Research

Are the barriers to commercial risk insurmountable? Here’s why they might be.

It's hard to find consensus on the future of commercial risk. While there are reasons for pessimism about commercial risk, it's still a necessary pursuit.

Is the future of commercial payment in value-based care or elsewhere? It’s an important question with serious implications on the future of value-based care that, surprisingly, has received little attention to date. Hypothetically, if all the major commercial health plans committed seriously to value-based care, they would have the scale to push the rest of the industry.

We’re prone to be optimistic about Medicare and Medicaid risk and pessimistic about commercial—many share that view. But it’s worth remembering that many smart people can disagree on value-based care and particularly the future of commercial risk. With that in mind, implementing risk-based payment in the commercial population carries distinct challenges.


What makes commercial risk so hard?

It comes down to this: What the commercial population needs and how they’re covered makes it significantly harder to extract meaningful cost savings.

There's simply more cost savings opportunity in Medicare and Medicaid. Both populations are far more complex, requiring expensive treatments and resource-intensive, wraparound support best financed by value-based care models.

By contrast, the commercial population is healthier and younger, so chronic condition prevalence and acute utilization is correspondingly lower. And while plenty of expensive procedures happen in the commercial population, they are not as avoidable so it’s harder for provider teams to intercept them upstream.

By “churn,” we mean patients switching from health plan to health plan. Commercial patient churn happens at two levels: patients switching health plans when changing employers, and employers themselves changing their employee health plans. But why does this matter?

Value-based care is a long game, not a short game. Success takes time. Upfront investments in care management, behavioral health support, data and analytic capabilities, and other competencies are expensive and mature slowly. It takes at least three years to generate meaningful savings under value-based payment. That means patients need to be part of a value-based commercial contract for at least that long for stakeholders to realize the savings on their investments.

So, health plans realize they may not actually see the savings on their commercial patients currently in value-based contracts, and providers also know their patients may not stay in those contracts to justify costly population health investments. Employers may be motivated mainly by what will best retain their employees. Less time to generate savings means less incentive to pursue it in the first place.

We’ve talked before about how risk adoption to date has been disruptively diffuse, as there are so many different commercial health plans and types of contract within each plan. That makes scaled cost reduction much harder across commercial plans. A provider entering into a value-based contracting relationship with one plan by no means guarantees they’ll enter into one with another.

While not completely monolithic, Medicare cost opportunity is far more concentrated, stemming ultimately from one payer. Medicaid not quite as much, but certainly is less dispersed than commercial.

Employers are particularly important for insurance plans as they’re a main source of plan income. But macroeconomic factors motivate employers’ decision-making and, right now, that seems to be against drastically altering benefit design.

Health care spending isn’t the top priority for employers—employee retention is. The job market is hot. Employers do not want to jeopardize employee retention by changing benefits packages and Covid didn’t damage employer budgets as much as expected. Over a third of employers’ health care costs were eight percent or more below budget at the end of 2020. 2021 budgets grew at around three to four percent, in line with past trends. Plus, employers are not necessarily health care experts and may not understand how benefits decisions drive cost to the system.

Finally, it’s hard for self-insured PPO plans to shift to value-based care because they have very little control over what their patients do. Patients can shop for electives and even travel to different markets for procedures, rendering cost mitigation tactics difficult if not impossible. So, employers carry large weight in determining the future of value-based care, but whether they will exert that influence is less clear.


Parting thoughts

The majority of executives we’ve spoken with say they are optimistic about the future of value-based care—but they are more tempered when discussing the future of commercial risk.


Next up

In the second part of our series, we will examine the other side of the argument—what makes commercial risk an opportunity worth pursuing.


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INTENDED AUDIENCE

AFTER YOU READ THIS

1. You'll learn why risk-based payment in the commercial population is challenging.

2. You'll understand the implications of value-based care on commercial health plans, employers, and providers.

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