Executive Summary

The healthcare industry is undergoing a significant transformation, moving away from volume-based care towards value-based models that prioritize patient outcomes and cost efficiency. This issue brief delves into delta MLR contracting, a type of value-based contracting that measures and rewards improved performance based upon incremental improvements in medical loss ratio. 

Delta MLR contracting is the next chapter on the way to full risk delegation, aiming to improve medical loss ratios by reducing unnecessary utilization through innovative tech-enabled care delivery transformations and offering the potential for future revenue increases for providers who achieve improved quality and appropriately document and code clinical conditions for accurate risk adjustment.

Medical Loss Ratio (MLR) refers to the percentage of premiums payers spend on medical claims and healthcare quality improvement, as opposed to administrative costs and profits. Delta MLR contracting presents an innovative framework for population health providers and virtual care organizations to align to the clinical and operational value created for risk bearing entities. Below we discuss the necessary emphasis in delta MLR contracting on the integration of documentation and coding practices, data, actuarial analytics, quality initiatives, and medical management. We also focus on the need for full financial alignment of virtual care solutions and risk bearing entities in achieving the Quintuple Aim.

By focusing on these elements, innovative providers can enhance patient outcomes, optimize financial performance, and navigate the complexities of value-based care more effectively. 

Delta MLR Contracting Framework

Delta MLR contracting focuses on identifying patient populations with, or likely to have, high MLRs, implementing strategies to better manage their care, and allowing payors, intermediaries, and providers to share the financial benefits derived from improved MLRs. The “Delta” refers to the change in MLR compared to the period prior to implementation of care management and quality initiatives, thus measuring the benefit of effective management practices.

The incremental cost of new medical management or quality initiatives worsen MLR, so these solutions must recoup their cost by generating downstream savings and achieving full alignment to drive the maximum value in risk, quality, and affordability. Providers or 3rd party risk-bearing partners receive a negotiated fraction of the “delta” in MLR that is achieved. While negotiated rates are multi-factorial, one way to conceptualize the model is to compare the marginal impact of the new solution compared to existing local and virtual population health infrastructure in a market.  

Integrating Quality and HEDIS Performance

Quality of care and HEDIS (Healthcare Effectiveness Data and Information Set) performance can be critical for delta MLR contracting, as they directly impact patient outcomes and future revenue for Medicare Advantage plans. When integrated into the care model, metrics addressing disease screening, process improvements, and improvements in patient outcomes have been shown to impact downstream health. For Medicare Advantage plans, improved performance can increase a plan’s CMS star rating, which can significantly increase future revenue.  

Role of Documentation, Coding, and Risk Adjustment

Increased patient engagement, annual wellness exams, and accurate clinical documentation and coding practices, can be critical in delta MLR contracts that are revenue adjusted. These elements ensure that patient risk profiles are accurately captured, leading to appropriate reimbursement, and enabling providers to allocate resources efficiently.

Challenges and Considerations

The contracting exercise between payors and providers/3rd party risk bearing partners should clearly define the terms of the delta MLR improvement sharing arrangement. Especially as delta MLR contracts often feature lower volume-based reimbursement, intermediaries/providers must understand the arrangement to maximize the likelihood of achieving financial benefits. Intermediaries/providers must understand various factors in order to propose, implement, and succeed in delta MLR contracting. This involves navigating several complex challenges:

