The least understood and arguably most disruptive change brought about by the Affordable Care Act is the transfer of financial risk to providers. It is one of the law’s two key mechanisms, along with expanded insurance coverage, intended to reduce health costs over the decade.

The industry has coined the phrase “provider-sponsored risk,” or PSR, to describe the basic change in incentives from volume to value. It essentially means that providers — doctors, hospitals, allied health professionals and others — no longer will be paid on a fee-for-service basis but, instead, will be compensated for the value of the work they do. The theory behind this is that if providers are incentivized for results — safety, outcomes, efficiency and patient experiences — instead of being paid for doing as much as they can, better care and lower costs will result. And reputable work by RAND Corp., Dartmouth, Institute for Healthcare Improvement, Institute of Medicine and others has shown that more care is not a recipe for better care.

The Status of PSR Activity

In the Affordable Care Act, several programs enable the shift of risk from volume to value: many of these started right after the ACA’s passage in March 2010; some are still being modified, some expanded and none have been suspended since passage. A sampling:

Programs started Jan. 1, 2012

• Medicare Shared Savings Program: Enables volunteering providers to form accountable care organizations to manage at least 5,000 Medicare enrollees for three years and share in savings from historic costs. There are more than 400 programs with 7.3 million assigned beneficiaries in 49 states plus Washington, D.C., and Puerto Rico.

• Bundled Payments Improvement Program: More than 1,700 providers volunteered to use at least one of the four models: retrospective acute care; retrospective acute care episode and post acute; retrospective post acute care; and prospective acute care.

• Pioneer ACO: Nineteen of the original 32 volunteer providers are still participating in the version of the MSSP that allows the ACO to take on more risk.

Programs started Oct. 1, 2012

• Comprehensive Primary Care Initiative: A four-year, multipayer voluntary program that provides incentives for care management. It includes 525 practices in seven states serving 313,000 beneficiaries.

• Hospital Readmissions Reduction Program: One of the mandatory programs, hospitals are penalized up to 3 percent of Medicare payments for avoidable 30-day readmissions for six conditions. Penalties assigned: Medicare raised payment rates to 1,231 hospitals; 1,451 hospitals are being paid less for each Medicare patient they treat; 729 hospitals will end up with an increase in payments from the combined readmissions and value-based programs; 416 hospitals that won bonuses in Year 1 were penalized in Year 2.

• Hospital Value-based Purchasing: Also mandatory, the VBP rewards hospitals for efficiency, safety, satisfaction and outcomes against historic costs; 2 percent of Medicare payments at risk by 2017. In fiscal 2016, about half of hospitals will see a small change in their base operating MS-DRG payments (between -0.4 and 0.4 percent). The highest-performing hospital in that year will receive a net change in payments of slightly more than 3 percent after 1.75 percent is withheld. The worst-performing hospital, receiving a total performance score of 0, will see the maximum reduction of 1.75 percent and will not receive an incentive payment.

Program started Oct. 1, 2014

• Hospital-acquired Condition: The mandatory program penalizes the bottom quartile of hospitals up to 1 percent of Medicare for hospital-acquired infections, safety.

Programs starting during calendar 2016

• Next-generation ACO: The voluntary version of an advanced ACO model includes higher levels of risk and four payment options including capitation. Number of participants: 21.

• Comprehensive Care for Joint Replacement: A program that is mandatory in 75 markets; hospitals at risk for up to 2 percent of bundled payment for total costs to 90 days post-discharge. Began last Friday, April 1, with approximately 800 hospitals participating. About 23 percent of all lower-extremity joint replacement episodes nationally will be covered by the program.

The impetus of these programs is Medicare; some are voluntary and some are mandatory; some involve hospitals only, and others integrated systems, physicians and a broader array of providers. In some cases, the downside financial risk is minimal and the upside shared savings modest. In others, the risks are higher. In many, the focus is on certain clinical populations, and in others, the program is designed to coordinate care across a pluralistic clinical population. In some cases, private insurers have followed suit as was the intent by Medicare, and in others, Medicare has pursued them independently. Finally, they involve a combination of sticks and carrots for providers, with penalties escalating over time for nonparticipation.

What have we learned thus far?

The shift from volume to value to become risk-ready requires massive investment by providers. Most organizations have struggled to account for the costs of information technologies, operational disruption and anxiety created when the organization embarks on the PSR journey. As a result, in most communities, providers have been cautious about participating while acknowledging that the PSR train has left the station. And hospitals have become the default bank for these efforts: physicians have looked to their hospitals for capital and operational support as they face the reality of provider-sponsored risk. The cumulative hospital revenue at risk for these programs is 6 to 8 percent today, and will increase over time.

An effective physician organization is key. Physician leadership within provider-sponsored risk programs is the critical ingredient for success. Engineering changes to diagnoses are made; how care is delivered, by whom and where requires keen clinical judgment as its foundation. And to implement PSR at scale, it requires substantial capital investment and clinical redesign to incorporate traditional and alternative health modalities, health coaching and customization of care planning.

Employers, private insurers and state Medicaid programs are following Medicare’s lead. The evidence in most communities is that private payers are following suit and, in some cases, doubling down on Medicare’s PSR bets.

Looking ahead: What’s the End Game for PSR?

The inevitable end game for PSR efforts is the shift of all financial risk to provider organizations via capitated contracts with payers. There will be specific populations for which fee for service will be continued and communities wherein contracting is a la carte. In most communities, populations will be contracted to fully integrated regional systems of health that have a strong regional primary care footprint, comprehensive array of specialized services, full continuum of preventive, chronic acute, post-acute and retail health services. Some of these also will sponsor their own health plans; others will contract with private insurers to access their infrastructures and analytics capabilities.

Provider-sponsored risk is still in its infancy. The data and technologies to facilitate risk-bearing by providers for most clinical populations is readily available; the will to accept risk and fear about its unintended consequences remain concerns. And there are legitimate questions that need answers — how to define value, how to address medical liability concerns, how provider organizations can integrate effectively to be able to manage populations, how to modify treatment plans as teams, how to address unpredictable drug costs and others.

Will PSR be a topic in “Campaign 2016?” No. It’s one of those issues about which the less said the better. After all, the majority in our citizenry believe everything’s that done is necessary, and costs can’t be controlled. But they also concur that fee-for-service incentives in health care contribute to its costs, so PSR is likely to gain approval if presented carefully to voters.

It’s been said that “change is constant; success is not.” That applies to provider-sponsored risk, but it’s here to stay.

Paul H. Keckley, Ph.D., does independent health research and policy analysis and is managing editor of The Keckley Report, a weekly blog free to subscribers at is a member of Health Forum’s Speakers Express. For speaking opportunities, please contact Laura Woodburn.