What Is a Risk Contract in Healthcare?

A risk contract in healthcare is a contract where a payer and a provider organization link payment to total cost of care and quality performance, with the provider taking on some level of financial accountability for the health outcomes of a defined population.

Providers can earn shared savings for beating a benchmark and, in many models, may pay a penalty if spending exceeds the benchmark.

Risk contracts are a key component of value-based care, which aims to shift reimbursement to reward outcomes rather than more activity. A value-based care contract can be layered on top of fee-for-service (FFS) or replace parts of FFS with prospective payments like capitation (PMPM).

Risk Contracts Expand PCPs’ Roles and Responsibilities

Typically, a risk contract makes a Primary Care Provider (PCP) or a group practice responsible for all costs incurred in the care of health plan members assigned or attributed to their panel. Thus, in addition to primary care-related expenses, the PCP must oversee various costs, including:

• Hospital services
• Emergency room visits
• Pharmacy costs
• Specialist appointments

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 expanded role of the PCP is the first characteristic of risk contracts.

Why Payers Keep Leaning into Risk Contracts

Risk contracts in healthcare are designed to reshape incentives so avoidable utilization drops (for example, unnecessary procedures or preventable hospital admissions and readmissions) while quality and access are protected through explicit performance requirements. 

There is also a measurable economic case for better contract design and operational execution:

• McKinsey has estimated that value-based care models can generate $100 billion in savings for the healthcare industry.
• CMS reported that Accountable Care Organizations (ACOs) produced shared savings of $3.1 billion in 2023.
• CMS 2024 results show net per-capita savings of $245 (gross $651) for ACOs, up from 2023.

Those numbers don’t mean every risk contract saves money. They do show why payers continue to refine risk contracts in healthcare: Savings are highly sensitive to contract mechanics and performance measurement.

The Core Building Blocks of a Healthcare Risk Contract

A healthcare risk contract only works when both sides agree on the mechanics that define performance, payment, and accountability. These building blocks set the rules for attribution, benchmarking, risk adjustment, quality, and settlement so the arrangement can be measured and managed with confidence.

Defined Population and Attribution

Every risk contract starts with who is in scope. Attribution can be prospective (who is assigned going forward) or retrospective (who “qualified” based on utilization patterns). Attribution rules should be explicit because they drive patient counts, risk mix, and volatility.

Financial Benchmark and Settlement Mechanics

Most payer-provider risk contracts compare actual allowed claims to a benchmark (sometimes called a target budget), then run a reconciliation. Key concepts in contract language include:

• Gross savings vs. net savings
• Minimum savings rate and medical loss ratio thresholds
• Risk corridors or caps that put limits on gains and losses

Risk Adjustment and Coding/Accounting Alignment

If revenue or targets are risk-adjusted, the provider must treat risk adjustment operations (documentation, coding workflows, submission timeliness) as a financial control function, not a side task. Risk adjustment exists to align expected cost with population morbidity and reduce selection effects.

Quality Measures and Quality Gates

Most contracts include quality measures. Attainment may be a minimum quality score or a sliding scale that changes the share rate. This is why many ACOs treat savings share as contingent on quality performance.

Care Model Expectations

Risk contracts work best when they’re paired with strategies that increase utilization, including care management, transitions of care, high-risk member outreach, pharmacy alignment, specialty referral steering, and site-of-care management.

Common Risk Contract Structures 

• Shared savings (one-sided, upside-only). Providers can earn a percentage of savings below benchmark but typically do not repay losses.
• Shared risk (two-sided). Providers share both savings and losses. These contracts often allow higher share rates because the payer is not carrying all downside exposure.
• Partial or global capitation (PMPM). Prospective payment per member per month, with the provider accountable for defined services.
• Episode-based / bundled payment. A defined payment for an episode window. An episode refers to treatment during a specific clinical event. An episode window is a defined time period used to decide what services count as part of that episode.  

The Risk Around Financial Performance

Will revenue exceed expenses? Since non-PCP costs of care can vary dramatically and 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.

However, risk contracts also have upside potential. A provider can receive a substantial bonus payment for participating in a risk contract. Federal law says that in the circumstance that providers earn more than 33% of what they need for direct services (according to primary care costs or capitation), this triggers something known as “Substantial Financial Risk” (SFR). Bonuses that trigger SFR are subject to certain limitations and depend on physicians or physician groups meeting various requirements. See this article for more information about SFR.