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40 Cards in this Set

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Part Two – Reimbursing The Providers

(Also includes material from SN 601 Ch. 1 and 4 and SN 105)

Considerations in Developing a Capitation Contract With Providers
Form of the Capitation Reimbursement
Other Factors
Scope of Covered Services; Carve-Outs
Size of Patient Base
Form of the Capitation Reimbursement
 Standard: PMPM
 Varying by Age and Sex of Enrollees
The blended capitation rate means the average capitation rate that the physician is essentially receiving per member.
 Varying By Other Factors
 health of the patients
 geog location
 practice type

 per subscriber per month
 Capitation as a % of Premium
 cashflows are hard to predict
 premium shortfall gets passed onto the physicians.
 e.g. due to poor underwriting.

 Full Risk Capitation (Referral Risk):
 favored by large physician groups
Other Factors
 Exclusive Business rewards
 Copay levels (Benefit Design)
 should only shift costs, not change doctor’s income
 The Scope of Covered Services (see next section)
 The doctor’s patient base (see next section)
Scope of Covered Services; Carve-Outs
 A PCP’s capitation should include all services the PCP will deliver himself.
 Be careful about including the following services in a PCP’s capitation contract:
 services the PCP might not perform himself:
 surgeries, ancillary diagnostics
 services the PCP usually refers out
 prescriptions
 immunizations; obstetrics (cost is out of the control of the PCP)

 Carve-outs are used for services that the physician doesn’t have discretionary control over. They are paid Ffs.
 Carved out services will have higher utilization
Size of Patient Base
 easy to know for PCP’s in HMO plans
 difficult to estimate for PCP’s in POS plans
 difficult to estimate for Hospitals and Specialists

Advice for Making the Scope of Services and the Patient Base Easy to Identify:
 Contract with Single-Specialty groups
 Specialty-specific IPA’s or DM organizations
 use self-contained ancillary providers
 Apply the capitation to a specific region
 Restrict PCPs’ choices of Specialists to refer to
 Hire a Specialty Network Manager
Converting from Fee-for-Service to Capitation
 Utilization will drop after the switch
  must enforce UM before switching
Advantages Of Capitation To The MCO
 encourages Utilz Control
 providers’ incentives match HMO’s
 Costs predictable
 easy & cheap to administer
 Physicians can't cheat by upcoding.
Disadvantages Of Capitation To The MCO
 Disliked by physicians
 hard for MCO to recruit new doctors
 encourages doctors to deny care (underutilize)
 poor societal perception
 exposure to lawsuits
 “Significant Financial Risk” laws
 UM can’t be used (b/c costs are fixed)
 The MCO must direct patients to the capitated providers
 Difficult to compute an appropriate capitation rate
 Difficult to compute age/sex/location variations
 Providers may fail to manage their risk and go bankrupt.
 Nondiscretionary costs must be carved out
 Capitation is difficult to use in POS and PPO plans (double payment)
Advantages Of Capitation To The Providers
 stable cash flow
 Providers who are good case managers are favored.
Disadvantages / Risks Of Capitation To The Providers

Disadvantages / Risks Of Capitation To The Providers

 punishes the doctor for good service.
 Doctors with very few patients have volatile experience (Law of Small Numbers).

Solutions to the Problem of Small Numbers:
 Capitate Pools of Doctors instead of individually.
 Provide stop-loss insurance to the capitated doctors
 Pay Ffs until the physician has more than 50 patients
 Pay the greater of capitation and Ffs
 high utilization risk
 catastrophic case risk
 referral risk (under Full Risk Capitation)
 Misestimation Of: (in evaluating a capitation rate)
 # of services, cost per service
 administrative costs
 family size (in a Per-Subscriber-per-Month contract)
 demographics
 Solution: Use capitations that vary by the age and sex.
 Misuse of funds
 Misunderstanding the risk
 Failure by MCO
 to meet enrollment objectives
 to penetrate employer groups  Leads to antiselection.

Ways providers can manage (reduce) their Capitation Risk
See SN 601 Ch. 2, last list, entitled “Practice Management”.
Forms of the Fee-For-Service Reimbursement
 Straight Ffs (“Straight Charges”, “Billed Charges”) $$$$
 Discounted Ffs (“Discount from Billed Charges”) $$$
 UCR (aka Fee Maximums) $$
 Discount from UCR (“Fee Allowance”) $
 Usual = what the doctor would normally charge
 Customary = prevailing charges

Determination of the UCR Amount:
 Collect UCR data from the region
 Set “UCR Maximum” equal the 60th percentile
 Claims < UCR Maximum are paid in full.

Problem with UCR:
 Physicians raise their normal fees to the UCR.

