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The Keckley Report

Campaign Issue Brief #3: Provider Sponsored Risk

By March 21, 2016March 1st, 2023No Comments

This is the third in the Campaign 2016 series to inform discussion about healthcare issues relevant to the electionNext week: “The ACA: Repeal or Repair”.  Previous Issue Briefs can be found at

The least understood and arguably most disruptive change brought about by the Affordable Care Act is the transfer of financial risk to providers. It is one of the law’s two key mechanisms, along with expanded insurance coverage, intended to reduce health costs over the decade.

The industry has coined the phrase “provider-sponsored risk” to describe the transfer. It essentially means that providers—doctors, hospitals, allied health professionals and others—will no longer be paid for the volume of the work performed on a fee-for-service basis, but instead they’ll be compensated for the results of the work performed. The theory behind the so-called ‘volume to value’ transition is that IF providers are incentivized for results—safety, outcomes, efficiency, and patient experiences—instead of being paid for doing as much as they can, better care and lower costs will result. Almost everyone wins…patients get better results, health cost increases slow, and the providers that provide the highest value win market share over those that don’t. That’s the theory.

The implementation of provider sponsored risk, aka the volume to value transition, is a big deal in healthcare circles but isn’t topical on the Campaign 2016 circuit. It’s too complicated for the candidates and confusing to voters. Polls show the country is divided on the Affordable Care Act: the half who favor it like its insurance reforms and expanded coverage; the half who oppose it fear federal control of healthcare. But the majority of voters think health costs are a problem and think the system’s incentives play a role. But that’s it. These beliefs are strongly held based on anecdotal observations, not a reservoir of knowledge about the economics of the system.

Nonetheless, provider sponsored risk (PSR) is an issue in Campaign 2016 because it represents a fundamental change in the U.S. health system that will dramatically alter how healthcare is delivered and paid for in this country. Though the candidates may shun questions about specifics, provider sponsored risk is at the heart of discontent by many in the industry who view it as an unalterable step in the wrong direction.

The Business Case for Provider Sponsored Risk (PSR)

The foundational principles on which the push toward PSR is based are these:

The current payment system—primarily fee for service—contributes to unnecessary care and costs. Unnecessary care for tests, procedures and medications for which there’s scant scientific evidence of medical necessity account for up to 30% of costs.  Fee for service incentives—doing more—is a contributing factor: In PSR, incentives shift to value from volume via a combination of penalties and shared savings programs and away from doing as much as possible. 

Provider decisions drive health costs. Fewer than 10% of health costs are driven by consumers (Avalere). Doctors make treatment recommendations including tests, drugs, hospitalization and more. Hospitals are the epicenter for technologies and facilities that are desired by consumers and physicians. And clinics, labs, pharmacies, post-acute providers and others bill for services that originate with the ordering pen of the physician. The vast majority of consumers trust physicians to make their treatment decisions and the vast majority of physicians jealously guard this role. It follows that providers, especially physicians, have the unique opportunity to influence what’s done, and how much is spent, without compromising safety and quality.

Provider-sponsored risk integrates key elements of federal health policy. The information technologies and analytic tools necessary to allow providers to know the costs associated with their treatments recommendations and their comparative efficacy and effectiveness exist today. Thus, the rationale for meaningful use Stages 2 and 3 requiring adoption of electronic health records across the system via the sharing of clinical, administrative and financial information between and among providers. Likewise, the push toward transparency, expansion of efforts against fraud and abuse, implementation of comparative effectiveness and limitations on physician self-referrals are core elements of health policy that codified already. Together, these policies form the foundation for shifting risk to providers for outcomes and costs.  

Medicare is the catalyst. Since Medicare is the largest payer in the health system, it has the clout to effect changes throughout the system. Other payers—Medicaid, employers, private insurers—are likely to ride the coattails of Medicare changes. Its stated goal that 30% of it payments in 2016 and 50% by 2018 be through alternative payment models underscores its long-term commitment to PSR. And despite early disappointments in accountable care organizations that failed to achieve savings, its expansion of that program suggests it is committed long-term.

The Status of PSR Activity

In the ACA, several programs were initiated to facilitate the shift of risk from volume to value: some are optional pilots and demonstration projects i.e. accountable care organizations and bundled payment programs while others are mandatory i.e. avoidable readmissions or the new payment program for physicians (MACRA)..

Many of these started soon after the ACA’s passage in March 2010; some are still being modified, some expanded and none have been suspended since passage. Some involve hospitals only, and others integrated systems, physicians and a broader array of providers. In some cases, the downside financial risk is minimal and the upside shared savings modest. In others, the risks are higher. In many, the focus is on certain clinical populations, and in others, the program is designed to coordinate care across a pluralistic clinical population. And in some cases, private insurers have followed suit as was the intent by Medicare, and in others, Medicare has pursued them independently. Finally, they involve a combination of sticks and carrots for providers, with penalties escalating over time for non-participation.

