Value-based contracts in healthcare

Introduction

The article titled "Value-based contracting in healthcare: What is it & how can it be achieved?" is an essential piece of literature on healthcare policy. This paper essentially discusses the concept of "value-based contracting".

Main ideas and supporting arguments

The consumer market is guided by brand perception, the price of the product, purchasing power, and the expected returns associated with utilizing such goods. One of the peculiar characteristics of healthcare goods and services is that patients are prevented from assessing the marginal value of such products and deciding if they have received adequate returns against the price paid. A consumer needs to gain sufficient knowledge to pay the total care price. If contracts are allocated a value, the clinical decision-maker can bifurcate that value into price and value.

The above reasons are critical in differentiating healthcare markets from other consumer markets. The key differences are:

a. Patients as consumers value healthcare as an input in producing health. Health can be construed as a consumption good, making it an asset for utilization and an investment in human capital. From a financial perspective, the return on investment associated with healthcare is related to reducing the risk of future medical events, thereby making preventive services and prescription drugs valuable.

b. Patients rely on healthcare professionals as agents of their healthcare decisions who ultimately determine the optimal combination of healthcare goods and services.

c. Health insurance is one of the benefits availed by the patients to account for the uncertainty of future demand for healthcare and the risk of high future expenses. This is a patient-friendly option since they would be willing to pay a fraction of the price of healthcare services for a high healthcare consumption.

The above reasons also contribute to the overconsumption of healthcare.

Underlying meaning

"Value-based contracting" is essentially tied to the term "cost-effectiveness". This summarises the health benefits a health service provider provides to a patient relative to its price.

In non-healthcare goods and services, a consumer would pay the total price in exchange for marginal benefits of consumer products. However, in healthcare markets driven by insurance, patients may overconsume healthcare since they are not personally liable for paying the total price. Thus, consumers will continue using their product if there is a price increase.

If we look at the other side of the coin, this might lead to over-consumption with uncontrolled utilization. This problem gives rise to the origin of a "value-based contract". Such a contract is defined as a contract between sellers and buyers of healthcare and is based on price coupled with an enforceable method of allocating healthcare based on cost-effectiveness.

The enforceable method is tied to the treatment protocol. This allocation is based on health benefits associated with such treatment. For example, in the case of insurance, an insurance provider buys health services depending on the demand for treatment for a specific population in a particular jurisdiction. Such cost price could be the sum of all funds collected from the patients and the amount available to be spent on care.

Concluding Paragraphs

One of the main challenges associated with attaching value to such detailed treatment protocols is that it would require much more coordination between payers and providers, which is typical in the U.S. healthcare system. A treatment protocol involves documentation of the relationship between the patient's characteristics and the expected impact of such treatment on patient outcomes.