The transition from fee-for-service to value-based healthcare reimbursement has prompted provider groups to reconsider their positions on the continuum of care with payors. Most physician practices still under the fee-for-service models are branching out and starting to sign up for value-based arrangements. Many have realized that taking on financial risk, although difficult, is the key to future success and have moved into “at-risk” contracts. In doing so, much consideration is needed, as taking on financial risk can expose other areas of liability, which should be factored in during the due diligence process.
The fee-for-service model has been a profitable and comfortable one for many healthcare providers, and thus there has been hesitancy to move into a shared risk model. Most such models have been limited to “upside risk” – allowing providers to share in savings when delivering care more efficiently. Now providers are expected to share in down-side risk – requiring that providers refund a payor if the actual cost of care exceeds the agreed upon financial benchmarks for care delivery. Though providers must now share in the down-side risk in these models, the financial rewards for providers who excel in these programs are most advantageous.
Value-based models are based on patient care management which rewards efficiency, meeting quality metrics, and achieving favorable patient outcomes. Participants must produce positive clinical results while managing the cost associated with patient care. Tools such as advanced analytics and data procurement are available in the form of dashboards and customized reports, which pave the way to predictive analytics to assist in the modeling of the cost of care for physician practices and healthcare systems.
Types of value-based payment models include:
- Shared savings – an organization is paid based on the traditional fee-for-service model and then an annual accounting is completed to compare total spending to the agreed upon target. If your organization was below the target, a bonus will be issued.
- Bundled payments – a payor bundles costs for a procedure or an episode of care. All providers share the bundled payment.
- Shared risk – in addition to shared savings, a healthcare entity would also share in the additional cost that exceeds the targeted amount.
- Global capitation – the entity receives a per-patient monthly payment for the individual’s care.
The value-based models are offered by the following:
Center for Medicare and Medicaid Services (CMS)
CMS has been testing new payment models – with varying levels of risk – for years. Of the models that include downside risk, the government has set up frameworks to ensure groups can absorb losses. Repayment mechanisms include lump sum payments back to CMS and reductions in future remuneration for physician participants. CMS also requires a form of collateral (see below), though the collateral itself rarely covers the risk.
CMS has a goal of having 100% of Medicare providers in meaningful downside risk programs by 2025.
Private/Commercial Payors
Commercial models tend to be watered down versions of government models. Payors often resist meaningful data – sharing and pressuring participants to purchase stop-loss insurance directly from the payors – limiting significant risk taking.
A few collaborative payors have built models that include true data and risk-sharing. While the benchmarks and target prices are negotiated, these programs can have considerable risk. The implications of the risk, and whether to transfer it, depend on individual circumstances.
Employers
Groups that contract directly with self-insured employers might do so with agreed-upon rates. If so, providers essentially guarantee costs. These models reflect what a true competitive market looks like. Unless special interests derail healthcare transparency, they are also what the future of healthcare delivery will look like.
Indeed, healthcare risk would no longer relate to the nuanced and complex rules of the government and commercial payor programs. Rather, the risk would be in failing to deliver care at the cost advertised. Healthcare becomes an open, functioning marketplace.
The Risk
Collateral
Whether dealing with the government, commercial payors, or employers, posting certain forms of collateral may be necessary under value-based models. Collateral may include a letter of credit, an escrow account, or a surety bond. Stop-loss insurance – though not always accepted as collateral – is often used to backstop any risk, limiting overall exposure, stabilizing balance sheets, and placating investors and creditors.
Risk-Bearing Structure
Depending on the structure and sophistication of the participating provider group, it may elect to file to become a risk bearing entity, such as an organized delivery system (ODS). Absent specific regulations, risk-taking entities may maintain their current structures and simply pay losses if/ when they come due. Small companies will generally purchase stop-loss which provides for a reasonable deductible and the liquidity needed upon a loss occurrence.
Larger entities often create captive insurance plans to handle risk. Captives allow companies to self-insure a certain amount of risk and purchase reinsurance above that amount. Managing a captive requires a serious time and capital commitment along with a myriad of reporting requirements.
