Purchasers of healthcare are demanding accountability and seeking out providers who demonstrate the ability to deliver high-value care (i.e., better patient outcomes & experience, through smarter spending). In many competitive markets, this has led to increased participation in risk-based contracts.

Global payment models (i.e., capitated arrangements) are the most extreme arrangement, in terms of shifting actuarial risk from the insurer to the provider.

Under global risk structures, the “accountable” physician/organization receives a set Per-Member/Per-Month (PM/PM) payment for each patient attributed to them. Under these models, providers are responsible for the costs associated with all services rendered to the patient, regardless of who performed the service. Any savings generated would be considered “profit”, while overages would be a “loss”.

These types of arrangements, while risky, do offer the greatest potential rewards, both in terms of financial opportunities and improved patient outcomes.

So what’s the downside?

Although the potential rewards are higher under capitated arrangements, the inherent risk and complexity associated with the design and implementation of these contracts are also greater. In this article, we describe three key issues that providers must be aware of when entering into these arrangements, to ensure fair and equitable pay rates.

Three things you should know about your PMPM rates

Potential savings won’t always translate to profit

PMPM rates are typically established using historical Fee-for-Service (FFS) payments that are reduced by an arbitrary discounted amount (e.g.,2-3%) to guarantee savings. Past performance in managing total costs of care will likely have a significant impact on the potential savings (profits) under these arrangements. For example, an organization that has historically done well at controlling costs and utilization may not have much margin in the way of potential savings, coupled with the “discounts” each year, which could minimize those margins even further. Conversely, organizations that have traditionally not done well at controlling costs and utilization may have greater opportunity in terms of potential savings, but the costs associated with delivery improvements that will be required to realize savings will offset those earnings. In many cases, provider organizations don’t have the capabilities or access to the data needed to validate that baseline rates are equitable and fair; based on accurate/adjusted performance; representative of the population.

True costs of care are not considered

PMPM rates don’t factor in the patient’s needs or the cost of delivering the care. Rate setting is performed using actual service utilization. This issue is particularly impactful to providers serving vulnerable patients with unmet needs. For example, if the population used to calibrate rates was “under-utilizing” services/care, this would result in lower PMPM rates. This is true regardless of whether the utilization of services provided an appropriate level of care. In addition, PMPM rates don’t factor in the actual costs of delivering care. Provider organizations are therefore on the hook, to determine these costs and to negotiate them into the contract rates. This should include costs for delivering appropriate wellness care and preventative services, proactive treatment and management of chronic illnesses, high touch care/support for individuals with multiple/complex issues, transitional care support for major acute conditions, as well as diagnosis and treatment planning.

Adjustments are inadequate

PMPM rates have traditionally taken into account chronic disease and severity of illness, but fail to include adjustments for acute conditions or social determinants of health. Despite widespread recognition of the importance that these factors have on quality, utilization, and costs of care very few risk-based arrangements take these into consideration. This issue again has a greater impact on provider organizations that are disproportionately treating vulnerable populations or those that serve patients with high acuity episodes of care. Again, the responsibility falls on the provider organization to understand the patient population well enough to predict care needs across the continuum and to negotiate that into their contracts, as well as form partnerships with community and other provider organizations to meet the needs of socially disadvantaged populations with complex needs.

These are just a few of the challenges organizations should anticipate as they expand their footprint in risk-bearing arrangements. The key to making the jump from one revenue model to another, smoothly, is really good information. At Inflight Health we’re focused on streamlining the collection and use of information and delivering the intelligence that healthcare organizations need to better understand risk and manage performance effectively in risk-bearing arrangments. Contact us to learn more or to set up a call with a member of our Success team.