Posted on May 04, 2022 | 3 min read

What is two-sided healthcare risk?


Financial Optimization

Value Based Care

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Two-Sided Healthcare Risk

Depending on your role at a health plan or risk bearing health system, you’re aware of value-based care (VBC) models. However, depending on the model itself (and sometimes within the same model of value-based care), there can be different variations of two-sided healthcare risk, also known as upside and downside. An organization’s level of engagement in two-sided risk can depend on model type, but also the contract within individual models. Given that variability, it’s no wonder it’s one of the more misunderstood elements of value-based care.

Of course, your specific engagement with upside and downside risk sharing arrangements is largely dependent on the lines of business your organization services. Regardless, it is still important to understand the nuance and potential strategic steps available to you in your risk adjustment journey. That’s why today, we’re going to clear up some of that misunderstanding.

First, as we covered previously, risk adjustment is a financial tool for estimating the cost to provide care to a covered population.

The risk, in this context, is the cost of care in a year. A higher RAF (risk adjustment factor) means a higher total maximum reimbursement. That means if, through effective condition management, a patient’s total cost of care comes in under that maximum, the savings are split between you and CMS. If the cost of care exceeds that maximum, the federal government covers the over-run. When you exclusively benefit from adopting risk through these shared savings, that’s “upside only” risk sharing arrangement.

With the adoption of downside risk, when costs over-run the RAF calculated maximum reimbursement, just like the savings in upside sharing, those costs are also shared between the risk bearing entity and CMS.

Most organizations that adopt a risk-based model start with “upside only.” Some even stay there, satisfied with the even split of shared savings. However, many programs CMS operates, ACOs for example, include a transition to downside risk over time. Even in cases where adopting downside risk isn’t mandatory, organizations are financially incented through a higher proportion of shared savings or bonus payments.

Long-term, CMS benefits from organizations taking on downside risk, but it can be daunting for smaller organizations, which is why there are “softer” approaches to downside risk under programs like direct contracting, where organizations can select tracks that trade out incentives for a cap on possible losses, or different capitation models. Because organizations often grow into downside risk over a number of years after starting upside-only, either through financial incentives or contract mandates, it is often referred to as more mature or advanced risk sharing arrangement. This is also because it takes a more sophisticated strategy to thrive under full, two-sided healthcare risk sharing.

From a clinical perspective, the system is built on the premise that more thoroughly managed preventative care is less costly and better for patients. Financially though, with the threshold between shared savings and shared cost set by the risk adjustment factor for patients, the system is dependent on a complete, accurate risk adjustment capture.

That dependency is why solutions like Edifecs Retro Review or Post-Visit Review exist. If all conditions treated are captured, RAF is maximized, giving organizations the highest possible ceiling between enjoying savings and incurring cost.

For organizations already operating a thorough retrospective capture program, there is also a prospective approach that can be added, enabled by Edifecs Pre-Visit Prep or Edifecs Suspects. With these prospective tools, when patients are scheduled for appointments, providers have a list of absent, but highly likely clinically-inferred risk adjustable conditions that need to be addressed. Because these suspected conditions come from the clinical record, they typically yield an additional 24% in captured conditions over claims-based suspecting. This compliantly drives RAF further up, in turn increasing that tipping point between savings via upside risk and cost from downside risk. For organizations that have adopted full two-sided healthcare risk and are incented with a higher share of the savings from CMS, this is a substantial impact on revenue while deepening care.

That impact on care is also how thorough risk adjustment, considered a financial tool, can impact the clinical side. In that regard, much like risk adjustment itself as a concept, this proactive approach falls right in line with the axiom, “An ounce of prevention is worth a pound of cure.”

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