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

by Neil M. Sullivan

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.