key-311986_640Key Facts 

Several innovative methods to distribute risk have been presented over the last few decades to ensure all healthcare stakeholders—including the patient through higher copays, and providers through quality-based payment arrangements, for instance—have “skin in the game.” The per capita cost of healthcare was rising at a much quicker rate than other cost of living indicators throughout the 1980s, 1990s, and early 2000s before declining from 2007 through 2013. Unfortunately that rise was not accompanied by a rise in quality of life: despite spending more than twice the average of other developed countries, the US ranks poorly in terms of life expectancy and other indicators, especially considering the cost. In short, we pay more for less on a population level. The causes for health care spending fluctuations are bitterly debated and each explanation is an ecosystem unto itself (the increase in deductibles, higher copayments and the Great Recession to name just a few). Regardless of the causes, the Affordable Care Act was one result.

key-311986_640 Key Policy #1: Affordable Care Act

The Affordable Care Act includes several key features such as the individual mandate, the ten essential benefits, and the end of insurance denials or cost based on gender or pre-existing conditions. The legislation had a profound impact on risk distribution, as detailed in the terms below.

tree-576847_640State Health Insurance Marketplaces/Exchanges. State Health Insurance Marketplace (HIM) (formerly known as “exchanges”) are a primary mandate of the ACA, which requires states to offer a transparent, consistent environment for individuals and small businesses to shop for standard commercial plans.  Marketplaces provide a set of government-regulated and standardized health care plans from which individuals may purchase health insurance policies eligible for federal subsidies based on income.

tree-576847_640Medicaid Expansion. Through the ACA, nearly all U.S. citizens under 65 with family incomes up to 138 percent of the federal poverty level (FPL) ($26,951 for a family of three in 2013) qualify for Medicaid in states that chose Medicaid expansion, which includes 31 states.  The right for states to opt out of Medicaid expansion was granted by the Supreme Court in 2012, which upheld the ACA in the same ruling.

tree-576847_640Coverage for Individuals with Pre-existing Conditions. At the heart of the ACA and how it is funded is the two-pack punch of mandates for individuals to get coverage and for payers to cover individuals regardless of health. Prior to the ACA, the individual health insurance market was medically underwritten, giving insurance companies the right to approve or deny coverage based on an individual’s health history. The ACA took this right away from payers with the “guaranteed-issue” requirement – they must offer coverage –which led to the guarantee of coverage for an estimated 52 million adults. At the heart of the issue of risk, guaranteeing coverage means a flattening of premiums, which is affordable only in a diverse risk pool. Eliminating this guarantee renders coverage for those with pre-existing conditions unaffordable.  

tree-576847_640High Risk Pools. In actuarial science, it is understood that pooling different groups is challenging in a voluntary system, unless there is a subsidy attached. That is simply because those who are healthy will choose not to have coverage if they don’t expect to benefit personally from it. Because of that and because the penalties for not getting coverage were much less expensive than coverage, the exchanges were hit by high-risk pools that led to many payers pulling out of the market entirely, reducing competition on the individual market.

tree-576847_640Risk Adjustment. One of the “Three R’s” of the ACA and the only one that is permanent by design, risk adjustment funnels money between payers to “level the playing field” for those insurers who have sicker, more expensive members overall.  As a result of this added revenue stream, payers have developed entire departments whose mandate is to maximize their risk adjustment collection capacity.  By creating a revenue stream based on managing care effectively and efficiently for higher risk populations, it led some payers to actively seek out members with diseases they feel they can manage well.

key-311986_640Key Policy #2


Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) Quality Payment Program

Avoiding the public scrutiny of the ACA, MACRA is widely accepted to be the most significant policy to impact Medicare since its creation in 1965. MACRA now governs all Medicare Part B payers and clinicians. Whereas the ACA primarily redistributes risk from individuals to payers, MACRA distributes risk between providers and payers. The bipartisan legislation includes two components:


tree-576847_640Merit-Based Incentive Payment System (MIPS). This is the default payment model for most providers. MIPS gives a performance-based payment adjustment to Medicare providers based on quality reporting. It is the baby step for providers new to bearing risk.

tree-576847_640Alternative Payment Model (APM). Whereas MIPS moves fee-for-service providers along the track toward value, APMs are already there. By participating in any one of CMS’s APM tracks, providers are exempt from MIPS reporting and payment structures. Only organizations that meet certain requirements are eligible to receive payment as an APM. APMs include 1-sided risk APMs and 2-sided risk Advanced APMs such as Next Generation ACOs.


