The Power of Value-Based Care: Leveraging ‘Agency Theory’ for a Better Healthcare System

Version 3: The Power of Value-Based Care

Leveraging ‘Agency Theory’ for a Better Healthcare System

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Introduction? 3

Value of Leveraging "Agency Theory" 3

Preferred Value-based Care Design of the Future? 9

Measurement of Value and/or Quality? 12

Empirical Findings & Impact on Outcomes? 14

Profitability Risk for Primary Care Practices & ACO REACH?? 17

Operationalization & Implementation Considerations? 21

Conclusion & Future Opportunities for Innovation? 22

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Introduction

Value-based care has emerged as a transformational approach to healthcare delivery, aiming to improve quality, reduce costs, and enhance patient satisfaction. To ensure the success of value-based care, it is essential to develop payment structures (& resulting contracts) that align incentives, mitigate gaming, and encourage participation from clinically efficient providers.

In this composition, we will explore the argument that payment contracts designed to encourage quality incentives can drive better care, reduce costs, and improve outcomes. We will draw heavily from the principles of agency theory to support our claims and justify using empirical evidence from various existing studies. Furthermore, we will discuss the profitability risks for primary care practices and Accountable Care Organizations (ACOs), deconstruct the economic principles that support value-based care, propose a payment structure with the hope of stimulating value, and conclude by highlighting the importance of operationalizing this approach to accelerate the shift toward population health management we have all been theorizing for more than a decade.

Value of Leveraging Agency Theory

Agency theory provides a framework for understanding the relationship between principals (patients, payers) and agents (providers) and how contractual agreements can align their interests. By carefully designing selection criteria such as clinical expertise, span of control within the continuum of care, services offered by acuity, frequency and condition, population health management infrastructure, and of course, historical cost and quality performance, we can begin by outlining a pool of providers who are best suited for value-based care.

These criteria ensure that providers possess the necessary skills, resources, capabilities, and a track-record of success, to deliver evidence-based care processes and achieve desired outcomes. Implementing agency theory in value-based contracting structures promotes accountability, transparency, and performance-driven incentives, resulting in improved care efficiency and patient outcomes.

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Following eligible, identification exercise, we must next complete the following, required, actuarial rigor-morale:

1.???? Opportunity analysis - Identify the frequency of conditions of priority and high concern to payors alongside the severity distribution associated with each member/patient identified with such condition alongside acute events tied to this population let alone chronic spend.

2.??? Value estimation and economic modeling - establishing a baseline using an agreed upon attribution methodology (whether bundle or capitation) and valuing the value potential (namely in $ followed by impact on health equity, etc.) of the alternative workflow, management and care regimen associated with the identified opportunity(s).

3.??? Risk assessment - people often overcomplicate this, but, it’s taking a look at whether your risk stratification has either a heavily skewed distribsution YoY or a median RAF is very volatile YoY, as well. Although important this most importantly serves to inform the financial contracting strategy and structure.

4.??? Contracting - Here’s where we start with what’s on the payer’s mind.

○????? I.e., what is the marginal opportunity generated by the differential between the existing mgmt. & workflow in dollars and associated confidence interval? To determine the confidence interval value in economic modeling, one must consider the risk appetite of both contracting entities. This includes but is not limited to the following risks/variables:

■????? Financial health? -

○????? Are they leveraged?

○????? Is there a lot of debt on the balance sheet?

○????? Do they have worries about cash flow timing?

●????? Is there the right level of diligence in cost accounting? (…can’t forget your administration costs and overhead here…)

●????? How large (or small) is their total cash flow and revenue? How about unit costs vs. FFS today? (See below for more)

■????? Value generation ability -

●????? Network contracting

○????? How historically successful has the respective network development organization been in negotiating supply chain costs?

●????? Does the organization HAVE (or maintain the ability to operationalize) the right set of enablement functions to achieve the estimated differential between the existing and alternative workflow? Examples include:

○????? A universal EMR used across their org.

○????? The right level of clinical risk stratification analytics

■????? Predicated on a unified data layer.

■????? Access to an HIE or minimally, ADT data

■????? EXTRA CREDIT: A deep learning architecture to supported supervised learning ensuring the model is learning.

