Two-sided risk is coming — here's how healthcare providers can prepare

As healthcare providers continue to build alternative payment models and transition to value-based care, government and commercial payers are more often requiring providers to assume greater levels of risk.

"Medicare is a driving force in the national movement toward two-sided risk, but now state Medicaid programs, commercial health plans and even major employers are adopting the model," says Joe Damore, vice president of population health management at Charlotte, N.C.-based Premier Inc., a healthcare improvement company. "Providers participating in these models are industry leaders in delivering value-based care. They recognize that success will come from improved outcomes, organizational efficiencies and integrated clinical processes across the continuum."

This article is sponsored by Premier Inc.

CMS implemented the Medicare Shared Savings Program in 2012 to encourage physician coordination, enhance quality and satisfaction, and reduce costs through the creation of accountable care organizations. As of 2017, there are more than 562 Medicare ACOs and 121 of them are participating in a risk-bearing track, according to a January CMS report. However, Shared Savings Program ACOs participating in the no downside track since the program's inception are about to hit their six-year limit for participation. These organizations must either move to two-sided risk or drop from the program and risk losing a portion of their investment or build a new ACO with a different set of participating providers.

In addition, more than 359,000 clinicians are participating in an alternative payment model (APM), as the Medicare Access and CHIP Reauthorization Act also incentivizes providers to take on two-sided risk by offering clinicians who participate in advanced APMs the opportunity to earn lump sum bonuses of 5 percent on their Medicare payments if at least 25 percent of their Part B payments and 20 percent of all Medicare patients are from an advanced APM in 2019.

While Medicare is an early leader in value-based, two-sided risk models, major commercial payers, such as United Health Group, Aetna, Cigna, Humana and Anthem, are starting to make up the bulk of the covered lives. They are also introducing two-sided risk by forming direct partnerships with integrated health systems and clinically integrated networks, according to Mr. Damore. Major employers, such as The Boeing Corp., have adopted two-sided risk models to control healthcare costs by removing intermediaries, and aligning incentives and sharing savings between employees, providers and the company. More than half of all Americans receive insurance through an employer-sponsored plan, according to 2015 data from the Kaiser Family Foundation. The overwhelming majority of employer sponsored health plans are self-funded arrangements.

"This is just the start of what we think is a major trend toward two-sided risk models," says Mr. Damore. He estimates that along with the 20 percent of Medicare ACO program participants in risk-bearing models, another 15 percent to 20 percent of commercial value-based contracts are also two-sided risk models, though many significantly limit the amount of downside risk.

How hospitals can prepare for two-sided risk

"Now is the ideal time for healthcare providers to begin preparing for two-sided risk, as there are numerous market incentives available, including MACRA and the potential savings from reduced hospital and skilled nursing facility admissions due to improved chronic disease care," according to Brent Hardaway, vice president of population health management advisory services at Premier. But providers must take a calculated and prudent approach when adopting additional risk. Here are four strategies healthcare providers should use to prepare for two-sided risk models.

1. Assess core capabilities. Healthcare providers should first assess their business and clinical performance strengths and identify where they need to make improvements to be successful with two-sided risk. "Healthcare providers should look at factors like the maturity of their care management program; the size and distribution of their primary, specialty and post-acute care networks; the metrics they're using; the effectiveness of their information technology tools; and whether they can measure clinical and financial performance across the care continuum," says Mr. Hardaway. Focusing on these core capabilities is crucial for healthcare providers to effectively take advantage of opportunities associated with two-sided risk and value-based payment.

2. Develop a committed provider network. As healthcare providers move to two-sided risk, they must ensure they have a committed and quality provider network that understands the performance metrics the healthcare provider is being held accountable to meet by the payer.

"Many of the healthcare organizations Premier works with are creating a preferred post-acute care network based on performance measurements such as readmission rates, length of stay and CMS' Star Quality Rating System for skilled nursing facilities," says Mr. Hardaway. "Creating a high-performing network of healthcare affiliates across the care continuum helps providers ensure patients receive the high quality care while meeting the financial and quality incentives under two-sided risk models. Compensation to providers must be aligned with the quality, utilization and financial metrics required in the two-sided risk arrangements to ensure the provider's incentives are aligned."

 3. Scale up value-based payments. "Healthcare providers need scale to change processes and behavior," says Mr. Hardaway. "At least 25 percent to 30 percent of an organization's revenue should come from value-based payment models before it embeds value-based care throughout the entire organization. This is the tipping point to shift to value-based payment models, when per capita costs often decrease or flatten out, creating a greater opportunity to generate shared savings," according to Mr. Hardaway.

