Show Me The Money: Supplier Risk Sharing and Value-Based Reimbursement

A recent industry article in Bloomberg outlined how Medicare Programs like Shared Savings, and Bundled Payments are affecting more than traditional providers. Somewhat to the dismay of segments of the device industry, manufacturers and service providers are becoming ensnared in the same net. As payers like Medicare and United Healthcare and the “Blues” demand quality outcomes as conditions of full payment, device or drug performance has been left alone until now. Providers are initiating demands that device and drug makers issue broad guarantees regarding the impact of their solutions.

Research we conducted showed that the majority of cost variation, and therefore savings opportunities, happen after the acute care episode and procedure. Post procedure complications and device failure cost the healthcare provider dearly. Penalties, lost payer incentives and bonuses, cost overruns, and poor public ratings result from this post-procedure area. Even though most patients do not suffer complications or require revisions, those that do require focused care and the provider will typically lose money on that case.

This means that if you make a drug or device, market it, or sell it, your best customers have a significant incentive to share their downside risk with you. Is this the beginning of a money back guarantee on a pill or pacemaker? It’s difficult to tell, but some manufacturers are venturing into the space with very bold proposals. These manufacturers are typically not the dominant player with the largest market share; instead they are aspirational players, or new players in the industry.

The manufacturers-suppliers to the healthcare industry need to consider a few things, including a fresh look to the possibilities that provider risk sharing and value based payments could offer.

1. Risk sharing contracts as “two-sided” agreements, where downside (losses) and upside (gains) are shared. Two-sided contracts are very rare. In practice, most of these contracts require the manufacturer to honor a market competitive price, and insure against downside losses. In exchange for these concessions, health systems will commit substantially all of their volume to the partner supplier. Upside sharing is rare, and there may be regulatory-legal reasons prohibiting this kind of share.
2. When considering downside risk sharing, manufacturers need to understand the usage of their solution, and the practical and likely potential hazards a bad contract would create. Most of the time, clinical education teaches the physician how to use a device, and once educated, the doctor is left alone. If a downside risk share is being contemplated, updated and periodic proficiency testing may be required. That way the company can safeguard against technique dependent issues.
3. A risk sharing contact should be clear about “trigger events” that would cause the supplier partner to pay the provider partner for the poor outcome. Typically these agreements follow a specified risk format, where certain conditions are specifically stated as outside of the performance conditions. Providers have an incentive to keep the exclusions of trigger events as narrow as possible. Best practices in this area suggest that the risk assumption be defined in the opposite direction; that means that the manufacturer excludes all conditions as trigger events except for those explicitly listed.

In our next installment we will describe considerations of risk-sharing regarding the shift toward ensuring patient outcomes through provider and supplier partnerships.