//When is the Right Time to Move to Risk Sharing?

When is the Right Time to Move to Risk Sharing?

With all of the discussion today about Alternate Payment Methods, Value Based Reimbursement, MACRA, MIPS, etc., talk very quickly turns to questions about risk sharing. For example:

  • What are the benefits of transitioning?
  • When is the right time to move to risk sharing?
  • Is there a progression from no risk sharing to risk sharing that I should consider?
  • What do we need to do to prepare for risk sharing?
  • When is it wrong, or is it ever wrong, to go the risk sharing route?

This article will discuss these issues and provide tangible insights for provider groups to consider as it relates to risk sharing.

What are the benefits of risk sharing?

The most obvious benefit of risk sharing, is the potential of supplementing reimbursement with incentive payments from the risk sharing process. Most risk sharing mechanisms define a specific set of services that are part of the “risk pool” or “risk share”. A budget is developed for these services and if the resultant cost of these services is less than the budget, a portion is shared (i.e., risk share) with the provider/provider group supplementing their other reimbursements.

One of the early and quite frequent approaches was implemented with multi-specialty medical groups in California. The health plan capitated the medical group for most, if not all, professional services. The remaining services, mostly facility services, were part of the risk pool. If the medical group was effective at controlling facility utilization and cost, 50% of the balance (budget – actual costs) was paid to the medical group as an incentive. If there was a deficit, 50% of the deficit was charged to the medical group in the true risk sharing arrangements. If it was just a gain-share arrangement none of the deficit was charged to the medical group.

Since physicians control, or should be controlling, the consumption of facility charges, this was a logical incentive arrangement. Those who are controlling have a chance of benefitting from the results of their activities. On the other hand, if they were unsuccessful at effectively managing their results there was a financial penalty for their ineffective efforts. In “incentive lingo” this involved both a carrot and a stick.

The appropriateness of the risk sharing process depends heavily on the reasonableness of the budget used to compare with actual costs. Reasonableness requires a clear understanding of:

  • What are the included/excluded services: a clearly written and concise DOFR (Definition of Financial Responsibilities)
  • Consistent understanding of covered population: must be defined, ideally with risk adjustors to reflect risk mix, etc.
  • Actuarial assumptions used to determine budget: assumed utilization and unit cost information, preferably supported with an actuarial cost model
  • Enrollment methodology: how are individuals enrolled in the plan, likelihood of selection bias, etc.
  • Comparison with prior cost results: needed to validate the assumptions
  • Role of health plan in care management: who is in charge of the care management processes

When is the right time to move to risk sharing?

Health plans are usually the first to want to move to some type of a risk sharing arrangement with providers. Sometimes the plan is driven by a frustration in their inability to control costs or remain competitive. Sometimes an insightful provider group wants to get a piece of the action and they request risk sharing. There are several considerations the provider group needs to evaluate as they consider risk sharing:

  • How good are we at care management? Do we have the right mentality to be able to control consumption?
  • What is our effectiveness at controlling utilization and cost? Are we better than average?
  • Could the health plan get along without us? Are they just profiting from our efforts?
  • How adequate is our current level of reimbursement?
  • How risk are the current budgets? Can we outperform that basis?

The biggest question for the provider group is: How good are we at care management? To be a winner under a risk sharing arrangement, you need to be able to effectively manage the care resources part of the risk sharing program. You can’t leave it to chance. One of the best ways to determine this is to obtain an external third-party assessment of current care management processes within the group. You can’t just rely on arbitrary feelings of we are good guys who don’t waste health care services. It may be true but unless there is a clear understanding of performance, entering the risk sharing process is too risky.

If and when the provider group is sure of their care management performance, and the budgets provide room for incentive payments, and the items included in the risk sharing budget are clearly items that the provider group can control and is in charge of, then it is the right time to step into risk sharing. Without any of these, the appropriate decision would be wait.

To be a winner under a risk sharing arrangement, you need to be able to effectively manage the care resources part of the risk sharing program.

Is there a progression from no risk sharing to risk sharing I should consider?

There is an obvious middle group in the transfer from no risk sharing to risk sharing. This is often called gain-sharing where only gains are shared with the provider group. Risk pool losses are retained by the health plan. This involves a partial risk transfer to the provider group. The provider group has less opportunity to do well. Since the health plans retains downside risk, the provider will receive a smaller part of the upside risk potential.

Some experts suggest that providers need to follow a glide path of no risk share to gain-share and finally to risk-share. They recommend a structured process of transition. Cautious providers are unwilling to jump directly to risk-share even if they think they would do fine. There is no right solution on this.

Sometimes other considerations determine the appropriate decision. For example, a high level of mutual trust between the health plan and the provider group will often lead directly to a risk-share program. The structure of the risk-share arrangement can provide security or concerns. For example, a recent project involved a medical group that wanted risk-share and a health plan who didn’t want to give up the margins. The health plan was unwilling to provide the risk-share opportunity for the provider group. Another example was a health plan that developed a comprehensive risk sharing program, with appropriate documentation of the risk sharing budgets, a clearly defined DOFR, risk adjustors for the budgets to be sure the provider group had a good chance for success and avoided the impact of a biased enrolled population. In this situation it was obvious the provider group could comfortably move directly to risk sharing.

What do we need to do to prepare for risk sharing?

The provider group needs to be sure they have the internal systems in place to appropriately keep track of what is provided by or referred by the medical group and how that ties into the DOFR with the health plan. This requires the creation of databases and reporting capabilities not normally part of a medical group. In some situations, this is becoming a small insurance company or health plan. This requires professional expertise different than what is normally part of a medical group staff. This requires additional overhead. Reporting systems can be internally developed or purchased/licensed from third parties. This requires the definition of a wide variety of reports necessary to monitor the results.

Beyond data collection and reporting, the medical group also needs to be sure they have appropriate care management resources to help individual providers manage the care of their patients. This may include the use of third party resources to maximize the cost effectiveness of prescribed care. This will likely require the assignment of one or more physicians to the role of oversight of provided care. This individual would provide the typical Medical Director activities present in a health in addition to monitoring the results of providers and providing mentoring assistance to help them become high performers.

Sometimes this requires a significant change to income distribution plans within the medical group to determine how incentive payments are distributed within the medical group. Consistency of payment to performance is key for incentives to work.

When is it wrong, or is it ever wrong, to go the risk sharing route?

Risk sharing is an option and knowing when to pursue it is key to its success. If budgets are incorrect, improperly documented, vaguely described and communicated it would be a bad decision to enter the agreement. If care is already optimally managed and no improvement is possible, it is probably not a good decision to enter a risk sharing contract.

On the other hand, if there is significant opportunity for an incentive and the administrative structures are all in place, it is a good decision to enter a risk sharing contract the earlier the better. Understanding the health plan’s objectives down the road when savings occur and how future budgets will be determined is key to knowing the likelihood of continued gains. For example, if a health plan ratchets down the budgets eliminating any potential for gains, risk sharing will eventually become unattractive. Fortunately, there always seems to be an opportunity for some type of savings although the low hanging fruit goes away quickly.


Risk sharing provides appropriate incentives for the medical group who is responsible for providing and/or referring care to assigned members. It is best implemented in an environment where the provider group has the capabilities of managing and monitoring the care provided and/or referred to other providers. Successful implementation requires appropriate budgets, risk mitigation, clearly defined DOFRs and collaborative relationships with the health plan. When any of these factors are missing, the risk of the proposed arrangement outweighs the value of it.

About the Author

David Axene, FSA, FCA, CERA, MAAA, is the President and Founding Partner of Axene Health Partners, LLC and is based in AHP’s Temecula, CA office.