What’s Your Risk-Sharing Tolerance?


A way to spread the responsibility around.

By Ronald D. Marrocco, MBA, MPA, Managing Partner, Strategy First Consulting


As the transition from fee-for-service to pay-for-performance accelerates, providers will find themselves searching for opportunities to operate more efficiently, improve population health, reduce waste and cut costs. All this in an effort to achieve what has been termed the Triple Aim.

The Triple Aim refers to the three goals of healthcare – to improve population health (outcomes), to improve patient satisfaction, and to provide the best possible care at the lowest per capita cost.

For this to work, all participants in the healthcare ecosystem, including pharma, bio and device companies, must contribute to the effort – not just the providers of healthcare services. This realization demands that we more carefully align the objectives of stakeholders by establishing incentives that encourage them to work collaboratively. That way, we will be able to establish the appropriate metrics that will enable them to monitor their progress as they work toward managing their operational costs and addressing the financial challenges.

The obvious stakeholders tasked with driving toward better value in healthcare are the providers – hospitals, their affiliated service facilities and the physicians and practitioners who care for their population members; payors – both public and private insurers as well as employers and healthcare exchanges; and policymakers, who will need to consider the hurdles that providers and payors operate in.

The less obvious stakeholders in the healthcare ecosystem include the suppliers of medical products and services whose innovations contribute to clinical outcomes and ultimately to the efficiency and cost of care.

The matrix of interests and interdependencies among healthcare stakeholders is further complicated by conflicting objectives (Table I) that will need to be tamed in order to move toward the objectives that the Affordable Care Act seeks to achieve by way of the Triple Aim.


This article is focused on the creation of new business models that aim to overcome the conflicting objectives of suppliers of medical technologies and the consumers of their products and or services – provider networks and payors (public and private).

Aligning Incentives with Objectives

While suppliers continue to benefit from a volume-based business model, the business model for providers has changed to focus on performance.

Supplier As Innovator:

Historically, the contribution of medical technology suppliers has been to supply products and/or services to healthcare institutions, physicians and to consumers who are in need of their outputs. Some refer to “suppliers” as “vendors” – the sellers of medical supplies. Both terms tend to devalue the contribution of suppliers to the delivery of care. It is the absence of value in this context that has led providers and their representative organizations, GPOs (Group Purchasing Organizations), to rely on price negotiations as the leading instrument in the armamentarium of the institutional buyer’s toolbox. It is this mindset (supplier as vendor, rather than partner) that has led to more consumer-driven mar- keting initiatives (B2C or direct-to-consumer advertising) and a shift in focus from the institutional buyer (or physician who is in a position to know what is best for the patient) to the consumer of healthcare services who has become educated on his medical condition by friends, family, advertising and the Internet.

Elevating the value of the contribution made by the supplier of medical technology can shift the relationship with the provider from vendor to partner. By engaging in a partnership, suppliers can be invited to operate in an advisory role where they work collaboratively with providers and their representatives to achieve the goals that matter most.

Regulatory bodies [ensure] that medical products meet the threshold of safety and efficacy…They are not tasked with demonstrating that a medical product is cost effective or that the market price is justifiable for its intended use.

Regulatory bodies have the task of protecting the public by ensuring that medical products (drugs, devices, diagnostics) meet the threshold of safety and efficacy so that the objective of Hippocratic Oath – ”Do no harm” -can be achieved. Regulatory bodies are not tasked with demonstrating that a medical product is cost effective or that the market price is justifiable for its intended use. This does not mean that the economics of healthcare products and services are of no value. On the contrary, as the pace of the shift to ”value-based” care accelerates, performance, in terms of population health, becomes a more critical indicator of value than volume. In the new paradigm, the economics of care takes center stage and the focus for medical technology companies will need to expand to include those metrics that will be used to measure the performance of their customers. As the old adage goes, “What gets measured, gets done,” so engaging suppliers that can help providers achieve their objectives will put more energy behind the work that must be done and elevate the commitment to seeing that it DOES get done.

Suppliers are unlikely to focus on a value-based message

It is unlikely, however, that a “value-based” message will be driven by the supplier for a number of reasons.

First, leading suppliers have little incentive to shift their focus from safety and efficacy to value. The volume-based, fee-for-service model serves their interests well. The more products sold, consumed or used, the greater their revenue.

