Service Funds: What are they?

Service Funds are a means of determining one piece of direct provider compensation. Compensation typically takes a mixture of three forms: fee-for-service (FFS), capitation, and incentive payments. FFS payments are well established. Capitation is typically a mechanism to simplify the financial relationship between payor and provider. It does this by establishing a fixed price for servicing a population based on an expected volume but regardless of actual volume. Some risk is born by the payer of overpayment if actual volume is low, and some risk of underpayment is taken by the provider if actual volume is higher than expected. Each of these provides a baseline compensation structure for a provider.

In addition, however, many providers will elect to participate in a “risk contract” that engages them to manage more than their own contribution to the care of a population. A Service Fund provides an accounting of how well or poorly they have done so in the form of a ledger. In some sense, therefore, the Service Fund is simply a ledger, but it implies the presence of a risk contract. When the ledger shows that the provider has managed the care of a population well (as defined by the terms of the contract), then an incentive payment is earned.

In this article, FRG presents the most important considerations for organizations planning to create, administer or participate in a service fund incentive contract.

  1. Service Funds are a means of determining one piece of direct provider compensation.

  2. A Risk Contract creates a relationship between an insurer and a provider that expands the financial relationship beyond the traditional transactional limits.

  3. These contracts involve “risk” chiefly because of the underlying uncertainty of their financial soundness.

  4. The most important component of a risk contract is incentive alignment.

  5. Medical cost risk refers to the chance that the actual costs for care of a population over time may not match the expected costs over the period.

  6. The most common measure of actual aggregate medical cost vs expectations is the Medical Loss Ratio, MLR (sometimes called the Medical Benefit Ratio, MBR).

  7. A MLR target for a risk group should be below the health plans internal goals.

  8. Insurers align provider organizations with their own MLR objectives by engaging them to oversee it for the subset of the overall membership that they manage.

  9. Monitoring performance, influencing attribution, and supporting risk groups with information are vital capabilities for health plans writing risk contracts.

  10. Transparency provides the best chance for success. Its three pillars are: full disclosure, frequent data sharing and consistent data processing.

Each of these will be discussed in additional articles over the next few months as we explore 10 facts about service funds and risk contracts.  The discussion is timely since the passage of the Medicare Access and Chip Reauthorization Act of 2015 (MACRA) is beginning to usher a movement to a value-based healthcare system that will present new challenges for many physicians and payers, but not all.

Indeed, the shift from transactional medicine to a more collaborative, results-oriented and economically responsible medical economy will transform provider compensation models dramatically by integrating incentives that reward alignment of resources with care needs over increased transactional volume – but only for some. The configuration and administration of Service Funds is an established discipline.  Stay tuned as we explain.