Option Pricing: A Flexible Tool to Disseminate Shared Savings Contracts

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The Issue

Shared-savings contracts are a key part of new health care payment and delivery models, like accountable care organizations (ACOs) and medical homes. These contracts encourage cost containment by allowing providers to share in any savings they create. However, care costs can vary unpredictably year to year depending on how many patients remain healthy or become sick. As a result, payers may avoid shared savings contracts. In addition, providers dislike contracts that offset this risk by including penalties for cost overruns. This Commonwealth Fund–supported study examines new tools that improve the business case for shared-savings contracts and may encourage more widespread adoption.


What the Study Found

Current strategies for reducing volatility in shared-savings contracts have not had a marked effect on reducing cost variability year to year. The researchers used health care spending data from a large commercial health plan from 2009 and 2010 to run simulations of different kinds of shared-savings contracts. They found that “option pricing”—adapted from the financial “call option” tool that protects investors against downside risk—was most effective. In this model, providers must pay a per-patient fee to participate in shared-savings contracts. These option prices can be tailored to individual practices; depending on size, expected costs, and the specific terms of bonus programs.


Conclusions

Shared-savings contracts hold promise for encouraging health care cost containment but have been deployed narrowly. To widen their usage, the researchers recommend contracts that include option pricing; a flexible approach that might appeal to a broader swath of payers, providers, and patients.

Publication Details

Publication Date:
September 3, 2013
Authors:
Mark W. Friedberg, Anthony M. Buendia, Katharine E. Lauderdale, and Peter S. Hussey
Summary Writer:
Naomi Freundlich
Citation:

M. W. Friedberg, A. M. Buendia, K. E. Lauderdale et al., "Option Pricing: A Flexible Tool to Disseminate Shared Savings Contracts," American Journal of Managed Care, Aug. 2013 19(8):e285–e292.

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