Second, clinical studies do not require collection of economic data to tell the value story. The more data that is needed, the more complex the trial, the more time it takes to assimilate and interpret the information, potentially delaying time to market and time, of course, is money.

Third, until recently, the kind of data needed to tell a sound economic story was largely unavailable. Many institutions are just now upgrading their data collection systems to integrate procurement information with patient and billing information. Without this level of sophistication, it is difficult to reconcile product use with outcomes and profit/loss analytics.

So what is an innovation? And who are these “innovators”?

An innovation in the context of medical technology and healthcare is any product or process that changes the traditional way of doing things – a new device, a pharmaceutical, a process or a business model. Technology innovators can disrupt the standard of care by improving outcomes, efficiencies, referral patterns or patient care guidelines. Business model innovators can change the focus from ”what matters to me” to “what matters to you,” and create interest among possible partners, improve their potential for consideration, and capture market share.

Suppliers of medical products and services have the ability to assist providers in achieving their objectives but are typically not incentivized to do so. In today’s evolving health-care system, payors and providers alike are interested in improving patient care while shifting the focus from care of the individual to the health of populations. To do this in a thoughtful and effective manner, healthcare stakeholders will need three things (see Figure 1);Pc0540000

Figure 1: Considerations in developing Risk-Sharing Contracts

1. A clearly defined set of objectives that each stakeholder is working toward

2. Information systems that capture essential data to identify areas of concern and demonstrate progress toward achievement of these objectives

3. The ability to leverage information and translate data into action and then to hold the organization accountable

Setting Objectives

Objectives can be set in partnership with a payor or as a provider network after careful consideration of the factors that the organization will use to evaluate its success. Objectives may also be set at the macro level (improve profitability by 2%, reduce readmissions by 5%, etc.) or at the micro level (reduce cost of supplies for the CCL by 3%, reduce number of admissions for COPD by 5%, etc.). Whatever the objectives, there must be agreement on the source and format of data that will be used to evaluate achievement of these objectives. All objectives that are set should conform to the S.M.A.R.T.format. By establishing objectives that are specific, measurable, achievable, relevant and time specific, the organization can identify key metrics that will enable the team to evaluate its success.

Since our focus is on risk-sharing between providers and suppliers, objectives may be structured in several ways:

A) Reduce the number of hospital- acquired infections to <1% (of all admissions) by the end of the 2016 calendar year


B) Increase profitability of patients admitted under DRG 0123xx by 2.5% within the next 12 months

C) Shorten the waiting time for ER visits to <15 minutes (on average) from the time a patient is registered until s/he meets with a staff physician

D) Increase the number of visits to PCPs in our network by 7% by year-end

E) Reduce the per capita costs of managing heart failure patients within the provider’s network by 5% from the same quarter of the prior fiscal year

While each of these objectives includes a specific target, measurable metric, and time frame for achievement, it must be possible to evaluate progress by utilizing existing data resources to capture the data that must be measured.

What Can Be Measured?

Metrics can be set, measured, and reviewed internally to track progress toward achievement of each objective. For example, in objective (a), a baseline of the prior calendar year for hospital-acquired infections would need to be established as a target to beat. The specifics of what would be included would be determined and the data source(s) for information on these infections would be identified in advance. Since this objective does not involve an outside partner, the methodology and sources of data should be defined by the team that will be held accountable for achievement of the objective.

Where multiple stakeholders share responsibility, it is necessary to collaborate to determine what can be affected and measured, and what data should be used to track and evaluate performance.

In a situation like objective (e), however, the organization may have agreed to partner with a pharmaceutical company to treat heart failure patients differently given the anticipated benefits of a promising new therapy. In this situation, the provider network, in concert with the payor(s) who have agreed to include the new therapy in formulary and the pharmaceutical company, which manufactures and supplies the product, would collaborate on establishing the metrics that would be used to periodically evaluate progress toward achievement of the shared objective.

In such a scenario where multiple stakeholders (provider network, payors and pharmaceutical company) would share in the responsibility to achieve the objective, it is necessary to collaborate to determine what can be affected, what can be measured and what data should be used to track and evaluate performance.

