What does “assuming financial risk” mean for a health care provider?

Historically, health care providers haven’t had to worry about the laws and regulations that apply to risk-assuming entities like insurance companies.   That is changing as more health systems and the carriers they work with look more seriously to risk-shifting arrangements to incentivize cost-effectiveness and share in the gains and losses.  Health systems that ignore these requirements do so at their own risk.

In New Jersey, N.J.A.C. 11:24-15.1 provides that:  

(a):  No person shall assume financial risk, in whole or in part, for the cost or provision of, or arrangements for, one or more health services to others unless the person is…An authorized payor as defined at  N.J.A.C. 11:24-1.2;.. A provider actually performing the health services (including providing supplies) within the scope of his or her license; or …An employer with respect to its own employees, and dependents of those employees.

At a broad level, any person (natural or corporate) who undertakes to provide a service that may cost more than the amount they’ve agreed to accept for it may be considered to have assumed financial risk.  So let’s start with the exceptions in the regulation:

  • An authorized payor or other entity properly licensed to assume risk.  This is discussed in greater detail below.
  • A provider actually performing the health services (including providing supplies) within the scope of his or her license.  This would apply, for example, to a doctor being paid on a capitation basis to care for patients in his or her panel.  While a panel of unusually high utilizers may cause the arrangement to be unprofitable, limiting the services to those provided by the doctor under his or her license keeps the arrangement within this exception to the prohibition.  For the same reason, a facility agreeing to be paid on a per diem or Diagnosis Related Group basis is not in violation of this prohibition, as long as the facility is performing the services and they are within the scope of its licensure.   
  • An employer with respect to its own employees, and dependents of those employees. 

What is Financial Risk?

Financial risk is defined in the regulation on Organized Delivery Systems (“ODS”) (N.J.A.C. 11:22-4.2) in part as follows:

“Financial risk” means exposure to financial loss … for the payment of claims or other losses arising from covered benefits for treatment or health care services other than those performed directly by the person or organized delivery system liable for payment, including a loss sharing arrangement. …. A financial risk shall exist if, under an agreement between the organized delivery system and the carrier, the financial obligations of the organized delivery system for payment of benefits or for providing treatment or health care services does or potentially may exceed any payments that may be received from the carrier…

The analysis is therefore focused on whether the arrangement with a carrier opens the system or provider up to the possibility that it may have to cover costs beyond those provided by it under its own license.  The following is an example adapted from examples on the website of the New Jersey Department of Banking and Insurance, but limited to the issue of assumption of financial risk:

Nature of Services

Carrier contracts with a physician hospital organization (“PHO”) for comprehensive health care services. The PHO contracts with hospitals and physicians to provide a network for delivery of services.

Method of Payment

Carrier pays the PHO a per member per month fee. The PHO reimburses the hospitals on a reduced fee for service basis or on a case rate basis. Generally, the physicians are paid on a capitation basis; however, specialists are reimbursed on a reduced fee for service basis.


Since the carrier’s liability is limited to a per member per month fee and the PHO’s payments to hospitals and physicians may exceed that amount, the PHO is assuming financial risk, and should be licensed as a payor or ODS.

What is an Authorized Payor?

“Authorized payors” include health maintenance organizations, health insurers and health and dental service corporations.  Other entities that may be licensed to assume risk apply with respect to Multiple Employer Welfare Arrangements and properly licensed ODS.

Trending Toward a Risk-based Future

In a recent survey conducted by the Healthcare Financial Management Association of 170 hospital and health system senior finance executives, 72% both believe their organizations have the capabilities needed to support increased levels of risk and plan to take on additional risk in the next one to three years across the following:

  • Commercial payor contracting models: 64%
  • Medicare value-based models: 57%
  • Medicare Advantage: 51%

Rules that may apply to new payment models under Medicare fee-for-service plans are very different from the state requirements that may apply when carriers and providers look to extend those arrangements to commercial plans.

Health systems would do well to ensure that as they review these alternative models, that they are as informed on the legal requirements as they are on the financial risks and rewards.

Out-of-Network Legislation Advances in New Jersey

After a decade of fits and starts, legislation aimed at curbing surprise bills to consumers who receive medical services outside their insurer’s networks, appears to have enough steam to hit the Governor’s desk shortly.

The surprise billing issue can arise under two very different sets of circumstances:

In the first, the use of the out-of-network provider is elective.  A patient has a plan that includes out-of-network benefits, usually covered at a lower level than the benefits that would apply to an in-network service.  The patient may want to use a particular provider who is not in the insurer’s network.  In order to know what the patient’s out-of-pocket costs would be, he or she would have to know the amounts that would be billed, the deductible, copayment and coinsurance under their insurance plan, and the ‘allowance’ that those cost-sharing amounts would be applied to.  Many, if not most, of these data points are currently beyond the reach of the average consumer.

The second set of circumstances involves non-elective use of an out-of-network provider.  It may be services received at an in-network hospital that are billed by an out-of-network hospital-based physician – such as an anesthesiologist, radiologist, pathologist or emergency room doctor.  The patient had no choice in the selection of the hospital-based physician, but may be subjected to billing for whatever the insurance doesn’t cover.  It may also involve emergency services, when the hospital the patient is taken to is out-of-network.

The bill, S485/A2039 deals with these two issues differently: by imposing transparency requirements on providers and insurers for the former, and by placing limitations on billing for non-discretionary uses of out-of-network services for the latter.

