Performance-based Contracting: Emerging Issues and Considerations

Reprinted with permission from the July/August 2014 issue of Trustee magazine, Vol. 67, No. 7. © 2014 by Health Forum Inc. All rights reserved. Permission granted for digital use only.

By James Pizzo and Mary Totten

A new business model is emerging to transform the care delivery and payment systems. The transition is underway in many communities — moving health care delivery from emphasizing sick care to addressing population health management.

Managing a population’s health involves proactively identifying and assessing those at risk of developing disease, pre-emptively managing those with chronic disease and implementing broad-based interventions in early stages of disease to avoid or reduce cost and improve health. This approach requires broadening the scope, environments and capabilities in which health care organizations must operate. It also involves developing the right strategies for specific population segments to maximize wellness and minimize illness. New payment models are evolving to align with the new care models.

Typically, under the terms of performance-based payment arrangements, hospitals, systems, physician groups and other providers will be responsible for delivering defined services to a specific population at a predetermined price and quality level. This development has significant strategic and financial implications. Change is occurring at different speeds in different markets. But, due to the unsustainable costs of health care under a fee-for-service system, a value-based system is expected to evolve nationwide, replacing the current volume-based system.

Ensuring success in this new environment is critically important to boards and executive leaders because change is driven organizationwide from the top. Just as boards must ensure that patients receive safe, quality care, they also will help to move the hospital toward a system of care that delivers greater value while protecting the organization’s financial resources. Understanding performance-based contracting — the mechanism fostering change from a volume- to a value payment model — will be essential for boards and executive leadership. This Workbook highlights current contracting issues and offers eight strategies for addressing those issues. Trustees will need an understanding of them to be able to provide financial stewardship in the changing payment environment.

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