In a previous post, I described the framework Aver uses when helping payer clients determine an episode pricing structure—illustrating that there isn’t just one, but several different pricing points that must be negotiated. All these price points hinge on the contracted price, and we provided a lot of information on negotiating the contracted price in a separate post.
In this post, I return to Aver’s pricing framework to highlight a few elements that we didn’t dive into during that first post: the gainsharing cap, the overage threshold or “painsharing” cap, and the warranty.
Gainsharing and Painsharing
Limiting reconciliation payments, both gainsharing and painsharing, is a fairly standard practice that helps to place guardrails around risk for both payers and providers. Gainsharing caps limit payments to providers for particularly low-cost bundles. Although usually not a major issue, this can help curb any potential for “gaming the system” and ensure that providers do not put patients at risk by reducing costs too aggressively.
On the other hand, overage thresholds, or painsharing limits, are often critical, ensuring that providers are not fully on the hook for rare patients with catastrophic costs. Unlike insurance companies, it is difficult for providers (specifically physician groups) to have or obtain capital reserves to cover unlimited risk. An overage threshold can also make a bundled payment arrangement more enticing to providers.
Reconciliation payment caps can be used in both one- and two-sided risk arrangements. In two-sided risk arrangements, payers and providers may wish to negotiate limits on both gainsharing and painsharing reconciliation payments. One way to establish these limits is as a percentage of the contracted price, as Medicare has done with its Comprehensive Care for Joint Replacement (CJR) model. In CJR, both gainsharing caps and overage thresholds are gradually increased during the 5-year agreement. Eventually, these limits reach 20% of the contracted price. Using our example of a $25,000 contracted price, providers would be limited to $5,000 in gainsharing per episode and would face at most $5,000 in painsharing if the total cost of care exceeds $25,000.
Another way to establish reconciliation limits is to incorporate market pricing. This may be especially attractive to a payer that used provider-specific pricing as the basis for the contracted price, and it can create a competitive dynamic among participants in the same area. For example, gainsharing may be limited to the 10th percentile of market prices and painsharing might be limited to the 90th percentile. However, using these parameters, market-based reconciliation payment limits may not be an option if the contracted price is greater than the 90th or less than the 10th percentile of market prices.
A third option is to exclude patients with very high or very low costs from the bundled payment program. Using our framework above, after completion of the episode of care, patients with total costs at or below $15,000 (the gainsharing cap) or at or above $50,000 (the overage threshold) would be excluded from the bundled payment program and providers would be paid on a fee-for-service basis. This may actually be less desirable for all parties—providers don’t receive any bonus payment for the patients with costs below the contracted price, and payers are responsible for all costs exceeding the contracted price.
One more option is to incorporate a shared savings and shared loss model. With this option, payers and providers may negotiate a gainsharing cap and an overage threshold, with providers sharing a portion of the savings or losses. Let’s consider a 50-50 shared savings/loss model under the framework illustrated above. If the contracted price is $25,000, and a bundle costs $14,000 (below the gainsharing cap), the provider would receive a $5,000 bonus, or 50% of the total shared savings above the cap ($10,000). If a bundle costs $55,000, the provider would be responsible for $12,500, or 50% of $25,000 (the total costs above the contracted price up to the overage threshold or $50,000).
I recommend that payers avoid this type of arrangement, at least on the shared savings side. It signals to the provider that the contracted price is “soft,” anchoring the provider to an artificially high payment rate. It is better to be more aggressive in setting the contracted price and pay providers 100% of the difference between actual costs and the contracted price, subject to a gainsharing cap.
Any of these four strategies for setting reconciliation payment caps—percentage of the contracted price, percentile of the market price, exclusion, or shared savings/shared loss—can also be used in a one-sided, or gainsharing only, risk arrangement. Just use the strategy to set the gainsharing cap, there’s no need for an overage cap.
Extending Risk Beyond the Traditional Episode
As I mentioned in a previous post, payers and providers may wish to exercise the option of extending the episode window to account for a narrower slice of risk by using a warranty. In practice, this often spans 365 days post-discharge/procedure but covers fewer services.
For example, let’s say we have a $25,000 contracted price for a knee replacement based on PROMETHEUS logic with a 30-day pre-procedure window and a 90-day post-procedure window. The pre- and post-procedure windows include a variety of clinical costs, such as imaging, physical therapy, occupational therapy, skilled nursing facility and home health care. The post-procedure window also includes all costs related to the following episodes: Pneumonia, Stroke, AMI, CABG, PCI, and Pacemaker.
For an additional $2,000 payment, a provider may agree to accept risk for an additional 275 days for knee-related conditions only, such as infection, implant failure, or other complications related solely to the knee. For a surgeon who has done hundreds, if not thousands, of knee replacement surgeries and who has a very low rate of knee-related complications in the year following surgery, an additional payment may well be worth accepting some incremental risk.
Gainsharing, painsharing, and warranties are nuances in bundled payment pricing that can make a program more attractive to both payers and providers. Once a bundled payment program is established, payers may consider launching into reference pricing and/or value-based payment design, which Elaine will consider in our next post.
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