A growing number of provider organizations is interested in pursuing risk-bearing arrangements, but many are approaching the transition to risk with caution. Hesitant to abandon fee-for-service revenue completely, they adopt a toe-dipping, pilot-based mentality. They may first test the waters by moving a small population to risk, developing a care model to tightly manage that population before diving into partnerships on larger populations with varied needs.
Although this approach can help providers build their population health management expertise and capabilities, our financial modeling shows that this more cautious approach is critically flawed because it does not allow organizations to truly test the financial viability of risk-bearing arrangements. Even if the provider organization gets the clinical transformation part right, a pilot-size market share is not enough to achieve profitable results. Providers need to grow market share if the shift to risk is to be financially accretive.
In other words, you need to go “all in” on a large population to make the economics of risk work.
The balancing act
After providers enter into risk-bearing partnerships with payers, there will be an unavoidable downturn in their revenue and profit levels. This is typically due to two factors: (a) most risk arrangements assume a starting point below the FFS equivalent (after all, there should be a net savings when we manage a population), and (b) a shift away from procedure-heavy, fee-for-service lines of business. After the initial decline in revenue, however, most organizations will see margin stabilization between years one and three as the clinical transformation takes hold and providers engage in managing care for patients. Then, between years four and five, an organization focuses on margin recapture and growth from the increased share of market lives.