Managed Care Contracting -- Determining Who to Contract with and the Amount of Risk to Assume

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This is the second article in the Managed Care Contracting "Signature Series" by Managed Care Resources, Inc. -- articles on topics in managed care written by experts in the field. The authors of this article are Ira H. Rosenberg and Thomas E. Richmond.

In this article, we will present an overview of the process every provider should go through when making the decision to initially contract or to renew a contract with one or more managed care payers (MCP). This article will also help providers to choose with which managed care programs to participate, and to determine the level of financial risk the provider organization should accept in its arrangement with MCPs.

Given the changing climate in the healthcare industry and the increasing pressures created by managed care, providers are increasingly being approached to contract with a number of different healthcare payers, each presenting itself as an effective managed care organization. In many cases, managed care is soliciting ever-increasing amounts of discounts for the services provided to providers, and are also trying to transfer the financial risk through various new compensation arrangements.

MCPs are becoming increasingly sophisticated in their techniques and approaches to contracting with providers. As a consequence, providers need to understand the risks and rewards that are inherent in these new risk arrangements, and the alternatives and strategies that are available to providers to optimize their position in this evolving health care environment.

Providers need to do their homework before beginning negotiations with MCPs. This research will allow the provider to compare and evaluate the different organizations, using specific parameters that have been developed based on the provider's specific situation. Data to evaluate includes:

• HMO's market position-assess the current position and request information about its forecasted growth.
• MCPs major employer groups--review current list.
• Population being served--understand the age and sex mix, and any special risk groups within the population.
• Gross revenues of the payer-compare on a per member per month basis.
• Plan's performance--compare from last year to this year, assessing changes (including but not limited to) in:
  • premium levels,
  • new enrollments over the 12 month period,
  • changes in the provider network, including the number of physicians currently in the network (primary care vs. specialists),
  • changes in the medical loss ratio
  • determination of current NCQA status
  • key statistical information, including days per 1000 members of hospital in-patient stay, hospital outpatient procedures or services, ER visits, PCP office encounters, etc.
  • profit and/or loss.
• HMO's growth plan--determine potential for the next twelve months, and request information regarding such areas as:
  • forecast of membership growth.
  • plans for any new products.
  • anticipated changes in premium requirements.
  • proposed new benefit plans.
  • network changes.
  • Standard procedures and the providers' rights in areas of disputes -- determine who ultimately has the responsibility to accept or to choose a course of treatment for a given patient.

Much of the information discussed above can be obtained directly from the HMO by making appropriate requests from the provider relations or network development staff person who is dealing with your organization. However, other sources are also available, including the annual financial reports for HMO's that are collected by the Department of Insurance in many states. Most states will send this information to you upon request.

In addition, many employers are requiring managed care organizations to seek accreditation from NCQA. Providers should use the NCQA information available through the Internet to evaluate HMO's, both those with which you are currently affiliated, as well as those under consideration. This information can indicate the strengths and weaknesses of the current operation, and is fast becoming the mandatory stamp of approval for HMOs.

Once the decision has been made to contract with an MCP, your next decision should be whether your organization should accept risk or capitation reimbursement. The primary concern here is that those who pay premiums into managed care organizations (usually employers) are increasingly forcing MCPs into this kind of reimbursement by demanding lower premiums. HMO's and other types of managed care organizations are in the business of trying to manage risk through a variety of arrangements. Most MCP executives believe risk management is best accomplished by having all subcontractors share in the overall financial risk that is inherent when providing prepaid medial care to an enrolled population.

The most common approach to risk sharing is capitation. Capitation is a mechanism that transfers agreed-upon financial responsibilities from the MCP to a provider group, thus making financial outcomes more predictable. However, when risk is transferred from one party, another party assumes the risk. Simply stated, someone's advantage becomes someone else's disadvantage.

The following is a brief outline of some of the advantages and disadvantages of capitation arrangements to specific parties.

• Capitator's (Payer's) Advantages:
  • Risk is shared with second party, thus minimizing unexpected valuations and costs.
  • Opportunity is provided to involve providers in risk assumption process.
  • Opportunity is provided for an incentive-based approach to managing providers (i.e. providers start to manage themselves).

• Capitator's Disadvantages:
  • Some control over providers is lost since data collection is harder.
  • Providers unable to control consumption may become dissatisfied.
  • Negotiations and confrontations with dissatisfied providers may be difficult, with the potential of even losing contracts.
  • Quality appropriateness and effectiveness of care must continue to be monitored by the capitator.
  • Capitators must stand behind risk in most states, thus never fully transferring 100% of the risk.

• Capitated (Provider's) Advantages:
  • Opportunities are created to preserve income through better management of services delivered.
  • Revenue flow is stabilized.
  • Links between patients and provider are stabilized.
  • Opportunities are created for exclusive contracting and/or improved potential to preserve patient base.
  • Providers are assisted in linking the cost of care to their practice patterns, thus better understanding how to manage care efficiently.

