In our last post, we explored the essential building blocks of effective Value-Based Care. Now, we zoom in on the most prevalent and foundational payment model in the VBC landscape: the Shared Savings Model.
This model is the engine behind most Accountable Care Organizations (ACOs) and similar arrangements. At first glance, the concept is simple: if providers deliver high-quality care for less money than expected, they get to “share” in the savings they’ve generated. But beneath this simple premise lies a complex analytical framework.
For any healthcare organization navigating this space, understanding the mechanics isn’t just important—it’s critical for survival and success. Let’s deconstruct the four analytical pillars that determine whether a shared savings program results in a significant payment or a disappointing loss.
1. The Benchmark: Your Financial North Star
The entire model hinges on the benchmark. This is the financial target—the expected annual cost of care for a specific patient population—that a provider group’s actual spending will be measured against. If your spending is below the benchmark, you’ve generated savings. If it’s above, you’ve generated losses.
Setting this benchmark is a crucial analytical task. It’s not just an arbitrary number; it’s a meticulously calculated forecast typically determined in one of two ways:
- Historical Benchmarking: Based on the provider group’s own spending in previous years, trended forward to account for inflation and other factors. This rewards organizations that were already efficient, but can be challenging for groups that started with high costs.
- Regional/Market-Based Benchmarking: Based on the average cost of care in a specific geographic market. This creates a more level playing field but may not fully account for a specific provider group’s unique patient population.
The Critical Role of Risk Adjustment: A key analytical layer here is risk adjustment. This process uses diagnostic and demographic data to adjust the benchmark up or down to fairly reflect the health status (or “acuity”) of the patient population. Without it, a provider group caring for sicker-than-average patients would be unfairly penalized. Mastering risk adjustment analytics is fundamental to ensuring the financial target is fair and achievable.
2. Patient Attribution: Who Are We Responsible For?
Before you can measure cost and quality, you must first define the patient population. Patient Attribution is the analytical process of assigning each patient to a specific provider group for performance measurement and accountability.
While there are several methodologies, the most common approach for primary care-focused models is based on plurality of care. In simple terms, claims data is analyzed to see which primary care provider a patient visited most often during a specific performance year. That patient is then “attributed” to that provider’s group.
This isn’t just an administrative task. It requires sophisticated analysis of claims data to track visits and apply the attribution logic correctly. Errors or shifts in attribution can have a significant downstream impact on everything from the benchmark calculation to the final performance results.
3. The Quality Gates: The Price of Admission for Savings
Generating savings is only half the battle. The core principle of VBC is that cost reduction cannot come at the expense of patient care. This is where quality performance comes in.
In nearly every shared savings model, provider groups must meet a minimum performance threshold on a set of quality measures to be eligible for any portion of the savings they generated. Think of it as a “quality gate”: if you don’t pass through it, the savings disappear.
These metrics often include a mix of:
- Patient experience scores.
- Preventive screening rates (e.g., cancer screenings, vaccinations).
- Chronic disease management outcomes (e.g., blood pressure or diabetes control).
This introduces another layer of analytical complexity. It requires organizations to capture, validate, and report on a completely different stream of data and successfully integrate the results with the financial outcomes.
4. The Reconciliation: Bringing It All Together
After the performance year is over, the final accounting—or reconciliation—takes place. This is where the data from all the other pillars comes together to calculate the final payment. The process generally follows these steps:
- Calculate Gross Savings/Losses: The organization’s actual total expenditures for its attributed population are subtracted from the final risk-adjusted benchmark.
- Pass the Quality Gate: The organization’s performance on the required quality measures is assessed. If it meets or exceeds the minimum threshold, the process continues. If not, they are ineligible for savings.
- Apply the Sharing Rate: The gross savings are multiplied by a pre-negotiated “sharing rate.” For example, in a 50/50 split, the provider group is eligible for 50% of the total savings.
- Determine Final Payment: The result of this calculation is the final net shared savings payment that the provider group receives.
To make this clear, let’s visualize the reconciliation process. Imagine a waterfall chart that starts with the benchmark, shows the reduction from actual spending, and then applies the various rates and adjustments to arrive at the final payout
Conclusion: A Model Powered by Analytics
The Shared Savings model is far more than a financial contract; it’s a sophisticated analytical framework. Success requires a deep, data-driven understanding of how benchmarks are set, how patients are attributed, how quality is measured, and how the final numbers are reconciled.
Mastering the data behind each of these pillars is the key to unlocking the full potential of VBC, turning a complex model into a powerful engine for improving patient outcomes and achieving financial sustainability.