including definitions of best practice, may help mediate some of the possible adverse effects.

Annual Contracting Arrangements

In theory, capitation and shared-risk arrangements provide incentives to pursue quality improvement strategies that minimize costs over the long term by keeping people healthy. To the extent that turnover in health plan membership and contracting arrangements occurs, however, suboptimization may result if the organization that undertakes the quality improvement does not see the benefits from those efforts.

Annual contracting arrangements can produce turnover in three ways. First, health plans and purchasers can alter annually the plans offered to consumers and force a change in health plan enrollment. Second, health plans and providers can alter annually the composition of provider networks, forcing patients to switch providers. Third, annual enrollment by individuals in health plans can produce turnover for the plans even if there is no change in the two former arrangements.

Annual contracting cycles may hinder a health care organization’s ability to pursue quality improvement initiatives if the organization believes the benefits will accrue to a competitor. If a health plan has even modest enrollee turnover, and a quality improvement project requires an up-front investment while the financial savings span years, patients may very well have shifted to another plan by the time the health benefits and related savings accrue. The same is true for a provider group that may develop a good program for difficult-to-manage diabetics and is able to improve compliance with treatment, but is dropped from the health plan’s provider panel, so that those now well-controlled patients go to a competitor’s diabetic program. Such turnover can eliminate the benefit for many proposed clinical improvement projects.

Longer-term arrangements among provider groups, health plans, and purchasers may be advisable to facilitate the investments needed to achieve quality improvement and ensure gains to the partners from the benefits that are generated over time (whether in the form of savings or improved outcomes). However, patients and consumers should be able to shift coverage or source of care for quality-related reasons. The ability of consumers and patients to do so can be a strong motivator for clinicians and health plans to offer such good care that people will not want to leave.

Up-Front Investments Required by Provider Groups

Provider groups face two specific managerial issues that are affected by payment arrangements and can hamper efforts by health care organizations to pursue quality improvement: (1) the difficulty of measuring the impact of quality improvement on the organization’s bottom line and (2) infrastructure challenges

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