Capacity Building, Strategy

How Healthcare Entities Think About Risk

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Financial risk is a mysterious concept to many community-based organizations, but any CBO interested in cross-sector partnerships must be able to understand, assess and address risk as an important part of its business case to healthcare organizations.

In this post, I will explain the concept of risk and explore four common risk-based models you are likely to encounter when working with healthcare partners.

What is Risk?

Broadly speaking, risk refers to the chance that the actual financial return – revenues minus costs – may be higher or lower than the projected return. When it comes to contracting with healthcare organizations, CBOs must understand and differentiate between two distinct contexts for risk:

  1. Risk that the healthcare organization faces by virtue
    of the payment system governing how it receives and expends its revenues for
    the provision of medical care; and
  2. Risk that both the CBO and its healthcare partner
    assume in the provision of social care.

Here, I’ll be looking at risk in the first context in particular. By understanding the risk arrangement that provider has with its payer(s), the CBO is better able to present a business case for partnership that is aligned to the provider’s own financial considerations.

Risk and Payer-Provider Contracting

To understand what risk means for CBOs, we must first understand what risk looks like for the payer and how the payer, in turn, might aim to manage their risk by delegating it to one degree or another with their network of providers.

The Payer’s Risk

For this discussion, let’s assume that the payer is a Medicare Advantage plan.

Under the Medicare Advantage system, the plan administrator receives a fixed per member per month (PMPM) payment from the Centers for Medicare & Medicaid Services. When it comes to actual care though, there is no guarantee that the PMPM will be sufficient to cover the actual expense of medical services delivered by a given provider. On the flipside, actual expenses may be lower than projected and, within limits, the plan doesn’t need to expend the entire PMPM on medical care.

The Medicare Advantage plan is therefore assuming two-sided risk under this arrangement. Two-sided risk means that if the plan spends more than the PMPM it receives, its net income shrinks; if it spends less than the PMPM, the plan benefits.

With this in mind, the Medicare Advantage plan will seek to mitigate its own risk by shifting all or some of it to its providers. So, when the plan contracts with a hospital, medical practice, integrated care system or any other provider, it will look to do so using one of four common risk-based models.

  1. Global Risk Model
  2. Dual Risk Model
  3. Shared Risk Model
  4. Fee-for-Service

The Four Models and What They Mean for CBOs

In building a partnership business case, your CBO needs to understand which model is in place and how your services can play a role in reducing risk for the entity that bears it under each arrangement.

With that in mind, let’s look at each of the four risk-based models.

1. Global Risk

With global risk contracting, the provider – often a medical group – takes full risk for all professional and institutional services paid for by a health plan. The plan provides a global or capitated payment to the medical group which then assumes responsibility for the total cost of care.

Think for a moment what this model implies for a CBO’s value proposition, given that this proposition is generally built on the CBO’s ability to lessen the total costs of medical care through non-medical services. With a global risk model in place, the plan would have minimal interest in the CBO’s services because medical expenses are not its responsibility, even though it may benefit from improved reputation and Star Ratings as a result of the medical group providing valued services to its beneficiaries. Instead, it will be the group who has the stronger interest in seeing social services provided; providing them is a means of keeping the cost of its care within the limits of the fixed PMPM payment received from the Medicare Advantage plan.

2. Dual Risk

In the dual risk model, the plan also sheds 100% of the risk but, unlike the global risk model, does so through separate contracts that apportion the risk to multiple providers. For example, a medical group and a cooperating hospital divide a capitation payment for all medical services between them. The physician organization takes the risk for professional services, and the hospital organization takes the lion’s share of the institutional services.

What implications does dual risk contracting have for a CBO? In this model, the plan has delegated all its risk in the form of two capitated payments. Consequently, a CBO should not be targeting the health plan that has chosen this as its dominant model. Neither is the physician group likely to be responsive to a CBO’s claim of reductions in post-acute-care utilization, since it hasn’t taken on substantial risk for institutional services. Instead, it is the hospital that has assumed the risk for this utilization that will be more receptive to the CBOs potential to reduce it.

3. Shared Risk

The third way that the health plan may manage risk is by sharing it with a medical group. Here, a physician group receives capitation payments — but only to cover healthcare professional services. The plan and physician group then share the risk for institutional services (hospital, nursing home, outpatient surgical facilities, home health). The plan, after paying the providers for their institutional services and the physician group for their professional services, then divides any excess income with the physician group. Conversely, if there is any shortfall, the plan and physician organization share the loss. In practice, this provides some incentive for physicians to limit the use of the hospital.

Here, a CBO’s potential to reduce acute care costs would in theory be appealing to both the plan and the medical group since cost savings would benefit both. In practice, however, any reductions in hospital care would make a bigger difference to the plan. The medical group, while having a stake in inpatient costs, relies more heavily on controlling the costs of outpatient services for which they alone are responsible. Therefore – unlike the global and dual risk models – the plan itself is the more logical target for partnership, because it has retained the institutional risk.

4. Fee-for-Service

Although this fourth model is uncommon, it’s not unheard of for a Medicare Advantage plan to retain all of the risk by contracting with providers on a fee-for-service basis. In this instance, the providers face no risk for excessive utilization and the resulting costs, so the obvious and sole target for a CBO is the plan. In fact, fee-for-service providers, since they are paid for volume, would lose income if a CBO were to reduce acute care utilization.

In Summary

A compelling business case for cross-sector partnership begins with your understanding of the intricacies of the payment arrangements between payers and providers. A CBO must identify which model is in place, determine which entity has undertaken the risk, and present its own services as a viable means of mitigating that entity’s costs – resulting in positive financial returns.

I’ll be looking at the second context for financial risk – how CBO and healthcare partners share risk for social services – in a future post. In the meantime, feel free to get in touch with Collaborative Consulting to learn how we can help your organization make a solid financial case to your potential partners.

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Victor Tabbush

Victor applies his deep expertise in healthcare economics and his firm commitment to leadership and management capacity building to enable health and social care organizations to develop viable cross-sector partnership strategies.