○????? Care management infrastructure, staffing and workflows underpinned by powerful care coordination platform.

○????? All these questions serve to help both parties arrive at the most amenable, risk-optimizing contracting structure. This can range from simple upside P4P through 50/50 gain-shares.

○????? As I’ve elaborated on in previous blog posts, there are plenty of financing strategies to managing financial risk along the aforementioned, AND are quite common including but not limited to:

●????? Stop-loss insurance

○????? Ideal for providers who are seeing elevated levels of volatility in population clinical economics but can be a two-sided sword. This can often be seen by the payer as a provider's lack of confidence in being able to manage the clinical risk they are taking on.

○????? It’s worth noting that high-interest environments DO make these opportunities more attractive.

●????? Risk corridor implementations

○????? If you are unable to project out the distribution of outcomes based on spend and services utilized accompanied by a low confidence interval, this is where risk corridors are useful.

○????? Of course, these protocols limit gain-share opportunities BUT there is no requirement that the corridors stay in place through all years of the arrangement. Risk-averse providers might be able to limit gain-share to boost their confidence interval in year 1 and remove corridors in the following years having modeled a decent upside gain-share NPV for both parties.

●????? The case for capitation: The greatest aligned payment structure to ‘Agency Theory’

○????? Capitated for physician groups or larger CINS, provide a fixed, predictable & stable source of income, and can help to reduce administrative costs through initiative-taking financial planning and a reduction in RCM ops needed.

■????? Generation of additional positive externalities through participation can also be financed as we know every financier loves a predictable cash flow.

○????? Recalling Agency Theory and the power of incentives, I would argue that capitation’s greatest quality is that it puts everyone’s ‘money where their mouth is.’

■????? Risk-hedging add-ons like ‘risk corridors’ only mute performance risk on incentives that have been agreed to.

●????? Bundles are a close ranked second to optimal incentive alignment.

○????? Yes, these APMs create financial value for the participating entities but more importantly that value DOES NOT MANIFEST without better patient outcomes. This is why global incentive alignment is so important - both from a macro and microeconomic perspective.

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I’m a risk averse person.

·?????? I’ll gladly play both sides of the coin and admit that capitation is not without its challenges. One challenge is that it can be difficult to set the capitation rate correctly.

·?????? If the capitation rate is too low, the physician group may not be able to provide adequate care.

·?????? If the capitation rate is too high, the Medicare Advantage plan may not be able to control costs.

Another challenge with capitation is that it can lead to decreased quality of care. This is because physician groups may be tempted to provide less care to save money.

●??????? However, there are several ways to mitigate this risk, such as using quality metrics to measure the performance of physician groups and providing financial incentives for high-quality care (e.g., through score carding HEDIS results, etc.)

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Preferred Value-based Care Design of the Future

So, what now? Where do we go from here? What the heck is the point of discussing all of this?

Well, developing these baseline understandings gives us the opportunity to brainstorm the evolution of value-based care; the ‘better next-gen’ maybe.

We all acknowledge that VBC requires a well-designed framework that incorporates key components to maximize its effectiveness. This section theorizes preferred VBC design components that provide valuable insights into the structure and characteristics that should be considered.

We start by emphasizing the need for two core components in a theoretically preferred VBC:

1.?? a substantial base payment &,

2.?? a small variable payment that explicitly rewards measurable aspects of? ???????____value (pay-for-performance)

The base payment is crucial to implicitly stimulate key-value dimensions, addressing the multitasking problem and the risk of teaching to the test associated with high-powered explicit incentives.

At the same time, the variable payment, though relatively small, plays a crucial role in a theoretically preferred VBC. It explicitly rewards specific measurable aspects of value, allowing for targeted incentivization of desired outcomes. This component can be designed as an "add-on" to the base payment or as an integral part, depending on the specific VBC model.

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We can further identify five key features of a theoretically preferred base payment:

1.???? Payment to a multidisciplinary provider group: To promote coordinated and comprehensive care, the base payment should be allocated to a multidisciplinary provider group. This encourages collaboration and integration among various healthcare professionals, fostering a patient-centered approach.

