The New Equation of American Health Care

Shared Savings: Way Station to Shared Risk

Without shared risk, shared savings might not be strong enough medicine for what ails American health care.

Peter Wehrwein

Sharing—that’s a good thing. And who can object to savings?

So shared savings certainly doesn’t have an image problem, and it’s one of the most popular payment mechanisms in this fledging period of value-based health care. But winning popularity contests doesn’t mean you’re without flaws or critics, who are more than happy to point them out. Shared savings has been knocked for rewarding expensive providers with historically high spending patterns and simply being a tricked-up version of pay-for-performance lacking horsepower to drive change in American health care.

Even those with less harsh opinions see shared savings as merely being a transition to payer–provider arrangements in which providers shoulder more of the burden if the health care costs they rack up are too high.

“Shared saving is viewed as a way station,” says Michael Bailit, MBA, a payment reform expert and founder and president of the Massachusetts health care consulting firm that bears his name. The next phase after shared savings is shared-risk arrangements, says Bailit, and then eventually full risk.

Bailit gave two reasons for shared savings’s status as a mere stopover. First, providers who have some success with shared savings will have fewer and fewer savings opportunities as time goes by. What do you do after you have squeezed—and squeezed again—the low-value care out of your practice, clinic, or hospital? People in health care management often talk metaphorically about low-hanging fruit—early accomplishments deceive because easier problems tend to yield to solutions faster than tougher ones. Bailit’s point is that shared savings efforts may lead to the corollary circumstance of only the high-hanging fruit being left to pick.

Reason number two is what decision theorists call loss aversion; without some downside risk attached, shared savings may not give hospital executives, doctors, physician assistants, nurses—anyone involved in the provision of health care—enough of a reason to take on the hard work of providing true value in health care. “Fear of loss,” says Bailit, “gives more motivation than the opportunity to gain.”

Even if shared savings is all about the journey, not the destination, it’s an important phase and would probably deserve its own chapter if yakked-about value-based health care actually comes to be. The basic concept is easy to grasp—and it’s easier still if you take the payer’s point of view. The shared-savings arrangement starts with the payer and provider organization agreeing upon some kind of financial benchmark for a population of patients—say, the cost of outpatient care for a year for a thousand people with Acme Health Insurance. That benchmark can be based on past spending patterns or comparisons with other providers in the same market—or both. A year goes by. If the provider spends less than that benchmark—the namesake savings, as far as the payer is concerned—then the provider and the payer divvy up that money. That is the shared in shared savings. In arrangements when only savings are at stake, the provider–payer split is usually 50-50.

In shared-risk arrangements—also called two-sided risk—the provider agrees to write a check to the payer if spending goes over the financial benchmark. (In the fee-for-service mode, that overspending looks like revenue to the provider, not overspending.) Typically, explains Bailit, in shared risk arrangements the 50-50 split changes to a ratio that gives the provider a greater proportion of any savings. That’s the trade-off for taking on the risk.

To guard against shoddy care delivered in pursuit of shared-saving dollars, the payer usually requires the provider to meet some quality metrics before the organization gets shared savings. Most shared-savings arrangements protect providers against costly outliers. The payer may simply agree to cover those cases or, in some cases, the providers purchase separate insurance against them. Some shared-savings arrangements set a threshold above the financial benchmark at which the shared savings start.

CMS put “booster rockets” on shared savings, and many payers are basing their program on what CMS is doing.

When Bailit and a colleague wrote a report on shared savings for the Commonwealth Fund in 2011, most of the 27 programs they assessed were primary care medical homes and “ACO-like” arrangements involving broader provider organizations. But since that report came out, CMS has launched its ACO programs, and shared savings is a prominent feature of those programs. CMS did not invent shared savings and nor is it the sole purveyor, but Bailit says CMS put “booster rockets” on the payment mechanism, and many payers are designing their programs using the CMS chassis.

The federal agency’s largest ACO program has shared savings in its name. As designed, the Medicare Shared Savings Program (MSSP) was supposed to wean the participating 400 participating organizations off of one-sided risk and move them into the discipline of the two-sided risk. But under new regulations that came out earlier this year, the participants will be allowed to sign up for another three-year hitch of one-sided risk at a 50-50 shared savings rate, provided they have met quality standards. One criticism of shared savings is that it doesn’t go much beyond penny-pinching—that’s not disruptive enough when it comes to reforming the delivery of health care and tilting the system toward value. The extension of one-sided risk in MSSP confirms that low opinion.

CMS’s other ACO programs do include two-sided risk. The Pioneer ACO Model program has a menu of five payment arrangements with shared saving and losses of up to 60% to 75% and adjusted based on quality scores. The New Generation ACO Model, which was just announced this year and isn’t up and running yet, has two proposed tracks: shared savings and losses up to 80% and another one with full risk—shared savings and losses of up to 100%. But by design, these are experimental programs, the products of the CMS’s Innovation Center, so there’s some question about how much sway they have, notwithstanding the surprising influence that CMS has come to have as a trendsetter.

That’s one small step for value…

Faulting shared savings as milquetoast may be missing the point, say some experts. Given how entrenched fee-for-service is and all the interests and behaviors that have grown up around it, incremental change may be more realistic and sustainable than anything root and branch. In that way, shared savings may be like the ACA. Moreover, shared savings isn’t really a stand-alone program but a concept and payment mechanism that can be used with pay-for-performance, bundled payments, or capitation. How it will be viewed in a few years will depend on the fate of value-based care.