How to Succeed in Downside Risk Arrangements

For decades, the healthcare industry has struggled with how to best distribute risk and responsibility for financing healthcare costs.

Downstream risk arrangements between health plans and providers first emerged in the 1980s and 1990s when insurance companies and health maintenance organizations began contracting with medical groups and independent physician associations using capitation and other risk-sharing mechanisms. In turn, the risk transfer created a market for provider stop loss insurance, which limits a provider’s financial responsibility for large unexpected claims on individual members or on an insured population.

In its early days, provider stop loss coverage operated without the benefit of today’s healthcare information technology and timely access to data. Further, because severity risk adjustment did not yet exist, the pricing of risk to providers was crude. For these reasons, many risk arrangements proved financial unsound, as some providers groups did not have sufficient capital to coverage large claims.

Lessons From the Past

As a result of the lessons learned from the 1990s experience with capitation, reinsurers and risk takers began paying more attention to analytical and operational approaches to risk management. Today, many companies continue to approach risk management from a financial or statistical perspective, but with greater sophistication by accessing large claims databases and applying predictive analytics.

As healthcare transitions from volume-based to value-based care, a few forward-thinkers have identified two new sources of opportunity to better handle emerging risk. The first opportunity is to be proficient at the traditional approach to financial risk management. Second, avoiding clinical variation can further improve certainty and predictability.

Several progressive companies have demonstrated the effectiveness of a physician-centric risk management model that combines financial risk management and reducing avoidable clinical variation. These models often focus on narrow networks of physicians, closing gaps in care, accurate and complete documentation and coding, and ensuring primary care access.

The Clinical Model Matters

A health system’s operating partner in population health must arm physicians—especially primary care physicians (PCPs)—with the tools, information and governance to manage care effectively. Moreover, there must be an incentive scheme that increasingly rewards improved clinical and financial results, rather than productivity and volume, over time.

Lumeris has developed an operating model to support health systems, providers and payers succeed in transitioning toward value-based arrangements. It focuses on aligning financial incentives as well as redesigning the care delivery model to ensure success in value-based care.

The Path to Successful Risk

Moving forward, providers will be asked to take on increasing amounts of risk. Developing an effective risk management strategy requires hospitals and health systems to evaluate several financial, operational and clinical considerations. For many organizations, successfully managing downside risk requires an operating partner to help them develop new operational and financial capabilities.

While hospitals and physicians in risk arrangements are able to take advantage of the advances in provider risk management described above, some of the same fundamental challenges remain. An effective risk management strategy begins by considering the following questions:

  • Does the stop loss coverage embedded in a payer agreement satisfy the health system’s best interests for price and coverage – particularly when value-based contracts are new and enrollment is small?
  • When should a provider look to a risk management specialist to consolidate risk arrangements under provider-controlled (rather than payer-controlled) management and reinsurance?
  • What operational capabilities should a health system have to effectively manage risk and related re-insurance arrangements?
  • When is it advisable to combine population health risk with other types of health system risk management programs in an enterprise approach?
  • What risk financing options are available to a health system for managing population health risk?
  • What approaches are most effective for anticipating and managing emerging risks such as high cost drug therapies?

Learn the key areas a health system must evaluate when developing a risk management strategy, as well as the operational and financial capabilities required for risk management success by reading the white paper.

mgordon@lumeris.com

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