Payer-Provider Contracting in a Value-Based Care World

Historically, contract negotiations between payers and providers have been based on a mostly adversarial, zero-sum approach that hinged on typical tactics: which side has the greater deal leverage, who has the better lawyers or advisors, who has the better-known brand, etc. Why? Well, at least in part because traditional fee-for-service (FFS) arrangements were never designed or intended to align the interest of payers and providers. In many ways, FFS arrangements pitted payers and providers against one another and at cross-purposes. Providers generate revenue by conducting procedures and checking off CPT® codes, and payers look to reduce costs by pushing back and denying coverage. Prices for procedures remain a secret as a way to increase profits leading to a bad deal for patients. This practice is so ingrained that the AACP website touts, “integral to billing medical services and procedures for reimbursement, CPT® is the language spoken between providers and payers.”.

Lost in all of this back-and-forth is any idea of payers and providers working together to pursue something purposeful like Triple Aim: that is, seeking to work in concert to reduce costs, deliver better patient care and outcomes, and improve overall population health. This is where value-based-care (VBC) arrangements offer a new landscape that requires a new approach to payer-provider relations and contract negotiation.

Value-Based Care Improves Quality and Reduces Cost of Healthcare

Broadly speaking, VBC arrangements focus on providing “value” in both a quantitative and qualitative sense. As opposed to FFS, which is based primarily on delivery and utilization of procedures, VBC payment arrangements “seek to hold payers and providers accountable for the quality and costs of healthcare provided to their patient population,” and encourage payers and providers “to collaborate to achieve these goals.”

Value-based care is a broad concept with a number of aspects, including those mandated by law for federal and state programs such as Medicare and Medicaid, and applicable to accountable care organizations (ACOs). However, VBC payment arrangements are growing at a fast rate commercially, particularly in the area of specialty practices such as orthopedics, cardiac, maternity, radiation oncology, etc. In these areas, opportunities abound for payers and providers to work together to achieve both cost savings and drive better outcomes. However, this will require true collaboration between payers and providers both contractually and beyond.

Value-Based Care Requires a Fundamental Shift in the Way Contracts are Negotiated

For example, consider an arrangement where the payer and provider agree to share savings obtained in connection with a knee replacement. In VBC terms, the provider will agree to be paid a single amount to pay fully for the entire “episode of care” – from the initial consultation pre-surgery, before and during the procedure, and post-op and following for rehab and physical therapy. The provider’s payment will include not only the direct provider costs but all of those “downstream”: the surgery center or hospital, the anesthesiologist, the nurses, the joint replacement implant, the physical therapist, sutures, and bandages! The payer and provider will agree, and the patient will know the cost up-front or “prospectively”. In the same way, you can buy a round trip ticket from Delta to fly to Washington, D.C., and back next week for $587.20, and know that Delta will take care of the plane, the gas, the pilots, the landing fees, even the ”free” onboard snacks (and that I won’t get some unexpected bill in 3 months for mystery fees or charges), the surgeon will quote a price up front and the insurance company will agree that they will pay it. The doctors can then focus on getting the best outcome.

In order for the provider to agree to a prospective fixed price and the payer to agree to pay it, they will need to collaborate in a number of ways, and the contract between them will need to reflect that collaboration. The payer and provider will have to share patient data, not only about the patient but significant amounts of historical data, so that the correct price and the risk can be set by both parties. They will need to collaborate on their respective goals for cost and patient outcomes, as any “sharing” of “savings” will depend heavily on the quality and accuracy of both. They will also need to come to a mutually beneficial agreement with respect to what could materially affect the costs and pricing of the agreed-upon bundle, so they can together and separately make their accounts for any outlying circumstances and to protect against or mitigate any losses. Lastly, they will need to be collaborative in managing the patient relationship to ensure the best outcome, which, in a VBC setting, will (unlike FFS in many ways), be in their collective best interest and shared responsibility.

The collaborative approach necessary for successful VBC contracting is similar to the early hyper-growth days of Internet e-commerce when the rules were few, and both sides were looking to explore (and exploit) a new way of doing business. It was truly a rising tide-lifts-all-ships scenario, and it is playing out again with the growing VBC frontier. The potential to truly embrace the goal of patient-focused care with better outcomes at more reasonable costs is very intriguing and exciting!


[1] Accountability and Collaboration in Payer-Provider Relationship, David E. Kopans, Jones Day; Health Plans Contracting Handbook: A Guide for Payers and Providers, Eighth Edition, American Health Law Association (2021)

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