Unlocking the value of Accountable Care Organizations by choosing the right contractual approach

Posted: 02/28/2017 - 09:34

"There has got to be a better way!" That’s the common lament from all aspects of the healthcare industry from providers, payers, and patients alike when talking about the relationship between those three parties. It not unusual to hear complaints like, “misaligned financial incentives”, the “tyranny of the 15-minute visit”, or it’s an “unsustainable system”.

Accountable Care Organizations (ACOs) are being hailed as that better way by establishing a system of coordinated care that shares in financial risks and rewards to eliminate current problems with existing payer, provider, and patient relationships. Coordinated care is considered “the most promising path toward financial sustainability and away from alternatives that shift costs onto patients, providers, and private purchasers.”

ACOs hold providers and payers jointly accountable for maintaining the health of their patients, giving them strong incentives to cooperate and save money by avoiding unnecessary tests and procedures. When an ACO succeeds in both delivering high-quality care and reducing the cost of that care below what would otherwise have been expected, providers can share in the savings.

While ACOs offer a great deal of promise, they will face many of the same problems plaguing traditional healthcare relationships if they are structured poorly. Fortunately, ACOs can learn from other organisational models ranging from governments, to non-profits to commercial enterprises that have been successfully working under similar relationship structures. These models can provide the necessary guidance for negotiating and structuring a collaborative, ACO risk-reward relationship. This article will highlight a collaborative process for negotiating ACO agreements. (NB: We’ve written a white paper which offers those who wish to develop successful ACO agreements a more thorough discussion of a proven negotiation and contracting process that has been successful in properly structuring such relationships.)

A History of A Lack of Trust

Forming these commercial ACOs with commercial payers has been a cultural shift for providers. The Chartis Group describes the traditional provider-payer relationship as arms-length at best, with interactions limited to negotiations over reimbursement, coverage policies and conflicts related to denied claims and overpayments.

The American Medical Association indicates that because of their prior experience with health insurers, some physicians may not be sanguine about the possibility of a win-win ACO collaborative with a health insurer.

Charting A Value-Based Path Forward

Therefore, getting providers to trust the commercial payer and willingly enter an ACO arrangement is critical for success. In fact, the American Medical Association’s Practice Management Center advises that a commercial payer cannot secure the requisite physician buy-in, until the following are in place:

  1. The physicians are involved in selecting and/or developing the quality and cost effectiveness metrics;
  2. The methodology, including any risk adjustment mechanisms, the health insurer utilises to determine physician performance is fair, statistically valid and fully transparent;
  3. Physicians have access to the data that the health insurer utilises to evaluate performance;
  4. Physicians receive timely and readily understandable feedback concerning performance with professional assistance from respected peers when improved performance is desired;
  5. Physicians have an opportunity to appeal performance determinations that they believe are inaccurate; and
  6. Physicians have an opportunity to appeal performance determinations they feel are inaccurate.

Each of these points can be addressed by a more relational contracting model or Vested™ approach to developing highly collaborative outcome-based relationships, such as an ACO. A relational contract is based upon a business relationship built on trust between the parties. While, there still exist explicit traditional operational and legal terms and conditions documented in a contract, the difference in a relational contract is that there are also explicit and implicit terms, conditions and understandings which guide the parties’ behaviours towards each other.

A relational contract stands in contrast to the more traditional or classical contract. Traditional contracts are arm’s-length agreements meant to get the best “deal” at a fixed point in time. The party with the most power and least to lose is often victorious. When purchasing widgets that are identical with plenty of fair market competition, arm’s-length transactions can provide the best price and value to both the buyer and the seller. Traditional contracting approaches become less suitable as the business outcomes both parties are trying to achieve require a relationship built on high levels of cooperation, such as in providing and paying for medical care.

Building and Maintaining Trust

Trust exists when a person or organisation has confidence in a positive result even when the issues and outcomes are out of their control, and there is risk of a potentially negative consequence. Partners also trust one another when neither side has reason to expect that it will be taken advantage of, and whenever possible, will even do things that advance the other’s interests.

Because trust is so fundamental to a commercial ACO’s success and a history of opportunism such a real threat to success, negotiators should establish processes centred on six social norms. The six guiding principles are outlined in Getting to We: Negotiating Agreements for Highly Collaborative Relationships. Agreeing on a set of principles reduces the possibility of opportunism, leading to a fairer and balanced workable decision making process.

