A risk contract creates a relationship between an insurer and a provider that expands the financial relationship beyond the traditional transactional limits. A risk contract makes a Primary Care Provider (PCP) responsible for all other costs incurred in the care of health plan members assigned or attributed to the PCP’s panel. Thus, in addition to primary care-related expenses, the PCP must oversee hospital, emergency room, pharmacy and specialist costs. The PCP also is often responsible for supporting risk adjustment functions to ensure the revenue available from the sponsor is matched to the expected member expenses.
These contracts involve “risk” chiefly because of the underlying uncertainty of their financial soundness. In many risk contracts, in the circumstance that expense exceeds revenue, the provider organization (not the insurer) will bear financial responsibility for overruns. This shift of risk from insurer to provider is known as “risk transfer.” However, when medical costs are lower than revenue, PCPs can earn substantial incentives.
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