 Performance-Based Fee-for-Service:
Fees vary by:
 the individual PCP's performance, or
 plan performance.
Two types of Performance-Based Ffs:
Budgeted Ffs
 maximum budget in each service category
 Ffs pmts reduced after budget is reached.
 Complicated to administer.

Sliding Scale Individual Fee Allowances
 Doctor’s reimbursement ranges from 70%UCR to 110%UCR
 More unnecessary services he performs, the lower the fees.
Special Legal Requirements for Billing in a Fee-for-service system
 coinsurance % must be applied to the actual reimbursement.
 No Balance-Billing

For MCOs
Advantages Of Ffs To The MCO
 Doctors are happy
 Easy to negotiate, as opposed to a capitation rate.

Disadvantages Of Ffs To The MCO
 Doctors negate discounts by raising fees.
 Manipulation by
 churning
 upcoding
 unbundling

Solutions by MCO:
 Tight UM
 watch for anomalies in physicians’ charges
 automated "rebundling" software
 peer review
 penalize providers who bill incorrectly
 more structured Ffs (UCR or performance-based)
For Providers
Advantages Of Ffs To The Providers
 Easy to understand
 Much less financial risk than capitation
 Rewarded for good service

Disadvantages / Risks Of Ffs Or Indemnity Plans To The Providers
 Bad debt (patient fees, insurance claim hassle)
 Cashflows not steady
 MCO could fail to bring in enough patients.
 If patient can switch doctors, then treatment is not continuous.
Reasons Why Combinations of Forms of Reimbursement Are Used Together, Rather Than Just One Method:
 Broad geog. area
 Merging MCO’s
 Different products
 Different services
 Each type of service has a relative value (based on ratios of UCR prices)
 payment = (monetary multiplier) * RVS

 only multiplier is negotiated (easy billing & payment)
 prevents unscheduled fee hikes

 Underlying UCR prices must be accurate
 procedural/cognitive imbalance
 Solution: RBRVS.
 reflects Time, Training, etc. needed to provide care
 Services the Hospital has no control over should be carved out of Per Diem (e.g. intensive care; maternity)

Problem with Per Diem
 Gives hospitals an incentive to keep patients there longer.

 Reimburse 2nd and subsequent days at a lower rate than 1st day
 use Sliding Scale per diem payments based on volume
 Use Global Fees or Capitation instead
 Use risk/bonus or risk-sharing arrangements
Scope of the Global Fee could be:
 one provider; one procedure
 a whole episode over a time period (episode-based)
 multiple providers (bundled; package pricing)
A hybrid of Capitation and Fee-for-service.
Similarities to Capitation
 hospital takes on risk
 rewarded if resource use is low.
 Fixed fee per episode
 stabilizes costs to MCO

Similarities to Ffs
 The more services performed, the more the reimbursement
Determination of the Global Fee for an episode
 Gov't publications specify different DRG groups
 consider what services are needed, and with what probabilities.
 If too much variability, then split the DRG into more specific DRG’s.
Advantages of Global Fees to the MCO:
 Administration and billing is simpler than per diem
 protects against unbundling (but not churning; also, hospital can falsify its DRG’s)
 A compromise between Capitation and Ffs
 gives hospital incentive to manage its utilization.
 Useful for MCO's with poor UM
 Including new MCO's.
 Good for POS plans, where pure capitation fails.
Disadvantages of Global Fees to the MCO:
 Providers can use “churning” or falsify their DRG coding on their bills
 Case Mix risk: If higher-cost DRG’s occur too often, total cost will exceed MCO’s expectations.
Advantages of Global Fees to the Hospital or Provider:
Disadvantages of Global Fees to the Hospital or Provider:
Advantages of Global Fees to the Hospital or Provider:
 Similar to Capitation or to Ffs, whichever the provider likes best

Disadvantages of Global Fees to the Hospital or Provider:
 Length-of-Stay risk
 Severity Mix risk (complicated episodes of a particular DRG)
 Trend risk (fixed global fee doesn’t adjust for inflation)
 Unforeseen administrative costs
 negotiation risk – maybe the DRG’s global fee was improperly evaluated

Solutions Hospitals can Use
 Control length of stay
 Use prospective, concurrent, and retrospective utilization management
 Use rounding
 Instead of inpatient procedures, use alternative settings: Outpatient, nursing homes, in-home care, etc.
Contact Capitation, and other modern forms of provider reimbursement, are combined with my notes to SN 105..
 MCO pays the hospital a monthly fixed amount per bed
 payment processing is easy.
 Similar to capitation.
 MCO hires a specialist at a fixed rate (adjusted periodically)
 Useful if network is short in that type of specialist.
 Withholds
 Bonus Pools (aka Profit Shares)
 Risk-Sharing
 Capitation Pools for Specialist and Hospital Services
 PCP’s have a monetary incentive to limit referrals
 SCP’s have a monetary inventive to prevent hospitalizations

