Aligning Contracts with Incentives Policy

People, including healthcare providers, typically behave the way they are incentivized and incentives to behave. Healthcare administrators, payers, and regulators spend a significant amount of time working to align incentives with desired behaviors and outcomes.

Consider the following hypothetical scenario:

You are the head of physician contracting at a small community hospital. The physicians who are employed by the hospital are paid an annual salary without any quality or outcome incentives. In contrast, area physicians with hospital privileges who are employed by medical groups are compensated for quality outcomes and are not paid an annual salary. Your boss, the director of contracting, has asked you to evaluate whether the hospital should shift its employed physicians away from an annual salary model and into a model that incentivizes quality outcomes.

How would you approach this request? What additional information do you need in order to evaluate what the hospital should do? Consider potential competing stakeholder values. Create a stepwise plan to respond to the director’s request.

Learning Objectives
Analyze the impact of incentives on healthcare provider behavior
Create a plan to address contract incentives, alignment, and quality outcomes
Analyze the role key stakeholders should have in shaping health policy
Develop a strategy to resolve conflicts among stakeholders
Reading and Resources
Required Resources
Textbook: Essentials of Health Policy and Law, Chapter 12
This chapter identifies major aspects of the healthcare quality environment. It discusses licensure, accreditation, medical errors and malpractice, and medical liability. Chapter 12 also outlines some recent efforts to promote better healthcare. Use this reading to help build a foundation for the rest of the module.

PDF: Oregon’s Health System Transformation—2013 Performance Report
This report explains how Oregon’s Medicaid coordinated care organizations performed on quality measures during the 2013 performance. Oregon is currently experimenting with Medicaid reform (via an 1115 waiver) and working to align Medicaid managed care payments with quality incentives to promote quality outcomes.

This report is a scorecard of early efforts. As you read this report, consider whether the outcomes selected by the state of Oregon to demonstrate improved health are accurate indicators of improved health.

PDF: Does Medical Malpractice Deter? The Impact of Tort Reforms and Malpractice Standard Reforms on Healthcare Quality
This report analyzes the relationship between tort reform and malpractice standard reforms on two measures of healthcare quality. Analyze how malpractice litigation and tort reform can create (or not create) de facto healthcare quality standards.

It is important to consider whether regulation is aligned with incentives and whether regulation will produce desired health outcomes. Misaligned regulation and incentives creates outcomes that can be hard to predict and correct.

PDF: Medical Staff Bylaws Template—West Virginia
Medical staff bylaws are an often-overlooked method of establishing quality standards. You should review this template as an example and not necessarily as a best-practice document.

Many policy makers have no familiarity with medical staff bylaws or other vehicles providers use to regulate healthcare quality.

Article: The Medical Peer Review Privilege: A Linchpin for Patient Safety Measures
This 2002 article provides an introduction to medical peer review. Peer review is a process that allows physicians and, to some extent, administrators, the opportunity to review physician performance in confidence. Think about this type of quality regulation as one of many ways to set and enforce quality standards.

Article: Blue Cross Blue Shield of Massachusetts The Alternative Quality Contract
This is one example of a payer’s attempt to align financial and clinical goals. Use this document to consider the impact of incentives on provider behavior.

It may help you think about the options in this module’s discussion.

Article: Is Your Physician Compensation Plan Aligned With Value-Based Reimbursement?
This is an industry article that sets out six steps for an organizational leader to transition to a “performance-based physician compensation model.”

This is just one example of ways to align incentives to promote health outcomes. Use this as one example to consider as you draft your discussion posts this module.

Module Lecture

The purpose of Module Six is to introduce you to healthcare quality, quality metrics, and the alignment of incentives to promote quality outcomes. Pay careful attention to the variety of ways that policy makers and industry stakeholders can influence provider behavior and health outcomes. While medical malpractice litigation and tort reform get much of the public’s attention in this arena, other types of quality regulation should not be forgotten. The textbook outlines the role that accrediting bodies, licensing bodies, regulatory entities, and payers play in influencing quality standards. As you read Chapter 12 in the textbook, think about which healthcare stakeholders affect healthcare quality standards in which setting.

Aligning Incentives
Aligning incentives to promote quality outcomes is a challenge and an opportunity. This module illustrates why it is important to assess stakeholders, their needs, and potential value conflicts. People who are consistently successful at aligning incentives to promote quality outcomes are skilled at assessing human behavior, motivation, real-world challenges, and best- and worst-case scenarios. They also work in environments that value system transformation or in settings where they can apply enough leverage to push for change.

Aligning incentives to promote quality outcomes is one of those concepts that sounds wonderful in theory. After all, who would not want to align incentives to promote outcomes? What is the downside? Consider, however, the opportunities for disagreement. In order to align incentives to promote outcomes, parties must come to some kind of agreement on the following:

What outcomes should we promote? Who chooses the outcomes? Are the outcomes forced upon us?
How will we measure the outcomes? How often will we measure them? Who should pay for the cost of measurement and evaluation?
If we agree on metrics, how should we connect them to provider behavior? Should the metrics appear in contract?
What kind of incentives should we test? Should we use a withhold, bonus, pay-for-performance structure, salary payments, or some combination of incentives?
Once parties agree on outcomes, metrics, and incentives, they must consider potential issues with implementation:

Can we afford the incentives necessary to change behavior?
Are there any competing factors that will change the relationship between incentives and behavior?
What is the market expectation? Do we compete with any entities that can make a better deal with providers or payers?
Is there a sufficient pool of providers willing to participate in this arrangement?
Has our lawyer reviewed the incentives to determine if they are legal? (Remember the lessons from Module Five.)
How will patients be affected by these incentives? Will patients be affected in a good way?
What happens if the outcomes are poor?
How much time should we allow for this experiment in order to determine if it “works”?
Next, think about the potential settings in which these types of discussions can take place:

Modifying medical staff bylaws
Changing credentialing standards for providers
Adopting new rules for licensure
Negotiating contracts with payers or managed Medicaid plans
Negotiating a corrective action plan with a regulator or a payer
Recruiting a new provider
Negotiating a merger or other business transaction
Considering whether to submit for a grant or pilot project
These settings, value conflicts, and competing needs (including provider livelihoods) can lead to protracted debates and power struggles. These negotiations can also lead to exciting new experiments, improved health outcomes, increased provider engagement, and health system transformation.

What’s Next?
Once providers, payers, and others negotiate an incentive and agree on certain health outcomes, someone has to implement changes and experiment with the new system. This could mean changing provider contracts, embarking on a media campaign, changing referral patterns, adopting new technology, evaluating provider work differently, or training new staff. Many attempts to align incentives to promote quality outcomes fall apart at this stage. Perhaps the negotiators failed to consider a market condition. They might not have accounted for the time necessary to make changes. A variety of influences can cause new incentive experiments to fail before they even get off the ground.

For those incentive experiments that do gain some traction, stakeholders may struggle to find the analytic support to evaluate their work. Providers may be overburdened with too many reporting measures or competing incentives. Some stakeholders may lose interest or turn to other tasks. Even successful incentive programs may take years to influence health outcomes. At the end of the day, remember that health system transformation is slow. Change takes time.

One Size Does Not Fit All
Each negotiation is different because stakeholders change, needs evolve, and power dynamics shift. The regulatory landscape changes. Just as the Affordable Care Act changed expectations for provider performance and health outcomes, another policy or legislative scheme is sure to affect healthcare and health policy in the future. The most successful organizations and providers work to stay ahead of change and embrace the opportunity to improve their work.

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