Captives have also come under scrutiny in recent years for not having adequate risk transfer and thus serving merely as tax shelters. Captive managers and other consultants can assist groups comply with myriad regulations associated with captive insurance products.
Risk taking is propelling many provider groups to the top of the care continuum. Responsible, calculated risk takers will continue to bring them closer to the premium dollar. Those who ignore the compliance side of risk taking do so at their own peril, and the peril of others who are impacted.
Compliance
Guarantors
Investors, and any employees used for purposes of collateral, should be considered in the decision to take on risk. If physician employees end up having their payments reduced due to poor performance under a value-based care program, employers will then bear the burden of the associated liability. Employers can also be liable to investors depending upon the relationship.
Management services organizations (MSOs) attract and often have private equity funding, which expects a healthy return on its investment. MSOs should provide full transparency into the terms of the deals being negotiated on behalf of physicians and investors alike. Details of VBC models can be extremely complicated, particularly when it comes to coding and risk adjustment. Everyone with a material financial stake should be apprised of, and comfortable with, the terms of downside risk deals and their maximum potential losses.
Balance Sheet Reporting
Private equity (PE) infusion is frequently utilized to facilitate acquisitions. When MSOs put PE dollars at risk – without sufficient insurance – it can create balance sheet inequity since the estimated loss, if not secured by insurance, is subject to financial reporting by the healthcare entity and (depending upon the circumstances) must be reflected as a liability or as a footnote to the financial statements to alert the readers of the loss occurrence. The best way to keep capital free is to hedge VBC risk.
Stop-Loss / Reinsurance
Stop-loss insurance is used as a tool to ensure financial stability and meet obligations to creditors and investors.
Given the breadth of liability associated with taking on risk, large payors have learned how to leverage stop-loss insurance. Newer entrants into healthcare risk taking often do not have the same tools or access to reinsurance dollars.
However, the stop-loss market for downside risk in VBC models has been developing new capabilities to support provider groups. Groups should not go at-risk without conducting due diligence on the cost and availability of risk transfer options.
Accounting / Legal / Financing
Contracts should be reviewed to ensure compliance. Review provisions in agreements with lenders, investors, creditors or vendors to determine if any require prior notice before entering into new risk sharing programs.
When taking on risk with multiple parties, be sure that the same collateral is not utilized more than once. On annual financial statements, liabilities should be properly addressed and classified. They should also be “valued” appropriately to avoid additional risk.
Conclusion
Value-based healthcare will continue to be the future of healthcare. To gain control within the new value-based healthcare delivery system, healthcare organizations need to manage clinical data and the down-side risk inherent in value-based models. Understanding how to use risk transfer mechanisms effectively can not only reduce liability under the value-based models themselves, but liability from countless other areas, and result in greater financial rewards for your healthcare organization. Please consult with your team of professionals to assist you in the process of migrating forward in value-based healthcare.
Brian S. Kern, Esq. is the CEO of Deep Risk Management, a boutique value-based risk firm. Debbie Nappi, CPA, is a Partner with SAX, a Top 100 accounting, tax and advisory firm. They have joined forces to bring helpful information to healthcare providers and assist them in navigating the complex and rapidly changing terrain of the healthcare industry.
About our Authors
Brian S. Kern, Esq. is a licensed healthcare attorney and the CEO of Deep Risk Management, LLC. He is a nationally recognized leader in healthcare risk, focusing mainly on professional liability and financial risk – and the intersection of the two. Brian works closely with some of the most reputable and innovative healthcare practices and MSOs in the US, helping them build cutting-edge risk management platforms by leveraging data and predictive analytics. He can be reached at bkern@deepriskmanagement.com.
Debbie Nappi, CPA, MST is a Partner at Sax LLP, and serves as Co-Leader of the firm’s Healthcare Practice. She is an advocate for her clients, and specializes in consulting services, revenue cycle management and physician productivity in the rapidly changing landscape. She serves as interim CFO during M&A transactions, mitigating risk and ensuring a smooth and successful process. She conducts due diligence for private equity, analyzes Healthcare related transactions on the buy and sell side, reviews practice evaluations and manages post-close transactions. She can be reached at dnappi@saxllp.com.