Risk-based contracting

Definition: Risk-based contracting is the act of establishing a contract between providers and payers that makes the provider (namely, the provider group) responsible for all the costs incurred in the care of empaneled health plan members. This includes not only primary care costs, but costs related to hospital visits (e.g., inpatient and emergency departments), medications, and specialists. The provider is given a fixed amount of payment per member per month (PMPM) paid in advance for the delivery of all health care services to the health plan’s members, whether the patient utilizes the services or not.¹

This model shifts the financial risk from the payer to the provider and encourages providers to give the exact level of care needed for each patient without excess.

Furthermore, the PMPM is set based on how “risky” the patient is through risk adjustment. For example, a patient with heart failure, diabetes, and COPD will have a higher risk score than someone with no comorbidities; thus, the provider would receive a higher PMPM fee for the complex patient.^2,3 This helps to “level the playing field” for those providers who take care of more complex patients.

There are two types of risk in risk-based models:³

• Upside risk (less risk = less reward): If the provider can treat patients below their budget allotted from the payer, then the provider will share profits with the payer. If the provider goes over the budget provided by the payer, they will not be penalized. This is also sometimes referred to as one-sided risk.
• Downside risk (more risk = more reward): If the provider can treat a patient below the budget allotted from the payer, then (depending on the contract) the provider may be rewarded with an even larger percentage of profits with the payer. However, if the provider goes over the budget for the patient, then they are held accountable for paying at least a portion of the extra expenses.

Sometimes a model will have both upside and downside risks. These models are referred to as two-sided risk models.³

How does it relate to ACO/PCMH: Risk-based contracts are a common component of a Patient Centered Medical Homes (PCMH) or Accountable Care Organization (ACO) financial models.

An example of risk-based contracting is the Medicare Shared Savings Program (MSSP), which was created by CMS. MSSP is a voluntary program that encourages groups of providers to join together as an ACO to give coordinated, high-quality care to their Medicare beneficiaries.⁴ This program shifts volume-driven care to value-based care by offering shared profits for providing patients with appropriate care and reducing unnecessary costs.

In addition to ACOs and MSSP, employers may work with providers and/or payers to establish risk-based contracts directly.

Pharmacists can play a role in risk-based contracting by helping to reduce the total cost of care, especially as it relates to medication costs.

Involved organizations/oversight: Providers, health care organizations (e.g., hospitals), payers, MSSP, employers

Resources

1. Financial Recovery Group. What is a risk contract? Tampa, FL: Financial Recovery Group. Available at: https://frgsystems.com/healthcare-finance-news/what-is-a-risk-contract. Accessed February 7, 2023.
2. Aledade. A comprehensive guide to value-based care for primary care. Bethesda, MD: Aledade. Available at: https://resources.aledade.com/guides/a-comprehensive-guide-to-value-based-care-for-primary-care. Accessed February 7, 2023.
3. Definitive Healthcare. Benefits of risk-based payments: How healthcare data improves profits. Farmington, MA: Definitive Healthcare. Available at: www.definitivehc.com/blog/instituting-true-risk-based-payments. Accessed February 7, 2023.
4. CMS. Shared Savings Program. Baltimore: CMS. Available at: www.cms.gov/medicare/payment/fee-for-service-providers/shared-savings-program-ssp-acos. Accessed December 22, 2023.

Contributing authors

Darren Mensch, PharmD, BCPS, BCACP
Clinical Pharmacist, Ambulatory Care—Population Health
Jefferson Health–Abington
Abington, PA

Katelyn MacDonald, PharmD candidate 2022
Thomas Jefferson University College of Pharmacy
Philadelphia

Last reviewed and updated December 22, 2023, by Darren Mensch, PharmD