Guy D'Andrea on Pitfalls and Practical Solutions with Shared Savings

By Clive Riddle, May 10, 2012

Guy D’ Andrea, Managing Partner at Discern Consulting, was one of the featured speakers in this week’s Contracting Web Summit 2012, and spoke on  Shared Savings: Pitfalls and Practical Solutions.

For those who need a refresher in what Shared Savings are all about, Guy summarized these core concepts:

• Retrospective calculation of provider’s cost savings (usually relative to overall trend) for a defined population
• Provider is eligible to receive some percentage of the savings as an incentive payment
• Usually (but not always) a “one-way” risk arrangement
• Can include some prospective, fixed payment (essentially a pre-payment for expected savings)

Shared Savings, of course, are a centerpiece of accountable care and medical home initiatives. But stakeholders do run into pitfalls as they try to come to agreement, and implement such arrangements. Before moving on to discuss building a payment model for shared savings with readmissions, Mr. D’Andrea discussed these pitfalls and some general potential solutions.

The prospective payment is a sticking payment. Guy notes that providers will always want the maximum possible prospective payment, since it is “risk-free” revenue.  Payers will want to delay payments until savings are achieved.” His solution: “treat prospective payments as an investment, and discount expected savings to present value.”

Then the argument comes up that is more difficult for high-performing providers to generate savings, because they tend to get penalized for having already done well, leaving less room for future improvements. His solution: “use a ‘blended’ model, in which the target budget is set using a combination of the provider’s own cost history, and that of the peer group.”

Next  comes the concern that  a provider’s experience, particularly when the population isn’t large enough to adequately spread the risk, will be influenced more by luck with outliers than factors under the provider’s control. The D’Abdrea solutions: (1) Establish minimum population sizes and savings rates;  (2) Tie payments to performance on clinical process measures; and (3) Exclude “random, rare, and expensive” events from cost of care calculations.

Lastly,  he addresses the concern of sustainability: he notes that “if savings are a “one-time” event, providers may be worse off financially in the long-run than if they saved nothing (especially for integrated systems).” His solutions: (A) Use a multi-year model that partially credits providers with savings in earlier years; and (B) In the long-term, seek to evolve from shared savings to “two-tailed risk” payment models, such as bundled payment or global capitation.