Financial Performance Management and Contracting

Actuaries can help refine value-based care objectives and obligations Kelsey Stevens


Once providers engage in value-based care (VBC) contracts, it is imperative that they understand how they are performing under the contract and what actions they need to be taking to achieve their organizational objectives. Financial performance management involves evaluating individual and aggregated measures of performance to ensure that both short- and long-term objectives will be realized. It involves analyzing opportunity areas to identify what changes need to be made or, conversely, evaluating the drivers of success with an intent to replicate the outcomes. It answers the following questions: “How am I doing and why?” and “What should I change given this information?”

Using data analytics and clinical input, actuaries can help answer questions regarding setting target amounts, setting and structuring budgets, measuring performance metrics, and so forth. Actuaries use data to align future actions with desired results. They can apply their unique capabilities to help organizations develop and build into operations the appropriate data-driven evaluation processes. Actuaries are accustomed to forecasting contingent events and are, therefore, skilled at applying factors to models for considerations like seasonality, workdays, incurred but not reported reserves (IBNR), and historical patterns. Once key drivers of desired results are identified, actuaries refine financial forecasting models to improve the accuracy of projected results and performance measurement. They can help providers deploy their data in meaningful ways regarding projecting future financial events and outcomes.

Financial performance management requires sophisticated data analytics and a strong sense of financial rigor. Assuming contracts have been written appropriately to reward value, the more financial rigor a provider organization has, the more likely it should be to succeed under VBC. Evaluating current performance often informs changes in multiple functions within the organization. For example, financial performance management analytics may lead to changes in contracting, care management and clinical pathway deployment, network composition modifications, and so on.

Actuaries provide reporting and analytics expertise to providers in many ways. They have extensive experience developing analytics at the population level and have the ability to develop and deliver analytics at the illness, member or physician level due to their training in investigation of causes and effects. For example, reports should include episodes, illnesses and reports for physicians to use to reduce variation in practice patterns. These may also include clinical, quality, financial and utilization measures.

Actuaries help providers model their financial performance at the enterprise level, contract level and service line level in the VBC environment. However, this modeling is more complicated than previous fee-for-service-only contracts, since this involves estimating future events. Actuaries have significant experience forecasting the interplay between claims and revenues for informing performance-management activities.

To add more value in VBC, actuaries should consider building and enhancing their skills to understand the clinical care involved in treating various disease conditions, as well as to understand internal expenses required to deliver care with an ultimate objective for refining our ability to forecast margins. Actuaries’ work in the measurement and management of internal expenses should be handled cautiously as their skills develop in better understanding these sensitive topics. To truly impact these areas, actuaries will need to become engrained in the operations and financial aspects of provider organizations.


Actuaries provide assistance to providers in many areas for contracting activities, historically supporting their fee-for-service contracting efforts. But this has expanded to include VBC contracting. Support in this area typically includes the upstream contracts with health plans or payer partners, but downstream contracts between a risk-bearing entity—such as accountable care organizations (ACO), clinically integrated networks (CIN), physician-hospital organizations (PHO), and its provider participants also deserve attention.

Contracting focuses primarily on provider organizations’ contractual terms that ensure receipt of adequate revenue to cover the cost for delivery of health care services. While leaders in this space are equally concerned with reducing both waste and expenses, and a more robust and advanced contracting strategy will address internal costs, our discussion focuses on optimizing revenue, including both fee-for-service and VBC revenue streams.

Actuaries can help providers understand and optimize the terms of their contracts with payers, the likely revenues from the contracts, the inter-relationship and interdependencies between fee-for-service and VBC contracts, and the impact on cash flows. In other words, actuaries must help providers understand their agreements and commitments, as well as identify information and data needed prior to and during negotiations.

