Transitioning from Service Fund Reconciliations to Value-Based Agreements

The terms “Service Fund” and “Risk Contract” may seem out of date since “Value-Based Agreement” has become more commonly used since 2020, but they are the foundation of these modern alternative payment models and date back to the 1990’s.

In this article, FRG explores the evolution of these deals and why they are still the future of healthcare delivery.

What are Service Funds & Service Fund Reconciliations?

As we have explained in other articles, service funds are financial accounting ledgers used to compute risk-based components of direct provider compensation, the terms of which are expressed in a risk contract. 

Service funds account for how well or poorly a provider has done at managing the total cost of care for the panel, not just their own claims.  They are “risky” in the sense that the outcome is variable. When the balance of revenue and cost is positive, the provider can receive a bonus payment from the payor for creating a savings over time. However, if medical expense exceeds funding, certain terms can require providers to pay back the insurance company for any deficit. The circumstances of savings or deficit can depend on many factors like revenue alignment and referral management, hence the risk.

The accounting typically includes the following summation:

• Membership – defines the panel for which the provider is responsible.
• Premium – defines the money available to the plan to provide for medical services and administration.
• Funding – defines the fraction of premium available to the fund, essentially a medical cost budget
• Medical Expenditure – itemized charges for medical cost items by category (inpatient, outpatient, emergency, urgent care, physician payments, and pharmacy)
• Actuarial Adjustments – itemized reserve and non-claim charges that accrue against the overall balance like the net of reinsurance, gross allocations
• Net Balance – defined as funding less medical expenditure and actuarial adjustments
• Available Balance – net balance factored by the percent risk exposed after any previous payments are deducted.

The straightforwardness of these agreements aligns providers and payors to achieve goals related to efficient allocation of premium to create a savings. In fact, payments of positive available balances associated with service funds are one of the three major sources of revenue for participating provider practices:

• Fee-for-service (FFS) – charges to the member’s carrier for transactional services
• Capitation – payments by the member’s carrier to pre-pay for specific services
• Risk-based Incentive Payments – any savings on the panel’s total cost of care

However, although these arrangements were typically accompanied by language to not deny services, these terms only set a floor to prevent creating a savings by withholding necessary care. These deals omitted any specific incentives to align the provider with the plan’s goals related to quality incentives.

Quality Incentives

Quality performance incentives have been around for many years in many forms across the spectrum. Major watersheds occurred in 2007 with the advent of the Medicare Stars program for Medicare Advantage,  in 2010 with Affordable Care Act linking Star Ratings to quality bonuses by 2012, and in 2015 with MACRA.  Along the way, Medicaid plans have incentivized immunizations and performance against benchmarks for various HEDIS measures.

Value-based care, in short, links these two frameworks together: if participating providers create a savings, they keep all, some or none of it depending on how well they do on their quality targets.

Within the last few years, the industry has referred to contracts that align incentives as value-based agreements because the term encapsulates both the concepts of service funds, which focus on balancing premiums and expenses, and quality incentive programs, which focus on health services delivery standards.

It is important to note, however, that all of the arrangements FRG has observed begin with a concept of determining the magnitude of a reward after a savings have been created!

The Future of Value-Based Care

Within the next five years, FRG sees the use of value-based arrangements continuing to expand. Cost containment is in the news and health care costs are some of the most significant of all entitlements. Expansion will likely be characterized by:

1.    Innovative VBC Models

Payors and providers are collaborating on frameworks which allow shared savings and targeted increases in savings based on quality performance. These arrangements will continue to expand into specialties beyond primary care to prioritize preventative and other patient-specific services.

2.    Leveraging Tech to Enhance Patient Care

Sophisticated data management tools, like FRG’s proprietary software AccuReports, and other technology solutions play a huge role in the future of value-based agreements. In the future, providers and health plans will continue to utilize these systems to make better decisions while also prioritizing safely protecting patient information.

3.    Shifting Away from Traditional Care

Since COVID-19, patients have increasingly shifted away from receiving care at traditional hospital settings and towards ambulatory care, telehealth platforms, and home-based care. With these changes providers and payers are having to explore innovative payment structures, like value-based care, that supports patients, providers, and health plans across care settings.

4.    Having Active Patients

In the future, active patients are going to continue to be more frequent and play a fundamental role in the success of VBC. Despite the legal and regulatory concerns that some might raise about telehealth platforms, mobile apps, and remote monitoring tools, it’s important for healthcare organizations in the future to embrace the trust and collaboration patient’s desperately want in healthcare while also focusing on mitigating any legal risks that may come with this new level of activity from patients.

Drive Financial Performance using Value-Based Healthcare with FRG!

FRG provides data distribution services for health plans that write risk contracts with primary care providers, as well as aggregation services to provider groups who accept risk across multiple carriers. For any additional information about FRG’s services, email info@frgsystems.com or call 888-466-1025 today.