Assess and prepare for financial risk

As described in Section I Step 7 Understand types of financial risk in VBP models, provider entities and clinicians are increasingly adopting VBP, but many are reluctant to participate in models with downside risk (shared risk). Moving away from the known FFS model and accepting financial risk can feel scary, despite knowing that risk-based contracts may provide stronger incentives or flexibility for care delivery transformation. To move forward it is important to assess your tolerance for financial risk in VBP models.

Ask the following questions for your organization:

  • Did you conduct a financial analysis to ensure that you understand the resources required to change clinical care operations, understand your data, and accept financial risk?
  • Do you have a means – facilitated by a payer(s) – to continuously monitor the costs to deliver services to attributed patients compared to revenue?
  • Do you have reserves or other financial means adequate to cover any potential contractual financial losses or changes to cash flow?
  • Are the right populations and/or services ‘carved out’ of the payment model?
  • Is your financial exposure limited for high-cost outliers?
  • How is risk adjustment being conducted by the payer(s)?

To be successful in any VBP model, including pay for performance and shared savings, investments in data analytics and clinical workflow changes are needed. See Section I Step 4 Identify current data analytical capabilities and gaps for details on the access to data and analytical capabilities to support successful engagement in VBP models, and Section II Step 4 Assess, interpret and leverage data to assess your capabilities.

Being paid prospectively or on a shared-risk basis requires providers to accept financial risk and to have the financial and technical capability to pay clinicians and staff. If your provider entity does not have experience in being paid under a prospective or risk-based payment, pilot such payment with trusted, collaborative payers and set up feedback loops with payers to identify challenges you may have, and any data quality concerns the payer may have and adjust the process as needed.

Providers that are small, less financially secure, less experienced with VBP models, and/or more risk averse may be concerned about potential financial losses in certain VBP arrangements. While this is a legitimate concern, provider entities may explore VBP approaches with their payers that mitigate the potential for significant provider losses and offer significant opportunities for provider entities to reap financial rewards from successfully transforming care and improving value. (1) More detail can be found in Section II Step 7, Engage and negotiate with payers.

A stop loss provision in a VBP arrangement sets a pre-determined cost threshold for a patient whereby any costs over the threshold are removed from the physician or practice’s Total Cost of Care calculations and liabilities.

Risk corridors mirror aggregate stop loss thresholds/ insurance in that physicians are protected against higher-than-expected total medical spending for attributed patients. Risk corridors function by limiting provider financial losses (and gains) beyond a specified, allowable range.

In consultation with payers, determine whether and how to use stop-loss or other risk protections in your population-based payment arrangements. You might negotiate individual-level risk protection with payers for high-cost outliers, and seek to self-finance and/or purchase aggregate stop loss coverage from the payer or a third party.

Know when and how the payer will determine financial performance against the budget targets. Consider what claims lag time might be, how the financial data will be analyzed, and whether the provider has an audit and/or appeal process on the budget calculation.

Understand how and when savings will be distributed and how any losses will be recouped. Payer approaches to addressing losses may vary by provider size and financial stability and experience. In the event of a loss, payers could reduce the budget or FFS payment for the following year to spread the cost of the losses out over a year. This doesn’t require the provider to actually pay the health plan dollars. Alternatively, larger providers with financial reserves, may be asked to reimburse payers directly for incurred losses within population-based payment models.

To estimate average savings per person, shared savings programs typically assess providers’ performance relative to an expected target or a comparison group’s performance, but the existence of random variation in medical expenditures leads to statistical uncertainty in measuring the savings rate. This uncertainty is greater for provider practices that have a smaller number of attributed patients. The probability of an incorrect performance reward or penalty is heavily dependent on panel size. This potential for statistical uncertainty isn’t limited to situations where the provider entity is small, (i.e., has few patients), but can also occur when an individual payer or health plan has few patients attributed to the provider entity. However, aligned multi-payer VBP models, such as those envisioned by the VBP compact can help to increase the size of attributed panels and achieve statistical confidence.The more VBP measures and models align across payers, the more there can be valid approaches to measuring provider performance even when a particular payer’s membership is relatively small with a provider.

(1) N. McCall. Tricky Problems with Small Numbers: Methodological Challenges and Possible Solutions for Measuring PCMH and ACO Performance, State Health and Value Strategies, 2016.