What Is Value-Based Contracting?

What Is Value-Based Contracting?

A value-based contract is an agreement between a payor or third party and a provider that ties payment to patient outcomes and the total cost of care rather than the number of services delivered. Under traditional fee-for-service, every visit, test, and procedure generates a separate payment, so revenue follows volume. A value-based contract changes what gets rewarded: providers earn more when patients get better results at a sustainable cost.

The idea is simple even if the contracts are not. Both sides agree in advance on what good care looks like (quality measures) and what it should cost (a spending benchmark). Actual performance is then measured against those agreements, and payment follows performance. Medicare runs the largest example, the Medicare Shared Savings Program, in which groups of providers share in the savings when they deliver high-quality care while spending healthcare dollars more wisely. In performance year 2024, 476 participating organizations cared for 10.3 million beneficiaries; three quarters of them earned shared savings payments totaling $4.1 billion, and Medicare saved $2.5 billion relative to benchmarks.

If the payment models themselves are new to you, our comparison of fee-for-service vs value-based care covers that background. This article focuses on the contracts: the main models, how shared savings works, and the single idea that organizes all of it.

The Risk Spectrum: The One Idea That Organizes Everything

Every value-based contracting model is a different answer to one question: who carries the financial risk when the cost of care comes in higher, or lower, than expected?

A simple illustration, using round hypothetical numbers. Suppose a payor and a group of providers agree that caring for a defined patient population should cost $10 million next year. That $10 million is the benchmark.

• If care actually costs $9 million and quality targets are met, there is $1 million in savings. Who receives it, and in what split, is defined in the contract.
• If care costs $10.5 million, there is a $500,000 overrun. Whether the providers repay any portion of it, or none of it, is also defined in the contract.

Upside is the share of savings a provider can earn. Downside is the share of losses a provider can owe. Every model below sits somewhere on that spectrum, from no downside at all to full responsibility for a population’s costs. Once you see contracts through that lens, the models stop looking like jargon and start looking like choices.

The Main Contracting Models, One by One

One-sided (upside-only) shared savings. The provider shares in the savings when outcomes and costs beat the benchmark and owes nothing when they do not. In the example above, the providers would receive an agreed percentage of the $1 million in savings. In the overrun year, they would simply earn no savings payment. No repayment, no penalty. This is the lowest-barrier entry point into value-based care, and it is where most organizations start. Medicare’s own program is built around a glide path that lets eligible new participants begin under a one-sided model before taking on downside risk.

Two details matter in any one-sided contract. First, the sharing rate: the percentage of savings the provider receives is negotiated up front, so a $1 million savings year means a defined, predictable payment rather than an open question. Second, the quality gate: savings are typically shared only when quality targets are met, which keeps the incentive pointed at better care rather than just cheaper care. Together, those two terms are what separate a well-built one-sided contract from a vague promise of upside.

It is worth being direct about where OMI sits: OMI’s programs run on a one-sided shared savings model. Participating practices carry no upfront cost and no downside exposure. If a program generates savings, providers share in them. If it does not, there is nothing to pay back.

Two-sided (downside-risk) shared savings. The provider shares in savings and also absorbs part of any losses. In exchange for taking on repayment risk, two-sided arrangements offer a larger share of savings than one-sided participation. The tradeoff is real: a bad year is not just a missed bonus but money owed. Many practices, particularly smaller and specialty practices, are not positioned to absorb that exposure, which is exactly why the one-sided model exists as the on-ramp.

Bundled and episode-based payments. A single payment covers a defined episode of care, such as a procedure plus its related follow-up and recovery, rather than a separate bill for each component. Deliver the episode for less than the bundled price while meeting quality standards, and the provider keeps the difference; run over, and the provider absorbs it. Bundles are common in specialty settings where episodes are well defined.

Pay for performance. Bonus payments tied to specific quality measures, added on top of existing reimbursement. This is the mildest form of value-based contracting: base payment does not change and there is no cost benchmark. Providers simply earn more for documented quality. It is often a first step for organizations not yet ready for shared savings.

Capitation. A fixed payment per member per month that covers a defined set of services regardless of how much care is used. This is the far end of the risk spectrum: the provider carries essentially all of the cost risk for covered services. It is more common in primary care than in specialty care, but it completes the picture.

What Makes These Contracts Work in Practice

Whatever the model, every value-based contract depends on the same machinery:

• Agreed quality measures, so that better outcomes are defined before the contract starts rather than debated afterward. Our guide to value-based care quality measures covers how these are set.
• A credible cost benchmark, built on historical claims data for a comparable patient population.
• Timely, shared data, so both sides can see performance during the measurement period, not just at reconciliation. This is where value-based care analytics and point-of-care decision support earn their place: contracts are settled retrospectively, but performance is created one clinical decision at a time.
• Accurate attribution, so it is clear which patients, and which costs, belong to which providers.

One thing worth saying directly: these contracts work when they align payors and providers around the same goal, which is better outcomes at a sustainable cost. The best arrangements are not one side winning at the other’s expense. Savings only exist when care improves, and both sides do better when it does.

Where Enablers Fit

Reading the list above, you may notice that most of it is infrastructure: benchmarking, data, analytics, attribution, and contract administration. Most practices do not carry that infrastructure in-house, and building it is expensive. That is why many providers enter value-based contracts alongside an enabling partner that supplies the machinery, and in some arrangements the financial protection as well.

OMI’s approach is upside-only participation: practices join programs with no downside exposure and no upfront cost, and OMI provides the contract administration, analytics, and point-of-care technology the programs run on. For a fuller picture of how payors, providers, and enablers fit together, see The Ecosystem of Value-Based Care.

Common Questions

Is value-based contracting the same as capitation?

No. Capitation is one model within value-based contracting, at the highest risk end of the spectrum. Many value-based contracts, including one-sided shared savings, involve no capitation at all.

Can a practice be in fee-for-service and value-based contracts at the same time?

Yes, and most are. In shared savings arrangements, providers typically continue billing fee-for-service as usual, and the value-based contract is reconciled on top of those claims at the end of the measurement period. The transition to value-based care is gradual, not a switch. Our post on how physicians are actually paid in value-based care walks through what this means for individual compensation.

What happens if quality targets are not met under a one-sided arrangement?

Savings payments are generally conditioned on quality. A provider that reduces costs but misses the agreed quality standard may forfeit some or all of the savings share; in Medicare’s program, meeting the quality performance standard is a requirement for sharing in savings. What a one-sided contract never does is send the provider a bill.

How long do these contracts typically run?

Commercial contracts vary, commonly one to three years with renewal. Medicare’s Shared Savings Program uses agreement periods of at least five years, measured in annual performance years. Multi-year terms are common for a practical reason: it takes time for improvements in care to show up in cost data.

Where to Go From Here

If you are a specialty practice moving from understanding these contracts to evaluating one, our deep dive on value-based care contracts for specialty providers covers what to look for and what to watch out for. And whichever side of the contract you sit on, the models above all point the same direction: payment that follows outcomes, with risk placed where it can actually be managed.