Value based care has gone from dream to reality. Accompanying this transition is a massive transfer of risk from third party payers to providers. We are, in essence, becoming insurers! Physicians have come to accept this new world, but are not in a position to truly understand it. The main reason is that we have never been trained to understand basic concepts in financial risk assessment.
The recent failure of Dartmouth-Hitchcock’s ACO is the best example. “We were cutting costs and saving money and then paying a penalty on top of that,” said Dr. Robert A. Greene, an executive vice president of the Dartmouth-Hitchcock health system. “We would have loved to stay in the federal program, but it was just not sustainable.” In the end, Dartmouth, which was a pioneer in creating the ACO model, improved quality and reduced Medicare spending on hospitalizations, procedures, imaging and testing. Nevertheless, they miscalculated the financial risk of the ACO and had to shut it down.
Why did some of the smartest physicians in the country fail? It may be that we are terrible at understanding and pricing different kinds of risk. For example, in the immediate aftermath of 9/11, the number of air passengers fell while the number of miles driven increased – even though driving is exponentially riskier than flying. This so-called “9/11 Effect,” prompted by a fear of further terrorist attacks and a wish to avoid long waits in airport security lines, had the unintended consequence of creating 2,170 additional traffic fatalities in the three months following the collapse of the World Trade Center. Clearly, travelers did not make their risk calculations are based on objective measures.
But even “objectivity” can be misleading. The stock market is a labyrinthine laboratory for understanding the machinations of risk assessment. More than any other industry, the financial services sector employs people who believe they can accurately gauge the probability or risk of a given outcome. In the end, though, estimates vary widely based on a combination of access to information and fundamental assumptions. The result? A marketplace where different models create different risk analyses and, in turn, different prices.
For physicians, risk analysis has historically revolved around specific interventions that were extensively studied and published in peer-reviewed journals or put forward as best practices by societies. Judgments grounded in training and informed by experience were applied to a specific patient presenting with a particular condition and set of comorbidities. Consideration might be given to a course of action that could mitigate risk from a malpractice action, but rarely went further afield.
Reimbursement Model Risks
The traditional method of patient risk analysis has been supplanted by the need to analyze patients through the lens of a healthcare model that relentlessly pushes for ever-better outcomes at ever-lower costs. The financial risks associated with newer reimbursement models, such as capitation and bundled payments, are real and require careful consideration.
When talking about financial risk, it’s helpful to talk in terms of objective risk – when the risk is known – versus subjective risk – the “perception” of risk (usually unknown). . It’s relatively easy to assume objective risks because they are easier to mitigate. It’s more difficult to assume subjective risks.
We know the probability of heads on a coin flip is 50%. That is objective. Irrational or not, a gambler may perceive that a coin which has just come up heads three times is going to “come up” heads again. This may be the subjective risk. Many argue that better measures of objective risks would allow us to make better decisions when confronted with data
In general, there are too many variables to calculate most risks objectively. For this reason, we use “inductive reasoning” by recording a large number of observations under a given set of conditions. This is where some may say medical research comes in. It certainly does for clinical risk. But what about financial risk?
In a fee-for-service paradigm, which rewards patient volume and treatment intensity, the objective risk is low. The provider knows the costs involved and can set rates accordingly. Price-setting mitigates the risk that the reimbursement will be less than the cost of service. The subjective risk – a low volume of patients or procedures – is also low, in that the provider can increase the revenues by increasing services for existing patients.
In a bundled service model, payment is made for a single episode of care, and may involve multiple providers and facilities. Adjustments are often made according to the severity of the episode and according to comorbidities. Both the objective and subjective risks are greater than with a fee-for-service model, but those risks are shared among the payees.
The capitation model rewards low patient volume and less treatment by paying providers a fixed fee per patient enrolled in a plan or program. While age and gender are considered when calculating payments, comorbidities typically are not. Thus, providers have little objective risk (they have a predictable revenue stream that’s paid prior to services being rendered, mitigating risks associated with cash shortfalls or reimbursement denials) but much greater subjective risk, in that the costs of services can be much greater than the capitation payment.
Another way to think of the upside-down financial risk of capitation is to imagine a hurdle that represents costs. Clearing the hurdle means the physician makes a profit. In a fee-for-service model, the height of the hurdle lowers as the doctor sees more patients and performs more services. In a bundled payment model, the hurdle rises and falls depending upon whether or not a given episode of care goes smoothly. In a capitation model, the hurdle gets higher as the physician performs more services and sees more patients.
