafting material adverse event changes? What are those events? How do you define thresholds? Any advice on that?
There are two broad approaches for material adverse change provisions:
- Broad definition of triggers with specific thresholds for adverse effects (e.g., government regulation changes, payer unilateral changes).
- Specific triggers with narrowly defined events (e.g., CMS changes, provider network modifications).
Recourse options for triggered material adverse changes include:
- Standard approach: Parties negotiate in good faith, and if no agreement is reached, the triggering party can terminate the agreement.
- Provider/vendor-friendly approach: Binding arbitration determines financial damages caused by the change.
- Negotiating leverage plays a significant role in determining the level of specificity and recourse in the provisions.
- Balancing act between comprehensive coverage, specific triggers, and recourse options.
- Specificity in defining triggers is crucial to ensure all potential risks are addressed.
- Negotiating success depends on the level of specificity and the flexibility of the provisions.
Q6: As you've seen this proliferation of different folks carving up different parts of risk, how do you tend to approach situations where you have overlapping organizations that are trying to take the same risk?
Developing attribution models for risk arrangements is challenging due to the need to avoid double payment and ensure target populations are not siphoned off. Paying attention to how attribution is done and avoiding unintended attribution to other parties is crucial, especially in subpopulations like ESRD.
- Most common solution is to exempt members already attributed in other arrangements. However, for subpopulations, it needs to be addressed to prevent loss of target population.
- Working with the payer and entities already taking risks on the population can be a solution, although operationalizing it may be challenging for the payer.
- Another approach is to negotiate with the payer to take over attribution from PCPs or carve out already attributed members while controlling attribution for new patients and providers going forward.
Payers may be open to these solutions and willing to create carve-outs or modify attribution for effective collaboration.
Q7: What's the distribution of payer knowledge on what they're looking for standard terms of contracts? And if you're negotiating your first deal, how should you think about going to payers to successfully execute on a contract?
This will partly depend on the payer and what type of company you are:
While most payers do not have built-in processes for digital health companies, they are actively in the process of developing forms for non-traditional value-based arrangements. Until those are robust enough, negotiations often remain bespoke.
Q8: I’ve seen sub-delegation rates run the gamut on an order of magnitude from 2% to 20%+ of risk. I'm curious if you have seen any emerging trends on either end of that spectrum. Is it still all over the place, and if so, do you expect it to continue to be so? Any benchmarking that you encourage your clients to think about?
There is no great resource for benchmark information on the right amount for sub-cap arrangements.
However, there are factors that will influence the sub-cap arrangement depending on what pathway you’re looking to take. Start by asking the following:
- Are you just looking to take on risk for services provided by the specialty group and potentially referral services? In this case, historical utilization data is often used as a starting point for determining the percentage of premium to take.
- Are you also looking to take risk for some or all referral services for that pop? These negotiations then tend to be more complex and individualized based on population and historical funding and utilization levels.
Q9: For groups that are defined as high risk based on retrospective analysis (e.g. multiple hospitalizations or ER visits), how is success measured? Is it just that we did better than last year? Or if there's a correction for regression to the mean? How is that done and do you have any best practices there?
The most common structure for sub delegated risk arrangements is improvement from historical performance. For sub-delegated risk on a population of high utilizers, you’re going to be working from a really low baseline level of performance. Thus, it will be about showing that your management of the population has improved outcomes from what they’ve done historically. The goal is not necessarily to achieve high scores like the general population but to show a minimum level of improvement over historical experience.
It’s important to note that benchmark ratchets down over time in many arrangements to reflect the assumption of rapid improvements and returns on population management.
Further, there is increasing variation and flexibility in sub delegated risk arrangements, including payments based on performance against specific individuals.
Q10: What advice do you have for someone who is looking at sub-contracting for a specific population for the first time?
Below are several best practices to consider when sub-contracting with a specific population:
- The gold standard for benchmarking in sub delegated risk arrangements is up to three years of historical utilization data for a similar population.
- Engaging with an actuary is important to analyze the data, understand trends, and establish reasonable assumptions for benchmarking.
- Contracting with a plan makes it easier to obtain the necessary data, but physician groups or entities may have limited data availability.
- If the physician group lacks robust data, alternative approaches can be considered, such as using data from payers or working with companies like Milliman for publicly available claims data.
- Reverse engineering a set of reasonable assumptions may be the best option in cases where data availability is severely limited.
Q11: What are best practices for a specialty telehealth vendor to approach subcontracting with a provider group?
Telehealth companies have started exploring risk and value-based care models, with examples like Heartbeat Health in the cardio telehealth space. Additionally, some bread and butter telehealth companies like Babylon Health have already been taking on risk for a few years.
For specialty telehealth providers, the challenge is from the payer perspective they look at attribution as primarily PCP-driven, except for certain disease states where specialist attribution is easier to identify. Considering that, specialties like kidney care/ESRD and oncology have seen easier entry into full-risk arrangements due to the clear management role of nephrologists, dialysis clinics, and oncology groups during specific treatment periods.
However, the cardiology space presents challenges due to the chronic nature of heart disease and the bifurcated relationship between patients, PCPs, and cardiologists. Given that, it becomes important to figure out the following to work well with the payers:
- Identifying the appropriate population for risk assumption and explaining the rationale to payers is crucial.
- Integrating with existing PCP value-based agreements and the process of patient attribution need to be addressed to gain payer comfort.
Q12: Knowing MA is licensed at the state level, I am curious how that is handled (state level variability in risk share, benchmarks, data sharing, etc.)? Any suggested advice on how to work all of our organizations when working with these large health plans that have national contracting infrastructure, and how to do that contractually to support local markets, given the MA state level?
Negotiations with payers vary depending on the company and their structure. For instance, some payers like Centene, operate in a siloed manner, requiring separate negotiations for each state contract, especially for Medicaid.
With other large payers, if negotiations go well in one state, the agreement can serve as a basis for negotiations in other states, with some adjustments based on state-specific regulations. It is not unusual for each state or geographic area to have its own negotiation dynamics, potentially leading to slightly different terms requested by the payer.
It’s important to note that the approach to negotiations can range from using the same form nationally with minor modifications to starting from scratch in each state. The payer's preferences and practices heavily influence the negotiation process.
That’s all for now, folks! We had a great time chatting with Jeremy and Greg from MWE, and appreciate them taking the time to share their knowledge with our fellow HTNers.
If you made it through this, and are finding that it sparked some additional questions for you, we’ve included both Jeremy and Greg’s contact information in the case you’d like to reach out.
Jeremy Earl: email@example.com; 202-756-8189
Greg Mitchell: firstname.lastname@example.org; 212-547-5826