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While the target is critical, do year-end losses on risk-based contracts even matter?

As we discussed in part 1 of this series, health systems (hospitals and provider organizations) continue to take on more and more gain/risk sharing contracts. A key question for this type of contract is understanding how it will affect revenue and margins.

To help answer this question, while assessing what can be a very complicated contract, a provider should focus on three aspects:
1) How the claims target is set in the contract
2) How the contract will help bring in new patients (i.e., increase market share) and/or lead to more services performed in-network with existing patients)
3) Whether an operating model is in place to share savings or losses among all the entities in the provider’s network

As a system considers risk-based contracts with payers, it should clearly understand these new revenue drivers to succeed in this new world of value-based care.

Keep your eye on the target

Gain/risk sharing contracts typically include a target to which the provider system is measured for managing claims spending. The methodology for setting this claims target is likely the biggest driver in whether or not a system is capable of earning shared savings payments during year-end reconciliations.

Payers typically set the target using the historical claims history for the systems’ attributed population to develop a baseline. Systems should make sure they understand how the payer calculates that baseline (e.g., what services are included/excluded), how it is trended, if it is discounted by an assumed savings factor, and what population is used for the target. If a system does not know the patients for which it is financially responsible, it is more difficult to manage the health of those patients and achieve savings to earn gain/risk sharing payments.

When reviewing the target in gain/risk sharing contracts, these are some of the critical questions that systems should ask:

  • Will the target be risk adjusted to reflect the demographics of the attributed population during the contract’s performance period?
  • How will trend be developed and applied to calculate the target and is it in line with the provider’s expectations, the target population, and the market?
  • Will there be an assumed savings discount applied to the historical levels, making the target even harder to achieve?
  • Will there be a mechanism to adjust for catastrophic claims and patients?
  • How will the target be updated from the first performance year to the second and third?
  • At what point will the target be “rebased” with new baseline year of data?
  • Do any parameters vary depending on the size of the attributed population?

Additional key questions beyond the target include:

  • Are lives prospectively or retrospectively assigned to the system?
  • Will the payer provide a list of the attributed patients before and/or during the performance year?
  • How much additional discount and/or care management efficiencies is the payer expecting to achieve a lower premium level?
  • What are the parameters defining the risk-sharing payments:
    • Is there a minimum savings/loss threshold?
    • If savings are achieved, what is the provider system’s shared savings percentage?
    • If losses are realized, what is the provider system’s shared losses percentage?
    • Do shared savings/losses go back to the “first dollar”?
    • Do quality metrics need to be met in order to obtain risk-sharing payments?
    • Do any of these parameters change over the lifetime of the agreement period?

The provider should confirm that the target setting process is clearly defined in the contract, that the language and process are detailed, and that the methodology is crystal clear. A thorough understanding of the target setting and reconciliation processes will help give the provider a better sense of how to achieve shared savings in gain/risk sharing contracts, avoiding confusion and disagreement during year-end reconciliations.

System-wide financial value and volume plays are even more important than shared savings

When analyzing the financial success of a gain/risk sharing contract, the provider should look at the contract from a holistic, system-wide view. Although understanding the payment mechanism is important, the contract could provide additional revenue through additional market share or increased in-network steerage. These elements will not be reflected in the financial reconciliation of the year-end reconciliation calculation. As such, providers have yet another reason for why it is becoming increasingly important to track patients across the continuum of care to understand in- and out-of-network usage.

As volume continues to be a major driver in the value-based world, it is essential that providers understand how a contract may bring in new patients or expand the in-network services provided to existing patients. In any gain/risk sharing contract, the provider should be gaining something that they did not have previously. The contract could provide a narrow network or benefit design differential that encourages patients to stay in-network within the health system, which helps grow the system’s market share. A provider should also realize that gain/risk sharing contracts have a variety of other non-financial benefits, as discussed in the first edition of this blog series.

If a provider is not gaining additional market share or in-network usage, entering into a gain/risk sharing contract will likely leave the provider in a worse financial state than a fee-for-service (FFS) contract. This is mainly because payers often want the provider to give a discount on their rates if they are going to agree to a narrow network or benefit design differential product. Discounted rates on services generally leave the provider with less revenue even if the volume of services is the same.

Don’t forget about the operating model

Even after considering the payment details and whether the contract will bring in new revenue and market share, a system can still trip up without an aligned operating model and a funds flow model that values and shares funds equitably across the organization. Health systems must agree how to share savings internally and who will be responsible for shared losses, should they occur.

Check back in two weeks when we continue the series with a focus on monitoring your gain/risk sharing contracts.

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 health care 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.