Healthcare Value

James H. Landman

How much risk will your organization face in the transition to a healthcare payment and delivery system that rewards value over volume?

Virtually all provider organizations will encounter some level of risk as the transition to a more value-based payment and care delivery system accelerates. But not all forms of risk will be appropriate for all organizations. HFMA's most recent Value Project report-Building Value-Driving Capabilities: Contract and Risk Management-defines three main categories of risk that healthcare organizations are likely to encounter in the transition to value and discusses strategies organizations can employ to manage their exposure to risk.

Risk Categories

Risks that healthcare organizations may face in the transition to value fall into three broad categories: transition risk, performance risk, and insurance risk.

Transition risk is a concern for virtually all healthcare organizations. Efforts to improve the value of health care are taking hold in federal and state programs and with commercial carriers, employers, and other purchasers of care. But the pace of change is uneven, varying significantly among markets and even among different payers and purchasers within a single market.

Hospitals and health systems increasingly find themselves facing incentives from some payers to better coordinate care, reduce readmissions, and drive down utilization, even as most revenue remains tied to volume under the current fee-for-service payment system. This dilemma creates the two most significant elements of transition risk: the risk, on the one hand, that reduced utilization from better coordinated care will reduce revenue under the current payment system, and the risk, on the other hand, that other providers will be better positioned to take advantage of value-based opportunities as they arise.

Performance risk encompasses a wide range of payment strategies in which a healthcare provider faces potentially lower payments or financial penalties for failure to meet quality targets, manage utilization or costs, achieve patient satisfaction goals, or meet other performance-related targets. In a March 2011 Value Project survey of HFMA members, nearly 60 percent of respondents indicated that they believe more than 10 percent of their total payments will be exposed to performance risk within the next 10 years, and almost one-third thought their exposure would exceed 20 percent of total payments.

Again, some level of performance risk will be hard to avoid for most hospitals and health systems. Prospective payment system hospitals will face some level of performance risk under Medicare's value-based purchasing program and its Hospital Readmissions Reduction Program beginning Oct. 1, 2012. Other penalties will attach to failure to achieve "meaningful use" of electronic health records under the Health Information Technology for Economic and Clinical Health Act and failure to control hospital-acquired conditions.

At the same time, hospitals and health systems have additional opportunities to voluntarily pursue value-based payment initiatives with both government and private players. In many instances, these initiatives ask provider organizations to take on some degree of performance risk. Exposure to risk under these initiatives can range from relatively minimal (failure, for example, to receive an incentive payment for meeting quality metrics under a pay-for-performance contract) to substantial (repeated failure to keep costs below the negotiated price for a bundled episode of care).

Insurance risk is the risk that a possible-but uncertain and typically uncontrollable-event might occur. Examples in health care would be the risk of an accident that causes traumatic harm or the risk of contracting a serious disease. The degree of risk faced is a combination of several factors, including the likelihood of an event happening and probable magnitude of harm if the event does occur.

With performance risk, a patient's condition is known in advance: The element of risk centers on how well the provider performs in treating the known condition. In contrast, insurance risk can expose an organization to unknown risks and unknown costs.

Managing Risk

At all levels of risk-transition, performance, and insurance-there are steps healthcare provider organizations can take to manage and mitigate their risk exposure.

With respect to transition risk, all hospitals and health systems should balance experiments in value-based care delivery with the need to remain financially viable under the current payment system. Strategies include the following.

Taking advantage of a self-funded employee health plan to experiment. Better coordination of care for high-frequency users of services or better management of chronic conditions among employees and their family members can both provide experience with value-based care delivery and produce cost savings for the organization.

Improving access to in-demand services. In markets where there is unmet demand for services, a focus on reducing per-patient utilization of those services can help develop value-driving performance improvement capabilities while opening up capacity for additional volume.

Focusing on cost containment. All organizations should be focused on lowering costs while maintaining the quality of services they provide. No matter what direction reform takes, bending the cost curve will be an imperative for all healthcare providers.

With respect to performance risk and insurance risk, strategies will vary depending on the extent to which a hospital or health system wants to-or should-expose itself to risk. At a minimum, all organizations should be modeling their exposure to performance risk that will affect most of the industry, including CMS's value-based purchasing and readmission reduction initiatives, and should be considering strategies that will help them limit this exposure. Beyond this, organizations should carefully consider the following factors in weighing their appetite for risk.

Network design. Are there incentives to encourage patients to stay "in network" for their care? If not, the ability to coordinate care in instances ranging from episode-based bundled payment to full-blown population management may be significantly weakened.

Data access and analytics. Does the organization have access to the data necessary to accurately price a bundled service, or to model historical utilization of services for an attributed population? Is it working with a payer or purchaser who is willing to collaborate on identifying and fulfilling data needs? Does the organization have the analytical and actuarial skills available to mine data for actionable information and identify cost and utilization trends?

Integration of the delivery network. Does the hospital or health system have an integrated primary care network to provide pre- and post-acute care, preventive care, and a referral base when more intensive services are required?

Performance improvement capabilities. Does the organization have a proven track record of successfully planning and implementing process improvements across the organization?

Downside financial risk. What is the organization's potential downside exposure to risk? What options are available-such as outlier thresholds, provider-carried reinsurance, or defined risk corridors-to limit this risk?

Increased exposure to risk will be a reality for most hospitals and health systems. For a more detailed look at risk-related issues and strategies, access Building Value-Driving Capabilities: Contract and Risk Management .

James H. Landman, JD, PhD, is director, thought leadership initiatives, HFMA, Westchester, Ill. (


Publication Date: Monday, September 03, 2012

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