Blueprint for Taking on Risk in Healthcare

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Facing growing pressure from insurers to assume more financial risk, healthcare providers are exploring ways to better manage cost and utilization through risk-based contracts.

Unfortunately, most organizations tend to focus more on the contract itself and fail to give adequate attention to planning out what they will do once the agreement is signed.

Effective contract negotiation and execution depend on the same set of capabilities. To succeed in risk-based contracting, providers need to build an infrastructure that supports every dimension of risk management—from risk modeling and contract design to population health strategy.

Here are four elements that will be instrumental to building this infrastructure.

1. Understand your patient population

The first step is to use cost and contract attribution modeling to gain an accurate understanding of the patient population. Clearly delineate the population under management using either a provider volume model or geographic distribution model:

  • Under the provider volume model, patients are attributed to the physician they see most often during a performance year. The benefit of this model is that a healthcare organization’s attributed population coincides with the group of patients it has most influence over. The downside is the model’s complexity.
  • The geographic distribution model means that the provider organization assumes risk for all patients within one or more defined zip codes. This approach is straightforward, but it comes with significant risk of network leakage.

Using either basic cost model, divide the population’s total monthly claims for medical services and pharmaceuticals by the total number of patients or members. This is the per-member-per-month (PMPM) cost for the population under management.

Moving forward, redefine this model over time. The data should be analyzed by medical spend and utilization to provide insights into the current health and cost status of the population and identify the organization’s contracting opportunities.

The next step is to identify and exclude costs and risks from the PMPM calculation. In general, providers want to carve out catastrophic costs and difficult-to-control risks—excluding members with claims over $100,000, for example.

At the end of every performance period for a risk-based contract, assess the results. The insurer and the provider must determine whether actual PMPM exceeded or fell short of the medical spend cost target. Be aware that if the methodology is not well defined, this reconciliation process can be a source of time-consuming conflict. Common problems include ambiguity regarding:

  • Baseline periods. It is important to define the specific service dates that will be used to determine initial PMPM targets.
  • Patient opt-in/opt-out issues. There should be rules defining how patients and providers enter and exit the attributed population.
  • Contractual exclusions. It should be clear which costs are and are not included in the agreement.

Different terms work for different organizations. Having said that, providers should never enter any risk-based contract without a full understanding of how the costs are calculated, all the elements that go into the reconciliation formula, and how these decisions will impact the organization.

2. Manage risks with a healthcare risk pyramid

As insurers move toward true risk-based contracts that include both upside and downside risk, healthcare organizations should broaden their focus to “rising risk” patients. This population can be defined as the 15 to 30 percent of the population with one or more chronic diseases. These patients typically are older, and their illnesses often are unmanaged. Optimizing care and outcomes for these patients is the key to achieving true cost control within a broad-based population.

To optimize care for this population, it's helpful to leverage both provider and insurer resources. Most provider organizations understand the benefits of care management, which requires using the clinical record to identify opportunities to lower costs by improving care and outcomes. Under risk-based contracts, however, providers also must manage utilization, and it makes sense that they can do so most effectively by leveraging insurer expertise in case management.

Provider organizations must also seek to minimize patient leakages. Insurer-based utilization nurses can assist with this by helping organizations understand referral patterns outside their systems. This can reveal opportunities to use member outreach and develop educational initiatives to steer patients back into the organized system of care.

Naturally, too, organizations should be prepared to go the extra mile for rising-risk patients. A growing body of research shows that factors such as access to transportation, food security, and social support can have a huge impact on clinical outcomes. Optimizing these factors is especially important for managing rising-risk patients, who, by definition, are on the verge of serious, high-cost health problems.

The final step in building the risk pyramid is to identify ways to reduce the provider’s financial burden. Care management is an essential element of a risk-based care model. With this in mind, it makes sense that insurers assume a portion of infrastructure costs. When negotiating a risk-based contract, the provider should request a PMPM care management fee. The fee may only cover 10 to 25 percent of infrastructure costs, but it will reduce the overall financial burden and it can help align both parties around care management goals.

3. Leverage relationships and alignments

One overall success factor for any risk-based contract is managing relationships. Healthcare leaders should focus on three priorities:

  1. Build strong partnerships with physicians.
  2. Strengthen provider-insurer relationships.
  3. Establish a collaboration network.

Roughly speaking, physicians make 80 percent of the decisions that affect patient health—yet hospitals bear 80 percent of the cost of care. For a health system to perform well under risk-based contracting, it must develop strong working partnerships with physicians.

The most effective strategy for tracking physician alignment is by using measures such as preventive screening rate and generic prescribing rate. It also is important to link these measures to compensation.

Transparency and the open sharing of data are also important to strengthen provider-insurer relationships as well. Although provider risk needs include a blueprint to prepare and engage in risk-based contracts, health plans can help determine success by sharing knowledge and insight with them, said Meredith Duncan, executive director and COO of Aetna’s Texas/Oklahoma/New Mexico health plan.

A governance group should meet quarterly to review 90-day performance and address problems proactively, after finding ways to align all the terms and understand each other’s perspective and objectives. The provider organization’s medical director also should meet with the insurer’s medical director regularly to review high-cost claims and high-risk members.

Provider organizations can also look to other provider organizations, as well. Although acquiring or merging with other provider organizations might sometimes make sense, independent organizations often can collaborate to manage populations effectively.

An effective collaborative network might include one or more community hospitals (to provide the bulk of inpatient care), a multispecialty physician group (to take the lead on care management), an academic medical center (to deliver high-cost tertiary and quaternary care), and a variety of skilled nursing and home health agencies (to manage patients who have chronic diseases or who require post-acute care).

4. Additional measures to consider

Effective risk management requires strong data management capabilities. This requires developing analytic systems that bring together clinical and financial information. Here are some areas to focus on when building these systems:

  • Create a disease registry. A disease registry is a customized database for tracking a specific at-risk population. Care management staff can use disease registries to identify and close gaps in care.
  • Continually refine the accounting formulas. As the organization gains experience with population health and care management, the accounting department should be refining the organization’s formulas for allocating fixed costs. Variable cost allocation should be addressed category by category, starting with the highest-spend items.
  • Use value modeling to predict outcomes. The organization should use clinical and financial data to create a value model for the network, which can then be used to identify new investments likely to yield a return under a risk-based contract.

Most provider organizations today are looking for the right time to assume risk. While taking hints form the market conditions is important, your timing should depend on how soon your organization can build and adjust to an infrastructure that focuses on managing populations, leveraging analytics, and building effective provider coalitions.

Is your organization risk-ready? Learn how to build a risk-ready healthcare organization.

Daniel J. Marino

By Daniel J. Marino

Daniel specializes in shaping strategic initiatives for health care organizations and senior health care leaders in key areas that include population health management, clinical integration, physician alignment, and health information technology.