What is a Risk Contract for Physician Groups?

Like in any contract an individual or company enters into, examining all provisions is critical to weigh the pros and cons, advantages and disadvantages, and security and risks. And with the evolving healthcare ecosystem, physicians and physician groups that enter into an agreement as a provider of care should be aware of the risks involved to prevent failure in health management and unnecessary expense. Protocols should be securely in place to assure success in the delivery of care and secure sustainability for the business. In this article, we will try to dive into those risks and help minimize them. Let’s begin by understanding some definitions of terms.

Definition of Terms

Risk Contract

A risk contract is an agreement entered by a party or parties that results in one entity assuming losses in insurance or business costs. In context, we are referring to the relationship involving the physician provider/s, company, and insurer. For example, if the company, physician provider, or insurer agrees to take and assume the risk in a contract, the same party will cover the excess cost of utilization. This principle goes beyond the traditional Medicare fee-for-service that has been the practice for decades but has now evolved to what we now call value-based care. 


Medical Cost Risk

A medical cost risk means an exposure to monetary losses for the party assuming the risk contract because the actual costs of care did not match or went beyond the projected utilization expense. Losses typically happen because the non-primary care physician/provider (PCP) or specialist care costs vary considerably and are dependent on the actual ongoing health condition, the severity of the illness, the risk of mortality, and the management needs of a patient beneficiary. 


On the contrary, a risk contract forecast of utilization is based on one, the previous year’s utilization, and two, a conservative actuarial computation of expected revenue versus prospective expense. And in reality, the cost cannot exceed the projected revenue for any business model to be sustainable. Because of this, insurers transfer the medical cost risk, also known as medical financial risk, to physician groups or provider organizations. The more reason for physician groups to be well-informed and open to all kinds of assistance they can get to make documentation work on their behalf.


Incentive Alignment:

Incentive alignment is the balance between driving the medical costs lower than revenue to have enough offset funds to reward a provider organization. This principle can only be realized if there is a strong foundation of a risk contract and when physician providers can mitigate the risks involved in providing care and documenting them.


Medical Loss Ratio

Medical Loss Ratio (MLR), also called the Medical Benefit Ratio (MBR), is the means to quantify the actual accumulated medical cost versus the projected utilization expense commonly within an annual period. To compute for the MLR, the accumulated medical cost of a specific population on a selected period of time is used as the numerator, then divided by the denominator using the projected utilization expense. To manage the MLR, the projected utilization expense includes the revenue forecast expected by an insurer, so they have enough surplus to run their operations.

Actionable Items to Mitigate Risks/Risk Contracts

After gaining some understanding of how the healthcare management ecosystem works and how each part plays a huge role in achieving medical cost transparency and sustainability for all shareholders, let’s now talk about how to mitigate risks for physician groups. Moreso, give them actionable items to help them gain more earning potential by maximizing the payment incentives.


Manage Costs

Managing costs is often the junction where physician providers encounter certain predicaments because they need to balance between giving the best care, which requires full access to tests and procedures for the best diagnosis and treatment. On the other hand, they are also aware that they need to manage costs within the allowable budget, if not minimize expenses so that it leaves them a safety net to get some incentives. 


One strategy is to use accurate documentation so that the projected cost of care can be prudently adjusted for the following insurable years. Physician groups should also take into consideration the following factors that affect accumulated costs such as patient health status, the severity of illness, predisposing conditions, risk for mortality, and available technologies that can help in proper documentation and monitoring. It is also critical that all providers share the same commitment to minimize cost without compromising the patient’s health.


Monitor Expense versus Revenue Cost

Monitoring the MLR is critical for any insurer business to keep them afloat and in operation. The usual acceptable medical cost percentage is below 85%. And there is only one way to avoid a catastrophic financial failure by monitoring medical expenses – in real-time if possible. Although it is the insurer company that may fail, it also creates a surge for the physician groups because they may not get paid in the process. To prevent this from happening, providers need to be conscientious of documentation and monitoring. They need to work hand in hand by helping insurers get their revenue stream and surplus so they can receive their incentives for their hard work.


Align Provider Organization Incentives

Aligning provider organization incentives can only be achieved when the physician groups and insurers work closely together in identifying reasonable incentives and MLR objectives. Achieving both goals will require transparency and an open discussion to see the entire membership profile and identify the risk group that could be a source of excess medical costs. Both parties may also consider discussing risk transfer on whether there is a need for patient beneficiary expense participation if they hit a certain mark in their medical expense.


Insurers should encourage providers that their cooperation is not a burden but a subset of their overall management of all members. Physician providers, on the other hand, should have a mindset that they still have freedom of patient care but that considerable boundaries are set in place to safeguard all shareholder’s best interests. In the end, the patient beneficiaries will benefit from both. Doing this can also get the beneficiaries to understand how they can cooperate in managing their cost of care.


Drive at Preventive Services

The old saying that “prevention is better than cure” still holds in the 21st century. And if physician groups can engage and educate patients about the need to do an annual wellness visit (AWV) or annual physical exam (APE) it will keep the beneficiaries healthy, saving opportunities for a better revenue stream. Preventive management can also include vaccinations, cancer screening tests, or an advanced plan of care, which can be less expensive than managing a sudden emergency condition. There are tools such as the HCC Assistant to help with documentation and monitoring patient conditions in real time. The HCC Assistant also provides features that aid in accurate risk assessment and medical coding.

Final Word

To make these actionable items a success, physician groups should utilize technology to ensure accurate documentation and medical coding. The HCC Assistant is by far, the most comprehensive tool that can help physician groups minimize errors and submit medical records on time.


Physician Groups need not wait for 2025 to pivot and adapt to risk alternative payment models because it is likely to be the norm as supported by all Medicare Advantage and traditional Medicare plans. 


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