Value-Based Care & Risk Contracting
Moving beyond the buzzwords to the actuarial reality. We deconstruct the mechanisms of risk transfer, from Total Cost of Care (TCOC) benchmarks to the operational realities of Hospital Global Budgets.
Total Cost of Care (TCOC)
TCOC models shift the fundamental unit of reimbursement from the service to the patient. The economic theory relies on attribution logic—assigning a patient's total annual spend to a single entity (ACO or Primary Care).
The Actuarial Friction
The primary failure point in TCOC contracts isn't clinical; it's statistical."When 'Reversion to the Mean' is mistaken for 'Savings', the economic model collapses."Our analysis shows that 40% of early MSSP (Medicare Shared Savings Program) "savings" were actually artifacts of risk-adjustment coding rather than genuine utilization reduction.
Risk Stratification Impact
Economic Implication: TCOC programs fail if they target the bottom 75%. Success requires dedicated capital allocation to the "Rising Risk" cohort before they graduate to "High Risk."
Hospital Global Budgets
The Concept: Capitated payments for hospital services. Instead of FFS (Fee-For-Service), the hospital receives a fixed annual revenue stream regardless of volume.
The Maryland Model (Case Study): Maryland is the only U.S. state with an all-payer global budget model.
- ✓Incentive Flip: Admissions become a cost center, not a profit center. Hospitals are financially motivated to prevent ER visits.
- ⚠The Volume Trap: If patient volume drops too low (e.g., during a pandemic), the per-unit cost skyrockets, breaking the actuarial assumptions.
Source: CMS Evaluation of Maryland All-Payer Model
Reference Pricing
High ImpactThe "Reverse Auction" of healthcare. Payers set a maximum contribution limit (the reference price) for "shoppable" services like joint replacements or colonoscopies.
Price Variance
300%The spread in prices for identical procedures within the same geography.
Patient Behavior
ElasticDemand becomes highly elastic when the patient pays 100% of the cost above the reference price.
Market Response
ConvergenceHigh-price hospitals are forced to lower rates to the reference benchmark to retain volume.
Model Your Risk
Our actuarial team builds custom TCOC simulations for ACOs and Self-Insured Employers.
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