Transformation In A New Payment Model World

June 21, 2016 | Featured Articles

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Change in a New World of Payment Models

“Don’t stand in the doorway. Don’t block up the hall. For he that gets hurt will be he who has stalled” – Bob Dylan

Change often comes in incremental steps and significant industry change requires more than just time to get through it; change requires effort, growth and maturity to adapt successfully to it. With big change already at our doorstep, the time to adapt is now.

Change is coming from all fronts:

  • Government/Legislation Change
  • Medical Provider Change
  • Marketplace Change
  • Consumption
  • Technology & Telemedicine
  • New Payment Models for Providers
  • New Solutions
  • Protection Models – Reinsurance
  • Funding Models – Captive: the “401K” for Managed Care

It’s important to take a fresh look at change through the lens of experience and perspective. Adapting and adopting operational and financial solutions to foster survivability is key.

New Day, New Dollars

I believe it’s a new day and that the new value-based payment models being thrust upon the provider community offers new opportunities to earn new dollars. The question is what will your new day look like? Let’s take a closer look at where all the change is coming from and what that means for you.

The Affordable Care Act (ACA) is changing the industry landscape for medical providers. Our healthcare world is being molded and reshaped before our eyes with the transfer of financial risk to providers. The original purpose of the ACA was to give patients greater access to healthcare for those who could not afford it. However, the consequences and unintended results of paying for the cost of healthcare is squeezing providers making increased efficiencies a must and paramount through new payment models built on increasing risk to providers. We thought this was happening at glacial speed but in retrospect, we recognize it was at hyper speed.

In fact, taking on this “provider-sponsored risk” and following the volume-to-value model can result in doctors earning less per fiscal year. The “provider transfer of financial risk” models of the ACA may be the most disruptive and least understood aspect of the act. The government is now using more restrictions, regulations and penalties.

Doctors and accountable care organizations (ACOs) are now increasingly looking for ways to adapt and thrive under these new at-risk contracts, and to protect themselves from this new financial risk. The premise of the shift from fee-for-service to value-based payment (or “volume to value”) models is that patients receive better care, healthcare cost is slowed, and the providers who excel under the new value formula receive more dollars versus their peers. At least, that is the premise!  In reality, it is creating a financial dilemma for most doctors due to unprecedented angst in the medical community arising from less income, more restrictions, more confusion and increased oversight from Payers and the government on a go-forward basis.

Change introduced by the government is also creating marketplace pressures. Payers are becoming providers and providers are becoming payers, blurring the lines between the two. Providers moving into insurance have the medical/clinical expertise of delivery but not the infrastructure, claims administration know-how, IT knowledge, and risk assessment tools to manage and respond to risk on a sustainable basis. Providers will have to find an intersection for participation while still engaging the Payers for these management needs.

New Payment Models for Providers

Payment changes are coming in all shapes and sizes and for all classes – Commercial, Medicare and Medicaid. They include ACOs, NextGen ACOs, PACE, Bundled Payments, Value-Based Contracts, etc. Fancy names are used to make them more palatable like “Provider-Sponsored Risk” (or PSR) or “Value Based” or “Shared Savings” or “Bundled Payment” contracts but the result is the same, Providers are asked to do more and at more risk.

This change to Provider Sponsored Risk (PSRs) from alternative / value-based reimbursements may seem rife with peril but solutions exist to help mitigate that. Advanced Captive Models can provide more doctor income with predictable and manageable risk through reinsurance.

Risks associated with value-based arrangements may include missed star ratings, missed benchmarks and performance metrics, loss of a Physician and/or HMO contract or hospital contract, and contracts that are Direct-to-Employers, etc. and many doctor groups are transitioning from “shared savings” to “upside/downside at-risk” commercial value based contracts from national payers.

Protection Models – Reinsurance

Risk does not have to be a dirty word! But it should be cautiously measured and evaluated to prevent financial peril. Remember that the goal of PSR is to shift financial risk to providers via value-based contracts from Payers.

Reinsurance is a tool to integrate with a ‘Captive’ fund to reduce and remove risk for greater and safer predictability and control. Risk is less with Reinsurance since it acts as a “safety valve” to prevent and avert financial loss from catastrophic high-cost medical events or missed attainment of performance. Using Reinsurance, the Captive can now morph and become a funding vehicle to allow less risky exposure and safer returns as providers navigate in this new at-risk world.

