The new normal is here … are you ready to embrace risk contracting?

The era of Medicare, Medicaid and commercial insurers paying for services without regard to quality or outcomes is rapidly coming to an end. And that means that acute and sub-acute provider organizations will face new levels of financial risk.

When fee-for-service and case rate contracts were the standard, most of the financial risk was assumed by the payer, whether government or commercial.

Contracts that specify value-based metrics and/or bundled payments increase the potential financial risk for healthcare providers. Accountable care organizations (ACO), shared-risk contracts and population health, which are rapidly becoming the short to medium-term goal, shift even more of the financial risk to the healthcare provider.

Government and commercial payers have two goals:

  • Making provider organizations accountable for quality and the total cost of care
  • Greater focus on population health management, rather than payment for separate and discrete services

For a hospital, rehabilitation center, nursing home, home health service, or other healthcare provider, this represents a shift in who bears the most financial risk. For many acute, post-acute, and sub-acute facilities, which are used to being paid based on resources consumed, this may be the first time they’ve faced potential financial risk.

The carrot and the stick

Providers face both incentives and disincentives in current and upcoming contracts.

In many cases, healthcare providers that fail to meet certain quality measures will lose 1-3% of their expected reimbursement amount, while those that exceed those measures may be in line for increased payments.

More importantly, participation in provider networks and referral business will also increasingly depend on meeting quality measures and holistically focusing on patient health management.

Many of these changes are being driven by The Centers for Medicare and Medicaid Services (CMS), which has set a goal of tying 30% of Medicare payments to outcome-based or patient management-related models by the end of 2016. That percentage rises to 50% by the end of 2018. Medicare’s overall goal is to only have 10% of its payments tied to traditional fee-for-service contracts within three years.

Major managed-care providers are adopting similar models, and many states are making changes in Medicaid that will include similar targets.

In short, outcome-based and partial risk contracts are rapidly becoming industry standards, and both acute and sub-acute facilities need to prepare now to internally manage the increased financial risks that those contracts will bring.

Becoming risk ready

Because this shift of risk depends heavily on metrics, organizations must institute integrated IT systems that collect data on patients, treatments, outcomes, utilization, and costs—both internally and as patients move to referral partners for additional services.

In conjunction with their clinical teams, healthcare providers will have to collect, analyze and understand the data generated when patients are treated across multiple providers. Not only will that data and analysis be critical to demonstrate compliance with quality measures, but it will also help providers manage their resources more efficiently.

For many providers, the IT system priority is getting a timely, accurate bill out the door. To manage these new financial risks, IT systems will have to collect and analyze data that justifies both their treatment and how well it aligns with their patients and their communities.

Clinical leaders will have to develop and manage programs at their organizations that encompass all aspects of inpatient and outpatient care—not only for care of diseases and industries, but also for wellness care and lifestyle counseling.

The key is for organizations to make a top-down commitment to adapting to the new reality of outcome-based reimbursement, risk sharing and managing patients across the entire continuum of care. C-level executives must embrace and drive these initiatives, as well as ensure that the organization has the resources to transform as needed.

Understanding external forces

To mitigate financial risk, organizations will also have to look outward at four factors:

Community needs. Using surveys, research, health-related demographics and other analysis, healthcare providers will have to closely align their capabilities and resources with the needs of their communities.

Value proposition.  Organizations must identify their value to the local marketplace, articulate it clearly and document it with data as much as possible.  Undocumented or “soft” value propositions will likely lead to reduced referrals and partnership opportunities moving forward.

Healthcare partners. Providers will need to institute seamless data and analysis collection and sharing, including robust EHR systems, as well as close coordination of services with other providers and partners in their regions.

Regional factors. Medicaid and managed-care payers vary by state and region. Some are already focused on quality metrics and outcomes, while other areas are lagging behind. A provider’s place in the healthcare ecosystem will also vary by location. Healthcare providers must understand their local region’s dynamics and where it’s going, and identify the networks and partners they want to be aligned with in the future.

Where to begin

The starting point is to understand where an organization is now. A risk-readiness assessment, whether conducted by an internal team or an external partner, can pinpoint areas where the organization needs to improve. Organizations also need to understand how they compare with their peers and where their referral partners are in the process.

Providers now have access to a wealth of data, both free and at a cost, about the health-related demographics of their communities, as well as the performance metrics of other providers. That data can be invaluable for devising strategies to align internal resources with the needs of the community.

For sub-acute providers, hospitals will be paying close attention to metrics such as re-admission rates and lengths of stay.  A rehabilitation provider, for example, that can demonstrate its treatment lowers hospital re-admission rates will be seen as a preferred partner and may be able to increase referrals from area hospitals.

When to call in an outside expert

An outside expert such as Baker Tilly can bring several benefits to a risk-readiness initiative:

  • Ability to provide a holistic look at an entire organization
  • An understanding of industry best practices
  • The ability to provide benchmark comparisons and metrics across regions, states or the entire U.S.
  • Recommendations that are unbiased

Organizations of all sizes can benefit from these assessments.  Even smaller providers in smaller communities, where cooperation is far more important than competition, can benefit from an unbiased, outside expert.

The future is now

From acute care in a hospital to sub-acute care in a facility to care provided in the home, the fee-for-service model is starting to fade. Profit margins, especially when contracts call for bundled payments or capitation, will be squeezed for organizations that aren’t prepared. Hospitals will be responsible for the healthcare of patients even when those patients are not in the hospital. Incentives will reward better performance, while disincentives will penalize providers who are not efficient and quality-driven.

These changes will transform healthcare as we know it. The time to prepare for those changes, and to mitigate potential financial risk, is now.


For more information on this topic, or to learn how Baker Tilly healthcare specialists can help, contact our team.