A view from the Center

Deloitte's Life Sciences & Health Care Blog

Does your investment portfolio contain only one stock? No. Risk-based contract portfolios should be diversified too.

Hospitals and health systems will take on gain/loss sharing contracts at different speeds, depending on their own capabilities and the demand in the market. After decades of fee-for-service contracts, it can be difficult and intimidating for a provider organization to move to these arrangements. For many health systems, there will never be a perfect time to start entering into gain/loss sharing contracts. Ultimately, many systems may find they must take this risk in order to force the organizational change that is needed to perform well in value-based care.

After a hospital or health system signs that first contract, it is important to keep in mind that its performance on one contract will not always reflect the “success” or “failure” of the system. As outlined in the first blog of this series, there may be many benefits to gain in these contracts besides just shared savings or losses, such as market differentiation, expanded market share, increased in-network usage, and organizational investments. A system may accept sharing in losses and cutting a check at the end of a contract year if it has essentially “recouped” those losses through additional market share, in-network spending, and improved capabilities. Paying money at the end of a performance year does not mean the contract was a failure. Provider systems should keep a holistic view of all the financial and non-financial implications of a contract and use that to define improvement and success.

It’s time to go “all in”
When moving to gain/risk sharing contracts, one contract is likely not enough. Critical mass is typically needed to shift care patterns and accelerate organizational changes to succeed in the value-based world. Hospitals and health systems should embrace gain/risk sharing contracts to create efficiencies of scale and offer physicians and care managers the right incentives to change their care patterns and maintain high-quality care. Based on our experience, the crucial tipping point for health systems is when about 35-40 percent of revenue is based on gain/loss sharing deals. Anything below this point can create potential conflicts, where improvements in care efficiency reduce a system’s earnings under fee-for-service contracts. Once a hospital or health system has reached this share of revenues, commitment to value-based care is clear and the organization can more effectively make system-wide changes to succeed in these gain/risk sharing contracts.

Comparing apples to oranges
No two contracts, populations, or lines of business will be the same in gain/risk sharing arrangements. Contracts will vary in structure and requirements based on the payer and population covered, and organizations will not necessarily manage populations the same way. As a result, different contracts will likely require care management teams to bring different focus areas and organizations will need to monitor the contracts in different ways based on the specific financial, clinical, and quality measures included in each arrangement. Unfortunately, there is no one-size-fits-all for gain/risk sharing contracts and comparing contracts is increasingly difficult.

“Shared savings” does not equal “shared risk”
Many health systems start small with gain sharing contracts (without the risk of a financial downside) and that is okay – in fact, we encourage you to do so for as long as you are able! However, the reality is that the market is likely heading further toward risk sharing and these contracts requiring risk for not meeting financial goals may be inevitable.  Further, we find, contracts without downside risk often do not give enough incentives to the physicians and the system to change and succeed. The risk of paying funds back forces organizations to change.

As we’ve explored throughout this blog series, hospitals and health systems have a lot to consider when taking on gain/risk sharing contracts. Steps to evaluate the agreement upfront are understanding the target, aligning operating models, and managing fund flows. Throughout the contract period, provider systems should actively manage their performance with supporting technology, insightful analytics, and timely reporting. Most importantly, hospitals and health systems should remember to keep a holistic view when assessing contract performance, keeping in mind the financial and non-financial benefits obtained through the agreement and treating their gain/risk sharing portfolio as just that – a portfolio.

“Success” and “failure” cannot be measured as a single contract’s performance in a single year. Hospitals and health systems should challenge themselves to take on more risk (in number of lives and/or in percentage of risk share) in order to change behavior to succeed in value-based care.

And again, a huge thank you to my colleagues Brian RushChris Schmidt, and Molly Stormont for their thinking in this area and support in developing this series.

Author bio

Mr. Mark J. Bethke has been a healthcare consultant for Deloitte Consulting LLP since June 1999. He is a Fellow of the Society of Actuaries (FSA) and a Member of the American Academy of Actuaries (MAAA). Mark is the health actuarial and financial modeling leader for Deloitte’s Value Based Care and MACRA market offerings. Mark helps his hospital, physician, and health plan clients bridge their financial business needs through strategic collaboration in value-based accountable care models. Mark’s core competencies include value-based aligned incentive models and health information analytics by developing data models to help assess risk and model potential business scenarios. He works on issues such as provider contracting, risk/gain sharing, product development, financial analysis and management, data structure design, and health status-based risk adjustment. He has extensive experience in healthcare data analysis and modeling, benefits pricing, and healthcare provider payment systems.