Two-sided risk

Two-sided risk is a term commonly used in the healthcare industry, particularly in the context of value-based payment models and accountable care organizations (ACOs). It refers to a payment arrangement where healthcare providers are financially responsible for both the cost and quality of care provided to a specific population of patients. In other words, providers assume financial risk for the outcomes and costs associated with the care they deliver.

Under a two-sided risk model, healthcare organizations are incentivized to improve patient outcomes and reduce costs by implementing strategies that enhance care coordination, promote preventive care, and optimize resource utilization. This approach aims to shift the focus from the traditional fee-for-service model, which rewards volume of services, to a value-based system that emphasizes quality and efficiency.

To better understand the concept of two-sided risk, it is important to differentiate it from one-sided risk. One-sided risk, also known as upside risk, is a payment model where healthcare providers are only accountable for the quality of care they deliver. In this model, providers are rewarded for meeting certain quality metrics or achieving specific outcomes, but they are not financially responsible for any additional costs incurred.

On the other hand, two-sided risk introduces a higher level of accountability for healthcare providers. They not only have to meet quality targets but also bear financial responsibility for any costs that exceed predetermined benchmarks. This means that providers may face penalties or financial losses if they fail to deliver high-quality care efficiently.

Two-sided risk is often confused with the term "shared savings," as both concepts are related to value-based payment models. However, there are distinct differences between the two.

Shared savings is a payment arrangement where healthcare providers are eligible to receive a portion of the cost savings achieved through their efforts to deliver high-quality, cost-effective care. In this model, providers are not financially responsible for any losses incurred; instead, they have the opportunity to share in the savings generated.

In contrast, two-sided risk goes beyond shared savings. While providers can still benefit from cost savings, they also assume financial responsibility for any losses incurred. This means that if the cost of care exceeds the predetermined benchmarks, providers may be required to repay a portion of the excess costs or face penalties.

To illustrate the application of two-sided risk in healthcare, let's consider a hypothetical example involving an accountable care organization (ACO) and a payer:

Example 1: ACO and Payer Partnership

An ACO, consisting of multiple healthcare providers, enters into a two-sided risk agreement with a payer, such as a health insurance company or Medicare. The ACO is responsible for managing the care of a defined population of patients, with the goal of improving outcomes and reducing costs.Under the two-sided risk model, the ACO and payer establish specific quality and cost benchmarks. If the ACO successfully meets or exceeds these benchmarks, it may be eligible for shared savings. However, if the ACO fails to achieve the desired outcomes or if the cost of care exceeds the predetermined benchmarks, the ACO may be required to repay a portion of the excess costs or face penalties.

Example 2: Bundled Payment Initiative

In another example, a hospital participates in a bundled payment initiative for a specific procedure, such as a joint replacement surgery. The hospital agrees to a two-sided risk arrangement with the payer, where it assumes financial responsibility for the entire episode of care, including pre-operative, surgical, and post-operative services.

If the hospital successfully manages the patient's care within the predetermined cost and quality parameters, it may receive additional payments or shared savings. However, if the cost of care exceeds the agreed-upon benchmarks or if the quality of care falls below the expected standards, the hospital may be financially penalized.

These examples highlight how two-sided risk incentivizes healthcare providers to deliver high-quality care while managing costs effectively. By assuming financial responsibility for both the quality and cost of care, providers are motivated to implement care coordination strategies, enhance patient engagement, and optimize resource utilization to achieve better outcomes and reduce unnecessary expenses.

In conclusion, two-sided risk is a payment model that holds healthcare providers accountable for both the cost and quality of care delivered to a specific population of patients. It differs from one-sided risk by introducing financial responsibility for any costs that exceed predetermined benchmarks. Two-sided risk is often associated with value-based payment models and encourages providers to focus on delivering high-quality, cost-effective care.