Managing Financial Performance Under Risk

Emerging Imperatives for Finance Departments in the Transition to Accountable Payment

By reading this white paper, members will learn:

  • The accounting challenges under total cost of care contracts and the impact on margin projections
  • The cash flow implications of delayed shared savings bonuses
  • Considerations for successful contract negotiations amid evolving provider-payer relationships
  • Financial Leadership Council and Health Care Advisory Board members, log in to download the white paper.

Executive Summary

Investments in clinical redesign outpace those in financial capabilities

As bundled payments, shared savings, and capitated arrangements become increasingly common, health system executives accustomed to fee-for-service economics and operations will face a number of challenges to maintaining sufficient cash flow.

Finance leaders know they're responsible for balancing clinical and financial transformation, ensuring that risk-based contracting occurs on pace with clinical redesign efforts intended to reduce utilization and emphasize population health. But advancements in financial capabilities are falling behind.

According to our 2013 Accountable Payment Survey, only half of providers pursuing total cost of care contracts have invested in risk-contract performance analytics to project and understand financial performance under accountable payment. Without these capabilities, successful care redesign may advance an organization’s clinical mission but at the cost of predictable, sustainable margins.

Three operational imperatives for finance leaders preparing for accountable payment

Projecting financial performance

The accounting challenges under total cost of care contracts can impact providers’ ability to accurately project operating margins. As a result, bond offerings may be difficult to execute and providers may risk bond covenant violations for existing debt. Further, annual capital planning may be compromised if a portion of a health system’s operating margin is dedicated to capital investments. Providers must develop the capabilities needed to make meaningful financial projections and provide accurate insight into financial performance.

Preparing for cash flow disruptions

For most health systems, the cash flow implications of delayed shared savings bonuses—at least in the short term—are likely to be relatively minimal. But, the impact on days cash on hand may be greater for contracts in which the provider is required to escrow funds to guard against potential cost overruns. Providers should also consider the cost of various clinical and financial investments necessary to succeed under risk-based contracts, which in many cases will be paid out of operating rather than capital budgets.

Negotiating favorable payer terms

As the migration of risk from payer to provider accelerates, the roles of each party, and the relationship between the two, are evolving. For providers entering risk negotiations in the near-term, securing payer support for infrastructure investments, recalibrating negotiation criteria, and standardizing contract terms across payers will be critical to contracting success.

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