Examining the Role of Financial Risk in Value-Based Care

As the healthcare industry ramps up its efforts to advance value-based care, providers are expected to take on more financial risk.

One of the goals of value-based care is to transition financial risk away from taxpayers and healthcare payers and instead place the burden on providers to make smarter decisions about utilization. For healthcare organizations, this means that providers are no longer paid for how many services they perform, but for how well they managed to reduce healthcare costs and improve patient outcomes.

Overall, the shift to value-based care causes providers to become more accountable for achieving cost and quality goals, especially since reimbursement amounts depend on it.

However, some providers have asked what it means to assume more financial risk through alternative payment models. How can their organizations manage this shift in accountability?

What are the types of risk-based models in healthcare?

Each alternative payment model maintains its own financial risk structure, but there are two basic types of risk in healthcare: upside and downside structures.

Some healthcare providers participate in upside-risk models, such as Track One of the Medicare Shared Savings Program. In this arrangement, providers who reduce healthcare costs below their benchmarks receive a percentage of the difference between the actual and budgeted costs, which is known as shared savings.

If actual healthcare costs go over the budget, providers in upside-risk models do not receive any shared savings, but they are also not financially penalized.

However, downside-risk models require providers that exceed budgeted costs to refund payers a portion of the difference in costs, such as in the Next Generation ACO. Despite the potential for shared losses, downside-risk models also generally allow for higher shared savings.

Other models, like bundled payments, incentivize providers to assume more financial risk. In bundled payment models, payers reimburse a set price for episodes of care, such as joint replacement or heart surgery, and providers can either earn savings by lowering the cost of care or lose the difference between actual and budgeted costs.

Many value-based care models are designed for providers to shoulder some downside financial risk and payers are increasingly transitioning providers to more risk-heavy structures.

“You cannot be fully accountable for patient population until you're willing to accept financial risk when things do not go as planned,” explained April Wortham Collins, Manager of Customer Segment Analysis at Decision Resources group, in a 2015 interview.

How does assuming more financial risk advance value-based care goals?

While accepting responsibility for potential shared losses may seem daunting to some providers, more financial risk can actually help drive better care quality and lower healthcare costs.

A June study from the American Journal of Managed Care explained that organizations that participated in more risk-based payment models demonstrated more advancement with health IT implementation, quality of care, and cost management.

For example, 90 percent of participants in risk-based contracts reduced hospital admissions and readmissions, developed preferred relationships with specialists and other hospitals, better managed care delivery for high-risk patients, and more effectively oversaw post-acute care.

Additionally, 80 percent of this population had a common EHR system across its healthcare system, enabling more coordinated care.

“Taking on greater financial responsibility gives providers a greater incentive to deliver care in the most efficient, cost-effective manner possible,” Sasha Preble, Senior Director at the Advisory Board Company, said in 2014. “In many cases, risk can act as the driving force that pushes an organization toward the transformation needed to achieve the Triple Aim.”

What are some challenges with participating in risk-based alternative payment models?

While financial risk is often seen as the key to advancing value-based care, it is not very widespread.  The American Journal of Managed Care also found that only one-third of providers received more than half of their revenue from a risk-based payment arrangement.

Some providers may hesitate to accept financial risk through alternative payment models because of the potential for shared losses or financial penalties. For example, a National Association of ACOs (NAACOS) report from June stated that some Medicare ACOs in downside-risk models could be liable to repay all of their Medicare income if their organizations do not achieve cost benchmarks.

“Having to potentially pay millions of dollars to Medicare is simply not practical nor feasible for these organizations,” wrote Clif Gaus, President and CEO of NAACOS and Allison Brennan, Vice President of Policy at NAACOS, in the paper. “This type of risk often necessitates that ACOs have considerable financial backing, which is why, for the most part, these models have attracted ACOs with hospitals, health systems or outside investors.”

Other challenges include a lack of technology and communication to improve care coordination. Without enhanced communication, providers may find it difficult to ensure patients are receiving the most appropriate care, which can help reduce costs.

“If the first step is to build out these networks, start engaging your other providers. Realize that under value-based programs, whether you're managing a population under an ACO initiative or patient episodes under Bundled Payments, at the end of the day, before you can take your first step, you have to understand who else you're working with,” explained Eric Chetwynd, Director of Product Strategy at Curaspan, in a 2015 interview.

Chetwynd added that technology facilitates better communication with other physicians and patients as well as boosts healthcare information sharing across networks.

How can providers take on more financial risk contracts?

CMS has developed several risk-based alternative payment models to help providers accept some form of financial risk.

Under the Medicare Shared Savings Program, CMS offers two reimbursement tracks that include downside risk. Through tracks two and three of the program, ACOs are eligible to save up to 60 percent of overall savings that are below its benchmarks, which is 10 percent more than in the upside-only arrangement of track one.

CMS also recently introduced the Next Generation ACO model, which allows ACOs to engage in more financial risk. Providers can enter either an 80 or 100 percent shared savings option. The model also establishes prospective benchmarks, making it easier for participants to manage patient care and costs.

Besides ACOs, providers can also participate in other risk-based models, such episodic or bundled payment models. For instance, the Oncology Care Model offers providers a downside-risk track, which mandates that participants lose the difference in costs if they spend over the target price for the episode of cancer care.

Participating in more financial risk arrangements may also help eligible clinicians earn more incentive payments under MACRA. Under the Advanced Alternative Payment Model track in MACRA, eligible clinicians in models that “demonstrate risk and reward for providing coordinated, high quality, and efficient care,” like the ones described earlier, can earn a five percent Medicare Part B incentive payment and be exempted from the Merit Based Payment System.

Additionally, CMS has encouraged private payers to also develop more risk-based reimbursement arrangements.

Dig Deeper:

• 12 Value-Based Reimbursement Strategies to Cut Revenue Risk

• Considering Healthcare Providers’ Value-Based Risk Burdens