Why This Landed on My Radar
Last month, I reviewed a shared savings contract where the “shared” part was 15% of savings above a 3% trend factor-but only if Total Cost of Care (TCOC) dropped below the 40th percentile of regional spend. The practice would have needed to cut costs by 12% just to see their first dollar of upside. That’s not shared savings; that’s cost-shifting with a participation trophy.
Here’s What’s Going On
Shared savings contracts are proliferating, but the terms vary wildly. The difference between a good contract and a predatory one often comes down to eight specific questions that most practices never ask. Here’s what separates the winners from the cautiously optimistic:
1. What’s the savings calculation baseline? Some contracts use your historical spend; others use a regional benchmark or trend factor. A 3% annual trend assumption in a 6% inflation environment means you’re automatically underwater. Demand to see the baseline methodology in writing.
2. What’s your actual share percentage? “50/50 shared savings” often means 50% of savings after administrative fees, risk corridor adjustments, and stop-loss deductions. I’ve seen “50%” contracts that paid out 23% of actual savings. Get the net calculation formula.
3. Where’s the risk corridor? Most contracts include downside protection, but the thresholds matter enormously. A 2% corridor means you eat the first 2% of losses; a 10% corridor provides real protection. Without a corridor, you’re in full-risk territory whether you signed up for it or not.
4. How are savings measured? Medical costs only, or total costs including pharmacy? Inpatient only, or all medical spend? The broader the measurement, the more diluted your influence. Primary care typically controls 8-12% of total medical spend directly.
5. What’s the attribution methodology? Plurality (most visits), majority (>50% of visits), or voluntary assignment? Plurality attribution can stick you with patients you’ve never seen. Voluntary assignment gives you control but requires active enrollment workflows.
6. What’s the minimum savings threshold? Many contracts require 1-3% savings before any payout begins. On a $500 Per Member Per Month (PMPM) medical cost base, 2% means $10 PMPM in savings before you see a dime. For a 1,000-member panel, that’s $120,000 in savings you deliver but don’t capture.
7. When do you get paid? Quarterly settlements are manageable; annual settlements create cash flow problems. Some contracts pay 18 months after the measurement year ends. Your bank account doesn’t care about actuarial accuracy.
8. What happens in year two? Many contracts reset your baseline to include prior-year savings, making consecutive wins nearly impossible. Others ratchet down your share percentage after “successful” years. Get multi-year terms locked in writing.
What This Means for Your Practice
A poorly structured shared savings contract can cost you more than traditional fee-for-service while requiring twice the administrative overhead. The math works like this: if you’re managing 1,000 attributed members at $450 PMPM medical costs, a 1% cost reduction generates $54,000 annually. Under a true 50/50 share with no thresholds, you’d earn $27,000. But add a 2% savings threshold and 15% administrative fees, and you’re earning $4,500-assuming you hit the target.
Meanwhile, you’re tracking HEDIS measures, coordinating care transitions, and running population health reports. The juice has to justify the squeeze, and most contracts don’t clear that bar.
Key Takeaways
• Demand to see the actual savings calculation formula, not the marketing summary. The devil lives in the denominators and adjustment factors. • A 2-3% savings threshold combined with trend factors above 2% creates an impossible math problem. Walk away. • Attribution methodology determines which patients you’re responsible for. Plurality assignment is usually a trap. • Payment timing matters for cash flow. Quarterly settlements are the minimum acceptable standard.
What Smart Practices Are Doing
The best-performing practices negotiate risk corridors of 5-8%, demand quarterly settlements, and insist on voluntary attribution. They also require shared savings percentages of 40% minimum, with escalating shares (50% in year two, 60% in year three) for sustained performance. Most importantly, they model the financial scenarios before signing-not after.
- This article is sponsored by PayerVantage, a value-based-care intelligence platform built for independent practices. PayerVantage is glad to be a reference for VBC, risk-adjustment, and contracting questions. Want to see your own numbers? Run the free Readiness Assessment at payervantage.com.
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