According to the authors of Vested Outsourcing: Five Rules that Will Transform Outsourcing there are five rules all highly collaborative relationships follow when establishing business relationships. The conversations that arise from following these rules help the parties work out those often-nebulous relationship rules of conduct. These rules were developed from research conducted at the University of Tennessee:

  1. Focus on outcomes, not transactions.
  2. Focus on the what, not the how.
  3. Agree on clearly defined and measurable outcomes.
  4. Optimise pricing model incentives for cost/service tradeoffs.
  5. Leverage a governance framework that provides insight, not merely oversight.

Each of these five rules can reduce opportunism (defined as self-interest seeking with guile) because the rules help the parties focus on developing a mutually beneficial three-way relationship (patient, provider and payer). From that relationship flow the varied transactions necessary for the parties to coordinate patient care. Opportunism thrives in environments where relationships are secondary to the gain from a single transaction. Successful ACOs in the Market United Healthcare stresses that successful ACOs require forging a different relationship with the provider community with an emphasis on collaboration, transparency and long-term commitment.

Memorial Herman Accountable Care Organization (MHACO) created a branded accountable care network with Aetna. Finke explains that both parties were seeking to create a new model of care for patients and create a health plan product designed to be priced around the new care model. They wanted to find ways for everyone involved in the care of a patient population to collaborate with one another. Their efforts have paid off, with reported consistent membership growth and cost and quality improvements. MHACO reports improved efficiencies and lowered costs from 2013 to 2014 achieved by:

  • Increasing generic prescription rates
  • Reducing avoidable emergency room visits
  • Reducing 30-day admission rate
  • Reducing impactable medical days
  • Reducing impactable surgical days

Finke summarises that providers and payers can share and learn from each other’s data and expertise. With common goals for patient outcomes, providers and payers can get one step closer to the triple-aim: improved care quality, lower cost and a better patient experience.

It takes considerable time and managerial resources to become a fully-fledged ACO. While many organisations have failed to fully realise all of the goals of accountable care many have made significant progress in transforming how they deliver care. Muhlestein points out that a full transformation cannot be realised in just a year or two.

Aetna’s Vice President of Network and Product Strategy Accountable Care Solutions, Amy Oldenburg, also addresses transformation as a long-term endeavour: “We know that it takes three years for motivated ACOs to make changes necessary to impact real savings and quality improvements.

The Center for Medicare and Medicaid Services (CMS) acknowledges that the longer an ACO is in operation, the greater the savings they generate. Pioneer Accountable Care Organizations, a CMS innovation centre initiative, was able to achieve more cost savings during their third year of operations than the first year.


ACOs offer a great deal of promise in creating a better system of coordinated patient care that permits payers and providers to share in financial risks and rewards. Most importantly, coordinated care will allow providers to enhance the quality of patient care while better managing costs.

This promise of both delivering high-quality care and reducing the cost of that care below what would otherwise have been expected, requires trust, behaviors that drive the relationship for the good of all parties, and contracting rules that govern the relationship for the mutual benefit of all parties.

The five rules outlined in Vested Outsourcing: Five Rules that Will Transform Outsourcing and the six guiding principles outlined in Getting to We: Negotiating Agreements for Highly Collaborative Agreements offer the best pathway to success. Organisations ranging from governments, to non-profits to commercial enterprises have been working under relationship structures that provide the necessary guidance for negotiating and structuring a collaborative, risk-reward relationship; there is a greater opportunity to create highly successful ACOs.


About The Author

Jeanette Nyden's picture

Jeanette Nyden is the author of three books including Getting to We: Negotiating Agreements for Highly Collaborative Relationships and Negotiation Rules! A Practical Guide to Big Deal Negotiations. Ms. Nyden works with executives to maximise key customer-supplier relationships by providing tactical, customised contract negotiation training and coaching from the planning phase through to execution.

Audrey Cushing is Strategic Sourcing Director in the supply chain management organisation at a Fortune 100 financial services company. Prior to joining her current employer, Audrey served in a similar capacity at The Hartford Financial Services Group, after several years of successively more responsibility for similar functions at MassMutual. Her areas of expertise include business process outsourcing (BPO), request for proposals, supplier relationship management, service level agreements, and complex negotiations, often with large multi-national service providers. Audrey holds a Master’s degree in Counseling from the University of Harford. In addition to being a licensed Nursing Home Administrator, she holds the IAOP designation of a Certified Outsourcing Professional (COP) and is trained and certified in the Vested Outsourcing methodology.