2.???? Cohesive set of care activities: The base payment should be tied to a cohesive set of care activities provided by the provider group. This ensures that all necessary components of care are incentivized, promoting comprehensive and holistic patient management.

3.???? Fixed payment: The base payment should be fixed rather than variable. This provides stability and predictability to healthcare providers, enabling better financial planning and resource allocation.

4.???? Adjustment for population risk profile: The base payment should be adjusted based on the risk profile of the predefined population. This accounts for the varying healthcare needs and complexity of patients, ensuring adequate resources are allocated to meet their specific requirements.

5.???? Risk-mitigating measures: The base payment should include risk-mitigating measures to protect providers from excessive financial risk. Even with risk adjustment, providers may still face residual financial risk. Additional approaches, such as insurance mechanisms, can be implemented to safeguard against unpredictable and large financial losses.

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Determining the payment level and financing arrangement are challenging tasks in VBC design. After reading MULTIPLE papers on this concept, I discovered commonality that manifested in three potential options for setting the payment level, with each carrying potential drawbacks.

The most theoretically preferred option is basing the payment on acceptable expenses, covering only those expenses generated in delivering medically necessary, cost-effective care. However, implementation challenges arise due to the complexities of selecting and pricing individual services.

Similarly, selecting the appropriate financing arrangement requires careful consideration. The base payment should include arrangements that effectively mitigate excessive financial risk for providers. These risk-mitigating measures protect providers from unforeseen financial losses, ensuring their financial sustainability and ability to deliver high-quality care.

In balancing the trade-offs between different value dimensions, decision-makers must weigh preferences for each dimension, considering relevant societal interests. The op-ed highlights the need to carefully evaluate the importance of each dimension, such as cost-conscious behavior and quality of care, and setting the variable payment and transitively, agreeing to financial risk for providers collaborating.

By incorporating these key components and considerations, a theoretically preferred VBC design can effectively align incentives, promote comprehensive care, and optimize patient outcomes.

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Measurement of Value and/or Quality

The accurate measurement of value and quality is a critical component of designing effective payment models in value-based care. Unbiased, and well-designed measurement processes, conducted with sufficiently large samples, can provide reliable estimates of performance, and pave the way for successful implementation of value-based payment systems. This suggests that a mixed payment model, combining measures of process quality, health outcomes, and transaction price, holds promise in striking a balance between the higher costs associated with measuring value and the potential patient health benefits it can yield. It is important to recognize that optimal payment models will vary depending on the context, including baseline market conditions and the structural relationships between purchasers, plans, provider organizations, and patients thereby necessitating different incentive sizes and structures.

When considering the use of process quality, patient experience, and health outcomes measures in incentive payment, payers must carefully weigh the measurement costs associated with each performance attribute against the relative benefits in terms of their impact on provider and patient behavior.

In this regard, I argue that clinical quality and patient experience, being more controllable by providers and provider organizations, can be measured at lower costs compared to outcomes. Therefore, they should carry greater weight in value-based payments, if there is robust peer-reviewed clinical evidence establishing a strong link between the selected process indicators and health outcomes.

To mitigate the risk of providers simply "treating to the test," it is essential that process measures are comprehensive enough to capture clinical behaviors that are most strongly associated with positive health outcomes.

While claims-based measures are more readily available from transaction systems, the balance of measurement costs is shifting in favor of outcomes as the meaningful use of electronic health records expands.

●??? Striking the right balance is crucial, and mixed payment systems offer a more optimal allocation of provider effort across distinct aspects of performance.

■????? Chalkley and Khalil (2005) highlight that when payers have access to information on both outcomes and treatment quality (evidence-based care processes), the optimal contract will be based on incentives for both outcomes and clinical quality, considering the costs of measuring both.

The measurement of value and quality in value-based care is a complex task that requires careful consideration of numerous factors. By utilizing a mix of process, patient experience, and health outcomes measures, payers can incentivize and drive improvements in the delivery of high-quality care while considering the associated measurement costs.

The ongoing advancements in electronic health records and the availability of more comprehensive data contribute to the evolving landscape of measurement in value-based care. By continuously refining and adapting measurement approaches, we can enhance the effectiveness and fairness of payment models, leading to better healthcare outcomes for patients. The following table is a great precursory attempt at perpetuating the logic corollary that the larger the organization, the greater their ability to optimize performance risk.

