In the early days of disease management, it was a common practice for DM providers to guarantee results, or at least offer risk/reward elements in their fees for services. A guarantee typically involves the provider paying some specified penalty if promised or agreed-upon results are not achieved. I know of no case where a “money-back” guarantee was used, where all fees were refunded if such results were not achieved. After all, the idea of a guarantee is to promote confidence among HM or DM prospects and customers, not to drive providers out of business.

Warranties have also been used in healthcare, though I know of none specific to DM or HM. Shouldice Hospital in Toronto has offered to charge nothing for the surgeon’s fee if a hernia repair has to be repeated. Geisinger Clinic in Pennsylvania has promised to cover all necessary care related to coronary bypass graft surgery within 90 days of admission, including any unexpected readmissions or complications, for one flat fee. By definition, a warranty involves agreeing to provide all needed service and promised results regardless of any extra effort required, for an agreed-upon up front price.Guarantees did not prove particularly popular in DM, particularly as arguments arose about how results were measured. Thanks to any combination of self-selection bias and regression to the mean, a lot of the “results” in the early days of DM were somewhat suspicious – not that they didn’t happen, but that they didn’t result from the DM program. And if they didn’t, why should purchasers have to pay?

Risk/reward contracts involve, in effect, selling not services, but solutions, where it is precisely the “performance” involved that is sold, not the effort or services provided in pursuit of results. For example, it is increasingly common in industry for suppliers to sell energy services with prices based on cost savings achieved, or paint suppliers to charge on the basis of a combination of cost and quality results achieved. When suppliers can share in the cost savings or revenue consequences of their services, they can get as much as 30-50% of the value they deliver, for example, far more than is normal with pricing not based on value delivered, compared to the value actually delivered. [JD Torslilieri & C. Lucier “Climbing Up the Value Ladder” Strategy + Business Fourth Qtr, 2002 (www.strategy-business.com)]

Healthways, Inc. for example, signed a ten-year contract with Blue Cross/Blue Shield of Minnesota where it is at risk for penalties if agreed upon results are not achieved, and can achieve extra revenue if they are exceeded. Such “gainsharing” is also part of the CMS demonstration project involving ten large physician groups, where DM results that save at least 2% compared to projected costs can yield providers an 80% share of savings, up to a limit of 5% of total projected costs. [“Physician Group Practice Demonstration Bonus Methodology Specifications” Centers for Medicare & Medicaid Services Dec 20, 2004 (www.cms.hhs.gov)]

So far, results achieved have not been that great, with only two of the ten participating providers exceeding the 2% minimum savings and eligible for gainsharing rewards. But if patterns of improving results over time that have been reported in other HM applications hold for the Medicare participants, more may be eligible for performance bonuses in future. Only one of the providers failed to yield any savings.

The advantage of the risk-reward charging/payment approach is that it deals solely in “found money”. The penalties for failing to deliver results expected can equal the amount of cost added for delivering services, for example. In such cases, HM providers will not lose their shirts, only their profits. And when results involve significant ROI, the added payments to HM providers represent only a share of the positive returns, so both parties win. A formal “gainsharing” approach may involve equal shares of net savings, or any other split, but both parties gain, by definition, when results are exceeded at agreed-upon costs.

A risk/reward element can be included with any of the flat fee/per member, per eligible or per participant charging/payment methods. Rarely would HM providers put their entire effort at risk by expecting payment only if pre-determined results are achieved. Moreover, any such arrangement would put extreme pressures on HM providers to “cook the books” in order to show results, even when they have not resulted from their efforts. As such, this is not so much a fourth charging/payment method as an added “wrinkle” to whatever basic method is chosen, and one normally used in the first contract between HM providers and their clients.

There is some question as to whether risk-reward arrangements can work in the long run. For one thing, once purchasers are confident that the HM programs they buy, and providers are sure the programs they sell actually work, the confidence-building effect of such arrangements are no longer as important as proven performance. For another, an HM intervention is bound to reach diminishing returns limits, since at some point, each additional improvement in health will cost more to achieve and deliver lower benefits when it does. This depends most on the degree of turnover among HM participants in the population at risk.

If turnover is high, the positive impact of HM interventions will tend to be close to the impact that individual participants deliver in their first or second year of participation. If turnover is low, the overall positive impact of the HM program can approach the higher levels that tend to apply to individuals that participate for many years. And once the point of diminishing returns is reached, the best that can be achieved will be to maintain a particular level of impact, rather than continuously increase it. [S. MacStravic “Evaluating Disease Management Results: Individuals and Cohorts vs. Populations” Disease Management Aug 2007]

Fortunately, when employees are involved, HM deals with a far less limited upper limit on value. Sickness care costs can be reduced only to zero, after all, and when employee shift more costs to employees, or government takes over health insurance, there may be few advantages in terms of sickness care cost reduction. But as is already the case in the UK and many other European countries, savings from in reduced turnover, absences, productivity impairment, along with gains in quality, customers, and revenue have already been found. And these are not only potentially far greater than sickness cost savings, but are not limited in the way that sickness care cost savings are.

Moreover, turnover among employees is often far less than it is among insurance plan members, who may change plans as often as monthly in the case of Medicare or Medicaid beneficiaries, and often do every year or two with commercial plans. Many employers have average turnover of ten to twenty percent or less, making it likely that they will yield higher economic impact both over time and across the “space” of far more impact dimensions. This makes it far safer to include risk/reward elements in charging and paying for HM programs, since failing to deliver expected impact in one dimension, such as sickness cost reductions, can easily be made up for greater then expected impact in productivity or revenue gains, for example.

This approach to paying for HM services amounts to value-based purchasing, a growing practice among employers and governments. It therefore amounts to value-based pricing by HM providers, which matches the value-based purchasing approach among purchasers. For this reason alone, this method should be at least considered, particularly if the prospect or customer is already involved in, or at least interested in value-based purchasing. If the provider is similarly involved or interested, this approach makes equal sense when paying for HM services.

Moreover, results-based payment systems, once they have been shown to work well for both parties, tend to promote trust and lasting relationships, as well as the kind of anticipation of future benefits that promote the continuation of such relationships. Just as demonstrating and reminding individual participants in HM of the intrinsic benefits they have gained, are gaining and stand to gain in future promotes their continuous or repeated participation in HM initiatives, the same works for relationships between HM providers and their clients. But the key will always be delivering promised and expected results and value.