• Capitated Disadvantages:
  • Additional technical skills are required, which are not typically available in a provider group. Serious financial difficulties can arise when services are not appropriately controlled. There is the potential for the capitator to take advantage of the provider by including more and more services without appropriate increase in capitation. Without careful analysis, a contract often sounds better than it really is.
  • A capital base for risk reserve is required to protect providers from statistical fluctuations.
  • A different means of funds distribution among the providers of their capitated populations is needed.
  • The providers are placed at financial risk, thus requiring them to set aside funds for potential losses (reserves).
  • The potential is created for additional administrative cost and the need for additional personnel or support services.

In addition to these advantages and disadvantages that each potential provider must evaluate in making its decision regarding risk, there are also operational issues that must be considered to determine the level of risk that is acceptable to each individual:

• Make sure that the number of members being enrolled through the capitation arrangement is sufficiently large that the costs can be statistically predictable. This is called "the law of large numbers".
• Make sure that in all situations the reinsurance and stop loss provisions regarding the amount to be expended on any one case is suitable to protect the physician from that risk.
• Make sure that the scope of services required under the contract is well defined and within the capabilities of the provider.
• Make sure that the rate of claims used to calculate the capitation rate has been historically predictable and stable.
• Make sure that the provider has the wherewithal and resources to actually have an impact on the flow of patients and the services that they receive. This is one of the keys to a successful arrangement, and it is to the advantage of both parties that this be so.

The different types of capitation arrangements are listed below:

• Primary care capitation
• Global medical group capitation
• Integrated delivery system capitation
• Hospital capitation
• Specialty capitation
• Individual service capitation

Primary care capitation requires a primary care assignment where members choose a PCP or where one is assigned to them. Capitation implies that a specific set of services is paid on a fixed monthly fee per member. Sometimes the capitation risk is adjusted to recognize varying components in consumption patterns or cost levels, i.e. age/sex adjustments. Many times primary care capitation is also accompanied by various incentive risk pools, where physicians can share in savings that accrue for reduced utilization of specialty services and hospital care.

Global medical group capitation is an extension of primary care capitation, but usually covers all physician services. Thus, a patient chooses a medical group and the services covered include physicians specialty care as well. This approach works well for medical groups, medical specialty clinics or physician care clinics. This form of reimbursement can also be used for IPA's, and in some "medical groups without walls". A key component of how successful these programs are within each respective provider group is predicated on the various means of distribution of the cap revenue to the individual members of the medical organization. In most cases, IPA's will tend to reimburse their existing physicians on a fee-for-service basis, and do not have appropriate incentives set up to effect the kinds of medical care changes that are necessary for capitation to be truly successful within these types of organizations.

Integrated delivery system capitation is a further extension of the capitation approach. This is the ultimate in risk transfer for a health plan, and almost all services are capitated, thus passing all the financial risk from the health plan to the provider. This approach can be very successful for those provider groups that have the internal structure and the financial strength to assume this level of risk. The global capitation concept as described here is growing in popularity with the advent of newer types of organizations such as PHOs and IDSs.

Hospital capitation is relatively new and is increasingly popular. Historically, hospitals have been compensated on either per diem or DRG rates, and in some cases, discounted fee-for-service for specific services. However, with the changing environment, hospitals have looked more favorably upon accepting capitation in many markets. Typically, the facilities tend to try to lock in their current revenue levels and try to achieve financial improvement by attacking utilization patterns within the institution.

Specialty capitation is also increasing in popularity. These arrangements are sometimes called "carveout" capitations. Common examples include mental health, radiology, pathology, oncology, and cardiovascular services. However, one should be sure when considering these types of arrangements that the number of patients covered is large enough to spread the risk over a reasonably sized population.

In summary, it is very important to investigate and understand the nature of the organizations with which you contract. Various managed care programs deliver a wide range of financial strength, philosophies of dealing with providers, and level of customer service that your patients can expect. By keeping all of these considerations in mind, you will be able to effectively select those programs that fit best with the goals and objectives of your organization.

Finally, depending on the amount of risk you intend to accept, most providers should retain their own consultants and in some cases, actuaries, to help negotiate these arrangements with managed care organizations. Managed care organizations employee individuals to thoroughly analyze data and costs, to assure that they have minimized their risk. Providers must do the same or the negotiation may be one sided. Having an expert assist the provider group or institution in their negotiations can level the negotiating playing field. Individuals or smaller groups may want to come together to share that cost. But it is important that you obtain a complete understanding of the risk that you are to accept.

I hope that you will join us as we explore all of the elements of managed care contracting in the coming months. In addition, we are offering a "Signature Series" on "Medical Management Under Managed Care". We hope that the two series combined will lessen the mystery of managed care and help level the playing field between providers and payers.

Ira H. Rosenberg

President, Managed Care Resources, Inc.

The Managed Care Resources, Inc. team has over 150 years of combined experience in the development and implementation of managed care services. Please visit our home page to learn more about how we can assist you with your managed care needs. We also invite you to contact us with questions or comments.

www.mcres.com email: info@mcres.com