• Physician Payment & Risk

    The Patient Protection and Affordable Care Act (PPACA), commonly called the Affordable Care Act (ACA), was enacted into law in 2010. The ACA created the Center for Medicare & Medicaid Innovation (CMMI) to test innovative payment and service models. In October 2011, the Centers for Medicare & Medicaid Services (CMS) finalized rules under the ACA to help physicians, hospitals, and other health care providers improve care coordination. As health care moves from volume-based to value-based models, consideration needs to be given to a business model which focuses on quality of care and risk sharing between physicians and payers.

    In a fee-for-service (or volume-based) payment model, the incentive for the physician is financially driven, focusing on quantity and cost of services, rather than focusing on the quality of services and achieving the best possible health outcomes for patients. In a pure fee-for-service model, effective population health management is difficult to achieve. Fee-for-service does not support all the care management processes needed to manage and care for a population of patients. In contrast, the overarching goal of a value-based payment model is to provide quality, cost-efficient care for the patient, while also compensating physicians through incentives that value their services.

    Risk in Payment Models

    Before accepting risk contracts, physicians need a broader understanding and education of risks, rewards, and the underlying cost of doing business. A physician takes on risk when agreements are made, which assume responsibility for delivering or arranging health care services to patients when the total payment for delivering those services has the potential to be greater or less than the total cost for such services. The table below provides an overview of the types of risk associated in payment contracts.

    Table 1. Definitions and examples of the types of risk

    Downside Risk Downside risk occurs when a physician could potentially incur costs that are greater than payments received for services Financial risk is associated with losses. Providers are at financial risk in the event that added resources are needed to care for patients.1 An example is nonpayment for preventable readmissions.2

    Medicare Shared Savings Program (MSSP) Track 1+, 2 and 3; Next Generation (Next Gen) Accountable Care Organization (ACO); some commercial ACOs

    Insurance Risk

    Insurance risk is related to the patient’s health status that is beyond the control of the physician, such as age, gender, and acuity differences.3

    A physician has patients with health conditions that are more serious than average. An example is a higher number of patients with chronic conditions than expected.

    All Health Plans
    Nominal Risk

    Contained in the Medicare Access and CHIP Reauthorization Act (MACRA) law, Advanced Alternative Payment Model (APM) participants must assume nominal risk or assume risk of an amount that is less than optimal, but substantial enough to drive performance.4

    Physicians share in potential financial losses as they do in downside risk.

    MSSP Track 1+, 2 and 3; Next Gen ACO; some commercial ACOs

    One-sided Risk

    One-sided risk typically means a payment model (such as shared savings) has only upside risk.5 In the MSSP Track 1, the ACO will share in the savings, but not the losses.

    Physicians benefit from meeting quality and cost targets. An example is pay-for-performance bonuses.

    MSSP Track 1; some commercial ACOs

    Performance Risk

    The risk of higher costs delivering unnecessary services, delivering services inefficiently, or committing errors in diagnosis or treatment of a particular condition is considered performance risk.5

    Performance risks are those that are within the control of the physician. If a physician orders unnecessary or expensive drugs or treatments, these are considered performance risks in specific payment models.5 There is a strong connection between payment and clinical outcomes with performance risk.6

    Bundled payments, capitation model; MSSP Track 1, 1+, 2 and 3; Next Gen ACO; some commercial ACOs

    Two-sided Risk

    Two-sided risk allows health care providers the opportunity for financial gains and losses.1

    Physicians have the opportunity to share in savings in two-sided risk models, but will have to absorb costs if spending is over benchmarks or quality targets are not met.1

    MSSP Track 1+, 2 and 3; Next Gen ACO; some commercial ACOs

    Up-side Risk

    Upside risk provides physicians the chance for a financial upside, but no downside risk.1 The risk comes from the uncertainty that there will be a positive margin and how large it will be.5


    Physicians could receive payment when services charged are below the benchmark. They may also receive payments for meeting quality targets that are specific and defined.

    MSSP Track 1; some commercial ACOs

    Shared Risk

    Under shared risk, the physician and payer agree to share responsibility when payment differs from the cost of care.5

    Shared risk requires the physician to effectively monitor the cost and quality of care. Shared risk arrangements can be one-sided, where physicians are only at upside risk; or two-sided, where there is potential for both upside and downside risk.7

    MSSP Track 1, 1+, 2 and 3; Next Gen ACO; some commercial ACOs

    Utilization Risk

    Utilization risk relies on the physician to take steps to limit unnecessary care.6

    Utilization risk measures may include readmission prevention strategies and the management of chronic conditions.6

    MSSP Track 1, 1+, 2 and 3; Next Gen ACO; some commercial ACOs


    Risk in Patient Populations

    As payments shift from volume-based to value-based models, physicians would benefit from a clear understanding of their patient population and the population’s health risks. Preventive care measures, along with managing chronic conditions of your patients will assist in achieving better outcomes in population health management. This understanding directly correlates to the financial risks of your practice.

