Commercial risk will be a critical catalyst of progress – it’s complicated, but is it possible? We think so.

Blog Post

71% of providers are interested in risk-based deals with suppliers—so why are they still so rare?

October 21, 2019

    Last year, we offered our take on why risk-share agreements, also commonly called outcomes-based contracts, are proposed far more frequently than they are executed. We recently re-surveyed health system supply chain leaders on the topic and found that many of the challenges we highlighted 18 months ago are still top of mind for two reasons:

    Nov. 14 webinar: The supplier’s guide to working with VACs

    1. These are complex deals that require considerable investment of human and financial resources; and

    2. Suppliers don't always take on enough risk to make the return worth that investment.

    But while conducting our current research on value analysis, we spoke to one supplier organization that, despite these headwinds, doubled down on risk and executed a successful agreement. Not only has the organization improved outcomes for the at-risk measures, but its investment in data collection has opened up a broader partnership that has shown benefits beyond procedural outcomes.

    In Part 1 of this two-part series, we'll provide an update on provider-supplier risk-sharing as it stands in 2019. In Part 2, we'll tell you the story of how a provider-supplier pair went at risk for patient outcomes.

    Despite low pick-up rate, health systems still interested in risk-sharing

    Generally speaking, risk-share agreements in which suppliers take on financial accountability for outcomes are still quite rare. While many supply chain leaders at provider organizations indicated that they had signed product failure rebates or warranties, far fewer have signed upside/downside contracts tied to patient outcomes, operational efficiency, or departmental performance. 

    However, despite the fact that these agreements are few and far between, providers are still interested in the concept. Seventy-one percent of respondents told us they were either very interested or somewhat interested in pursuing risk-share contracts with suppliers in the future. The top three factors driving that interest were:

    1. Belief that suppliers should take on more cost-quality performance risk (held by 91% of respondents);

    2. Opportunity to improve clinical quality (held by 68% of respondents); and

    3. Signal of greater time and financial investment in us by a supplier partner (held by 32% of respondents).

    Notably, "ability to gain favorable contract terms" came in as the least-common interest driver, selected by just 18% of survey respondents. Writ large, we think that drives home the fact that providers view these agreements as an opportunity to form a mutually beneficial partnership, not an opportunity to skimp on payment.

    If both parties are interested, why aren't these deals more prevalent?

    Reasons for avoiding or backing out of these contracts vary by market and individual organization; still, our quantitative and qualitative research highlights three overarching ideas that underscore why risk-sharing has been more talk than action.   

    First, both parties have to agree on a set of metrics that are measurable, meaningful, and able to be directly influenced by the supplier. That's hard to do. In conversations with provider executives, many point out that it's difficult to isolate whether the use of any single product can cause a particular outcome. We hear comments like, "the outcome might have been correlated with the product, but it may have also been related to clinician training, the underlying protocol, or sheer luck."    

    Second, a successful agreement requires significant data extraction and analysis, and most providers don't have the necessary resources for it at present. Of those respondents who were interested in risk-based contracting, 59% noted that a top hurdle is not having enough full-time employees (FTEs) for analysis or the local sourcing process, and 41% cited their inability to collect the performance data in-house. Of those providers who were not interested in risk-based contracting, 83% said it was primarily because they lack the staff to execute on those deals.

    Third, these deals require a long-term commitment from both parties in exchange for uncertain benefits. Both providers and suppliers tell us it can take months to get the appropriate tracking and reporting infrastructure in place; then, it takes many more months, if not a year, to collect data that can tell a meaningful story about outcomes. After all that, these deals may not result in big savings for the provider or revenue boosts for the supplier. Those organizations looking at these agreements as a play for dollars may be disillusioned by how they actually pan out.

    Moving past the impasse

    Taking stock of this landscape, it's striking that there is simultaneous interest in the underlying idea of risk-based contracting alongside genuine concerns about the reality of implementing one of these agreements. It begs the question: How, if at all, will organizations bridge that gap moving forward?

    In two weeks, we'll share how one provider-supplier pair executed a successful risk sharing agreement. In the meantime, we'd love to hear from you on the topic. If you have any risk-share successes, failures, or general questions, please don’t hesitate to reach out to me at GoldmanJ@advisory.com.


    Nov. 14 webinar: The supplier’s guide to working with VACs

    We’ll explore how VACs have evolved over the last three years, where health systems may look to their committees next, and what factors may help or hinder that progress for any given organization.

    Register Now

    Have a Question?


    Ask our experts a question on any topic in health care by visiting our member portal, AskAdvisory.