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Why Risk-Based Contracts Are Worthwhile

Karen Minich-Pourshadi, for HealthLeaders Media, October 8, 2012

Ward explains, however, that working with payers and getting them to agree to a fair margin still adds to the complexity of the contracting negotiations.

"We need to get them to understand what margin it takes to support the organizations and provide care to the patient. Our negotiated payments aren't cost plus a fair margin like most other businesses."

"Everybody understands capitalizing your business, but what I don't think healthcare has done a good job of is projecting what our true costs are and what it takes to actually take care of a patient. Quite frankly, as an industry, we've done that to ourselves. Annd now we have to figure out how to fix it," says Ward.

Chris McLean, executive vice president and CFO at Methodist LeBonheur Healthcare in Memphis, says his organization has done a few risk-based contracts, and it has already tried to expand into the employer market, but without much success.

"We're going back to our insurance companies and the [larger] employers," McLean explains. "Our CEO went out and talked to the other CEOs of the large companies [in the area], but we found that some didn't want to do a direct contract with us. They wanted to go with Cigna and ‘cover the world.' Whether we like it or not, that's what the insurance companies bring to the table that we can't in our individual markets."

But McLean adds what healthcare organizations can reduce utilization to benefit the developing ACOs. "True cost comes back to our level of utilization; it's all over the board. It's what we've done because we're paid per click," he notes.

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