Preparing for risk-based contracting and value-based healthcare presents challenges and opportunities

December 21, 2022 5:26 pm

The traditional economics of care delivery in a fee-for-service payment model are placing providers and insurers alike at increasing risk of being unable to fulfill their mission and purpose. Yet many organizations are ill-equipped to succeed in a reimbursement environment defined by provider organizations taking on meaningful downside risk.

In a roundtable discussion, Kaufman Hall managing directors Matthew Bates and Nora Kelly and senior vice president Max Timm discuss the rise of risk-based contracting in value-based healthcare arrangements, what providers and insurers need to watch out for, and what success in risk-based contracting will look like.

Q: A relatively small proportion of providers and payers currently take on downside risk. Why should healthcare organizations expect, and prepare for, a more risk-based healthcare environment?

Matthew Bates is a managing director and leader of
the physician enterprise practice at Kaufman, Hall & Associates,
Chicago, Ill.([email protected]).

Matthew Bates: The healthcare market has gotten a little confused by the terminology around risk and value-based care. Often, people think those terms mean fee-for-service payment with a value adjuster of a couple percentage points.

Real risk-based care models — whether it’s primary or specialty care or fully capitated models — are growing materially. There’s been a significant increase in the employment of physicians by nontraditional health systems. Twenty percent of physicians now work at for-profits or private-equity-backed companies that are playing, for the most part, in non-traditional fee-for-service models (i.e., risk-based contracts).

Nora Kelly: While the evolution has happened more slowly than we might have originally anticipated, it remains the case that the current, predominantly fee-for-service model isn’t working. There’s persistently high inflation compounded by an affordability crisis. Then there are the demographics: an aging population with a lower proportion of the population that’s working age.

Other stakeholders have entered the market, have seen a tremendous opportunity and are pushing the pace. There’s a tremendous influx of private-equity money and for-profit publicly traded entrants. They’re segmenting the market in a different way, and they’re focusing on not just different geographies but different specialties and points along the continuum of care. The market has recognized there’s a tremendous opportunity to make healthcare more affordable and accessible.

Max Timm: If 2022 has taught us anything, the traditional economic model of care delivery is not working, at least right now. That’s partly because of rising expenses and a slower-than-expected rebound of patient volumes.

This could be one signal for organizations that have been historically rooted in a fee-for-service environment to look at scenarios where economic performance is dependent upon the ability to effectively manage either the premium dollar or a significant proportion of medical spend.

Q: What are the biggest challenges to moving to risk-based models?

Nora Kelly is a managing director at Kaufman, Hall &Associates, LLC, Chicago, Ill. ([email protected]).

Kelly: This is a tremendous culture change, requiring payers and providers to work together in different ways, with trust and collaboration and not as adversaries, as they might be in a fee-for-service world. You must redefine incentives within those relationships and be willing to adapt as you learn from the experience. The transition also requires providers to adjust their own internal operating model and incentives to create alignment. Those changes impact the day-to-day roles of both providers and business leaders, and it is important to communicate the vision and create internal buy-in.

These meaningful changes, both internal and external, create overall business risk, which is often challenging for provider organizations that value stability and predictability.

Timm: Let’s say an organization doesn’t own all the capabilities at scale. It might not have a provider-sponsored health plan, an integrated primary care platform, or other services that enable success in an outcomes-based environment. Then the barriers are finding willing partners. Each party needs to be willing to mutually advantage each other, uniquely creating value and growing covered lives.

Bates: I think the biggest challenge for traditional health systems is how to deal with dual transformation. We’ve had this image for a decade of one foot on the canoe and one foot on the dock, but I think the reality is that real risk-bearing requires an organization to organize differently around two parallel tracks.

How do we embrace risk with part of the organization and grow the skills and expertise to address it, while recognizing that the vast majority of the organization is still living in a predominantly fee-for-service model?

And let’s not pretend those two approaches blend easily. For example, in a fee-for-service system, you lose money on primary care physicians, and you make it up on downstream referrals. Today the numbers suggest there’s $2 million plus in revenue per primary care employed physician. That’s a lot of tests and specialty referrals and emergency department [ED] visits and hospitalizations linked to that primary care physician. Conversely, in a risk-based model, we make the money on primary care — by not referring when we don’t need to, by not running unnecessary tests, by reducing ED visits and hospitalizations.

These two models are fundamentally aligned very differently, which is why it’s very difficult in most systems to take on a little bit of risk and then ask their traditional fee-for-service practice to take on 5% or 10% patient volume at risk.

Q: What does success look like?

Max Timm is senior vice president at Kaufman, Hall &Associates, LLC, Chicago, Ill. ([email protected]).

Timm: It comes back to data — including data sourcing, aggregation, exchange and analytics.

Managing high-risk or rising-risk lives requires intervention, and you must be able to understand patterns and identify these member segments. You need to make the data usable and establish processes to get it in the hands of people who need it and create a feedback loop.

Bates: The most successful examples of risk are where payers and providers are working together. It’s an important shift from the traditional focus on the question “Who can get an angle on the other party?” You need to lean in a different way and give leaders authority to do things differently.

For instance, most health systems direct all labs to their own system, even though hospital labs are not the cheapest option. If you’re doing it at risk, the physician should send it for a good quality result at the cheapest price, or the hospital lab should be asked to compete. That means you give up the margin on the lab. It’s a very difficult conversation for a system with a little risk, but not a lot.

Second, you need to figure out how to operationalize risk-based delivery. That requires degrees of freedom, which very few folks have.

Kelly: There will certainly be new metrics to track, but at the end of the day, many of the traditional metrics hold — patient satisfaction, provider satisfaction, quality, and the practicality of financial measures. What is different is the way you get there and achieve those things. 

The pace of transition is one of the hardest questions. Going from no risk to all risk too quickly can challenge the viability of an organization. On the other hand, some organizations have stayed for long periods of time at 10%-20% risk-based payment, and they struggle to gain traction, because the overall business is still driven by fee-for-service.

There is no single playbook or solution that works for every organization. It requires thoughtful consideration of both external market dynamics as well as internal capabilities and readiness for change. For example, if you get ahead of yourself with capitated payer contracts before your organization has fully prepared internally, you could set things up for failure. The right answer for your organization requires a clear vision and plan of execution as well as a willingness to accept a higher level of business risk through the transition.


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