I’ve been thinking a lot about financial risk for health and human services over the past month. While the shift in “who is at risk” has been glacial, the effects on the service delivery landscape are becoming increasingly apparent. At the payer level, the shift of financial risk from employers, from Medicare, and from Medicaid plans continues. At last count, 77% of the U.S. population with health insurance was enrolled in managed care plans—including commercial (99%), Medicaid (68%), and Medicare (33%) (see U.S. Population Enrolled In Managed Care, 2011-2016: An OPEN MINDS Reference Guide).

For provider organizations, health plans are moving their payment structures to more value-based reimbursement—though downside risk is the exception. Depending on who is counting, 47% of health plan business is value-based (see 47% of Payer, Provider Business Tied to Value-Based Care). And we know that about 58% of specialty provider organizations are getting some revenue from value-based reimbursement agreements and 9.3% have 20% or more of their revenue coming from VBR—a big change (see VBR @ Scale-Changes Required and 2019 OPEN MINDS Performance Management Executive Survey). But, continued health plan rate competition and the possibility of changes to the Stark Law rules will likely speed this transition in the year ahead (see Will Changes In Stark Law Speed Up Value-Based Reimbursement?).

Then, we have the many provider-affiliated accountable care organizations (ACOs). Since the launch of the ACO program with the Patient Protection and Affordable Care Act (PPACA), the Centers for Medicare and Medicaid Services (CMS) has been slowly pushing Medicare ACOs to take on additional risk, because, as the data has shown, ACOs that have more downside financial risk produce more savings for CMS (see The ACO ‘Savings Confusion’). This shift recently culminated with new rules requiring Medicare ACOs to accept downside risk after two years-previously, ACOs could participate in the program without taking any downside risk for up to six years (see CMS ‘Pathways To Success’ Medicare ACO Overhaul Limits ACO Time Without Risk).

But, the specter of mandated downside financial risk has many ACO executive teams considering dropping out of the program (see 71% Of MSSP ACOs Would Leave Program If Required To Assume Risk). For those executives (and executives of any provider organization looking at assuming more financial risk in their reimbursement mix), the question is what are the ingredients for success? A recent analysis identified the characteristics of ACOs that were able to successfully shift from shared savings models to managing downside financial risk (see Leavitt Partners Releases “Track Switching In Medicare ACO Programs: A Look At The Move To Downside Risk” White Paper). I thought the findings apply to any provider organization executive team that is considering case rates or capitated arrangements of any scale.

Time and experience play a big role in a provider organization’s ability to manage risk—The longer an ACO is part of the Medicare Shared Savings Program, the more likely they can successfully take on downside financial risk. This makes sense. Mature systems and clinical teams that are accustomed to using clinical decision support tools will likely be more effective in managing risk. Experience is a factor that executive teams looking at their first risk-based contract can’t manufacture, but lack of experience should be considered in your financial projections. Costs will always be higher, and savings will always be lower in an initial contract than in a mature system.

Strong partnerships and referral relationships are the cornerstone of successful risk-based contracting—ACOs that had pre-existing relationships with physicians and hospitals do better managing risk than those that did not. For provider organizations, collaboration is key in moving to a more value-driven financial system. While it isn’t an eliminating factor, if your organization does not currently have relationships with health systems, primary care practices, social service agencies, and other provider organizations, now is the time to start a plan for collaboration. That includes referral relationships and data exchange.

The ability to monitor performance and exchange data is essential to risk management in a value-based environment—Successful ACOs can effectively coordinate care and manage performance through a robust information technology system. Over two decades of working with provider organizations managing a wide array of case rates and capitated contracts, my experience has been that no matter how good the service delivery system or the rates, organizations lacking real-time clinical/financial information for risk management will likely fail (see The Business Model Transition To Value-Based Care).

For risk-based contracting, size matters—Large ACO systems are more successful than smaller systems. The issue of scale in success in managing financial risk is often misunderstood by executive teams. I often hear that “we already have financial management abilities” and “we serve the community on a very small budget.” But the financial risk of providing services to consumers who present for care is different than the financial risk of guaranteeing necessary services for a consumer population. As provider organizations move to contracts with downside financial risk, they are moving from the risk of managing the cost of a service to the risk of managing the cost of serving a population. That population risk is an actuarial risk, based on statistical models. And it is the normal variance in those statistical models that makes scale matter. “Negative variance” (providing more services than budgeted) can be a financial rounding error for a large organization and a financial catastrophe for a small organization. They don’t call it “risk” for nothing.

For any executive team looking at contracts with higher levels of financial risk, these are competency issues that should not be ignored. And, I would add one more issue for consideration. Rates for risk-based contracts—whether bundled/case rates or capitation—are based on statistical assumptions about service utilization and on the definition of “medically necessary and clinically appropriate” services. As our team wrote about the past few weeks (see Why Clinical Guidelines Matter More With Risk-Based Contracting), there is not agreement about those definitions—another “risk” to be factored into the equation.

For a primer on financial risk to share with board members or others not as familiar with these risk concepts, check out my piece—Understanding The “Risk” In An “At-Risk” Contract. Some of my other recommended readings include:

  1. Planning For A Risk-Based, Community-Focused I/DD Market
  2. Social Risk & The ‘Value’ Of Health Care
  3. The Keys To Negotiating Risk-Based Contracts: Advice From Centerstone’s Debbie Cagle
  4. The Problem With Risk – Not Everyone Can Be Above Average
  5. Does My EHR Have The Functionality Needed To Manage Risk-Based Contracts?

And if your team would like to know more about specific competencies, I would recommend walking through our managed care readiness assessment (see OPEN MINDS Managed Care Competencies Assessment) and value-based reimbursement readiness assessment (see Value-Based Reimbursement Readiness Assessment). These two assessments provide executive teams with a great roadmap for the market ahead. Finally, for a deeper drive, join my colleague OPEN MINDS Senior Associate Ken Carr on June 3 in New Orleans for his executive seminar, Succeeding With Value-Based Reimbursement: An OPEN MINDS Executive Seminar On Organizational Competencies & Management Best Practices For Value-Based Contracting.