Show Me the Money III: RISK: Managing Risk, Taking Risks, & Sharing Risk

The three dimensions of Risk that a reforming health system must manage are: Population Risk, Utilization Risk, and Financial Risk.

Population Risk considers the possibilities of having an insured group of people who are sicker than average. This population, or group, of patients would consume a significant amount of the system’s health care services and resources. The ability of a health system to predictively assess high-risk populations has become an essential process in this new era.

Utilization Risk considers the likelihood that a sick person will be treated aggressively (expensively) versus conservatively (inexpensively). Physicians control the majority of utilization and therefore in some cases contribute to this risk. Doing the maximum number of lab tests, performing more complicated and costly procedures, or using expensive tools, drugs, devices, and supplies all contribute to Utilization Risk.

Financial Risk considers the ability to manage and operate a business effectively, and how incentives and penalties affect a managers actions and behaviors. Higher financial risk is more apparent to organizations with large potential liabilities and relatively limited assets, cash, and access to capital.

Taking Risk and Moving from Volume to Value
No rational person or organization wants to take risk without adequate compensation. Therefore, the default orientation toward risk taken by providers is to avoid all possible avoidable risks, and to transfer as much risk to payers and others. Consequently, how Population, Utilization, and Financial Risks are held or transferred indicates how oriented a provider’s progress is toward Value-Based care delivery. For example, a provider that refrains from taking Population Risk and/or Utilization Risk is in a Volume-Based care delivery orientation. A provider that takes Population Risk and/or Utilization Risk is focused on Value-Based care delivery. Under the current stage of healthcare reform, providers are being pushed by most payers into taking more Population, Utilization, and Financial Risk.

How Risk Sharing is Involved: Incentives
Interestingly, both Value and Volume oriented providers have asked suppliers for risk-sharing options. We observe that these requests happen in order of magnitude more frequently than they are seriously considered or implemented. Risk-Sharing can be advantageous and profitable if it meets certain criteria. Perhaps Risk-Share Agreement Utilization is low because very few offers consider how alignment can be maximized. Risk Sharing only makes sense when the parties have complimentary capabilities and can directly affect the Shared Risk independently, and collectively.

The name of the game in Risk-Sharing is Incentives. Insurance companies are organized to manage risk, and to do so, each one monetizes the cost of risk, and diversifies and controls exposure with risk pools. Insurance companies are well-informed of the Healthcare Event to Loss Rate equation, and are adept in how to adjust losses by changing incentives. Penalties and incentives are applied throughout the global healthcare delivery system to drive advances in the standard of care, safety, and financial stewardship. Risk-Sharing is a given in the reforming healthcare markets, for payers, providers, and now suppliers. As a supplier, in this period of reform, your offering, or accepting, a Risk-Share arrangement with your provider customer can be a distinct competitive edge.

What You Need for Risk Sharing
For a feasible risk-sharing agreement, the participants must have:

1. At least one direct independent risk reduction capability
2. At least one clear interdependent risk reduction capability
3. At least one economic incentive that is misaligned without risk sharing
4. At least one aligned economic incentive with risk sharing
5. The ability to create bilateral or multilateral incentives
6. The ability to enforce bilateral or multilateral penalties
7. The ability to grow volume, share, and profitability with risk sharing

In our next and final installment we will elaborate on these criteria and further illuminate best practices.

By:
Gunter F. Wessels, Ph.D., M.B.A.
Total Innovation Group Inc., Practice Principal, Partner
and
Sam O’Rear
Total Innovation Group Inc., Senior Partner

Total Innovation Group
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