Capturing What Matters: Applying the Risk-Sharing Approach

Begin with what matters to your organization and what you wish to achieve. Then develop a roadmap to evaluate progress. The roadmap involves;

A) Identifying stakeholders who are able to influence outcome

B) Defining the data that will serve as baseline and future state metrics

C) Identifying sources of data and relevant inputs

D) Relative contribution or ability to impact outcomes

E) Reporting frequency As an example, objective (e) from Setting Objectives will be used to outline the approach to developing a risk-sharing model.

A risk-sharing model is a formulaic representation of weighted factors that contribute to the clinical, financial and operational success of a product or system innovation in actual practice.


Objective: Reduce the per capita costs of managing heart failure patients within the provider’s network by 5% from the same quarter of the prior fiscal year.

Purpose: It has been documented that within this delivery network, despite reimbursement declines, costs associated with managing the heart failure population continue to rise. At this rate, the network expects to be losing money on managing this cohort of patients.

What can the network do to reverse the cost trend while improving outcomes? A new pharmaceutical agent to manage heart failure patients has been introduced. This product has been shown in clinical trials to:

• Reduce the risk of death from cardiovascular causes by 20%

• Reduce heart failure hospitalizations by 21%

• Reduce the risk of all-cause mortality by 16%

Based on demonstrated clinical outcomes, it appears that this new pharmaceutical agent will be able to help reduce overall costs and outcomes associated with the management of this population of heart failure patients. These insights can now be used to create a risk-sharing model where the supplier could potentially achieve greater returns by partnering with the network to help realize its overall objectives.

Risk-Sharing: In order to reduce per capita costs by 5% year-over-year, measured quarterly, the network will enter into a risk-sharing contract with the pharmaceutical manufacturer. The contractual end points will mimic those established by leading payor organizations in partnership with the network. Those end points may include;

A) Number of patients hospitalized with heart failure

B) % of patients hospitalized with a heart failure diagnosis from year to year

C) Average per capita in-hospital costs to manage admitted heart failure patients

D) Mortality of heart failure patients from year to year

E) # of outpatient or ED visits for co-morbidities associated with heart failure

F) Total number of patients on new pharmaceutical agent, compared to number of admissions

G) Cost differential between new therapy for population and prior therapy

The end points listed above represent a possible set of metrics that would be used to structure the agreement between payor, provider network and supplier.

Data: Coming to an agreement on the sources of data that will be used to evaluate the contract is the next big step in the creation of the value-based risk-sharing contract. Establishing trust among the contractual stakeholders will require review of data sources and potential report outputs including a baseline report for all agreed upon metrics.

The acceptance of reporting metrics and outputs will serve as the foundation for the risk-reward contract. In such an arrangement, the supplier would provide access to the product at a price that is above cost but below the negotiated formulary price. The upside for the supplier would be calculated based on the potential for savings.

Every negotiated risk-reward contract would be different and would be based on a combination of factors ranging from the number of individuals accessing the product to the potential savings and the potential for other therapies to also affect the outcome.


Until recently, certain types of risk-sharing models between payors or providers and suppliers have proven difficult to implement because of a lack of suitable data infrastructure and well-defined, measurable metrics. Today, however, many institutions are integrating supply chain procurement data with admissions, patient charge data and data from physicians who treat and care for patients within their networks. While the information will not be perfect, it has evolved to the point where trending insights and cost data can be captured to facilitate structuring of critical performance contracts with key suppliers. •



Ron Marrocco has broad experience in driving adoption for healthcare innovations around the world. Strategy First Consulting is a business growth and strategy firm focused on helping suppliers, providers and payors to better serve the interests of their stakeholders in the new paradigm of value-based healthcare. Formerly Mr. Marrocco was Strategic Advisor to the United States Agency for International Development’s global health supply chain at Booz Allen Hamilton, Strategic Advisor to the Ministries of Health, and Marketing Strategist for several leading medical technology companies including Philips Healthcare and Boston Scientific.

1 S.M.A.R.T. objectives are (1)Specific,

(2)Measurable, (3) Achievable, (4) Relevant and (5) Time bound – achievable within a specified time period

2 Neumann, PJ, Chambers, JD, Simon, F and Meckley, LM, Risk-Sharing Arrangements That Link Payment For Drugs To Health Outcomes Are Proving Hard To Implement, HEALTH AFFAIRS, 2011; Dec, 2329-2337