Table 1 - Aligning Incentives with Organization Form

Organization Form

Aligned Value-Based Incentive Design

Small, independent practices

FFS with risk-adjusted value incentives

Primary care groups

Risk-adjusted primary care capitation with adjunct

incentives

?? Single-specialty groups

Risk-adjusted “contact capitation” with adjunct

incentives

Hospitals

Case rates extending DRGs to episode of care and

variants of bundled payment

Multispecialty groups, IPAs &?

integrated delivery systems

Risk-adjusted global cap with adjunct incentives

Accountable Care Organizations

Risk-adjusted global cap with adjunct incentives or

“equivalent” two-sided shared savings

Source HSR Health Services Research | 50S2, Part II (December 2015)

Empirical Findings amp; Impact on Outcomes

Value-based care has garnered significant attention due to its potential to improve quality, reduce costs, and enhance patient outcomes. Empirical studies have provided valuable insights into the positive impact of value-based care compared to fee-for-service (FFS) models. This section will explore the findings from two studies, supporting the thesis that Medicare Advantage (MA) in physician groups taking two-sided risk is associated with improved quality and care efficiency compared with FFS Medicare.

Cited Study #1: This cohort study compared the performance of Medicare Advantage (MA) in physician groups taking two-sided risk with a matched sample from fee-for-service (FFS) Medicare. The study assessed various quality metrics, including patient experience, preventive care, and chronic disease management, as the primary outcome. Secondary outcomes included the number of hospital admissions, emergency department visits, and total costs.?????????

The study included a substantial sample size of 1,268,169 beneficiaries, with a mean age of 70.4 years, of which 55.6% were female. The results reveal significant advantages of MA in physician groups taking two-sided risk over FFS Medicare. The MA group demonstrated lower rates of hospital admissions (1,119 vs. 1,234 per 1,000 person-years; P < .001), emergency department visits (200 vs. 218 per 1,000 person-years; P < .001), and total costs ($10,730 vs. $11,476 per 1,000 person-years; P < .001) compared to the FFS group.

These findings highlight the improved care efficiency associated with MA in physician groups taking two-sided risk. Lower hospital admission and emergency department visit rates indicate better preventive care and chronic disease management, resulting in reduced healthcare utilization and costs. The study's results support the original thesis that value-based care models lead to enhanced quality and care efficiency compared to traditional fee-for-service models.

Study #2 (I believe I sourced from a paper from the great Ian Duncan): Another report examined the impact of value-based contracting on outcomes among Medicare Advantage beneficiaries. The study assessed hospital readmission rates, emergency department utilization, and per capita costs.

The findings indicated a significant association between value-based contracting and positive outcomes. Medicare Advantage beneficiaries enrolled in value-based contracts experienced a 10% decrease in hospital readmission rates and a 15% decrease in emergency department utilization. Furthermore, the study revealed a $100 decrease in per capita costs among Medicare Advantage beneficiaries under value-based contracting.

These results further reinforce the original thesis, emphasizing the positive effects of value-based care. By incentivizing care coordination, preventive measures, and efficient resource utilization, value-based contracting leads to lower readmission rates, reduced emergency department utilization, and decreased costs.

The empirical findings from the studies provide substantial evidence supporting the original thesis that value-based care, particularly in Medicare Advantage physician groups taking two-sided risk, is associated with improved quality and care efficiency compared with fee-for-service models. Lower rates of hospital admissions, reduced emergency department visits, and decreased costs demonstrate the positive impact of value-based care on patient outcomes and healthcare utilization. These findings underscore the importance of transitioning towards value-based contracting to achieve better healthcare outcomes while ensuring cost-effectiveness.

Profitability Risk for Primary Care Practices amp; ACO REACH

The profitability risk associated with capitation contracts for primary care medical practices is a crucial factor to consider when implementing value-based care.

The case study (#3) titled "Profitably Risky: A Study of Medicare Capitation Contracts for Primary Care Medical Practices" sheds light on the financial implications and challenges faced by healthcare providers under capitation contracts. These findings further qualify the thesis by providing insights into the risks and considerations involved in transitioning to capitation-based reimbursement models.

