As I read the Centers for Medicare and Medicaid Services (CMS) proposed rule for the revision of the Medicare Shared Savings Program (MSSP), and particularly the strong focus by CMS on accelerating the movement to downside risk, my mind wandered back to an article titled "Risky Business" that I coauthored several years ago for the British publication Healthcare Leader. That article focused on why physicians in England might need to engage the services of an actuary. At that time, the Department of Health in England had published a white paper in which it set out proposals hinting at incentives to encourage and reward groups of primary care physicians who successfully manage financial risk, along with penalties likely for those who failed to do so, particularly if they also failed to control service risk, e.g., quality and outcome risk. Notice any parallels with the MSSP?

With this familiar push for providers to assume greater responsibility for downside financial risk, I wondered if my original article might now have particular relevance in the United States. This article addresses actuarial principles of financial risk management viewed through the lens of a U.S. provider. While there are some clear fundamental differences between the financing of healthcare in England and the United States, when it comes to providers bearing financial risk, many of these principles are the same.

All ACOs will need to consider taking downside risk within the next two years

Of course, taking downside risk is not new for U.S. healthcare providers. Two-sided risk tracks have been available in the Medicare value-based payment world since day one, for example with the Pioneer program. Some providers are also currently engaged in two-sided risk-sharing agreements with many commercial and Medicare Advantage plans. And back in the 1990s, many physicians were reimbursed via full capitation arrangements. However, CMS's proposed rule substantially changes the playing field for the majority of accountable care organizations (ACOs) and their participating providers, and fairly rapidly too. The scale and potential consequence of the proposed rule is significant. To stay in the program, all ACOs (new and existing) will need to make a decision within the next two years as to whether they are comfortable and ready to take downside risk.

Downside risk doesn't need to keep you awake at night

To quote from my original article: "To manage financial risk you first need to understand it. To understand it, you need to model it. And to model it, you need good quality, credible data."

Actuaries are well-positioned to advise providers on the management of financial risk in two-sided value-based payment models. We are experts in using data to model and quantify financial risk and uncertainty in healthcare utilization and cost. We develop scenarios that model the uncertainty, helping providers understand the potential range of outcomes under different MSSP tracks and other payer risk-sharing arrangements. We provide estimates of adverse scenarios and the probability of financial loss, and we quantify the impact that high claimants may have on the variation in results. Using actuarial modeling, an ACO or other provider entity can gain a robust understanding of the financial risk taken when engaging in a two-sided payment model, which in turn informs decisions on how best to fund any downside risk.

A common worry among providers taking risk is being held to an average cost target but receiving a disproportionate share of "sick" patients. Risk adjusters use claim experience, diagnosis data, and other information to modify the average premium to more accurately reflect the morbidity of the population for which the provider is taking risk. Risk-adjusted payments can be based on past (i.e., retrospective) or projected (i.e., prospective) experience. Actuaries understand risk adjusters and can ensure that providers are receiving a fair payment through their use.

Managing the downside is as much about identifying the upside

Population-based payment structures typically set healthcare cost budgets on per member per month (PMPM) or percentage of premium bases. Detailed actuarial models based on a health system's or ACO's experience, as well as industry benchmarks, are important in developing budgets and measuring financial results as they emerge. Those same actuarial models can be used to help providers identify utilization management opportunities, which can lead to greater likelihoods of obtaining savings in two-sided arrangements. An example includes comparing a provider's data to risk-adjusted benchmarks in order to pinpoint inefficiencies in clinical areas by population segment, and identifying potentially avoidable services.

Beware the unintended consequences!

Negotiating two-sided risk payment terms between payers and providers is a high-stakes effort for both sides. The technical aspects of contracts can be difficult to analyze, and today's complex contracts may lead to unintended consequences for the uninformed. Actuaries have expertise in analyzing the technical components of complex contractual arrangements and provide detailed analyses grounded in financial realities, which can be invaluable for providers contemplating taking additional risk through capitation or other reimbursement methods. We can help providers assess various reimbursement methods using appropriate data and pointing out the strengths and weaknesses of various approaches. Actuaries also audit the technical and financial components of value-based reimbursement agreements. This includes auditing attribution, cost target verification, data validation, and financial settlements.

Enhance your opportunity for success by informing your decisions

Whether you're an ACO considering taking risk in Medicare under the proposed new MSSP, or a provider considering downside risk with Medicare Advantage or commercial carriers, seeking actuarial advice can help prevent you from taking on avoidable or unnecessary financial risk. It can also help identify opportunities to maximize the upside, which ultimately leads to greater likelihood of long-term success for providers in a two-sided value-based reimbursement world.