The Cost of Value-Based Care

A look at enterprise and financial risk strategy development and support Kelsey Stevens


As a part of a Society of Actuaries (SOA) Health Section Strategic Initiative on value-based care (VBC), several of my professional contacts and I researched ways in which actuaries can support providers now and in the future. One of the major umbrellas of provider actuarial support identified through this work was enterprise and financial risk management. “Enterprise and financial risk management” refers to business and financial matters related to health care delivery and involves a dynamic risk assessment of both an organization’s revenues and costs. In this context, “costs” refers to the actual cost of delivering health care services (e.g., labor and supply costs within a hospital setting) and not the definition typically used by health care actuaries in the context of health insurance medical expenses (i.e., provider claims expense).

Further, the “costs” in the latter definition are equivalent to the revenues for providers. Although these concepts are basic, it is worth noting the dual definitions when working with provider organizations. In the past, actuaries typically supported providers in their fee-for-service contracting activities through modeling impacts to total revenues and/or benchmarking contracted reimbursement rates. However, as VBC has become a more prominent part of a provider’s business, the actuary’s role has also expanded to assist with the evaluation of the revenue aspects of the more complicated and contingency-based VBC contracts.

Provider actuaries are now being asked to assist with the management of the cost component of the provider’s business. Actuaries are assisting health care provider organizations with preparing, implementing and managing the technical details of these new payment models as well as contributing to the overall organization’s margin management process involving optimizing both revenues and costs.

Strategic Considerations

As a provider expands its VBC footprint and makes the decision to move further away from fee for service and closer toward fee for value, there are a number of strategic considerations the provider should make. First, it is important to understand the overall strategic objectives of the provider organization and the plan for implementing such objectives. It is important to understand how these overall strategic goals relate to the organization’s enterprise-wide financials.

In this article, we discuss considerations that provider organizations must review when developing and supporting its enterprise objectives. By understanding the provider’s objectives and the organization’s willingness to change while balancing its risk appetite, providers—with the support of actuaries through modeling and financial risk guidance—will be able to better understand financial and other implications of entering various alternative payment models.

Actuaries can help guide providers through a series of decisions in moving through the VBC continuum in a way that supports the enterprise’s objectives. Actuaries can evaluate various options and the range of possible financial outcomes by modeling traditional financial levers (e.g., accurate diagnosis coding, underlying reimbursement changes, changes in benefits); clinical interventions (e.g., new population health management programs, care transitions); and the underlying internal cost structure of the provider, offering a wealth of information to inform provider decision-making. Providers may be facing such decisions as entering new payer-provider partnerships and even creating their own provider-sponsored health plans, and providers can leverage the financial expertise that is common among actuaries to help them prioritize the various interventions and deployment of resources that will be needed to prioritize the financial risk, clinical risk and internal cost structure activities.

Providers’ strategic motivations will inform an organization’s appetite for risk and level of VBC contracting, which will generally steer providers down sometimes very different strategic paths. As an example, one provider may be looking to respond incrementally to VBC market forces, with more limited cost-management activity and a focus on managing revenues and margins as closely as possible to the status quo. In contrast, another competitor provider may be interested in driving significant disruption in a market, via transformation of its clinical and financial processes and models, including aggressive medical expense and internal cost-management activities to capture significant growth and margin expansion opportunities. Being disadvantaged by uncompetitive pricing, low market share and/or network composition may drive the latter provider’s motivations, and that provider may be looking to gain a significant competitive advantage in the near future. To execute on this strategy, the provider may have the need to assume material risk and responsibility for outcomes, leading to reduced direct and/or per capita revenues while presenting broader opportunities to increase revenues for the value created through medical expense savings to the overall health care system and in gains in market share. This is not an uncommon situation in today’s markets, and each provider has a new level of complexity that will need to be addressed.

For each provider and its specific situation, actuaries can contribute expertise in evaluating the situation, market forces and potential impact for its actions. Actuaries are skilled at substituting facts for impressions and valuing the risk and reward trade-off. For a provider, one may argue there is little that is more challenging than upending its traditional fee-for-service revenue model. Actuaries place emphasis on understanding the full range of potential outcomes, the likelihood of each and the interplay of numerous forces that work together to produce a particular result. Actuaries will work with a provider to deeply understand the current state of its financials; to uncover all the micro- and macroeconomic forces that will influence results going forward; and to project the potential results for applying different strategies, tactics and arrangements, including the likely impact to margins.