The case study identifies several key findings related to profitability and risk management.

1.?? Prior capitation attempts: The study revealed that previous attempts at capitation contracts faced financial failures, with thirty-one out of 153 physician organizations in California experiencing financial difficulties between 1998 and 2001. The size of a practice plays a significant role, as smaller practices may face substantial financial exposure and risks.

2.?? Measures for financial results: The study captured net income before taxes for the practice and examined various cost factors, including external referrals, hospital stays, and emergency room visits. Service delivery metrics such as waiting times and times spent with medical practitioners and support staff were also considered.

3.?? Physician income risk measurement: Three measures of physician income risk were used, including standard deviation, the percentage of simulation runs with negative income, and the percentage of runs with income less than $150,000. The threshold of $150,000 was chosen based on the 10th percentile for salary and bonus of primary care physicians in a specific market, adjusted using the consumer price index (CPI) and physician fee schedule.

4.?? Optimal practice size: The study emphasized the existence of an optimal practice size for capitated contracts. If a practice is too small, it may face significant financial exposure and risks. Conversely, if a practice is too large, personal financial incentives for primary care physicians (PCPs) are diminished, leading to reduced healthcare utilization. Further research is needed to determine the effective size range for capitated practices.

5.?? Widespread use of capitation: The study revealed that more than 33% of physician practices had at least one capitated contract, with 20% of revenue being capitated. However, many contracts lacked stop-loss provisions, and a significant percentage of physicians were unaware of the presence of stop-loss provisions in their contracts.

6.?? Financial vulnerability of healthcare providers: The study highlighted the exposure of healthcare providers to financial risks associated with capitation contracts. It emphasized the importance of physicians having a clear understanding of the costs and benefits of carrying stop loss to mitigate potential financial risks.

7.?? Implications for MA payers: The study suggested that Medicare Advantage (MA) payers could benefit from reducing utilization among their members, influenced by the level of capitated risk borne by PCPs. Upside-only contracts were identified as providing strong financial incentives to practices, particularly for small practices and those new to capitation. The decision to carry stop loss depended on the costs and risks involved for PCPs and the MA plans.

The findings of this case study underscore the importance of carefully managing profitability risks when implementing capitation contracts. Stop-loss provisions are necessary to protect practices from extreme costs associated with extremely sick patients, while the optimal practice size should be considered to strike a balance between financial exposure and personal incentives for PCPs. By addressing these challenges, primary care medical practices can navigate the profitability risks and reap the benefits of reduced healthcare utilization, cost savings, and higher revenue under capitation.

These insights from the case study deepen our understanding of the profitability risks associated with capitation contracts and highlight the need for careful financial planning and risk management. It is crucial for practices and healthcare systems to consider the financial implications, practice capacity, and patient needs when transitioning to capitation-based reimbursement models. By addressing these factors, providers can effectively manage profitability risks while delivering value-based care and achieving improved patient outcomes.

Economic analysis and principles supporting more VBC deals justified using these core theories.

Economic analysis plays a vital role in evaluating the value and cost-effectiveness of healthcare interventions. Within the realm of health care economic studies, four types of analyses are commonly utilized:

1. Cost-benefit analysis
2. Cost-effectiveness analysis
3. Cost-minimization analysis, and
4. Cost-utility analysis

Each analysis focuses on several aspects such as costs, outcomes, and the value received from interventions.

????? Cost-utility analysis, considered the most sophisticated form of cost-effectiveness analysis, incorporates both the improvement in quality of life and/or length of life, resulting from a health care intervention. This analysis combines the evaluation of the quality of life with the duration of the benefit, measuring the value gained in terms of quality-adjusted life-years (QALYs). Utility values, which range from 0.0 (death) to 1.0 (perfect health), are used to measure the preference for a specific health state.

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????? Cost-utility analysis enables the comparison of the patient-perceived value of various health care interventions for the dollars expended. By multiplying the change in utility measures conferred by an intervention with the duration of the benefit, the number of QALYs gained can be determined. This value improvement is then combined with discounted costs to calculate expenditures per QALY gained ($/QALY), providing a measure to assess the cost-effectiveness of interventions.

