Healthcare providers pursuing the transformation to value face potentially high risks to financial sustainability. For many hospitals and health systems, questions are quickly arising around fluctuating volume trends and revenue projections as the market shifts to population health. Below, Oliver Wyman’s accountable care expert Niyum Gandhi joins with Guy Carpenter’s medical reinsurance specialist Gary Bischel to explain how detailed financial modeling can provide some clarity:
In the past, health systems needed to only worry about a relatively straightforward financial picture – revenue came in from services delivered, and the costs to deliver those services needed to be reduced. There is a meaningful component of fixed cost, so more volume improved financial performance.
In the new world, with risk contracts, health systems now have a profit & loss statement that includes pieces that look like traditional health systems and pieces that look more like an insurance company. And the benefits on one side often mean declining profitability on the other side. As a health system moves from predominantly fee-for-service to predominantly population health, navigating that transition with a foot in each canoe requires greater insight into the financial puts and takes of the shift.
Detailed financial modeling provides the clarity leaders need to understand the risk-reward trade-off of key decisions in crafting their roadmaps from fee-for-service to fee-for-value. Targeted modeling also sets up an integrated business case for the entire transformation, avoiding the need to evaluate each population health investment in isolation. One-off evaluations are difficult tasks that end up ignoring the integrated nature of the business and its overall clinical transformation needs.
Moreover, through entering into new value-based business models, providers expose their organizations to whole new risks, some of which are positively correlated, not correlated, or negatively correlated with their traditional business model risks. Leaders must enter into this venture with eyes wide open on the nature and magnitude of those risks if they hope to strike the right balance between their risk exposure and risk tolerance.
By creating a comprehensive modeling approach for the insurable and non-insurable risks of the current and transforming business, providers can adequately quantify the risk they are taking on (along with the diversification benefit of multiple uncorrelated or negatively correlated risks) versus their risk tolerance, and ensure that they’re transferring or mitigating an appropriate amount of risk, rather than over or underinsuring.