Research

How to navigate hybrid financial incentives

Overview

Many provider executives have told me they’re more bullish on risk-based arrangements now more than ever before. But even with more risk-based contracts on the books, fee-for-service is far from extinct. The strategic imperative for executives is to find a way to maximize both fee-for-service and value-based incentives—which is no easy task.

Covid-19 exposed how volatile fee-for-service revenue can be. And executives are split on how to lead their transition to risk-based payment. Some are hesitant to shake things up given ongoing financial uncertainty. Others are accelerating toward risk-based payment models in pursuit of more predictable revenue streams.

Either way, the practical reality is that most organizations will still have a sizable fee-for-service business for the foreseeable future. The journey to value is not binary, which leaves executives with the difficult job of leading a clinical enterprise that supports multiple—and oftentimes conflicting— business models.

 

How we got here

The shift to value-based payment is surprisingly well underway. Advisory Board surveyed 227 provider organizations in December 2020. 70% of organizations reported participating in some form of risk, with one-third in both upside and downside models (full report coming soon).

But it hasn’t been a walk in the park. The transition to value has been disruptively diffuse. The pace of risk adoption is highly variable across payer segments. Plus, risk contracts vary. Take Medicare for example: Medicare has over 17 disparate models to reimburse providers for value. And that’s just one payer—a single provider organization usually has several different contracts with different payers that all look different.

Over ten years after the Affordable care Act spurred value-based care in earnest, it has taken a long time to make progress. Though organizations may be on their path to value, a bulk of their revenue (oftentimes the majority) is still fee-for-service.

 

Two strategic shifts to navigate hybrid incentives

Barring any major legislation, a hybrid financial model is the new normal. The question is: how do executives navigate simultaneous volume- and value-based incentives for the long haul?

Below, I’ve outlined two shifts executives can make to maximize both.

  • 1. Assume the end-state is a hybrid financial model—not full capitation
  • 2. Allocate wraparound resources to patients covered under risk-based contracts
 

Parting thoughts

One of the trickiest parts of the transition to value is pacing risk-based payment adoption. Payment transformation consistently lags care model evolution. That’s because payers don’t just hand over risk. Participation in these contracts is contingent on experience effectively managing a population’s needs, improving quality, and decreasing costs.

But you can set the pace. Don’t let value-based care happen to you. Instead, negotiate for the future that you want so that these contracts become enablers, not barriers.

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