Hospitals, insurers slow in adding downside risk to contracts

When Janie Wade stepped into her new role as chief financial officer of a 10-hospital health system based in Colorado, she expected to encounter a hefty appetite for innovative, risk-based contracting from commercial health insurers.

Boy, was she wrong.

“We have offered out for bundles at some of our sites and there’s just not a lot of appetite,” said Wade, CFO of Broomfield-based SCL Health, which is the 10th-largest Catholic health system in the country, according to Modern Healthcare’s 43rd annual Hospital Systems Survey. “Two of the biggest payers here have told us they can’t really administer a bundle.”

Commercial risk-based contracting depends heavily on the culture of a region, insurers’ market share and relationships between payers and providers. In many pockets of the country, health system leaders say it’s just not on the menu. “Some payers seem to be pulling in the reins on value-based programs in Connecticut,” said Tricia Hasselman, vice president of contracting and payer relations for Hartford HealthCare. “It’s a challenging market for both payers and provider systems.”

Health system leaders who participated in the survey said the percentage of their net patient revenue generated as part of risk-based contracts is expected to be 12.3% this year, up from 11.9% in 2018. But it’s a small sample size. Representatives from 51 systems completed this year’s survey, and some didn’t answer that question.

Hospital finance experts said percentages near 12% sound suspiciously high.

“When I hear those numbers, I have this visceral reaction where I almost start to discount them,” said Joseph Fifer, CEO of the Healthcare Financial Management Association.

Even more interesting was the wild variation in responses from health systems. From a whopping 85% from Edward-Elmhurst Health in Naperville, Ill., to a group in the middle who said between 15% and 35%, down to about half who said between 0% and 5% of their net patient revenue came from risk-based contracts.

All this underscores what many in the industry see as an inherent problem with value-based care and risk-based contracting: There are no set definitions that govern what’s what. Each health system executive who responded to that question likely interpreted it differently.

“You hear me say ‘pay for quality, pay for performance.’ That’s a fundamental problem,” said Howard Cutler, vice president of payer strategies in the acute-care division of King of Prussia, Pa.-based Universal Health Services, the fourth-largest for-profit chain.

Others wondered whether to include Medicare’s mandatory value-based purchasing component.

“Technically that’s a risk-based program, but you don’t get to opt in or out of it,” SCL Health’s Wade said. “So it’s never really clear whether you should count that.”

Edward-Elmhurst’s 85% includes all arrangements in which part of its payment was affected by performance, including the Medicare Shared Savings Program and contracts with its large commercial payers, said Shawn Roark, the system’s vice president of payer strategy.

And what about providers in states with managed Medicaid programs? Dr. Joshua Liao, associate medical director of contracting and value-based care at UW Medicine in Seattle, said such programs are the norm in many states. “They are doing it, but they may not count it because it’s the way it has always been,” he said. “What is considered value makes a difference.”

Nearly 60% of respondents to this year’s survey said their contracts involved both upside and downside risk in 2018, up from 46% in last year’s survey. Fifty-three percent said upside risk only, compared with 54% last year; 63% of respondents said they contracted with private health insurers as accountable care organizations in 2018, up from 59% in 2017.

In a recent Navigant survey, 64% of health system finance leaders said they plan to assume risk in contracts with commercial payers in the next one to three years.

“Our experience is an increasing percentage of health systems are feeling confident that they could be successful at risk-taking,” said Rich Bajner, a managing director with Navigant. But Bajner, who agreed that the survey results sounded high, said commercial risk-based contracting isn’t catching on because commercial insurers simply aren’t offering it in many regions.

It’s rare for health systems to decline the opportunity to enter risk-based contracts with favorable terms, Bajner said. Sometimes payers and providers enter talks but the contracts ultimately don’t pan out, he said.

Among the health systems that told Navigant they won’t pursue increased risk levels, 56% cited low market demand as the reason. Bajner said that’s typically because a single commercial payer has 60% to 80% of market share and isn’t willing to engage in those contracts. In those cases, providers sometimes partner with other companies or create their own health plans to take on risk.

Hartford HealthCare currently has five commercial value-based contracts, six Medicare Advantage value-based contracts and it participates in the Medicare Shared Savings Program. But even with all that, the multibillion-dollar annual revenue system does not generate significant revenue from its value-based contracts yet, Hasselman said.

“It is going to take a market like Connecticut a bit longer to get there,” she said.

In Western Michigan, Spectrum Health CFO Matthew Cox said the region’s largest commercial payer, Blue Cross and Blue Shield of Michigan, has agreed to more risk-based contracts. Spectrum also has risk-based contracts through its own insurance company, Priority Health, whose coverage extends statewide. All told, 1% of Spectrum’s net patient revenue was tied to risk-based contracts in 2018, including a risk-based Medicaid plan, Medicare Advantage and commercial contracts, Cox said.

“I think as you look across the healthcare industry, you can see it’s true that we are going to be able to bend the cost curve by insurance companies and providers working together to share the risk,” he said.

Montefiore Health System in New York City said 40% of its net patient revenue was tied to risk-based contracts in 2018 and again in 2019. The Bronx-based not-for-profit has developed and relied on advanced delivery and payment models since 1996, spokeswoman Lara Markenson wrote in an email. Today, Montefiore holds risk-based contracts with more than a half-dozen insurers in New York City and the Hudson Valley, including commercial, Medicaid and Medicare.

The slow evolution toward value-based care comes as the country’s largest health systems balloon in size. Modern Healthcare collects data on health systems’ size as part of its annual Hospital Systems Survey. Nashville-based HCA Healthcare had $46.7 billion in operating revenue in its fiscal 2018, maintaining its position as the nation’s largest health system by revenue.

Although newly formed CommonSpirit Health reported results for Dignity Health and Catholic Health Initiatives separately, when combined the two organizations would be second overall and first among not-for-profit systems with operating revenue of $29.2 billion for CommonSpirit’s fiscal 2018.

Kaiser Foundation Hospitals, Oakland, Calif., had estimated operating revenue of $25.3 billion, a number that doesn’t include membership dues at the integrated provider of $54.4 billion; if membership dues were included it would boost Kaiser to the top of the list with revenue of $79.7 billion.

UHS, the fourth-ranked for-profit system, generates about $3.6 billion in annual revenue from private insurers, Cutler said. Of that, only about 1% is in programs where payment is tied to quality.

“So as much as I’m a guy who believes the tectonic plates in healthcare are shifting, the reality is, what my organization sees is it is not moving at the pace I think many expected.”

DATA: 2019 Hospital Systems Survey