The Essentials of Risk-Based Contracting

It is rare to read a paper that has so much relevant information that even on the fourth reading, there is something new and applicable. This happened to me recently.

I was sent The Essentials of Risk-Based Contracting: Avoiding Financial Missteps in Structuring Contracts by The Advisory Board Company. I strongly recommend anyone who is working on innovative contracts to read it. You can access the full document from The Advisory Board Company.

It’s a great summary of the common pitfalls in risk based contracts from a provider perspective. Being a US publication it requires some translation of their findings and recommendations into an NHS context, of course.

Initially I read it with some trepidation as I have been working on commercial arrangements for alliance contracts. Armed with information from risk sharing contracts in other sectors and a good working knowledge of NHS and council finances I have felt mostly comfortable. I’m aware though that this is a new departure and there are, no doubt, mistakes to be made. It was enormously helpful and reassuring to read that we are approaching most things in the recommended way. Or at least putting in place measures to avoid the pitfalls.

For instance the paper cites ‘Create an infrastructure for collaboration’ as a strategy to avoid ‘Ambiguous Breakdown of Responsibility’. I find it hard to understand how anyone can think that you can deliver an integrated system without regular dialogue and a new way of working together. Yet time again we still see integration initiatives bolted onto existing ways of working. Our Partnership Boards, Fora and similar are just talking shops unless they have financial responsibility and risk. That means extracting financial responsibility and risk from one-to-one commissioner-provider relationships. Not easy.

Another recommendation relates to prospectively agreeing targets in order to avoid ‘Detrimental Structure of Incentive Payments’. Again it sounds obvious but in the rush to sign contracts without properly baselined performance information, it can happen. We incorporate a process whereby all parties have a say in the setting of the thresholds in the performance spectrum so there is good understanding and buy in to the intent as well as the detail.

There is an interesting section about risk sharing contracts being on a progression of sophistication from Pay for Performance to Capitation. The authors argue that the actuarial capabilities needed to succeed with capitation contracts is lacking in many providers. If that is true for US providers, it is bound to be true for UK ones. There is a very helpful diagram of the capabilities required for the various risk based contracts: Pay for Performance, Care Co-ordination, Upside Shared Savings, Downside Shared Savings and Capitation. Don’t rush to capitation if the capabilities are not there – that is the message.

I see it is very positive that we are trying out various approaches to innovative contracts. Lead contractor ones, capitation ones, outcomes based, value based and alliances. There are many overlaps and some important differences. We must continue to share the learning, good and bad, in order to improve and refine. Evaluations and research such as that developed by The Advisory Board Company are invaluable.

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