Actuaries understand insurance requirements and can evaluate risk nuances of specific covered populations along with the likely associated impacts to the overall success of a contract. Furthermore, actuaries provide expertise around how current fee-for-service contracts will and/or need to change, as well as how the terms, measurements, target setting and reconciliation processes should be addressed under potential VBC contracting opportunities. VBC contracts tend to be more complicated than historic fee-for-service contracts, given the nuances of the mechanics of various alternative payment programs, attribution methodologies and risk-adjustment methodologies for which actuaries tend to be well versed. Actuaries have strong analytics skills and market knowledge and are accustomed to thinking about total cost of care concepts and where risk exposure exists.

By asking the “right” questions—How much variability exists with respect to service severity? What about variability by type of patient population? and others—actuaries can eliminate a lot of noise from contract negotiation by making some of the unknown variables known, reducing the level of fear and distrust throughout the process. They bring an increased perception of objectivity to the negotiation by continuously aiming to achieve fair and equitable terms for all parties involved.

Actuaries can often provide a new perspective to provider organizations with regard to health plan pricing methodologies, underwriting methodologies and policies, risk management, product and portfolio management, and overall business strategies. This insight can be invaluable while negotiating contracts with health plans or, better yet, developing strategies that better align objectives between providers and health plans.

As mentioned, in addition to the relationship between a provider and health plan, actuaries can model and provide insight into the contracts between a risk-bearing contract entity (e.g., ACO) and its downstream provider participants. This relationship will be critical to the success of a VBC contract, since the providers will, in many instances, be the stakeholder that is being asked to intervene to create the value within a VBC contract.

Here are examples of both upstream and downstream contracting work for which actuaries are equipped to assist providers.

Upstream—With Payers

  • Fee-for-service
  • Total cost of care shared savings contracts between the provider and health plans for all populations (commercial, exchange, non-exchange, Medicare Advantage, Managed Medicaid)
    • One-sided risk
    • Two-sided risk
    • Percent of premium
    • Medical loss ratio
    • Various ranges of risk corridors
  • Capitation—specialty provider capitation, primary care physician capitation
  • Bundled payments
  • Direct to employer
  • Central management services innovation models
    • ACO
      • Medicare Shared Savings Program (1, 1+, 2, 3)
      • Medicare Next Generation ACO Model
      • Advance Payment ACO Model
      • Pioneer ACO Model (legacy program)
    • Episode-based payment initiatives
      • Bundled Payments for Care Improvement initiative
      • Comprehensive Care for Joint Replacement Model
      • Oncology Care Model
    • Primary Care Transformation
      • Comprehensive Primary Care Initiative
      • Comprehensive Primary Care Plus
    • Initiatives focused on the Medicaid and CHIP Population
    • Initiatives focused on the Medicare-Medicaid Enrollees
    • Initiatives to accelerate the development and testing of new payment and service delivery models
    • Initiatives to speed the adoption of best practices
  • State agencies
  • Pharmaceutical companies
  • Delegated clinical management services (utilization management, disease management, care management, etc.)

Downstream—With Providers

  • How to allocate episodic costs equitably for payment purposes
  • Attribution model—when payment is contingent on an algorithm that decides who a provider’s patients are, attribution models need to be well-understood and well-documented
  • Employed provider models
  • Sub-delegated risk models
  • Capitation rate developments

Since contracting terms drive providers’ revenue and income, this is a very important component of their overall business model. With the increasing frequency of VBC arrangements in the industry, this work is becoming even more valuable. We are seeing ever-changing reimbursement models—those that are not driven simply by doing things, but rather by the overall ability to achieve the objectives of the triple aim.

Actuaries have sound actuarial modeling capabilities, are equipped to manipulate and understand large data sets to evaluate contract terms, are trained to assess and mitigate risk, and can even add value in negotiating better terms. It is imperative that actuaries stay on top of innovation in this space, understanding the nuances of alternative payment programs of interest in the industry.

Kelsey Stevens, FSA, MAAA, is director and senior consulting actuary at Wakely, and a member of the SOA Health Section Council.

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