Benefits of risk-based payments: How healthcare data improves profits


In 2008, Congress passed the Medicare Improvements for Patients and Providers Act (MIPPA). This legislation paved the way for value-based care programs (also known as value-based contracts). The industry then began the transition from fee-for-service (FFS) to alternative payment models (APMs).

The different types of APMs differ in terms of performance thresholds and reimbursement incentives. But each type shares two important things in common:

  • Reimbursement is based on the value of care delivered rather than volume, and
  • Reimbursement requires providers to assume more risk

There are a variety of risk-based models that place differing amounts of risk on participants. Before we go further, let’s first answer what risk-based payment is.

What are risk-based payments in healthcare?

Risk-based payment models aim to hold providers accountable for better, more efficient care. This model is also called risk-based payer contracts. Providers are paid a fee per patient and are then responsible for treating the patient within this budget. Depending on the model, providers may be eligible for additional bonuses based on quality performance.

In risk-based models, physicians are accountable for providing quality care while avoiding excess readmissions. Parent facilities are expected to support their physicians with cost-efficient supplies and devices. The goal is to provide quality care while remaining below budget to maximize profit. If the budget is not achieved, the provider is responsible for paying excess expenses.

How do risk-based contracts affect hospital finances and U.S. healthcare?

A study of Californian providers found that the more risk a hospital undertakes for a patient, the lower the care costs and the better the outcomes. This is because of accountability. When providers take on more financial risk for a patient, their profit becomes directly tied to how efficient treatment is.

There are different levels of risk a provider can agree to. This is called risk-sharing. Risk-sharing is when two or more stakeholders agree to share financial risk when a patient receives care. This agreement can occur between payers, providers, or manufacturers. Risk-sharing makes accountability more palatable by ensuring financial responsibility is not solely on the provider.

The ultimate goal is full financial risk-sharing, or true risk.

Medicare set a strong precedent for how well this can work, but the commercial sector has been slower to adopt. According to an Atlas benchmarking report from 2017, only 23 percent of the Californian patient population received treatment from a full-risk commercial provider that year. However, these providers offered services at the lowest costs during the study period.

Two-sided financial risk: Upside vs. downside risk

There are different types of financial risk models a provider can take part in. There are upside risk-only models, downside risk-only models, and models that combine the two.

Upside risk means that if a provider can treat a patient below budget, they will share profits with the payer. But if the provider goes over budget, they will not be penalized.

Downside risk is the opposite of this. If a provider goes over budget during treatment, they are held accountable for the extra expenses.

Models that have both upside and downside risk are called two-sided risk models.

Most providers prefer to enroll in models that favor upside risk exclusively. In fact, from 2012 to 2016, use of one-sided, upside risk models grew by 261 percent among ACOs. Use of two-sided models grew only 26 percent for that same period.

As the Center for Medicaid and Medicare Services (CMS) rolls out alternate payment models, they encourage more providers to take part in downside risk-inclusive contracts. For example, CMS released three bundled payment models (BPMs) in 2016 aiming to reduce cardiac and orthopedic care costs. These models phased in downside risk for providers.

How third parties can help hospitals capitalize on risk-based payment opportunities

Under risk-based payment models, the provider’s objective is to give a patient the exact level of care necessary—without excess. Facility administrators should support their physicians in this mission while still enforcing a budget. By keeping care costs down, providers can increase their profit margin.

Healthcare industry vendors act as an external support system. They can help providers and facilities capitalize on risk-based payment opportunities in many unique ways. A medical supply vendor might have means to reduce a hospitals equipment cost with a more affordable supply offering. Or, a healthcare consulting firm might uncover higher than average operating costs at a facility and have data-backed suggestions for how to improve. There is always room for creativity and innovation in facility problem-solving.

What is most important here, however, is how these vendors identify provider problem areas.

Healthcare data and analytics can tip the scales for vendors

A strong healthcare data platform will have up-to-date records of key facility financials like total annual operating expenses, pharmacy costs costs, medical and surgical supply costs, etc. Data-driven organizations looking to help providers deliver better patient care can leverage this data for more effective sales and marketing tactics.

Let’s look at Definitive Healthcare’s Hospital Profile capabilities, for example. Leveraging this analytics technology, we can see an overview of which CMS programs a hospital is participating in and whether that program is helping the hospital turn a profit. Observe the financial data in the table below:

Medicare incentive programs financials

METRIC FY2017 FY2018 FY2019 FY2020 
Revenue Adjustment Due to Value Based Purchasing -4,989,424.29 -2,922,159.43 355,411.77 -1,761,124.04 
Revenue Loss Due to Hospital Acquired Condition Penalty -7,818,470.55 -6,010,557.64 -6,197,112.79 -7,613,712.52 
Revenue Loss Due to Readmission Penalty -11,538,471.67 -14,178,788.37 -13,633,022.02 -13,421,159.45 

Fig. 1: Data from Definitive Healthcare’s Hospitals & IDNs database. This is sample data from one hospital (name withheld). Data is an aggregate of member hospital financial information from CMS Medicare Cost Report (July 2020). Most recent data available. Accessed September 2020.

In this case, we see that for the past several years, this sample hospital has largely failed to meet CMS performance standards. Except for value-based purchasing participation in FY2019, all Medicare programs cost this facility significant losses between 2017 and 2020. This financial drain has likely raised red flags internally.

This should also be a red flag for vendors and third parties with potential solutions to offer.

The remaining question is this: how can my product or service turn these financial losses into gains? The answer to this question will be your value proposition.

Learn more

Want to learn more about the ways value-based care is evolving the healthcare industry? Or about common provider challenges surrounding risk-based payer contracts? Check out our webinar on Value-based Care in 2019 and Beyond for more information.

Originally published April 27, 2017

Definitive Healthcare

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Definitive Healthcare

This blog was written by a former contributor at Definitive Healthcare.At Definitive Healthcare, our passion is to transform data, analytics and expertise into healthcare…

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