Providers would prefer no risk at all, but as we move further and further into these new payment models, there is little choice but to assume some of it. Reinsurance can be a bridge in migrating to “reasonable risk” and upside profits for providers. Reinsurance mitigates the risk and acts like a safety net to eliminate the downside risk so the contract becomes break-even or upside risk to the physician group. The proper reinsurance can be a sound and economical financial investment. Its use is becoming increasingly important to protect physicians under value-based contracts.


If physician groups have operated successfully over the last few years under at-risk contracts or shared savings arrangements then this establishes a proven track record that will serve to keep their reinsurance cost low.

For full risk providers, such as ACOs, other unique Reinsurance solutions can be tailored to an ACO’s medical loss ratio (MLR) on an aggregate risk basis. Specific reinsurance is warranted for any high cost medical claims that are rare, infrequent, and out of the ordinary but costly.

Reinsurance can be over-engineered and under-engineered. The challenge is to over-engineer for rigidity, sustainability, strength, and resilience, and then to under-engineer for greater flexibility, adaptability and ease of use while allowing for change as new needs and goals emerge over time. It is then and only then that the right amount of reinsurance purchased can be combined with the best method of paying for it through the Captive for maximum financial results.

Funding Models – Captive: the “401K” for Managed Care

While many healthcare firms and medical practitioners are just beginning to employ Captives in these new methods under “at-risk and capitated contracts”, other industries have used Captives successfully for many years. This marrying of the healthcare world’s  risks with the existing captive world is an advanced financial solution with strong money management impact. These unique financial vehicles coupled with reinsurance serves to reduce the tax consequences on risk that already exists for ACOs and other at-risk organizations. It is just a newer iteration that takes advantage of “medical risk from contracts” in a more creative and advanced fashion for maximum savings.

The Captive model that was typically reserved only for malpractice and based on negligence of the hospitals/doctors is now the financial ‘go-to’ model for mitigating risk in the new at-risk contract and payment models. In reality, it actually resembles and functions like a 401K model for Managed Care At Risk Contracts by insulating the income stream of providers, and funds at a faster rate for savings and dollar accumulation that can later be withdrawn at a much lower tax rate. This analogous concept and understanding is key since the Captive provides a level of coverage (protection against loss) while being sensitive to cost/cash flow (paying/funding of risk) for best combination of protection and cost over the long term.

In addition, the cost of forming, managing and owning your Captive is tax deductible and is minimal compared to the profit return. The captive model can be a real financial solution for protecting providers from new risk contracts from both commercial and government Payers.

Medical providers can now manage and mitigate these risks with captive/reinsurance options to maximize profits, and offset risks while continuing to provide quality medical care to patients. By forming their own insurance called a Captive, providers can more efficiently manage the financing of risk and provider reinsurance.

While the money goes to the Captive to fund losses, it remains under the provider’s control and at their bank. Premiums paid to the Captive are tax-deductible. The provider’s profits under a Captive may become tax-exempt, reduced or delayed.

This advanced Captive Model may pay great dividends to you (and your doctor network) in managing risk you already have. The main benefit is that you manage risk you already have but fund it with the same dollars on a “tax reduced” basis. This applies to ACO and similar organizations risks (for all lines – Commercial, Medicaid & Medicare).

Additionally, captives can cover and protect previously uncovered risks such as: missed star ratings, missed value-based benchmarks, risk adjustment scores, medical loss ratios, loss of key Physicians, loss of Payer and/or HMO contracts, Direct-to-Employer contracts, higher utilization costs and bundled payment risks.

In Summary

We are in a tug-of-war between what we know has worked in the past and what the government is hoping will work in the future. But are these changes sustainable and, if so, at what cost to providers? Physicians are asked to care for the patient. But is anyone asking or concerned about who will care for the physicians and their future livelihoods? In the end, physicians control the pen, prescriptions and their practice of quality medicine and can thrive under these new PSR / value-based and capitation risk arrangements, once they know how.

The solutions described through reinsurance and captives can smooth the road ahead for less risk and make the new risk contracts more attractive with less potholes and bumps.