Understanding Provider Financial Losses in Value-Based Contracts

The shift from fee-for-service (FFS) healthcare models to value-based care (VBC) has been a monumental transformation in the healthcare industry. However, as this transition unfolds, it has added significant complexity to the healthcare system. Insurers have spent decades developing infrastructure and analytics to manage risk. In this paradigm shift, the onus is on providers to urgently catch up and be capable of profiting in risk-sharing arrangements. While there is a myriad of ways providers can incur losses, there are two basic elements that stand out as easily addressable by combining actuarial and clinical expertise.

Contract Negotiations

The negotiation of VBC contracts is a sophisticated process that involves setting cost targets for providers, against which they share in the savings or losses. However, the methodologies of setting targets are fraught with challenges:

Lack of Data and Transparency: One of the key issues in contract negotiations is the lack of transparency from payers and the unavailability (or lack of awareness) of relevant data for providers to use during these negotiations. Providers often enter contracts without a clear understanding of how to push back or validate the reasonability of shared savings/loss targets. In reality, there are both public and private data sources that can be used to validate the reasonability of assumptions that yield the cost target. In addition to relevant internal claims databases, actuarial consultants can assist providers by utilizing URRT, MLR, risk adjustment, and other public data.

The Risk Continuum Fallacy: There’s a common but flawed perception that risk in VBC contracts lies along a simple continuum from “low risk” Fee-For-Service (FFS) to “high risk” capitation. The reality is more complex. There are multiple dimensions of risk, including the often-overlooked technical risk. Technical risk pertains to contract elements accurately reflecting the provider’s specific population and circumstances. This type of risk is highest in shared risk contracts (as opposed to full risk). It’s relatively simple to contract for FFS and capitation but equitably measuring and sharing profit/loss is incredibly complex. Payers, with their institutional knowledge and resources, have significant leverage to tilt contracts in their favor if providers don’t understand how to negotiate.

Multi-Year Dynamics: VBC contracts typically span multiple years and where there’s a complex interaction among assumptions for setting cost targets. This can easily produce situations where the provider faces an increasingly aggressive target over the duration of the contract. While sometimes appropriate, this phenomenon needs to be understood and requires actuarial expertise to properly develop a projection model.

Care Management

Even when a fair target is set, financial losses can occur through inefficient care management. Risk adjustment should always be incorporated into VBC arrangements, which helps ensure that losses are not incurred from a sicker attributed population but rather from inadequate care delivery and/or poor outcomes.

Although actuaries can identify areas of care inefficiency and calculate the return on investment (ROI) for changes, implementing these changes and convincing clinicians to modify their practices are formidable challenges. This is exacerbated by the fact that medicine is practiced differently across geographies and individual doctors. Where a doctor attended medical school can have a significant impact on the protocols they follow. Therefore, it’s critical for actuaries and doctors to collaborate in any cost-reduction analysis and change management. Below are some ways this can occur:

Data-Driven Decision Making: Actuaries can analyze vast amounts of healthcare data to identify trends, cost drivers, and areas where efficiencies can be improved. Meanwhile, physicians can provide clinical insights to ensure that the data interpretations align with practical and realistic medical practices.

Risk Assessment and Management: By combining the clinical expertise of physicians and the risk analysis skills of actuaries, healthcare organizations can more accurately assess patient risks and manage them effectively. This includes identifying high-risk patients who may benefit from more intensive management or preventive care.

Performance Monitoring and Improvement: Actuaries monitor the performance of healthcare delivery by analyzing outcomes and costs. With regular meetings and updates, physicians can use this data to make real-time adjustments in clinical practice to improve patient care and reduce unnecessary expenditures.

Tailoring Care Based on Patient Populations: Actuaries can provide insights into the specific health needs and risks of different patient populations so physicians can tailor care plans, leading to more effective and efficient treatment.

Pricing and Cost Control Strategies: While actuaries can help to price health services and design cost control strategies, physicians can provide insights about what is necessary to minimize the impact on care quality or possibly make improvements.

Education and Training: Actuaries and physicians can engage in mutual education sessions to understand each other’s perspectives better.

Technology and Innovation: Both can collaborate on adopting and integrating new technologies like AI and machine learning in healthcare, which can lead to more accurate diagnoses, personalized treatment plans, and ultimately, cost reductions.

Actuaries can provide valuable data insights, but it’s often clinicians who have the influence and expertise to drive change in clinical practice.

Conclusion

In the transition from fee-for-service to value-based care, losses in contracts can result from a variety of factors, certainly more drivers than are covered in this article. Understanding the nuances of both utilization risk and technical risk is crucial for determining whether a particular VBC contract is right for a provider. Historically relegated to roles within insurance companies, actuaries are now becoming more common in provider organizations as they learn to assume risk. Actuaries can provide valuable data insights, but it’s often clinicians who have the influence and expertise to drive change in clinical practice. By working together, these stakeholders can navigate the complexities of value-based care, mitigate losses, and ultimately improve the quality of care for patients.