The Bridge

Your 2018 pulse check on provider-supplier risk-sharing arrangements

by Brandi Greenberg and Matt Pesesky

What's the current state of provider-supplier risk-sharing arrangements? And what do Advisory Board experts anticipate from these deals—often called outcomes-based contracts (OBCs)—in the near-term future? These are member questions we have tried to answer through webconferences, blog posts, insights articles, and conversations with many of you and your colleagues.

We have been following the trend for years, but when we recently assembled a list of known risk-sharing partnerships, we gained a greater perspective as to why some agreements have succeeded and why these arrangements remain quite rare. Below, we've summarized our thoughts into five key takeaways.

1. Providers' slower-than-expected migration to payment risk is limiting the uptake of outcomes-based contracts

Risk-bearing provider organizations (e.g., those participating in ACOs or bundled payment programs) have a strong financial incentive to improve care quality in ways that lower the total cost of care. Such payment models encourage providers to consider cost and/or quality implications beyond a single procedure or inpatient stay. Care decisions (and product choices) that measurably reduce the likelihood of post-op infections, adverse drug events, or readmissions will win out—even if the products associated with these decisions may increase short-term procedure or DRG costs.

Unfortunately for suppliers, the slower-than-expected shift to payment risk has limited many hospitals' and health systems' incentives to pursue OBCs. Even if a manufacturer's products can lower downstream costs, providers with significant fee-for-service business still have little financial incentive to do much more than hammer vendors on price and volume.

2. These deals are incredibly complex to negotiate and manage

Put simply, outcomes-based contracts are very difficult to design. Part of that difficulty may lie in their novelty, but the larger challenge lies in the data pulls, analytics, and performance-based financial adjustments that aren't needed in standard agreements. Both providers and suppliers need engagement and buy-in from a wide variety of internal stakeholders—moving beyond physicians, administrators, supply chain leaders, and sales executives to also include population health managers, financial analysts, health economics and outcomes research and actuarial consultants, legal advisors, and more.

In exchange for this time and resource investment, health system leaders want a bespoke agreement that is customized to their facilities and needs. This further complicates negotiations and ongoing contract management.

3. For providers, there is often a low return on this complexity

Many proposed risk-sharing agreements get bogged down in the negotiation phase because, at least in most of the OBC proposals we've seen, the potential provider upside is too limited. There simply isn't enough of a financial return on the time, data, and "leaps of faith" required to close such deals. In many instances, there isn't enough measurable difference between comparable products to yield a visible clinical and financial upside for providers choosing to use one product over another. The dollar gains from avoiding a post-surgical complication or eliminating an avoidable readmission often require very high volumes within a singular procedure in order to make financial sense, thereby limiting the market for OBCs.

Fixed-cost contracts structured to limit providers' financial exposure during highly-complex outlier cases (e.g., supplier limits cost per procedure to $X, regardless of how many stents or wires are required) may be a notable exception here, but even in those instances, the pool of health systems regularly performing such high-variability procedures is typically limited to AMCs and Level I trauma centers.

Further complicating matters, most publicly-traded manufacturers must carefully limit their own risk exposure, and as a result, the dollars that most suppliers will put "at risk" are rarely high enough to entice providers into labor-intensive, complicated contracts. For the vast majority of health system service line and supply chain leaders we've interviewed, the upside potential in OBCs simply isn't yet worth the added time, labor, and stress.

4. The learnings from OBCs aren't very scalable

In reviewing our own knowledge-store of risk-sharing arrangements, we've learned that "if you have seen one risk-sharing contract, you have seen one risk-sharing contract." The deal terms, data requirements, and governance structures vary widely. Moreover, most are confined to a narrow procedural category and affect a single group of specialists within an IDN, so even if the vascular team at a hospital successfully managed an OBC with one supplier, the clinicians and service line leaders in the hospital's orthopedic group will still be starting from scratch.

Unfortunately for suppliers, such procedural silos—when coupled with organizational differences and regional variation—conspire to further slow the interest in and adoption of OBCs. Ironically, one-size-fits-all contracting models are unlikely to succeed, but the flexibility required to secure OBCs limits the scaling of insights and infrastructure necessary push the market toward a tipping point of widespread adoption. At least for the foreseeable future, we continue to believe that even the most progressive suppliers will track their count of risk-sharing arrangements in single digits (or maybe 10s) rather than in 100s.

5. Our take: Use risk-sharing arrangements to foster innovation and trust

So, how should suppliers move forward? At this point, we continue to hold the somewhat contrarian view that risk-sharing deals between providers and suppliers are unlikely to supplant more traditional contracting approaches any time soon. But, that doesn't mean we think risk-sharing is a bad idea. From the success stories we've tracked, the upside lies in bolstering trust, collaboration, and a foundation for creative partnership with a handful of progressive provider organizations.

Manufacturers interested in pursuing OBCs will be well-served by setting realistic expectations about the short- and long-term gains of such deals—as well as the total number of risk-sharing provider partners they're likely to engage in the next 1-3 years. Those pursing OBCs as a kind of Google-inspired "Genius Hour" activity—enabling them to test new ideas, work across silos, and iterate rapidly – are best positioned to achieve their goals. Those pursuing OBCs with fixed terms and aggressive targets will likely face many of the challenges we've outlined above.

For the near-term future, our advice to members is to be flexible and creative with your contracts, focus OBCs on products tied to measurable cost and quality outcomes, but remain humble in your financial expectations.

Build in buffers for multi-stakeholder discussions and negotiations to take much longer than you'd otherwise expect. Recognize that a successful risk model in one procedural category may not translate to another product category. And strive to focus your discussions on trust-building, transparency, and collaborative problem-solving, even if the risk agreements don't materialize. By taking this approach, you can improve your reputation, relationships, and readiness for alternative contracting scenarios if and when the market evolves.

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