What have we learned thus far?

The shift from volume to value to become risk-ready requires massive investment by providers. Most organizations have struggled to account for the costs of information technologies, operational disruption and anxiety created when the organization embarks on the PSR journey. As a result, in most communities, providers have been cautious about participating while acknowledging the PSR train has left the station. And hospitals have become the default bank for these efforts: physicians have looked to their hospitals for capital and operational support as they face the reality of provider sponsored risk.

Medical management led by an effective physician organization is key. The most successful ACOs after 2 years are those sponsored by physician organizations with the right tools, technologies and processes. The savings from bundled payments are the result of care coordination and effective post-acute network management. Physician leadership within provider sponsored risk programs is the critical ingredient for success. Engineering changes to diagnoses are made, how care is delivered, by whom and where requires keen clinical judgement as its foundation. And to implement PSR at scale, it requires substantial capital investment and clinical re-design to incorporate traditional and alternative health modalities, health coaching and customization of care planning.

Employers, private insurers and state Medicaid programs are following Medicare’s lead. The evidence in most communities is that private payers are following suit, and in some cases doubling down on Medicare’s PSR bets.

Looking ahead: What’s the End Game for PSR?

The inevitable end-game for PSR efforts is the shift of all financial risk to provider organizations via capitated contracts with payers. There will be specific populations for which fee-for-service will be continued and communities wherein contracting is a la carte. In most communities, populations will be contracted to fully integrated regional systems of health that have a strong regional primary care footprint, comprehensive array of specialized services, full continuum of preventive, chronic acute, post-acute and retail health services. Some of these will also sponsor their own health plans; others will contract with private insurers to access their infrastructures and analytic capabilities.

Provider sponsored risk is still in its infancy. The data and technologies to facilitate risk-bearing by providers for most clinical populations is readily available; the will to accept risk and fear about its unintended consequences remain concerns. 

And there are legitimate unintended consequences of the shift from volume to value including…

Defining and measuring value: There is no consistent definition of how to define value in healthcare nor a methodology that’s agreeable to all parties. If “results” such as mortality, morbidity, patient satisfaction are a surrogate and costs include direct and indirect, even then the calculus gets fuzzy. Over what period of time is the value to be calculated? And what process measures are most useful in measuring results? Other systems of the world are more systematic in defining value in terms of quality adjusted life years et al; the pluralistic U.S. system does not enjoy that advantage. The shift of risk to providers aka volume to value remains makes sense in theory, but in practice, it is hard to measure.

Medical liability: the cost of defensive medicine exceeds $55 billion annually, and physicians believe it’s much higher.  Shifting risk to providers for efficiency without adequately protecting against lawsuits based on tests not done or steps not taken is problematic.

Risky risk:  Provider sponsored risk is risky. Insurers have protections in the Affordable Care Act for participating in insurance reforms via reinsurance pools but there are no safety nets in these programs for providers.

Physician response: Physicians are trained to do no harm and shun the notion of considering costs when advising patients. The notion of provider sponsored risk runs afoul of the profession’s core beliefs regardless of how strong the evidence suggesting efficiency and effectiveness are not incompatible aims.

Consolidation: Today, per the AHA, 245,000 physicians are employed in hospitals and one in five operate a health insurance plan. The notion that ‘all healthcare is local” is no longer applicable. And the shift of risk to providers will accelerate integration of providers into regional systems of health with the capabilities necessary to manage risk.

Public acceptance: The public’s not privy to the volume to value transition nor aware of the its implications. Given information that incentives include cost reduction, might patients push back? It’s a delicate but inevitable issue soon to be faced.

Will provider sponsored risk bend the cost curve? Logic says yes. Though providers will complain, there’s no doubt that incentives drive behavior, and in our system, volume-based incentives have contributed to higher costs. Not solved, in the near term, is the issue of drug costs which are unpredictable: provider sponsored risks can be tied to medication management and patient medication adherence, but not to the actual cost of the drug.

Will PSR be a topic on the campaign trail? No. It’s one of those issues where the less said the better. After all, the majority in our citizenry believe everything’s that done is necessary, and costs can’t be controlled. But they also concur that fee for service incentives in healthcare contribute to its costs, so PSR is likely to gain approval if presented carefully to voters.

In campaign 2016, repeal or repair of the Affordable Care Act will be a spotlight issue. Provider-sponsored risk will likely not be discussed as a path to constraining costs. But the sweepstakes winner in November will inherit PSR as a path to continued transformation of the system. My hunch is it will continue regardless of who moves into the White House in January, 2017.


Campaign Issue Brief #4 Next Week…The ACA: Repeal or Repair?