The Healthcare Hub

New Healthcare Contracting Challenges With Trends in Payment Models

Wednesday, September 13, 2017

The healthcare industry is notable for complex contracting process, but recent trends in payment models and the continued volume of mergers and acquisitions are bringing new challenges. Overall, these developments emphasize the need for a holistic view of healthcare and for identifying a total cost of care, which is critical for success with a bundled-payment model. These external forces are driving changes internally for supply chain earlier in the process in managing contracts.

A few of the trends occurring in contracting today:

  • A wider variety of contracts are being managed within supply chain
  • There are more localized agreements for physician preference items (PPI) and pharma
  • IDNs are viewing PPI and pharma as opportunities to drive compliance initiatives and contracting strategy
  • Movement toward more standardization in contracting agreements
  • Multi-year agreements of 3-5 years and even longer
  • Alignment of hospital spend across departments such as IT and services
  • Alignment of incentives addressed through pay for performance and physician payment models based on outcomes

The trend toward standardization and longer term agreements represent a more strategic relationship between manufacturers and healthcare systems. And, this focus on more standardized contract agreements helps to define total-spend values which is necessary to capture with the move to bundled-payment models.

  • Increasing emphasis on outcomes, quality and risk sharing
  • More contracts coming under bundled-payment model

The bundled-payment model requires providers to assume financial risk for the cost of services for treatment as well as associated costs with preventable complications. With outcomes impacting reimbursement for providers influenced by factors well beyond the treatment event, the true value of the supply/product needs to be considered.

When calculating the true value cost is important, but a holistic view includes metrics for quality and outcomes (shortened length of stay, readmission rates, etc.). Sometimes increasing the supply cost is the way to drive down total cost based on the associated costs of the supply. Supply chain working with clinicians provides understanding for which products perform best which can be instrumental in reducing associated costs. This information can impact contracting negotiations with requests for risk-sharing agreements in the event that agreed upon milestones are met or not.  

We are only at the beginning of bundled payment programs with likely adjustments to come over time — the ultimate goal being to improve the quality of healthcare and reduce costs. Adjusting our contracting strategy as we go will play a pivotal role in accomplishing these goals.

View a GHX webinar with more detail on the traditional versus new way of determining case cost with guest Mike Schiller, Senior Director of Supply Chain for AHRMM.