Four Downside-Risk Payment Models To Consider

Value-based care is changing the healthcare system. Choosing the right downside-risk model can be tricky

Imagine a healthcare system where patients get the best possible care—and at an affordable price. That is the mission behind value-based healthcare. Yet as of 2020, 97% of physicians still rely on traditional fee-for-service (FFS) arrangements for the bulk of their payment strategies instead of value-based payment models.

Under FFS arrangements, providers are rewarded based on the volume of patients they treat which can lead to a higher intensity of services provided regardless of whether the treatment improves the patient’s outcomes. In contrast to FFS, downside risk models place greater accountability for quality and cost outcomes on those delivering care.

When implemented correctly, value-based payment models can both cut costs and help patients live healthier lives, benefiting all parties: patients, providers, and payers. 

However, moving from a traditional FFS model to a value-based, downside risk model can be an overwhelming and daunting task. The Centers for Medicare and Medicaid Services (CMS) estimates there are over 40 alternative payment models in the market supporting value-based care, with each providing different levels of risk, care coordination, and emphasis on the quality measures offered. 

To find the right model, providers need to understand the nuances of value-based care, weigh the advantages and disadvantages of each model, and choose the ones that works best for their circumstances. 

Global capitation delivers greater financial certainty for providers willing to take on risk-based payment

In global capitation models, providers are paid a single, fixed amount per patient per month for all healthcare and administrative services provided within a specific timeframe. This risk-based payment model carries a higher risk for providers since they assume full financial risk for patients’ overall healthcare costs. In turn, providers reimbursed under global capitation are given strong incentives to prioritize preventive services and care management programs that lower costs and improve overall quality of care provided.

Because providers are paid upfront for treatments and services, providers receive an ongoing cash flow that can be put towards improving care delivery systems, data analytics, information technology, and regulatory compliance.

Providers leveraging global capitation models also spend more time engaging with patients and have greater flexibility to determine the best mix of treatments and services patients receive. This model puts providers directly in charge of patient care decisions while offering incentives that lower costs and improve the quality-of-care patients receive by eliminating unnecessary interventions.

Global capitation also works best when combined with risk adjustment strategies. Because providers assume all risk baring under this value-based care model, one unintended consequence is providers are often incentivized to avoid sick or complex patients. Sophisticated risk adjustment strategies mitigate those incentives while promoting integrated management models to care for such patients.

While there are many advantages to implementing a global capitation model, providers should also explore the potential challenges the model poses when choosing an alternative payment strategy. Though single, fixed payments provide an upfront cashflow which providers can use to invest in data analytics and infrastructure, organizations should evaluate their existing infrastructure to ensure they have the capital and data systems in place to manage the financial risks involved with capitation.

Providers who adopt this risk-based payment method assume all financial risk – including losses. Therefore, they must be able to absorb costs that occur when patients require unanticipated high-cost care. Because of this, organizations with patient pools large enough to sufficiently disperse and mitigate losses fare better with losses arising outside their control. Reinsurance also can help organizations protect against losses arising from unanticipated high-cost cases.

Shared savings models incentivize doctors, hospitals, and specialists to work together

Accountable care organizations (ACOs) are another common type of alternative payment arrangement. ACOs work by placing financial responsibility on providers. ACOs that achieve a certain level of savings “share” those the savings with their Medicare, Medicaid, and/or commercial payers. Providers in ACOs can also receive additional payments if their spending remains below benchmarks. To ensure quality of care remains high, shared savings arrangements typical include quality performance measurements providers must meet.

Because providers in ACOs share risks and rewards, the financial benefits of shared savings arrangements are high. In this risk-based payment scenario, providers are directly involved in their patients care which can have a significant impact on the quality-of-care patients receive. Providers can meet patients’ needs across the care continuum, including preventive care and disease management, through better care coordination.

