Upside and Downside Risk Should Be Part and Parcel of ACO Financial Arrangements

This post is the fourth of an 11-part series that proposes structures and actions that characterize successful accountable care organizations. Click here to download A Model for Value-Based Provider/Payer Partnerships white paper that covers the subject more in-depth.

Most provider organizations today are not built to manage risk. In many of the current fragmented payment models, physicians continue to be reimbursed on a fee-for-service (FFS) basis, although there may be some pay-for-performance (P4P) stipend attached. FFS reimbursement encourages volume-based care and discourages care coordination and cost reduction. Even the P4P models, while sometimes based on quality, do not focus on efficient and effective use of resources or evidence-based medicine to drive cost reductions.Cynthia Kilroy

Fee-for-value, on the other hand, takes costs out of the system through improved utilization. To incentivize decreased utilization, providers take on a level of risk based on their ability to impact outcomes. The essence of a payer-provider approach is to create interdependence between the partners so that each organization has a vested interest in reducing costs—instead of the old model of shifting costs or maximizing revenues.

An upside and downside (profit and loss, respectively) risk-sharing financial model is a key driver of success for an ACO partnership. ACO models at the Centers for Medicare & Medicaid Services (CMS) have upside as well as downside risk on a defined population, capping both downside and upside savings based on a predefined cost-of-health-care baseline.

According to the 2012 Optum study[1], few providers feel prepared to take on financial risk. Providers can prepare for risk by developing competencies in clinical performance management, clinical integration and population management.

The next installment in our series discusses the benefits of defining and sharing financial and clinical benchmarks with the right leadership teams

Multistakeholder Survey 2012[1] Multistakeholder Survey, Optum Institute-Harris Interactive. Optum Institute for Sustainable Health, July 2012.


Cynthia Kilroy, Sr. Vice President, Provider Strategic Initiatives, Optum

4 thoughts on “Upside and Downside Risk Should Be Part and Parcel of ACO Financial Arrangements

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