Contracts Are Essential

Submitted by hci3-usr on Friday, October 14, 2016 - 07:35

Newtown, CT – October 14, 2016

This year’s Nobel Laureates in Economics were rewarded for their important work on the effect of contracts, and the incentives baked into those contracts – As we know, the base contract enforced today between payers and providers is to pay a fixed fee for a specific service. And we don’t need to win the Nobel Prize in Economics to decipher the expected effect of such a contract. But what the laureates remind us is that the elements of those contracts are perfectly designed to generate the current results. That’s because the action is controlled by the agent receiving the benefit, is easily observable and the financial gratification is almost immediate. In addition, the signals are easy to interpret and can be managed to great effect, for example by continuously favoring the provision of services that generate higher revenue. There is no concept of value in a fee-for-service contract, and the addition of often vague and limited measures of quality of care as add-on incentives or modifiers simply don’t counter the fundamental and strong base signal. This week we published an Issue Brief that illustrates the effects of these contracts on children and adults with asthma. The upshot is that more than 60% incur a potentially avoidable complication every year, close to 30% are given low-value services, and close to 70% fail to get at least one of the recommended services for the proper management of their condition. Yes it’s depressing, but there is something we can do about it.

What this means to you – We estimate that every year we waste close to $40 billion in avoidable complications and avoidable services because of inadequate management of people with asthma. And this is an area where the numbers are proportionally worse in Medicaid than with the commercially insured. These numbers pile up on top of other data that are published year in and year out and that continue to paint the same picture, that of a system that wastes blood and treasure, impoverishing and hurting the people it claims to serve. And the culprit, at least if we believe in the work of this year’s Nobel Laureates, is the contract between payers and providers. So why aren’t these contracts changing? A recent survey by Premier indicates that providers are more eager to change these contracts than payers, and that’s the continuing puzzle that must be solved. In states like New York, Tennessee, Arkansas, and a few others, the plans aren’t given a choice anymore, at least in Medicaid, and that has already produced good effects. But what about commercial health plans? What’s stopping them? And more importantly, why aren’t employers increasingly making the shift away from fee-for-service contracts a condition for entering into their own contracts with third party payers. Contracts matter, and employers can create a very powerful incentive for their TPAs to change the way they do business, but most haven’t. And until they do, they, and their employees, will continue to pay the price for the lack of action. So if you’re the CEO of a company, next time you complain about the increase in employee and employer health care costs, simply look at yourself in the mirror and know that it’s your fault and that you can change it by changing contracts.


Francois Sig