To be successful, ACOs must develop strong accountable care networks that offer a wide range of health services settings including inpatient, outpatient, laboratory, radiology, and pharmacies. Failing to do so often limits patient choice and often results in higher patient costs. However, creating networks that provide patients with sufficient provider and treatment options can be costly. Many healthcare systems lack the IT infrastructure to support such arrangements which results in higher upfront investment across the ACO. If provider groups within the ACO can’t afford the upfront investments, they likely won’t be able to achieve the corresponding savings.

Bringing together disparate groups of providers and facilities can also create other challenges. Because each group within the ACO often has its own vision, mission and priorities, decision making within the network can become more bureaucratic when it comes to billing or choosing a new direction to take. Anticipating these challenges and tackling them upfront can help ACOs administration function more smoothly in the longer term.

Partial capitation provides a hybrid downside risk model where providers can reap rewards with less risk

Partial capitation is a hybrid downside risk model where some services, usually preventative care, continue to be paid in a traditional FFS method while other encounters, such as sick visits, are covered by a lump sum paid out monthly. 

Unlike global capitation models, providers only assume risk for specific services, treatments, and episodes of care while payers continue to own the risk associated with services paid under FFS arrangements. This creates a highly flexible system where both payers and providers work together to determine the right blend of risk sharing for each arrangement. 

Because risk is shared between providers and payers, the financial rewards are lower than with global capitation which makes it an attractive alternative payment model for those entering risk-based payment arrangements. Providers under partial capitation arrangements can leverage the advantages of both capitation and FFS to achieve optimal outcomes. The model incentivizes both the provision of services and provider autonomy in medical decision making. 

However, providers still must have a full understand of the mix of patients being treated under capitation and FFS to stay financially sound. Identifying which services and what percentage of billing to capitate can be difficult to determine and providers often struggle to develop the payment policies and systems needed to administer partial capitation models effectively. 

Bundled payment models are a popular starting point for risk-based payment strategies

With bundled payment models, patients pay a single price for the services received, even if multiple providers have treated the same patient. This form of alternative payment model incentivizes providers to coordinate care across the patient’s entire course of treatment with all physicians, settings of care, and procedures paid out together based on the outcome. 

Bundled payment models work best for treatment of a single condition or medical event, or episode of care, which is treated during a fixed period. Conditions like joint replacement, myocardial infarction, congestive heart failure, stroke, and labor and delivery are all commonly involved in bundled payment models and typically include both acute and post-acute care delivered by hospitals, physicians, and other facilities participating in the patient’s care. In essence, providers are rewarded for coordinating care, avoiding complications, and reducing waste throughout the episode – all of which helps improve patient outcomes.

This downside risk model is a popular middle ground for providers who are willing to assume some financial risk but are not ready to assume higher levels of risk sharing involved in other payment models such as ACOs. However, like ACOs, bundled payments models still require a significant amount of care coordination across each patient’s episode of care. To account for this, providers involved in bundled payment models must adopt efficient coordination of care strategies to successfully treat patients and avoid unforeseen costs.

Like other alternative payment models, bundled payments carry risk. If providers successfully lower the cost of services below the bundled price, they share the savings. However, if the costs exceed the bundled price, they are responsible for the difference. Therefore, providers participating in bundled payment models should carefully select which associated services are included in the bundle, particularly for patients with multiple chronic conditions. Unforeseen costs and unintended consequences may arise if without meaningful quality measures and monitoring in place.

Choosing the right downside risk payment model can be tricky since no one size fits all

Despite its popularity, the traditional FFS model is not sustainable. As both payers and providers seek new and improved ways to moderate healthcare costs and improve outcomes, alternative payment model adoption is sure to increase. Providers inevitably will need to assume more risk and participate more in risk-sharing arrangements across the care continuum. Understanding the types of risk-based payment models available and how each one will perform in specific situations and under each provider’s unique circumstances is key to creating sustainable payment strategies that support provider, payer, and patient needs.

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