Financial Risk Arrangements

Submitted by hci3-usr on Friday, February 12, 2016 - 06:52

Newtown, CT – February 12, 2016

You can’t produce high quality care for nothing, and in some instances it can cost a lot – That simple realization leads to several observations. First, there is a floor on the cost of any episode of care, whether a chronic disease, an acute event, or a procedure. In some cases, that floor should be a hard floor because we don’t want underuse of needed services, especially in managing patients who have conditions that require continuous monitoring. Second, the floor creates a very specific and quantifiable savings zone, which is the difference between, say, the current observed cost – which includes some amount of overuse and avoidable complications – and the floor. For any given physician, practice or health system, an analysis of historical costs could help determine that savings zone. Third, we can observe a ceiling in the costs of managing a patient for an episode of medical care, and that ceiling can be very high, sometimes three, four or even ten times the average cost. When the occurrence of these high cost cases is low, it can be manageable, but when they’re not it’s a different story. And while our analyses suggest that the higher cost cases are almost always caused by potentially avoidable complications, we have to understand that the difference between the shallow floor and the high ceiling can create an asymmetry in gains and losses.

What this means to you – As alternative payment models proliferate, most all deals include gain and loss sharing arrangements. The structure of those deals is almost always the same: symmetrical. For example, the APM contract can call for sharing gains and losses 50/50, or as in the case of Medicare, limiting the gains and losses to 10% or 20%. Either way, it’s symmetrical while the potential for gains and losses often isn’t. Practically speaking, this amounts to creating a deal in which payers are mostly the casino owners and providers are the gamblers, and we all now that the House always wins because the game is rigged. In a new Altarum Blog we explain how badly the game can be fixed, in particular if you don’t adjust for the severity of patients, and for reasons that are incomprehensible to us, Medicare has stubbornly refused to adjust its bundled payment program for patient severity. The upshot of this piece, which is entitled Leveling the Playing Field in Risk Arrangements, is that there are simple techniques that can and should be applied to all risk arrangements to make the deals fair from the start and not stack the deck on the side of payers or providers. That’s because a fair deal ensures that the results of the risk arrangement are more a function of the actual performance of the providers than the luck of the draw. For thousands of years people have uttered two simple words before signing a deal – caveat emptor – and the same two words should be uttered by every provider and payer before entering into a risk arrangement. Of course, that presumes you have a choice, which is not the case in the poorly designed, stacked-deck deal that is the Comprehensive Joint Replacement program that Medicare has mandated. For those forced into that program we offer the two words uttered by everyone to every gambler: good luck.


Francois Sig
Francois de Brantes
Executive Director