Payment models and risk management in family medicine
Value-based payment (VBP) contracts make it important for physicians to understand how risk, rewards and cost are intertwined.
Value-based payment contracts aim to boost the work family physicians do every day to improve outcomes and reduce costs for patients and the health care system. However, these contracts aren’t all created equal, and they can come with pitfalls. Before agreeing to a VBP contract that involves risk, it is important to understand the potential financial downsides and rewards, as well as what actions to take to optimize payment.
Understanding payment models in health care delivery
Physicians increasingly have options when it comes to choosing which VBP contracts make sense to sign. Generally, such payment models focus on quality of care and risk-sharing between physicians and payers.
Risk-sharing has financial downsides: payment for services delivered to patients could be less than the practice spent to provide those services.
However, the opposite is also true. Practices can unlock revenue by meeting patient needs and delivering outcomes at lower costs.
Risk in fee-for-service vs. value-based payment models: Key differences
Generally, in a fee-for-service payment model:
- Payers take on the financial risk rather than practices.
- Business is focused on quantity and cost of services rather than quality of services and long-term health outcomes for patients.
- Effective population health management is difficult to achieve.
- There is not enough support for implementing all the care management processes needed to manage and care for a population of patients.
In contrast, the overarching goal of a VBP model is to:
- Provide quality, cost-efficient care for the patient, while also compensating physicians through incentives that value their services. Physicians often take on financial risk in these models in exchange for potential shared savings.
Nine types of risk in payment models
Methods of managing risk
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Type of risk |
Definition |
Trigger |
Payment models |
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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. Physicians are at financial risk in the event that added resources are needed to care for patients. An example is nonpayment for preventable readmissions. |
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Insurance risk |
Insurance risk is related to aspects of the patient’s health status that are beyond the control of the physician, such as age, gender and acuity differences. |
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 |
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Nominal risk |
This is contained in the Medicare Access and CHIP Reauthorization Act. Advanced Alternative Payment Model participants must assume nominal risk or assume risk of an amount that is less than optimal but is substantial enough to drive performance. |
Physicians share in potential financial losses as they do in downside risk. |
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One-sided risk |
One-sided risk typically means a payment model (such as shared savings) has only upside risk. In 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. |
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Performance risk |
The risk of higher costs associated with delivering unnecessary services, delivering services inefficiently, or committing errors in diagnosis or treatment of a particular condition is considered performance risk. |
Performance risks are risks within the physician’s control. If a physician orders unnecessary or expensive drugs or treatments, these are considered performance risks in specific payment models. There is a strong connection between payment and clinical outcomes with performance risk. |
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Two-sided risk |
With two-sided risk, physicians have the potential for financial gains and losses. |
Physicians have the opportunity to share in savings in two-sided risk models, but they will have to absorb costs if spending is over benchmarks or quality targets are not met. |
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Upside risk |
Upside risk provides physicians the chance for a financial upside with no downside risk. The risk comes from the uncertainty of whether there will be a positive margin and how large it will be. |
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. |
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Shared risk |
Under shared risk, the physician and payer agree to share responsibility when payment differs from the cost of care. |
Shared risk requires the physician to effectively monitor the cost and quality of care. Shared risk arrangements can be one-sided, with physicians only at upside risk, or two-sided, with the potential for both upside and downside risk. |
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Utilization risk |
Utilization risk relies on the physician to take steps to limit unnecessary care. |
Utilization risk measures may include readmission prevention strategies and the management of chronic conditions. |
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Managing financial risk in physician payment structures
Payers and practices use several methods to appropriately assign and limit financial risk.
Risk management methods
|
Risk terminology |
Definition |
Correlation with cost of care |
|
Risk adjustment |
Risk adjustment is used in payment models to avoid holding physicians accountable for factors outside of their control that affect performance or cost. It modifies payments and benchmarks to reflect the health or illness of patient populations. |
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 capitation payments, which are based on the actuarial characteristics of the patient. Risk adjustments may also be used to adjust one or more measures of quality, utilization or spending that determine physician payment. |
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Risk corridor |
According to the Center for Healthcare Quality and Payment Reform (CHQPR), 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.” |
According to the CHQPR, 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.” 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.” |
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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. An example of a clinical category risk adjustment is the hierarchical condition category coding used by Medicare. |
Patients with one chronic condition may be placed in a different category than patients with multiple chronic conditions. Patients with multiple chronic conditions will have higher health care costs and poorer outcomes compared to patients with only one chronic condition. 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. |
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Risk score |
According to the CHQPR, “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 relative to other patients.” |
The CMS hierarchical condition category risk adjustment models are used to calculate risk scores, which predict individual beneficiaries’ health care expenditures relative to the average beneficiary. |
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Risk stratification |
This methodology assigns risk to groups, prioritizes interventions and prevents negative outcomes for the patient population. |
Assigning risk to patients by characteristics will impact cost and allow staff to identify interventions that decrease risk and spending. |
Best practices for optimizing payment and reducing risk
By understanding financial risk in payment models and the health risk of your empaneled patients, you can be better prepared to avoid the financial pitfalls that are possible in some payment models associated with value-based care.
These four actions can help you mitigate risk and secure incentives:
Shift your practice’s focus from reactive to proactive care. Assigning patients to a specific panel allows physicians to focus on interventions and support for a patient population with particular health needs.
Be aware of specific diagnosis coding to accurately capture patients' severity of illness. ICD-10 diagnosis coding will help payers assign appropriate insurance risk. It will also position your practice for VBP 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 and cost and estimations of resource use.
Higher risk assignment may also equate to higher payment for care management 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.Risk stratify empaneled patients. Using a risk-stratified care management rubric and algorithm can help you identify and assign a risk score. The rubric stratifies patients into six risk levels based on health severity, social determinants of health and utilization of services. Categorizing patients based 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 patient populations at higher risk.
Get access to the right data on quality and cost. 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 interventions. Start small and focus on quality improvement initiatives that are important to your practice.