Developing A Strategic Plan

An abundance of alternative payment models, or VBC arrangements, are available in the marketplace for providers to choose from, each requiring a different level of transformation and risk. Through careful strategic development and support, providers will develop a strategic plan for their ideal portfolio of VBC products at different points in time. Is it bundled payments, accountable care organizations (ACO), shared savings, shared risk, global capitation or some combination of many? How does this ideal portfolio change over time?

Providers need to consider where they are operating today and how far up the continuum of VBC options they are ready to move and by when. Each step along the continuum creates opportunity for reward in exchange for taking on added risk and responsibility. To further complicate matters, multiple arrangements may be appropriate based on the type of arrangements. That is, a joint venture may subcontract downstream with providers utilizing an ACO, bundled payments and/or other contracting options.

Transforming relationships with payers from fee for service to fee for value is a major shift that has implications for a provider’s financial status that cannot be overstated. While the change can be approached in an incremental and limited manner, more often it carries significant changes to a provider’s long-standing revenue and costing models, as well as timing and outlook for profitability and growth.

There are immediate and longer-term cash flow implications to consider as well. As with most things in life and business—greater risk and responsibility carries the opportunity for greater reward. The potential for both upside reward and downside risk needs to be well understood—that is, the size, timing, resource requirements—to enable a provider to make an informed decision about how much change to pursue. It is important for providers not only to generate value but also to contract appropriately to receive rewards based on the value it creates.

Using data on the provider’s current state and data on the marketplace, the actuary will model potential outcomes and help various enterprise leaders (such as the chief financial officer, lead for payer relations and contracting, chief medical officer, head of population health management, chief strategy officer, chief innovation officer, and others) reach conclusions about the likely implications of different approaches over both the short and long term.

Metrics that actuaries assess include but are not limited to:

  • Mix of business for revenues and margins across various payers (e.g., Medicare Advantage, Medicare Fee for Service, Medicaid, commercial)
  • Mix of business by service, provider type or place of service
  • Cost to charge ratios and expected margin
  • Fixed and variable costs
  • Capital investments current and planned
  • Quality measures
  • Current revenue and cost contracting arrangements
  • Market share in total, by attributed populations and by service line
  • The amount of risk a provider is legally allowed to take
  • Type of services that a provider is legally allowed to take (such as a hospital with physician risk)
  • Pharmacy services, both medical and retail
  • Full claims dataset (factoring in episodes versus services or claim lines, incurred versus paid bases, billed versus allowed claims, member out-of-pocket responsibility, and so forth)

Marketplace data that actuaries may consider include but are not limited to:

  • Uninsured versus insured populations in the area the provider serves
  • Insured populations (such as commercial, Medicare, Medicaid, etc.) broken out by segment (that is, individual versus small group versus large group; health maintenance organization (HMO) versus preferred provider organization (PPO) versus exclusive provider organization (EPO) versus point of service (POS))
  • Projections for population growth or contraction
  • Competitors, traditional providers or new entries
  • Market opportunity analysis
  • Disruption
  • Local, state, regional and national changes in policies

It is increasingly unlikely that a provider can avoid making some level of transformation to VBC. As health care spending continues to rise in the U.S., both government and private forces are driving this change. The Centers for Medicare and Medicaid Services (CMS) is increasingly driving transformation (e.g., the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA)), and providers need to understand what capabilities are required to manage participation in these programs going forward and how to allocate their investments and resources across all payers. The goal in both the private and public sector is the “triple aim”—to increase quality and reduce variations in care, improve population health and the overall health care experience, and lower medical spending.

It is necessary that providers inform themselves, prepare for the VBC shift and participate by developing strategies and solutions that will work for their organizations and benefit the health care industry as a whole. Actuaries’ skill and training in sourcing and using objective data and uncovering all aspects of risk and opportunity to estimate the cost of uncertain events makes them critical partners for providers moving forward.

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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