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Contract Options for Value-Based Purchasing Innovation: Financing the Transition from Volume to Value-Based Payments with Pay for Success


By Andrew Olson, Michael McKnight

States and managed care entities have multiple options to move into value-based purchasing using shared-savings or shared-risk methods of paying for outcomes that enable Pay for Success financing arrangements.

Setting up value-based purchasing arrangements can be complicated and is inherently a risky endeavor for publicly-financed healthcare systems. The additional complications of financing them with Pay for Success mechanisms adds layers of opacity that can obfuscate the purposes of the agreements:

  1. To create a scalable state-wide framework that enables managed care entities to advance their own small-scale demonstrations of service-delivery innovations, so the state can assess their effectiveness and scale successful approaches;
  2. To raise innovation funds for the expansion of local health-related social service and other providers to meet the local needs of communities; and,
  3. To transfer the program’s risk away from the publicly-financed healthcare system and to other interested parties.

The current system is suboptimal for incenting small-scale, rapid-cycle innovation programs, allowing the state to observe what programs are most effective and scale them to state-wide efforts, or beyond:

  • Federal regulations guide and limit the state’s relationship with managed care providers regarding value-based purchasing arrangements;
  • State level contractual and regulatory limitations govern the contractual relationships between the managed care provider and the Pay for Success project; and,
  • The managed care entity cannot easily go beyond these mandates without financial or regulatory disincentives or penalties.

A scalable state-wide framework for managed care entities can be implemented that allows for managed care entities to develop value-based purchasing arrangements that align with Pay for Success financing arrangements. In so doing, the system will develop new tools and benefits to their projects allowing advances in payment mechanisms.

To enable these contracts to work, state managed care contracts can allow their managed care entities to develop value-based purchasing arrangements where they can pay for:

  1. Share savings (or risk) for reductions in total cost of care for a population;
  2. Impacts on specific outcome measures at set prices; or
  3. A combination of both.
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