5 Tips for Taking on Risk in New Payment Models

It's happening in different ways and different places around the country, but, broadly speaking, healthcare payors are starting to move away from traditional fee-for-service payment models. Providers, in turn, may be taking on a certain amount of risk in payment models that rely more heavily on capitated payments.

Most accountable care organizations take a hybrid approach to payments — they aren't merely fee-for-service but they aren't purely capitated payment models. Many ACOs offer a fee-for-service arrangement with tacked-on measures that offer incentives for physicians to improve care, and possibly deductions in pay if they don't meet an established set of standards.

Here, David Harlow, JD, of The Harlow Group, shares five tips on risk-bearing contracts — what providers need to consider when entering into shared savings agreements and risk models and how to move forward comfortably with those contracts.

1. Know thyself. There's a high degree of self-knowledge needed before embarking on capitated payment models or risk sharing structures, Mr. Harlow says. Providers need to know their costs, and some may not have a very good handle on this.

"There are actuarial figures and tables you can turn to for general information, but it's important to know exactly what it costs you, in your system, to care for, let’s say, a fifty-five year old diabetic," he says.

He gives the example of a hip replacement. Orthopedic surgeons may not be fully aware of the actual cost of the implant, the pre- and post-surgical care, and the surgery itself. Providers should specifically know how much a procedure costs for them to perform before accepting risk for patients in certain demographic categories. This step is sometimes glossed over when structuring capitated or risk-bearing contracts, Mr. Harlow notes, which could have a serious impact on the provider's bottom line.

2. Develop a rational risk-bearing plan. Mr. Harlow says once organizations know their costs they need to take a rational approach to providing high-quality care at the lowest reasonable cost. But the goal under new risk models needs to be more than just cutting costs.

"We made that mistake last time around in the rush to capitation when people focused entirely on capitation and dollars per member per month but not on quality measures," he says.

Hybrid payment models of many ACOs emphasize cost-containment and put equal emphasis on quality control and improvement.

"The dollars saved are not going to be available to providers who save them unless they perform at a high quality level as measured by a whole host of measures depending on the payor," Mr. Harlow says. "There's a repository of these metrics and providers need to be familiar with them," Mr. Harlow says.  Best practices need to be considered and incorporated into operations as well.

3. Be sure contract negotiators works closely with operations. It is important that the people within a health care organization working on specifics of a risk-bearing contract keep close dialogue with those on the operations side, Mr. Harlow says. This alignment ensures that health care organizations entering into capitated risks are promising only what they can deliver and not leaving themselves vulnerable to serious financial concerns.

Having the people who work on developing capitated or shared savings contracts aligned with those involved in operations may seem self evident, but Mr. Harlow says he's seen situations where this doesn't happen.

4. Make sure payors don't withhold too much money. Payors will want to withhold some payments under shared savings or risk agreements so there will be an incentive for providers to perform well, Mr. Harlow says. At the same time, providers don't want the amount of money withheld to be so large that cash flow becomes an issue.

He says this is ultimately a matter for negotiation between parties involved in a particular agreement.

5. Consider reinsurance arrangements. Providers entering into new risk agreements may become, in a sense, insurers themselves, according to Mr. Harlow.

"You don't necessarily want to be in that position," he says.

This was an issue raised in the course of development of ACO arrangements. The federal government had to backtrack and clarify that it didn’t intend to make ACOs into insurers, according to Mr. Harlow. But it can be an issue at the state division of insurance level.

"It is a legitimate question that can be raised based on the structure of the agreement," he says.

Mr. Harlow observes that most providers mitigate their risk by entering into a reinsurance arrangement with a third party.

David Harlow is a health care lawyer and author of the award-winning HealthBlawg: David Harlow's Health Care Law Blog.

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