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 can be an additional source of provider compensation. Fee-For-Service (FFS) payments, capitation payments and incentive payments (often from service funds) are the three main provider compensation sources.

2. A Risk Contract creates a relationship between an insurer and a provider that expands the financial relationship beyond the traditional transactional limits. Risk Contracts specify the opportunity to earn incentives or incur liability, and they itemize the appropriate regulatory criteria including care delivery and reinsurance requirements.

3. These contracts involve “risk” chiefly because of the underlying uncertainty of their outcome in financial terms. In full and partial-risk arrangements, providers can earn bonus payments, but they can also end up owing money to the contract writer (i.e. health plan) if medical costs exceed budget targets. The outcomes of upside-only and shared savings arrangements are also uncertain, but providers are not subject to cost overrun repayment penalties, so the “risk” is one-sided.

4. Risk in these contracts is chiefly “medical cost risk,” meaning uncertainty in the amount of tot