The Risk-Sharing Arrangement
 5 expense pools, each with its own target PMPM cost
 The risk-sharing agreement specifies how each pool’s surplus or deficit is shared among different classes of providers. For example:
Hospital pool: Surplus/deficit split 50% hospital / 25% SCP’s / 25% PCP’s

 Each PCP’s individual utilization could be considered
 The Hospital pool surplus might not be paid out completely
 May or may not include Pharmacy (since controversial)
Warnings About Risk/Reward Systems
 The following types of services should not be part of a risk/incentive program. That is, doctors should not be at risk for the following services:
 Capitated laboratory contracts
 services the PCP has no control over the cost of:
 obstetrics, immunizations, possibly drugs
 patients known to have chronic diseases

 scope of services must be clearly defined
 Problems with Risk/Incentive programs based on drug costs
 drug costs volatile
 only large groups can manage drug use
 no evidence that this lowers drug costs.
Regulation of Physician Incentive Programs (PIP’s)
 Significant Financial Risk laws
 Stop-loss protection req’d.
 Pooling must be used
 PIP’s disclosed to patients
 Any conflicts of interests disclosed.
 Similar laws govern capitation arrangements.
 Prepaid Risk (aka Service Risk)
 by capitated providers.
 “Opportunity cost” if the doctor’s capitated patients fill up his whole schedule.
 Financial Risk (Business risk; Administrative risk)
 voluntary risk-sharing
 default risk
 financial instability of the MCO (“affiliate risk”)
 Analytical Risk
 Underpricing/Overpricing
 Misestimation of expenses
 Includes random risks like catastrophes, epidemics, etc.
Individual Risk Vs. Pooled Risk
 Physicians with good experience prefer Individual risk/reward
 Physicians with poor (high-cost) experience prefer to be pooled.
Individual Risk Programs
Adv and disadv
 easy to track individuals (Accountability)

 "Law of Small Numbers" (luck has huge impact)
 PCP’s blame bad experience on bad luck
 not appropriate for Hospitals (costs too volatile)
 PCP’s have incentive to deny care
 or make their patients go out of network.
Pooled Risk Programs
Adv and disadv
 reduces volatility

 The impact of any individual PCP is hard to detect
 doesn’t elicit behavior change
 hard for MCO to give feedback.
 physicians with good experience resent having to subsidize poor physicians

Moral: The Pool must be large enough to have statistical integrity, but small enough to see individual doctors’ results.
 Straight Ffs
 Discounted Ffs
 Sliding Scale Discount based on volume
 Discount from UCR

Relative Value Scales

Performance-Based Ffs (the most structured type of Ffs)

Ffs-Capitation Hybrids
 Per Diem
 Sliding Scale Per Diem
 Higher First-day payment
 Global Fees (DRG’s)
 Contact Capitation (SCP’s only)

 Straight capitation
 with carve-outs
 adjusted for age/sex
 PMPM or PSPM or As A Percent Of HMO’s Revenue
 Salary (staff model HMO’s only)

Risk/Incentive Programs
 Withholds
 Bonus Pools
 Risk-Sharing
 Capitated Pools for Nonprimary Services (PCP’s only)

Handling Capitation in POS Plans
 Method 1. Don't reduce capitation rates at all.
 Double-paying
 PCP has incentive to push sick patients o-o-n.

 Method 2. Reduce capitation rates given to physicians
 Puts physician at greater Service Risk
 Inequitable
 Law of Small Numbers

 Method 3. Retrospectively adjust the payment at the end of each month
 viable and equitable

 Default risk: Hard for MCO to collect refund at end of month

 Method 4. Only use capitation for patients in the pure HMO plans; pay providers Ffs for services rendered to patients who are in the POS plan.
 viable

 confusing to physicians.
 Ffs is more expensive than capitation.

 Method 5. Use Global Fees instead. Best.
Handling Risk/Incentive Programs in POS plans
 Trade-Off:
 PCP’s have no control over o-o-n costs
 But if PCP’s not held responsible for them, they will push sick patients o-o-n

 Solutions:
 spread out risk/reward among Pools of Doctors
 base incentives on nonutilization factors such as
 quality
 patient satisfaction
 efficiency and e-commerce use
 compliance.
Handling Performance-based Fee-for-Service in POS plans
 The problems are similar to those of Risk/Incentive programs.
Summary: Recommendations for Reimbursement in a POS plan:
 Use Standard Fee-for-Service (non-performance-based)
 Use Global Fees
 Use Capitation Method #3 or #4.
 Base risk-sharing bonuses on factors other than utilization.