Provider and payer arrangements, including alternative reimbursement models
The contracting spectrum
- Fee-for-service: the provider is paid per activity, so volume risk sits with the payer and the incentive is to do more.
- Capitation: a fixed payment per head per period; utilisation risk moves to the provider, which may under-provide unless quality is monitored.
- DRG/HRG tariff: a fixed price per episode or spell, as in England's national tariff based on healthcare resource groups; the provider bears length-of-stay and complication risk.
- Bundled or episode payment: one price across the care pathway, forcing coordination.
- Pay-for-performance: a withheld percentage released on quality metrics.
- Shared savings: payer and provider split savings against a baseline, subject to a cap and quality gate.
What the actuary must model
Risk adjustment for capitation (age, sex, diagnoses, prior cost), the cost of transferring risk to a provider with thin capital, leakage and out-of-network spend, baseline drift, and the concentration risk of a dominant provider.
Worked example
A shared-savings contract has a £12.0m baseline, 50% sharing, 20% withheld against quality metrics, and a cap at 10% of baseline. Actual cost is £11.1m, a £0.9m saving. The cap is £1.2m, so the full saving counts. The provider's share is £0.45m, of which 20% (£0.09m) is withheld, leaving £0.36m paid now and £0.09m at risk. The payer retains £0.45m plus any forfeited withhold.
Traps
Assuming capitation reduces cost rather than relocating it; ignoring under-provision and access risk; comparing providers without risk adjustment; forgetting that baselines drift and can be gamed; ignoring provider default and concentration of a single hospital group.