What is a Risk Contract?

A risk contract creates a relationship between an insurer and a provider that expands the financial relationship beyond the traditional transactional limits. Typically, a risk contract makes a Primary Care Provider (PCP) (or really, the group practice) responsible for all the other costs incurred in the care of health plan members assigned or attributed to his or her panel. Thus, in addition to primary care-related expenses, the PCP must oversee hospital, emergency room, pharmacy and specialist costs. Furthermore, the PCP is often responsible for supporting risk adjustment functions to ensure that the revenue available from the sponsor is matched to the expected expenses for a member. This expansion of the role of the primary care provider is the first characteristic of risk contracts.

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

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. Will revenue exceed expense? Because non-PCP costs of care can vary dramatically and because most risk adjustment programs estimate revenue on a prospective basis (forecast), there is always a chance that the answer is no. In many risk contracts, in the circumstance that expense exceeds revenue, the provider organization (not the insurer) will bear financial responsibility for overruns.  It is in this way that risk contracts have the net effect of transferring medical financial risk from the insurer to the provider organization. This is the second chief attribute of risk contracts: risk transfer.

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

Savvy PCPs in risk contracts know that they can take action to mitigate the risk.  After all, they often have the strongest relationship to the member (i.e. their patient). Insurers know this, and they write these contracts to make it in the provider’s interest to take those actions. However, insurers know that when medical costs are lower than revenue, PCPs can earn substantial incentives. They also know that many PCPs in their network will not be successful at managing the expense to funding balance. With this in mind, risk contracts typically strike a balance of rewarding one provider organization but only up to the point where its accomplishments can still offset those of another. This is accomplished by setting targets which align incentives, the third foundation of risk contracts.

To learn more about how risk contracts align incentives, keep reading.