key-311986_640Key Features

Different risk-bearing models can best be considered on a trajectory from zero risk, volume-based (“fee-for-service”) to 1-sided risk (no loss, potential gain through a bonus) to 2-sided risk (penalties and bonuses possible) to, ultimately, full risk (flat fee per capita for total care):


tree-576847_640Fee-for-Service is the traditional relationship between providers and payers, where a provider charges the health plan for each service, often at a contracted rate.  While it is the least complicated, it is considered problematic because the incentive is for the provider to order as many tests and procedures as possible because their payment is volume-based.

tree-576847_640Pay-for-Performance (aka Performance Based) contracts offer bonuses to providers who show they are following evidence-based clinical pathways or protocols, and/or show they improved cost in some way.

tree-576847_640Shared Savings contracts offer bonuses to providers who coordinate care to keep costs low and quality high, as measured against a similar risk pool.  This risk model is most prevalent in CMS’s ACO programs, but also is being piloted by private insurers with state Medicaid programs and employer groups.


tree-576847_640Bundled/Episodic Payments

Bundles are generally tied to a defined episode of care such as a knee or hip replacement, or maternity. They are often a part of Medicare Part A payment models, but are also used by commercial payers. The provider is given a lump sum and left to determine how that sum divvies up with physical therapists, surgeons, and everyone else who participates in the patient’s care through the episode.  They are held to a standard of care which is measured through quality benchmarks to ensure care quality is not sacrificed.

tree-576847_640Shared Risk/Value-based Contracts

As more organizations develop the infrastructure to track quality and the care coordination protocols to manage their populations, they are willing to take on risk with the promise of higher rewards. But this has been a slow process, as reported in Modern Healthcare in June 2016:

“Only 13 hospital systems out of 80 respondents said they derived 10% or more of their net patient revenue in 2015 from risk-based contracts. Two-thirds of the respondents estimated that risk-based contracts generated 1% or zero of their net patient revenue.”

tree-576847_640Capitation. Capitation models include flat monthly payments for specific hospitals or specialties.

Global Capitation. Global capitation is just about the simplest of all: a set amount of money is paid per capita per month. One and done. But there is a catch: how do you incentive quality of care rather than denial of care in a capitated model?


key-311986_640Key Entities on the Risky Road to Value

tree-576847_640Accountable Care Organizations or “ACOs” includes Advance Payment ACOs, Next Generation ACOs, Medicare Shared Savings ACOs, Pioneer ACOs, and commercial ACOs. Mostly formed by CMS for Medicare lives, ACOs are organized groups of providers that provide care coordination and are paid through a combination of fee-for-service and an adjustment based on how efficient and effective their management of their lives was compared to other similarly risk-stratified and regional ACOs.


  • Pioneer ACO: Designed for providers already involved in care coordination strategies, the Pioneer model was designed to lead providers from shared savings toward more risk.  
  • Medicare Shared Savings ACO: Providers learn to coordinate care and are offered bonuses based on outcomes and reduced cost.
  • Advance Payment ACO: Participating providers are offered care coordination funds up front to fund the infrastructure necessary for participation in the Shared Savings program.
  • Next Generation ACO: One step further along than the Pioneer ACO, Next Generation ACOs offer more reward for more risk.


tree-576847_640Centers for Medicare and Medicaid Services Innovation Center (CMMI)  tests various payment and service delivery models that aim to achieve better care for patients, smarter spending and healthier communities. It is responsible for the ACO models listed above, and the general drive from volume to value.

tree-576847_640Patient Centered Medical Homes (“PCMH”). According the PCMH certifying body, the National Committee for Quality Assurance (“NCQA”), a PCMH “is a model of care that emphasizes care coordination and communication to transform primary care into ‘what patients want it to be’.”  Providers can either be in 1-sided or 2-sided risk arrangements, and are often part of an ACO’s strategy.

tree-576847_640Integrated Delivery Networks: These are often health systems that can operate as the umbrella organization over various ACO models, physician groups, and hospitals.  They tend to have the infrastructure and cost transparency to actually impact cost and quality of care, and thus have proliferated since the ACA.

Watch out in early 2017 for a couple more key terms and players posts focused on Quality and on the Triple Aim. Til’ then Happy New Year from all of us at Brooks Group!

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