4. Methodically phase in additional risk. Healthcare providers that lack experience in value-based payment should first enact a one-sided risk model to build their core capabilities and to learn how to manage a population. For those still eligible to do so, participation in a no-downside Medicare APM is a perfect opportunity to learn how to manage care and to use unblinded claims data as an important tool for success while becoming comfortable with risk. Organizations can then implement what Mr. Hardaway calls "two-sided risk with guard rails." This model places limitations on an organization's downside risk. For example, an organization with a 5 percent cap on downside risk and a per capita expenditure of $10,000 per beneficiary could lose a maximum of $500 per beneficiary if they exceed the targeted spend.

Mr. Damore cautions healthcare providers from taking on significant risk too soon. Instead, organizations should phase in risk over time. Healthcare providers should determine how much risk to take on according to their core capabilities, market situation and market potential, and their organizational and financial status, among other factors.

"Implementing two-sided risk models is like investing," says Mr. Damore. "It's all about risk and reward. If you're going to be taking greater risk, you need to make sure you're thoughtful about your own capabilities, how much risk you can afford and how much risk you're willing to take to obtain a larger reward."

The benefits of two-sided risk

When implemented effectively, two-sided risk models can benefit payers, providers and patients.

Unlike fee-for-service models, which incent clinicians toward volume, value-based payment models encourage clinicians to provide better quality care at a lower cost by rewarding value. Under the latter model, healthcare providers are motivated to improve outcomes and quality measures, especially for populations with costly chronic diseases like diabetes. By better managing these patient populations and their conditions by preventing complications, healthcare providers can dramatically decrease per capita costs.

Two-sided risk models take value-based payment to the next level, creating a win-win-win scenario as patients achieve better health outcomes, physicians and other providers earn even larger financial incentives, and insurers, the government and employers save money from covering fewer healthcare complications.

Healthcare providers and payers in high-use, high-cost markets stand to gain the most under two-sided risk models, says Mr. Damore.

Consider the south Florida market. Here, annual Medicare per capita annual costs range between $16,000 and $17,000 per Medicare beneficiary, compared to the national average of about $9,700 per beneficiary, per year. As healthcare providers better manage this population's health, per capita dollar amounts are beginning to drop significantly primarily due to utilization reductions, according to Mr. Damore.

While Medicare and other value-based payment policies are moving both providers and clinicians toward two-sided risk, venture capital companies are taking advantage of these market dynamics and entering high use and high cost marketplaces, organizing primary care physicians into independent practice associations, CINs or APMs and contracting directly with payers to capitalize on shared savings opportunities.

"They're building APMs without hospitals and simply viewing hospitals as a cost center," Mr. Damore says. "If hospitals wait to join in shared savings, they will need to work fast and consider the competitive risks of a venture capital-backed physician network entering the market. Private insurance companies, competitors and government payers will take the full benefit of the per capita cost reductions available due to the market changes we're seeing today. Providers need to build their core capabilities and enter risk arrangements before the per capita costs decline and the opportunity for savings disappears in their market."

Phoenix-based Banner Health exemplifies how providers can excel under shared risk models. The health system has consistently generated more shared savings than any other U.S. organization in CMS' Pioneer ACO program since 2012, according to Mr. Damore.

Premier works with organizations — including Banner Health — that have mature two-sided risk programs in place. Premier uses the lessons learned and experiences from these mature programs to help other organizations develop their own models. The Premier team works with providers to implement or strengthen core capabilities to ensure they're prepared for two-sided risk. Once these core capabilities are in place, Premier also helps members evaluate how much risk to take on and what method they should use to phase in additional risk and return. To promote continued success under two-sided risk, Premier brings together national payers and health systems on a regular basis to discuss potential changes or improvements.

"It's a really exciting and challenging time to be in this field and help organizations create these new second generation value-based payment models in a way that helps build success for payers and healthcare providers, as well as better outcomes for patients," says Mr. Damore. "This is a massive change in the healthcare system, and it won't occur overnight. However, we've already seen significant progress and it's only going to grow."


The healthcare industry is just at the beginning of the curve when it comes to adopting two-sided risk. As the model becomes more prevalent, healthcare providers must ensure they are prepared for the risks in order to attain the rewards. Clinicians and providers that don't take on two-sided risk may miss out on valuable opportunities to save money as a result of lower per capita costs, better outcomes and more satisfied patients. Ultimately, healthcare providers that strengthen their own performance and processes, assess market conditions and proactively and prudently proceed into well-calculated, two-sided risk arrangements will be most successful under value-based medicine.

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