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Maximize Value April 13, 2016

Risk-Ready Providers: Is It Time to Take on Medicare Advantage?

Partner, Health & Life Sciences, Oliver Wyman
Principal, Oliver Wyman
Key Takeaway
Providers can't assume excellence in #healthcare delivery translates to excellence in #pophealth or risk management

With the Medicare Advantage (MA) opportunity large and growing, many provider organizations are convinced that they, too, want to be a part of the risk equation. However, convincing provider leadership and administration to increase MA risk is no small undertaking. Once buy-in is secured, there are still numerous issues that must be addressed before any risk product can be launched. What type of risk arrangement is best? How many lives is the right number, and how quickly can the organization scale? And how does a system know if it is ready?

Oliver Wyman has partnered with numerous regional and national health systems as they tackle these questions. Here, government programs expert Melinda Durr, a partner with Oliver Wyman, and Sarah Eizenga, a principal with Oliver Wyman, share their perspectives on how provider organizations can best prepare themselves for risk. And they provide some surprising answers to some of the most critical risk questions:

What type of risk arrangements should you pursue? (Spoiler: The most risk does not always equal the greatest financial opportunity.)

There are three typical entry options, listed here in order of increasing risk:

  1. Contract as a provider within an existing product and increase the risk you assume for managing care. On one end of the continuum, this could mean maximizing existing payer-sponsored incentive programs while maintaining traditional FFS contracts. On the other end, it could mean assuming partial or full capitation for attributed populations.
  2. Launch a partnered product. This option requires selecting a payer partner, using their license, administrative, service, and risk expertise, and then coupling it with your own brand and care-delivery capabilities. Certain functions, including medical management and consumer engagement, can be managed by either partner, depending on strengths and local dynamics.
  3. Go it alone. Providers who pursue this path must obtain a license and launch an independent product. They must hire an experienced MA leader, find a strong back-office partner who will help secure a license, manage regulatory filings, and launch the new product.

To many, option 3 seems the most enticing (more risk = more reward, right?); but the reality is a measured risk-based contracting strategy (option 1) can often be both quicker to market and more lucrative for providers.

MA product owners are constricted by regulated medical loss ratio (MLR) caps, in that they have to spend at least 85 percent of revenue on benefit costs – most of which goes to care-delivery partners. Tack onto that administrative expenses (typically another 10 to 12 percent), and the MA product owner ends up with a profit of just 3 to 5 percent of benefit revenue.  

In contrast, providers that enter into capitated arrangements with payers have the opportunity to manage the full MLR capped amount. Those who are able to rigorously manage risk and utilization will spend only about 80 percent of that benefit payment on care delivery, leaving 10 percent or more of the capitated payment as profit.

Assuming the per member per month (PMPM) revenue is $800, providers that are plan owners might end up with PMPM profit of $32; but providers in capitated arrangements might see PMPM profit of $136. Sure, providers who are both the product owner and care manager can earn both; but when picking where to start, there can be more upside in the capitation.

How many lives and how quickly? Tip: This is not the time for toe-dipping, but you also can’t overextend.

In modeling the economics for both providers and payers in value-based MA arrangements, we have consistently found membership scale to be the main determinant of how quickly the economics of value-based contracts can become positive. A floor of 2,000 MA lives is typically recommended to minimize volatility of benefit cost, but there’s no upper limit of membership size to maximize success.

The transition to risk-manager (whether through a new product launch or value-based contracting) requires substantial upfront investment to generate smaller, high-frequency downstream returns. Adding membership accelerates the pace with which the downstream annuity payments offset (and outweigh) the one-time investment upfront. From that perspective, more members and more risk is always better; the only limiter becomes capacity, and capability.

How do you know you are ready?

Success in MA isn’t always a guarantee, and it requires careful management of Stars, Risk Adjustment, and benefit costs. Providers cannot assume that excellence in care delivery will translate to excellence in population health or risk management. A core set of execution capabilities is necessary to ensure the proper identification and management of population health issues, as well as appropriate alignment of incentives across the stakeholders (consumers, caregivers, and the full care team of providers) who will intervene.

Providers must ensure their capabilities are evaluated – both in terms of functionality and operational maturity – prior to assumption of risk. Where gaps are found, development plans and partnerships can be put in place to address. Conversely, any strengths that are identified should be documented, as these bright spots can be useful in gaining buy-in from various internal and external stakeholders, including potential partners or investors.

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