Transparency Requirements

For the first, the bill imposes transparency requirements.  It would require facilities to inform prospective patients about their network status, provide information on the network status of employed physicians, and advise them to inquire as to the network status of those who are not.  It also requires that they provide information on their websites including standard rates.

Health care professionals are also required to provide internet or written disclosure of the plans in which they participate.  If they are out-of-network, they are required to provide an estimate of how much they will bill upon request, and let the patient know that they will have a financial responsibility for amounts not covered.

The law also requires insurers to, among other things:

  • Update their on-line provider directory within 20 days of the addition or deletion of a provider from their network;
  • Provide a clear description of the plan’s out-of-network benefits, including the methodology to determine the allowed amount for out-of-network services; and
  • Provide examples of anticipated costs for frequently billed out-of-network services.

Billing for Non-discretionary Services

The more controversial aspect of the bill has been the process to resolve billing disputes for emergency and other nondiscretionary uses of out-of-network services (the latter are referred to in the bill as “inadvertent out-of-network services”).

If a carrier and out-of-network provider cannot agree to a reimbursement rate, a carrier, facility, or covered person can initiate binding arbitration.

The bill anticipates that the Department of Banking and Insurance would contract with one or more firms to perform the arbitrations.  If a party initiates arbitration, the arbitrator would review the final amount offered by the carrier, and the final amount demanded by the provider, and the decision will have to be one of the two amounts.

The Federal Employee Retirement Income Security Act preempts state laws that relate to employee benefit plans, with the notable exception of state insurance law.  Because of this preemption, the arbitration is mandatory for insured plans, but not for self-insured employee welfare benefits plans.  It does, however, include a provision under which self-insured plans may opt in to the arbitration process, in which case the prohibition on balance billing, and the decision of the arbitrator, are both binding.

S485 was released by the Senate Commerce Committee and A2039 was released by the Assembly Appropriations Committee this past Thursday afternoon. It is expected that the bills will head to the floor of both houses for a full vote on April 12th.

New Bundled Payment Initiatives From CMS

Although a new Secretary of Health and Human Services has yet to be confirmed, Centers for Medicare and Medicaid Services Administrator Seema Verma is putting her fingerprints on a course change in handling bundled payment initiatives for beneficiaries covered by traditional Medicare.

The Trump Administration had previously pulled back from the Obama Administration movement toward mandatory programs, in favor of voluntary initiatives. On August 17, 2017, the new administration proposed a rule that among other things scrubbed a mandatory Episode Payment Model finalized on January 3, 2017 in the last days of the Obama administration.

In that proposed rule change, CMS said “if at a later date we decide to test these models, or similar models, on a voluntary basis, we would not expect to implement them through rulemaking, but rather would use methods of soliciting applications and securing participants’ agreement to participate consistent with how we have implemented other voluntary models.”

On January 9, 2018, CMS did just that, soliciting applications for voluntary participation in 29 Inpatient Clinical Episodes and three outpatient clinical Episodes in what it is calling “Bundled Payments for Care Improvement Advanced (BPCI Advanced)”.

The 29 Inpatient Clinical Episodes are:

  • Disorders of the liver excluding malignancy, cirrhosis, alcoholic hepatitis
  • Acute myocardial infarction
  • Back & neck except spinal fusion
  • Cardiac arrhythmia
  • Cardiac defibrillator
  • Cardiac valve
  • Cellulitis
  • Cervical spinal fusion
  • COPD, bronchitis, asthma
  • Combined anterior posterior spinal fusion
  • Congestive heart failure
  • Coronary artery bypass graft
  • Double joint replacement of the lower extremity
  • Fractures of the femur and hip or pelvis
  • Gastrointestinal hemorrhage
  • Gastrointestinal obstruction
  • Hip & femur procedures except major joint
  • Lower extremity/humerus procedure except hip, foot, femur
  • Major bowel procedure
  • Major joint replacement of the lower extremity
  • Major joint replacement of the upper extremity
  • Pacemaker
  • Percutaneous coronary intervention
  • Renal failure
  • Sepsis
  • Simple pneumonia and respiratory infections
  • Spinal fusion (non-cervical)
  • Stroke
  • Urinary tract infection

The three Outpatient Clinical Episodes are:

  • Percutaneous Coronary Intervention (PCI)
  • Cardiac Defibrillator
  • Back & Neck except Spinal Fusion

Seven quality measures will apply.

Acute Care Hospitals and Physician Group Practices can participate as “Convener Participants” or “Non-Convener Participants”. Other entities that are either Medicare-enrolled or not Medicare-enrolled providers or suppliers may participate as “Convener Participants” only. A “Convener Participant” is a Participant that brings together multiple downstream entities, facilitates coordination among those downstream entities, and bears and apportions financial risk under the Model.  A Non-Convener Participant is a downstream entity that bears financial risk only for itself.

Under the program, Medicare Fee-for-service payments are made for services delivered, with a retrospective reconciliation. CMS will compare aggregate Medicare Fee-For-Service spending for all items and services included in a Clinical Episode against the Target Price for that Clinical Episode to determine whether the Participant is eligible to receive a payment from CMS, or is required to pay a repayment amount to CMS.

Clinical Episodes are measured from the first day of the triggering inpatient stay or outpatient procedure, and extend through the 90-day period starting on the day of discharge from the inpatient stay or the completion of the outpatient procedure, as applicable.\

BPCI Advanced will qualify as an Advanced Alternative Payment Model under the Medicare access and CHIP Reauthorization Act (MACRA) Quality Payment Program.

Interested participants have until March 12 to apply.