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????? Among the economic analyses, cost-utility analysis holds significant importance. This analysis combines the improvement in quality of life and length of life achieved through interventions with the associated costs. It allows for the determination of the dollars expended per QALY gained, providing insights into the cost-effectiveness and value of different healthcare interventions. However, there are challenges in performing cost-utility analyses, including the controversy surrounding what costs to include and the need to standardize parameters such as utility value measurement methodology, costs, and discount rates.

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????? Discounting, another essential concept in economic analysis, accounts for the time value of money. Future costs and health benefits are discounted to their present value using a discount rate. In cost-utility analyses, a recommended annual discount rate of 3% is typically used.

To maximize the effectiveness of value-based care, it is crucial to establish a reference frame for economic analyses. Currently, there is a lack of strict guidelines for determining cost-effective interventions. Concrete guidelines can only be developed when a system of health care value standards is established. This includes standardizing parameters such as utility value measurement methodology, costs, and discount rates to facilitate meaningful comparisons across different cost-utility analyses.

By applying economic analysis principles such as cost-utility analysis, healthcare organizations can make informed decisions regarding the value and cost-effectiveness of interventions. These analyses provide essential insights into the allocation of resources, helping to optimize the delivery of value-based care.

Operationalization amp; Implementation Considerations

The practical implementation of the base payment in value-based care (VBC) should consider the contextual factors at hand, as they can significantly influence its feasibility and effectiveness. Several examples exemplify this notion. Firstly, if there is a lack of individual-level data on population risk characteristics, the implementation of a base payment that requires complex risk adjustment may not be practically feasible. Secondly, in settings where healthcare providers primarily operate in separate disciplinary "silos," finding provider groups willing and capable of assuming whole-person accountability could present challenges. Thirdly, in settings with underdeveloped IT infrastructure, the effective sharing of information among multidisciplinary provider groups for well-coordinated, integrated care might be hindered. Lastly, expanding the coverage of VBC to include larger and more diverse provider groups may impact market concentration, potentially limiting consumer choice and hindering workable competition.

These examples underscore the importance of tailoring the design of the base payment to the specific circumstances of time and place. It is essential to consider the existing data infrastructure, provider collaboration dynamics, IT capabilities, and market dynamics when structuring the VBC model. By taking these contextual factors into account, the implementation of a base payment can be optimized to ensure its practicality and effectiveness in promoting value-based care.

The goal remains to align incentives, promote comprehensive care, and improve patient outcomes. While the practical challenges should not be overlooked, they should be addressed and overcome through innovative solutions and adaptations. The thesis of our essay, emphasizing the benefits of incentive-compatible payment contracts in value-based care, remains intact. The contextual considerations highlighted in this section further emphasize the need for thoughtful design and implementation strategies to ensure the success of VBC models in different healthcare environments.

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Conclusion amp; Future Opportunities for Innovation

In conclusion, leveraging agency theory and designing payment contracts that align incentives is crucial for the success of value-based care. By promoting evidence-based care, improving efficiency, and enhancing patient satisfaction, value-based care offers a path towards higher quality care, health equity, cost-conscious behavior, and cost-effectiveness. Although operationalizing this approach requires effort, the potential benefits make it a critical shift towards population health management. Innovations, such as integrating behavioral health and psychologists into value-based care models, can further advance its effectiveness.

In embracing the framework of agency theory and evidence-based findings, value-based care can revolutionize healthcare delivery, ushering in an era of improved outcomes, reduced costs, and patient-centered care. By embracing this approach, we can pave the way for a more sustainable and equitable healthcare system that prioritizes value, quality, and patient well-being.

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APPENDIX:

Case Citations:

1.????? Cohen K, Ameli O, Chaisson CE, et al. Comparison of Care Quality Metrics in 2-Sided Risk Medicare Advantage vs Fee-for-Service Medicare Programs. JAMA Netw Open. 2022;5(12): e2246064. doi:10.1001/jamanetworkopen.2022.460649

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2.????? Citation of study: Wieck, Michael, "Profitably Risky: A Study of Medicare Capitation Contracts for Primary Care Medical Practices" (2021). Dissertations. 1102. https://irl.umsl.edu/dissertation/1102