For bundled payment and capitation models, the key to lowering the hurdle or mitigating the risk is to have tight cost controls, meaning more impactful treatments. For the former, you want predictable or rising volumes. For the latter, you want smaller volumes.
Physicians negotiating bundled or capitation payments need to have a firm grasp of the costs associated with treating various diagnoses, as well as complication and readmission rates. Consideration must also be given to the adjustments hospitals may or will make to control costs, such as shorter stays and outpatient surgeries, that can increase or decrease complications and readmissions. Patient volume and population health are also considerations, as is the provider’s ability to effectively treat patients in a more cost-effective manner.
Overview of Other Risk Spectrums
As healthcare decisions become increasingly data-driven and physician payment models move from fee-for-service to bundled payments or outcome-based remuneration, physicians must learn to assess risk along other spectrums. Here are some examples.
Risk Management Roles
The very fact that organizations of every size need risk managers speaks to the new healthcare landscape. Hospitals and large practices likely have a dedicated risk manager (or risk management department), while a physician in a smaller practice may wear that hat. As it pertains to the insurance arena, risk management often requires staying abreast of changes in the professional liability field, documenting loss prevention measures, and exploring risk financing options. The risk manager role can also encompass responsibilities typically assigned to a compliance officer, such as licensing, ICD-10, and employee screening.
While a compliance officer – or a physician assuming that role – can support HIPAA compliance efforts, the regulation demands a strict control environment that requires substantial information technology expertise. Physicians must be aware of the security infrastructure needed, which includes hardware, documentation, and administration.
Human Resource Allocation
Given that physician payments are increasingly based on outcomes or rooted in bundled payments for episodic care, it’s critical to travel down the highest-quality, lowest-cost care pathways. This involves rethinking how resources are allocated, and specifically how individual skills are best utilized in each case. Physicians must overcome the fear of upsetting colleagues, an unease that can prevent the most qualified clinician from being assigned to a particular case. Creating the best outcomes demands clearheaded risk assessment and egoless decision-making.
Negotiating Your Bundle
Collegiality can be a liability when a physician negotiates his or her slice of a bundled payment. In the world of value-based care, an individual provider’s data becomes a bargaining chip in securing just compensation. Understanding the risks associated with bundled care and other types of compensation packages – and taking steps to mitigate those risks – can ensure rewards for stellar performance and a safety net for setbacks in patient outcomes.
Yet there are times when collective negotiation can produce greater benefits than going solo. Integrated healthcare systems offer a plethora of both risks and potential rewards. Just as a rising tide lifts all boats, aggregated data can demonstrate value and quality of care in ways that individual data cannot. Leveraging strong performers can yield strong results.
An increasing number of physicians are opting for salaried employment over independent practice. While the objective risks are typically lower with employment, there is a concomitant opportunity cost that can lead to a career marked by underperformance. As an employee, a doctor can largely focus on the practice of medicine and can enjoy a stable and predictable career. In an independent practice, a physician can potentially reap much greater financial rewards as well as implement his or her vision for healthcare delivery (within the constraints of the zeitgeist, of course).
Just as drivers in the months following 9/11 weren’t aware of the increasing toll of highway fatalities, physicians may not be aware of the risk of unintended consequences in delivering outcome-driven, cost-conscious care. In an effort to decrease risk to a practice’s outcomes, it may be tempting to cherry pick patients. If physicians or practices that have better outcomes are adept at managing risk by selecting patients at the lowest risk of complications or readmittance, it can have the unintended consequences of leaving the unhealthiest or highest risk patients with the least qualified providers.
Although those in the medical profession are steeped in the concept of risk as it pertains to morbidity and mortality, they are likely not much better than the average person in understanding, assessing, and mitigating the different axes of risk presented by the current topography of healthcare delivery. Stepping outside of the boundaries of risk traditionally associated with the practice of medicine creates a perspective that will serve clinicians well in the months and years to come. As we become better at utilizing data to predict outcomes for individuals and populations, we will be in a better position to estimate risk and appropriately price our services. We may also need to help create specialized insurance products to help bear the cost of catastrophic financial outcomes, much like we do the same for malpractice insurance!