Healthcare finances: how the sausage gets made

“Show me the incentives, and I’ll show you the outcome.”

- Charlie Munger, Berkshire Hathaway

Nuanced and segmented

The recent cyber-attack on United Healthcare highlighted the intricate payment web across the healthcare industry. And while United Healthcare is rumored to have paid a $20 million ransom payment (a drop in the bucket for a corporation with a valuation of $436 billion on the New York Stock Exchange,) payment structures across healthcare are not only intricate, but highly nuanced.

It is common to hear complaints in the main-stream media from healthcare organizations and providers they do not paid enough” to provide services. But they rarely mention the financial incentives available beyond visit or procedure reimbursements - such as incentives for excellent consumer experience, great care outcomes, or driving specific drug utilization.

A range of revenue sources

When thinking strategically about doing business in the healthcare space, it is important to keep in mind the multiple types of revenue. Depending on the consumer segment served, the regulatory framework governing the type of health insurance, and the organization’s strategic partnerships, various combinations of revenue and financial incentives apply.

Transaction revenue: transaction revenue is earned with a one-time sale of goods or services

How it manifests in healthcare: fee-for-service provider payments by insurance carriers or the Federal government

Project revenue: a single payment for completion of a defined project

How it manifests in healthcare: bundled payment to a team of providers and facilities for a single episode of care, often used by insurance carriers to pay teams for treatment like total joint replacements

Recuring revenue: regular subscription payments for goods or services

How it manifests in healthcare: 1) health insurance premiums paid by consumers; 2) monthly capitation payments to provider groups by insurance companies for the cost of care for a defined population; 3) subscription fees in exchange for preferred or on-demand access to care like One Medical and Aim Health.

Outcomes based revenue: incentives for exceeding defined metrics

How it manifests in healthcare: substantial financial incentives in Medicare Advantage for bettering cost and patient experience benchmarks. In the fully insured market, provider financial incentives for bettering specified total cost of care benchmarks.

Marketplace revenue: payment for connecting consumers to products

How it manifests in healthcare: rebate payments by pharmaceutical corporations to insurance carriers based on the volume of specific drugs dispensed to the carrier’s insured consumers.

Show me the market segment and I’ll show you the revenue

Healthcare revenue streams vary by consumer segment. A waiting room full of patients may all have the same health condition, but the provider is likely to be paid differently for all of them. If it sounds confusing, that is because it is.

Let’s take a look at the revenue types and financial incentives in the two most highly regulated healthcare markets: Medicare Advantage and individual and small group Affordable Care Act(ACA) plans sold on Healthcare.gov.

Medicare Advantage revenue and financial incentives

A Medicare Advantage insurance carrier receives a monthly capitation payment from the Center for Medicare Services (CMS) as well as a monthly premium payment from the consumer. The CMS monthly capitation payment is adjusted based on local healthcare expense benchmarks. It is also adjusted based on the risk score of the consumer, which in turn is based on coding recorded by providers during visits.

Opportunity: If your company offers digital and/or engagement services that would encourage Medicare Advantage consumers to regularly see their doctor and thus improve risk coding, highlighting those services to insurance carriers, hospitals and providers could drive new business.

If the hospitals, providers and insurance carriers can manage costs during the year and reduce the total healthcare expense below a defined CMS benchmark based on fee-for-service Medicare, they can earn additional financial incentives. If their consumers provide positive experience ratings when surveyed by CMS, there is yet another bucket of financial incentives earned.

These incentives drive provider behavior. A recent study published in Health Affairs found primary care physicians working within a Medicare Advantage plan were 13% less expensive than those outside a Medicare Advantage plan, and at the same time achieved better patient health outcomes.

Opportunity: Medicare Advantage insurance carriers, hospitals and providers live and die by their consumer experience ratings. Consumers are human, and they don’t understand healthcare, so they are frequently frustrated. There is a significant opportunity to help consumers navigate the system in a more satisfying way. Navigation and engagement solutions are constantly sought by insurance companies.

Lastly, insurance carriers can earn further revenue in the form of rebates from pharmaceutical corporations based on utilization of select drugs. A number of pharmaceutical corporations have purchased insurance carriers to maximize this revenue stream. As an example, CVS purchased Aetna Medicare Advantage plans not long ago, no doubt as a vehicle to leverage the rebate revenue stream. It is reported that in 2023 CVS made $186.8 billion in pharmacy rebates.

Individual and small group revenue and financial incentives

Like Medicare Advantage, insurance carriers collect a monthly premium payment from consumers. That monthly premium is calculated based on the age if the consumer and the county they reside in, as well as assumed health needs based on demographic data.

Interestingly, there is no contract obligation for the consumer to remain insured throughout the year. Hence some consumers purchase ACA health insurance coverage, get the care they need early in the year and then drop their coverage. This creates a financial problem for insurance carriers since the calculated monthly premium was based on an assumed 12-month policy duration.

Opportunity: Insurance carriers in the individual market struggle with disenrollment of 10% to 15% during the plan year. Third party companies that can help stem this tide of disenrollments have an opportunity to sell services to insurance carriers in this market segment.

ACA health insurance plans are backed by both state reinsurance and risk adjustment programs. The reinsurance programs limit the total cost of healthcare expenses incurred by an insurance carrier to cover high-cost cases like a heart transplant that are relatively rare and very expensive. The risk adjustment program seeks to level the risk across insurance carriers within a state. If one carrier enrolls healthier, lower cost consumers and another enrolls consumers that require more expensive care, the first carrier makes a payment to the second after the plan year is over. These payments are calculated based on risk score data submitted to the state by the insurance carriers.

Opportunity: Annual risk adjustment payments between insurance carriers are often in the tens of millions of dollars. Since risk coding by providers is a key factor in the calculation, getting ACA insured consumers to see a provider each year is critical for accurate and complete risk coding. If your company offers services that would increase regular provider visits in this market, or more accurate and complete provider coding, highlighting those services to insurance carriers could drive new business.

Similar to Medicare Advantage, ACA insurance carriers earn further revenue in the form of rebates from pharmaceutical corporations based on utilization of select drugs. This is not an insignificant revenue stream. Insurance carriers with close ties or are owned by pharmaceutical corporations manage the drugs in their formulary to maximize these rebates.

What does this all mean?

Understanding the multiple health insurance revenue streams and how they vary by consumer segment is key to building a successful business strategy. Whether your company provides direct patient care or supports the industry as a vendor, these nuanced revenue models are key to delivering value and winning new business.

When you understand healthcare revenue streams and incentives, you gain insight into the decisions and priorities of healthcare leaders. Incorporating those insights into a business strategy is the first step toward long term growth and success.

2itive is a Portland based consultancy founded by Erik Goodfriend, offering a unique combination of market intelligence, knowledge of healthcare payment systems and creative business strategy insights. Feel free to contact us at info@2itive.com