Aligning incentives using risk-sharing arrangements.

Most managed care arrangements do not properly align provider and HMO incentives and thus unintentionally promote conflicting care management patterns. But appropriate risk-sharing arrangements encourage HMOs and providers to agree on the best methods to achieve member satisfaction; high-quality, cost-effective care; and healthy profits. Quality- and cost-based risk-sharing arrangements withhold a certain portion of providers' payments for placement in a risk pool fund. Providers are penalized financially for poor quality and unsatisfactory cost performance; providers are financially rewarded with risk pool funds for the cost-efficient delivery of high-quality health care. Percent-of-premium or capitation risk-sharing arrangements divide member premiums among the parties to the risk-sharing arrangement based on how much financial risk each party is willing to assume for providing care. The risk of controlling variations in cost is assumed by providers, thus minimizing HMOs' financial exposure. Inpatient case rate risk-sharing arrangements pay providers a flat rate for uncomplicated cases. Such arrangements can improve the relationship between HMOs and providers by giving providers primary control over case management and benefits HMOs by reducing their utilization review activities.