Engaging in risk-based contracts? Get an actuary’s opinion

Elena WhiteHealth care providers across the country are looking at ways they can increase their clinical and financial risk exposure under value-based contracts. But if they’re not experienced with risk, they may enter into contracts that put them in difficult situations. The consequences of bad risk contracts could include poor cash flows, non-competitive rates resulting in decreasing market share, strained capital or, a worst-case scenario, insolvency.

“Who is your actuary?” is my first question to health care providers looking to engage in risk-based contracts with payers.

Insurance companies ask their actuaries to focus on a product line in order to create benefit plans that attract members while also balancing the companies’ need for positive margins. For the provider market, actuaries have typically helped with managing their portfolio of fee-for-service contracts and margins with multiple payers, including how each of these contracts come together to support the organization as a whole.

In the new health care economy, it will be important for provider organizations to garner favorable risk reimbursement contract terms to position themselves in the most advantageous market position possible. That could be anything from growth in market share due to care retention, to narrow network products, etc., or the ability to develop and capitalize on health care delivery efficiencies both inside and outside the health systems walls.

The old real estate investment adage that “you make money when you buy the property, not when you sell it” holds true for risk contracts. In other words, the contract needs to be written to allow providers to be successful from the very beginning; a poorly contrived contract will undermine their best outcomes for achieving high quality and efficient care.

The distinct lenses of providers and payers are merging. With this merger, providers are absorbing more risk, and with more risk comes opportunity. Providers need to be acutely aware of how to capture this upside opportunity while minimizing the downside risk. This has been the role of actuaries within health plans. We encourage providers to make sure they level the playing field as well. If anything, they should double-check their numbers with an experienced actuary.

risk mattersTo learn more about how providers can take an actuarial approach to risk, see the article “Why actuaries count for health care providers in the new world of risk” on page 34 of the Spring 2015 edition of RISKMATTERS.

To join the conversation on risk-based business models, download the spring edition of RISKMATTERS and visit the new website for additional content at optum.com/riskmatters.

About the author

Elena White currently serves as Vice President of the Risk Quality & Network Solutions division for Optum. She has over 18 years experience leading network optimization initiatives, network development and expansion, business planning, provider reimbursement development, transformation to risk based arrangements and medical cost management strategies for both health plan and provider organizations.

Elena holds a Bachelor’s Degree from University of California at Riverside and Master’s Degree in Business Administration from Loyola Marymount University.

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