    To accurately capture severity of illness of patients, physicians will want to be aware of specific diagnosis coding. ICD-10 diagnosis coding will help payers assign appropriate insurance risk, as well as position your practice for value-based payment by accurately reflecting the health or severity of illness of individual patients. Insurance companies and government payers use diagnosis coding to make comparisons of quality, cost, and estimations of resource use. Higher risk assignment may also equate to higher payment for care management or under a capitation model. Under capitation, a physician or group of physicians receives a risk-adjusted set payment amount for each enrolled patient assigned to them for a period of time, whether or not that person seeks care.

    Table 2. Definitions of methods used to appropriately assign and limit financial risk  



    Risk Adjustment

    Risk adjustment is used in payment models to avoid holding physicians accountable for factors that affect performance or cost outside of their control.5 It modifies payments and benchmarks to reflect the health or illness of patient populations.8


    Risk adjustment may be used to increase or decrease the amount of payment for a service or bundled services. One such example is per member per month (PMPM) capitation payments, which are based on the actuarial characteristics of the patient.9

    Risk adjustments may also be used to adjust one or more measure of quality, utilization, or spending which determines physician payment.5

    Risk Corridor

    Risk corridor refers to “limiting the financial risk a provider faces if a large number of patients need above-average numbers of services or if an unexpectedly large number of patients need expensive services.”5

    A risk corridor in a payment model “could occur because of random variation in patient characteristics that are not captured effectively by a risk adjustment system.”5 Examples include instances in which a physician treats a small number of patients or “because of non-random but unexpected factors, such as a significant increase in the price of an essential drug or medical device.”5

    Clinical Category Risk Adjustment

    Clinical category risk adjustment assigns patients to categories based on how they affect spending or performance measures for a practice. Categories are assigned a weight associated with spending or performance measures for patients within that particular category.5 An example of a clinical category risk algorithm is hierarchical condition category (HCC) used by Medicare.

    Patients with one chronic condition may be placed in a different category than patients with multiple chronic conditions. Individuals with multiple chronic conditions will have higher health care costs and poorer outcomes compared to patients with only one chronic condition.5 Payment is supported by diagnosis coding. Coding to the highest level of specificity provides for the correct level of payment based on anticipated resource cost and consumption.

    Risk Score

    “A risk score is a numeric value assigned to a particular patient in a risk adjustment system that indicates the relative level of spending that will be required for that patient or the relative level of quality or outcomes that can be achieved in the delivery of care to that patient in relative to other patients.”5

    The CMS-HCC risk adjustment models are used to calculate risk scores, which predict individual beneficiaries’ health care expenditures, relative to the average beneficiary.

    Risk Stratification The methodology assigns risk to groups, prioritizes interventions, and prevents negative outcomes for the patient population.

    Assigning patients by characteristics will impact cost and allow staff to identify interventions that decreases risk and spending.

    Shifting Focus to Manage Risk

    Physicians and care teams need to shift their focus from reactive to proactive care. Assigning patients to a specific panel allows physicians to focus on the needs of their patient population with specific health needs.

    The next step is to risk-stratify empaneled patients. The American Academy of Family Physicians (AAFP) created the Risk-Stratified Care Management Rubric to identify and assign a risk score. The rubric stratifies patients into six risk-based levels based on health severity, social determinants, and utilization of services.10 Categorizing patients on risk scores allows the care team to identify high acuity patients. Shifts in roles and responsibilities in the care team will likely result in a practice workflow redesign for the support of high-risk patient populations.

    Data on quality and cost cannot be overlooked. Trends can be identified through data collection, measurement, and analysis. Care teams may need additional focus on clinical processes, cost of care, and the impact of those interventions. Start small and focus on quality improvement initiatives that are important to your practice.11

    By understanding financial risk in payment models, coupled with health risk of empaneled patients, physicians can better be prepared for payment models associated with value-based care, such as AAPM.

    The Medical Home

    The medical home transforms the delivery of comprehensive primary care. Through the medical home, practices seek to improve the quality, effectiveness, and efficiency of the care they deliver while responding to each patient’s unique needs and preferences. No matter where you fall on the spectrum of transformation—managing current projects, enhancing basic concepts, or advancing complex initiatives—the adoption of medical home concepts can benefit your practice, your patients, and your bottom line.

