The actuarial basis for financial risk in practice-based commissioning and implications to managing budgets

Abstract

The aim of this paper is to be both educational and thought provoking. The financial risk associated with acute budgets is an issue which affects everyone in primary care, and the calculation of the size of the financial risk is explained in an easy-to-understand way.The shift in financial responsibility toward practice-based commissioning (PBC) opens the need for a deeper understanding of the actuarial basis of financial risk in healthcare purchasing. This paper first presents the statistical basis for this risk and then looks at the implications to the day to day running of practice budgets, such as what type of reports will be needed, budgets for practices in a group and the issue of overspends.Poisson, Negative Binomial and Extreme Value distributions lie behind the expression of overall financial risk. Low volume and hence, high-risk events, tend to have a high cost, and the high cost further magnifies the underlying chance risk. Particular diagnoses associated with emergency admissions have an even higher risk profile due to the influence of meteorological and environmental factors. In a capitation-funded environment, where the budget is fixed, the financial risk is higher than acceptable for populations of less then 100 000 head. A large proportion of the overall budget needs to lie within a large regional risk pool in order to allow PBC to flourish within a financially stable environment. These conclusions will also apply to health maintenance organizations in the USA.