The Great Oversight of Risk Based Payments: Carrots and Sticks

“Aligning incentives with outcomes” is all the rage these days.  However, while the general concept has been around some time – years, actually, going back to previous efforts at reform – today’s policy discussion continues to miss some very important lessons from the past that undermine the success of future risk-based payments.

To begin, let me say that I, too, think that developing provider contracts with a shared-savings model, or some type of accountability for outcomes, is critically important to addressing quality.  Moreover, there is an adage I promote with our clients that reinforces the lesson.

You can get to cost by focusing on quality.  You can’t get to quality by focusing on cost.

Some might quibble with that, citing alternative approaches, and that’s fine.  But I think as a general rule, a focus on quality has ancillary benefits on its own – often including a reduction in errors, a reduction in over treatment, and a focus on causes rather than symptoms, which bring down costs.

That said, here is a fundamental lesson I’ve drawn from Washington State’s health reform efforts in the 1990’s that is seldom discussed.

Lesson:  Moving risk to organizations that have no capacity to manage risk, no experience to manage risk, and often no payment to build reserves to mitigate that risk, is a recipe for failure.

In the 1990’s, following a move to risk-based methodology, proto-ACOs formed across the state.  Over 120 provider groups took on full, capitated risk arrangements for Medicaid, all subcontracted through private plans.  Typically, those arrangements generally included some portion of the premium – say, from 10-15% – paid by the state for care to remain with the plan.  The provider group, the group responsible for all risk, for all care, and all utilization management, got the remaining portion.

Of those 120, I am aware of only three remaining today: Northwest Physicians Network, Highline Medical Services Organization, and Wenatchee Valley Medical Center.

In other words, generally speaking, provider groups were unable or unprepared – or both – to effectively manage risk and care delivery at the same time.

Looking back, this shouldn’t be a surprise.  These were provider groups of various types – IPAs, multi-specialty groups, PHOs, etc.  They were not health plans or risk managers.

“Ah, but DJ,” you say, “surely provider groups are smarter today about risk than they were in the 1990’s.”

Maybe.  Maybe not.  But here’s what I know, according to a recent Kaiser Study:

“…only one in five hospitals pursuing an ACO model reported that they were using data to predict which patients were most likely to be in poor health and need more services—a significant gap in their ability to manage risk, says Audet.

“If you want to be able to manage financial risk, you have to be able to determine who in your high-risk population will need more care-management,” Audet says.

Whether history is repeating itself or not, I don’t know, but it certainly is rhyming.  Provider groups – those in this case most willing to take on risk – are saying themselves that they are not taking adequate steps to fully manage that risk.

Which leads me to a final key lesson about the future of payment reform.

Lesson:  Almost all of the behavioral change desired out of provider groups can come with an upside risk arrangement.  The downside risk arrangement model is unnecessary, and actually an obstacle for change.

Because provider groups – particularly smaller practices – are unable to take on the kind of downside risk that can lead to being forced to close their doors, often they won’t.  That’s not a recipe for adoption.

Smaller provider groups, unlike larger, highly capitated players like plans or hospitals, don’t have the reserves in place – often for tax reasons, such as those in a cash-based accounting methodology – to manage and mitigate downside risk.

But, they have the patient relationships in place to make a shared savings model hugely successful.  These relationships are the most important things in the entire system to broad system reform.  Payment reform should be focused on getting the most out of those relationships, not in transferring downside risk to entities unable to manage it.

Positive system change starts at the primary care level.  If payment reform starts there, too, it should start with the upside risk first – particularly in the smaller group setting.

In practice, a focus on upside risk is very similar to focusing on delivering quality care.  A focus on down-side risk arrangement, where providers are punished, is very similar in practice to a focus on costs.

In other words, you can get to cost by focusing on quality.  You can’t get to quality by focusing on costs.


Event Sponsor

Major Sponsors

Reception Sponsor

Track Sponsors

Network with Us