    The AAFP advocates for the development and implementation of quality and practice improvement metrics that deliver on the “Quadruple Aim” of health care (better care, better health, smarter spending, and physician satisfaction). Along with other health organizations, the AAFP determined that health care needed a paradigm shift. In 2007, the AAFP worked closely with the American College of Physicians (ACP), the American Academy of Pediatrics (AAP), and the American Osteopathic Association (AOA) to develop the Joint Principles of the Patient-Centered Medical Home(www.annfammed.org).12 The principles are as follows:

    • Personal physician: Patients have an ongoing relationship with a personal physician trained to provide first contact, continuous, and comprehensive care.
    • Physician-directed medical practice: Patients have access to a personal physician who leads the care team within a medical practice.
    • Whole-person orientation: The care team provides comprehensive care at all stages of life, including acute care, chronic care, preventive services, and end-of-life care.
    • Care is coordinated and integrated: Practices take steps to ensure patients receive the care and services they need from the medical neighborhood in a culturally and linguistically appropriate manner.
    • Quality and safety: Practices use the quality improvement process and evidence-based medicine to continually improve patient outcomes.
    • Enhanced access: Practices commit to enhancing access for patients, families, and physicians to behavioral health care resources through systems of collaboration, shared problem solving, flexible team leadership, and enhanced communication.
    • Payment: Practices recognize the value provided to patients who have a medical home, as well as the added value of behavioral health care and including those clinicians as members of the care team.

    Population Health Management

    Population health management is at the core of the medical home. It requires practices to regard patients as individuals, as well as members of a population. This allows a practice to properly identify the health needs of its patient population, and to determine how to best meet the needs of its patients.

    Population health management involves a proactive, team-based approach to care that focuses on preventive medicine, early intervention, and a close partnership with patients to closely manage chronic conditions.

    Population health management allows a practice to more easily:

    • Proactively identify patients who need evidence-based chronic or preventive care using health data collected and stored in patient registries.
    • Provide planned care and outreach based on patient diseases or conditions.
    • Provide patient self-management support.
    • Monitor patient progress, identify appropriate care plans, and recommend changes to care plans by incorporating prompts in the patient’s electronic health record (EHR).
    • Monitor practice performance by tracking patient data and comparing it with national guidelines or internal benchmarks.

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    1. Delbanco S. The payment reform landscape: overview. Health Affairs Blog. http://healthaffairs.org/blog/2014/02/06/the-payment-reform-landscape-overview/(healthaffairs.org). Accessed December 1, 2016.
    2. Norris C, Davenport S. Risk adjustment techniques for improving value-based payments. http://www.milliman.com/insight/2016/Risk-adjustment-techniques-for-improving-value-based-payments/(www.milliman.com). Accessed December 1, 2016.
    3. Spector JM, Studebaker B, Menges EJ. Provider payment arrangements, provider risk, and their relationship with the cost of health care. Society of Actuaries. https://www.soa.org/Files/Research/Projects/research-2015-10-provider-payment-report.pdf(www.soa.org). Accessed December 1, 2016.
    4. American Academy of Family Physicians. MACRAnyms. http://www.aafp.org/practice-management/payment/medicare-payment/acronyms.html. Accessed December 1, 2016.
    5. Center for Healthcare Quality and Payment Reform. The payment reform glossary. Definitions and explanations of the terminology used to describe methods of paying for healthcare services. http://www.chqpr.org/downloads/paymentreformglossary.pdf(www.chqpr.org). Accessed December 1, 2016.
    6. Lazerow R. Defining provider risk in accountable payment models. Advisory Board. https://www.advisory.com/research/health-care-advisory-board/blogs/toward-accountable-payment/2011/03/defining-provider-risk-in-accountable-payment-models(www.advisory.com). Accessed December 1, 2016.
    7. Delbanco SF. Shared savings or shared risk? For each model, more experience is needed. Health Care Incentives Improvement Institute. http://www.hci3.org/ content/improving-incentives-newsletter-shared-savings-or-shared-risk-each-model-more-experience-nee(www.hci3.org). Accessed December 1, 2016.
    8. Yeatts JP, Sangvai DG. HCC coding, risk adjustment, and physician income: what you need to know. Fam Pract Manag. 2016;23(5):24-27.
    9. Health Care Incentives Improvement Institute. Capitation Models. http://www.hci3.org/thought-leadership/why-incentives-matter/capitation/capitation-models(www.hci3.org). Accessed December 2, 2016.
    10. American Academy of Family Physicians. Risk-stratified care management rubric. https://nf.aafp.org/Shop/practice-transformation/risk-stratified-care-mgmt-rubric. Accessed December 2, 2016.
    11. American Academy of Family Physicians. Performance measures criteria. http://www.aafp.org/about/policies/all/performance-measures.html. Accessed December 2, 2016.
    12. American Academy of Family Physicians. Joint principles: integrating behavioral health care into the Patient-Centered Medical Home. Ann Fam Med. 2014;12(2):183-185.