Types of Financial Risks in Healthcare

Healthcare organizations face many types of financial risks. These include tight liquidity and being fully drawn on credit facilities, as well as declining reimbursement rates from payers.

This study examines contract terms that incentivize healthcare providers to take on financial risk. Specifically, we analyze contracts that are characterized by cost caps and the allocation of financial risk to hospitals.

Costs

Financial risks in healthcare are a significant challenge for health care organizations. Rising costs can affect profitability, erode cash flow, and threaten the sustainability of the organization. These risks can result from a variety of causes, including supply cost increases, labor shortages, and increasing demand for healthcare services. To mitigate these risks, healthcare organizations must establish what could happen, how likely it is to occur, and how severe the impact might be.

Survey measures of financial burden – material difficulty paying for medical care and worry about affording healthcare – are associated with less utilization of primary, urgent, and specialty care in the six months following the survey. These effects are more pronounced for worry than for material difficulties paying for medical care.

In systems with a purchaser-provider split, purchasers and providers negotiate about the allocation of financial risk in contracts. We find that contract terms governing financial risk for hospitals vary widely, and a hospital’s market power affects its ability to obtain favorable contracts. Insurers’ purchasing policies and negotiation skills also influence the allocation of risk between insurers and hospitals.

Revenue

Healthcare organizations have a complex revenue cycle that begins when patients schedule appointments or hospital visits and ends when the providers receive complete payment from the patient or their insurers. This process is prone to errors and delays, including underpayments from payers or uncollectible balances due to patients’ inability to pay. In addition, the COVID-19 pandemic has exacerbated these risks by limiting access to capital and reducing reimbursement rates.

Our analysis finds that the allocation of financial risk in contracts between hospitals and insurance companies is affected by the level of market power between the contracting parties. This result is consistent with the hypothesis that stronger market power may lead insurers to conclude more costly contracts in order to reduce uncertainty and create more cooperative relationships with hospitals.

Another important factor is the degree of hospital specialization. More specialized hospitals are more likely to negotiate contracts that allocate less financial risk, perhaps because they treat a more stable population of patients. In addition, they can benefit from the economies of scale that come with specialized services.

Reimbursement

Healthcare providers face many financial risks, including a gap between cost and reimbursement. This gap is exacerbated by rising inflation and insurer payment delays. This is a significant challenge for the industry and requires new financing mechanisms.

One approach to addressing these challenges is leveraging value-based reimbursement (VBR). VBR involves paying providers a fixed price for each episode of care or procedure, rather than per service or per patient. It can reduce costs by shifting them from higher-cost procedures to lower-cost ones. However, implementing VBR can be complicated by changes in payer contracts and policies.

In addition, a VBR approach can help reduce hospital bad debt by promoting consumer self-pay. This is especially important in regions with high rates of Medicaid enrollment. However, this strategy may have unintended consequences, such as reducing the amount of time patients receive care. It can also encourage a race to the bottom in pricing. For example, providers may use low prices to attract customers and avoid losing them to competitors. Moreover, it can undermine the trust of consumers and hurt patient health.

Licensing

The licensing of healthcare products and services is vital to maintaining patient safety. This process requires a thorough background check and an exam to ensure that the product or service is safe for use. This process can be time-consuming and costly, but it is essential to the health of patients. It is also a necessary step for facilities that want to protect themselves from lawsuits.

The scope of licensure in the United States is broader than in other countries, with even entry-level and mid-level health care workers subject to state boards’ licensing processes that carry higher fees and burdensome administrative requirements. These obstacles limit healthcare innovation and contribute to rising costs.

In addition, the licensure system provides a framework for making ethical decisions that are often faced by practitioners. From end-of-life care to resource allocation during emergencies, healthcare practitioners face complicated ethical dilemmas that require a clear understanding of the moral foundations and decision-making frameworks of their profession.

Human Resources

In the same way that any business must manage risk to keep its doors open, healthcare provides a unique set of risks. These risks include faulty equipment, malpractice lawsuits, and financial losses. Healthcare HR professionals must be adept at handling these issues, from the largest facility to the neighborhood dental office.

The human resources (HR) role in healthcare is complex and specialized. It involves recruiting, hiring, and retaining the right people to work in stressful jobs. It also requires compliance with privacy laws and other regulations. This is why HR leaders must be well-versed in the law and seek legal guidance.

National policies and budgetary restrictions at the macro-level may affect financial risk allocation in hospital-insurer contracts. For example, if a hospital is in financial distress, it will likely prefer less risky contract types, such as cost-per-case arrangements. However, this could be countered by the use of alternative payment models that incentivize value-based care and reduce costs. As a result, a hospital’s ability to attract patients depends on its market power and the flexibility of its contractual agreements with insurers.