Leaving It to Chance: The Effects of Random Variation in Shared Savings Arrangements

Shared savings arrangements are designed to financially reward provider groups that reduce healthcare spending through improved care coordination. A major concern with these arrangements is that annual changes in spending are subject to a variety of random factors that are unrelated to care coordination efforts. As a result, resources can be misallocated if providers who are unsuccessful at controlling spending are inappropriately rewarded and providers who are successful are inappropriately denied rewards. This paper provides a systematic analysis of the role of random variation using a general statistical model based on shared savings arrangements that are currently evolving in the public and private sectors. The model focuses specifically on the variance of the average savings rate (ASR), which is the quantity used to determine whether and by how much a provider group will be rewarded. Variance in the ASR is a major driver of the probabilities of Type I error (i.e., inappropriately rewarding providers) and Type II error (i.e., inappropriately failing to reward providers), which can lead to major resource misallocations. We find that the probabilities of Type I and Type II errors associated with common approaches to savings measurement can be quite high, often exceeding 10 or 25 %, respectively. We also find that the likelihood of both types of errors can be substantially reduced through careful planning and design of savings measurement schemes before payers and providers enter into shared savings agreements.