  • Care Model Risk Alignment:  Parties must assess their ability to impact institutional, professional, and drug costs (and understand the extent to which such costs are delegated to the intermediary or provider in the arrangement); as well as quality and risk adjustment. Contracting strategies may range from aligning with the most modifiable sub-categories to embracing full MLR plus revenue considerations. Contract duration should either be long enough (ideally 3 years) to account for the delay in quality-based revenues or contain creative ongoing quality adjustments in order to capture value as it is created. A term longer than 3 years creates risk that the assumptions that underpinned the original deal terms are outdated, which can result in both clinical and financial misalignment between the parties.   
  • Access to Data:  Access to data is crucial. This includes both historical data (including during contract negotiations and during the performance period) and on as current of a basis as practicable during the performance period. Ensuring access to multiple years of target population data (or closest substitute) to understand current state is critical to understanding the ability to impact the MLR. Access to data allows actuaries to model existing trends, percent regression to the mean, and outlier sub-populations in order to identify the most impactful approaches and to monitor and adjust performance. Unfortunately, lags in the availability of data make it more difficult to act on information.
  • Actuarial and Med Econ Capabilities: Under a delta MLR arrangement, the risk-bearing provider is effectively being asked to operate as an insurer. Traditional health plans and insurers have staffed up large departments of actuaries, medical economists, and analysts to maximize performance as a risk-bearing entity. Unfortunately, providers do not have the resources to build out fully staffed actuarial and med econ teams, so they will need to prioritize essential analytical functions and address the others over time as needed. To do this, providers must leverage internal sources, external consultants, or both, and get creative to procure these capabilities efficiently.
  • Patient Selection:  Establishing clear parameters for the target population, including inclusion/exclusion criteria and precise definitions of “attribution” is essential for enabling accurate financial accounting downstream. Attention must also be directed towards a health plan’s attribution methodology and disenrollment factors, such as loss of insurance coverage, transition to hospice care, and mortality. A delta MLR arrangement must include a large enough patient pool to reliably demonstrate results and should anticipate patients with high medical costs. Special terms may be necessary for how these patients are included in the results in order to avoid their having an outsized effect on outcomes.
  • Tools:  Tools that integrate information into provider workflows/patient visits help providers target gaps in care that can be addressed to improve quality and savings. Tools that assist with care coordination and monitoring of patients between visits offer similar benefits. At the same time, the costs and efficacy of technologies must be well understood given the ever-expanding number of technology solutions on the market. 
  • Benchmarking and Discounts:  Consensus on the methodology for calculating benchmarks is critical, ensuring both parties acknowledge historical expenses and MLRs. Virtual care solutions may offer specific percentage point improvements or discounts, reflecting their confidence in the MLR changes they can effectuate. It is important to understand whether improvement is modeled against a period that proceeds the contract or over the prior year during the contract term.
  • Downside Risk:  Vendors may opt to place a portion of their fees (up to 100%) at risk contingent on MLR improvement. In the absence of benchmark discounts, they might assume partial MLR downside risk. This financial exposure demands careful consideration and may necessitate substantial reserves, credit supports (such as a letter of credit or escrow), and stop-loss insurance strategies.
  • Upside Potential:  In contracts that incorporate benchmark discounts and downside risk, vendors may claim the entirety of the delta in MLR improvement beyond the agreed-upon discount. Without discounts, vendors may negotiate for a share of the MLR improvement they facilitate.
  • Reporting and Reconciliation:  The parties to a delta MLR arrangement must carefully define the cadence and format for reporting on results and must define a process for calculating a provider’s or 3rd party risk-bearing partner’s share of MLR improvement. The parties may consider using actuaries to resolve disagreements in order to avoid the friction, costs, and delay of litigation or arbitration. 

Delta MLR contracting embodies a progressive strategy for healthcare delivery and reimbursement, harmonizing the essential elements of quality, efficiency, and patient-centric care. By weaving together quality metrics, HEDIS performance, and the enhancement of revenue through precise risk adjustment, healthcare organizations are poised to realize superior health outcomes, fine-tune financial returns, and further the overarching objectives of value-based care. Attaining success in this innovative contractual approach necessitates a comprehensive strategy that harnesses technology, data analytics, and cooperative partnerships to appropriately align financial incentives, adeptly manage the complexities and seize the advantages inherent in this model of contracting. Due to the complexity of the arrangements, the contracting process for a delta MLR arrangement can take 12 to 18 months to go from initial term sheet to a final signed agreement. The negotiations are greatly enriched by the acumen of seasoned advisors and consultants who can help the parties identify and resolve issues before they extend the timeline or result in misalignment.

Risk-based contracting strategies like the delta MLR are complicated to structure and implicate a multitude of federal and state laws (such as those addressing kickbacks, physician self-referrals, risk adjustment, the corporate practice of medicine, and insurers). Along with strategic, actuarial and health econ consultants, parties should engage qualified legal counsel prior to entering arrangements to assess compliance and to prepare effective contracts.

Quintuple Aim Solutions (Quintuple Aim Solutions), Crowell & Moring LLP’s C&M Health Law Blog (Health Law | Crowell & Moring (cmhealthlaw.com), and Accorded (Actuarial Intelligence | accorded.com) are jointly publishing this issue brief. 

We would like to thank Reza Alavi of Quintuple Aim Solutions and Frank Cheung of Accorded for their contribution to this blog.

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Photo of Todd Rosenberg Todd Rosenberg

Todd D. Rosenberg is a partner in the firm’s Corporate Group. Todd’s practice focuses on mergers and acquisitions, joint ventures, equity and debt financings, and complex commercial agreements (including outsourcing agreements, service agreements, and intellectual property licensing agreements). Todd regularly advises public and…

Todd D. Rosenberg is a partner in the firm’s Corporate Group. Todd’s practice focuses on mergers and acquisitions, joint ventures, equity and debt financings, and complex commercial agreements (including outsourcing agreements, service agreements, and intellectual property licensing agreements). Todd regularly advises public and private corporations, financial institutions, hedge funds, and private equity funds. Todd has significant experience with transactions in a wide-variety of industries, including healthcare, financial services, government contracts, transportation, media, technology, and telecommunications.