Fairleigh Dickinson Executive MBA Health Systems Management

1. Fairleigh DickinsonExecutive MBAHealth Systems Management Managed Care and Provider Reimbursement Robert Eidus MD, MBA

2. Today’s Objectives Brief Review of Prior Session Discussion of Readings Review of Health Benefits Plans Management of Health Care Expenditures through Provider Reimbursement Strategies Case Study-Oxford Health Plan Debate on Physician Accepting Risk Network Contracting Issues- Any Willing Provider, Profiling Other Legislative Issues and Managed Care Finish Contracting Issues

3. Key Points from Last Week • Managed Care in not the same as HMOs • Managed Care has been an evolution • US Healthcare system is a mixture of capitalism and governmental social support • Early managed care activities were in response to access • In the last 30 yrs., managed care activities have been in response to the need to control health care expenditures • Managed care strategies exist primarily a capitalistic, competitive sphere, where cost is king • Managed care must respond to customers’ demands to control cost- however • Society’s demands for access are inserted, primarily through legislation, regulation, and political pressure • Cost and access tend to be inversely proportional • Quality tends not to vary until one gets to the extremes of utilization

4. Appropriate Quotes • Democracy is the worst form of government, except all the rest: Winston Churchill • “I got upset because he was getting awfully close to my price”: Abraham Lincoln • “I am not a member of any organized political party. I’m a democrat.” Will Rogers • “A billion here, a billion there, pretty soon you are talking real money” Everett Dirkson • “100% of providers have patient populations that are sicker than average” Bob Eidus

5. Questions About Today’s Readings

6. Discussion About Your Health Benefits Plans • What type of plan do you have? • What is the cost to you? • What is the cost to the employer? • What are the major exclusions? • Any limited benefits? • How is your insurance company managing health care costs? • How is your employer managing health care costs?

7. Containing Health Care Costs Through Benefits Variations • Virtually all of benefits variations involves shifting costs from the payer to the insured (member, employee, patient) • There is good evidence that cost shifting reduces demand and thereby contains costs

8. Common Types of Cost Shifting • Deductible • Copay • Coinsurance • Restrictions • Limitations • Exclusions

9. Pros Easy to administer in a FFS environment Easy to understand Can be offered as an option Reduces utilization Cons Difficult for provider to know whether the patient has met the deductible May cause patients to defer necessary services or lump health expenditures into a single year Preventive services at risk Once the deductible is met, this deterrence goes away Deductibles A hallmark of virtually all indemnity plans. Also used in PPO and some POS. May be used for selective services in HMO benefits (e.g. infertility)

10. Pros Restores accountability between provider and patient on each episode of service Incentive does not extinguish unless out of pocket maximum is met Cons Complicated billing and statements Requires balance billing the patient Increased billing costs May reduce necessary services if the coinsurance is too high Can affect poor people more severely Co-insurance Examples: Used in virtually all indemnity policies, out-of network POS, and PPO

11. Pros Smaller hit to patients Easy for patients to understand Simplified billing and collection Cons If copay is too low, may not serve as a deterrent Provider is not accountable to patient for intensity of services Therefore, will not affect upcoding and excess utilization Copays Used in virtually all HMO and POS (in-network) products, including mental health, and pharmacy

12. Pros Fixes problem for payer Little administration needed except for appeals, grievances, and lawsuits May provide “political coverage” for employers, at the expense of the insurer Cons May engender consumer, political backlash Essentially converts people to uninsured for these services May appear to be unfair or arbitrary May stimulate legal or legislative action (mandated benefits) ExclusionsA service is not covered, independent of whether it is medically necessary Medicare (preventive health, Rx), experimental services, alternative medicine, services which are not accepted as standard, birth control pills (some employers)

13. Pros Good for services that are difficult to manage otherwise (e.g.- chiropractic care) Limits financial exposure Some providers like it, because it allows them to bill the patient when benefits are exhausted Cons Reduces desire to manage utilization May appear arbitrary to the public May spur regulatory or legislative action LimitationsA service is covered, however the coverage is limited (e.g. 20 visits, $1000, etc) Mental health, chiropractic care, physical therapy, acupuncture

14. Pros Allows funneling patients to selected providers May be used with deep discounting or capitation Can improve quality Cons Access and availability may be compromised May cause the payer to contract based only on cost If provider becomes overwhelmed with volume, quality may decrease RestrictionsA service is covered, but only with a specific provider, or when prior treatments have been tried first

15. Case Study: Oxford Health Plans • Ilona

16. Containing Costs Through Variations in Provider Contracting • Types of Provider Reimbursement • FFS • Discounted FFS: Percent of Charges • Discounted FFS: Fee schedule or fee max • Case rates • DRG • Capitation • Incentives

17. General Contracting Strategies • Like all industries: Volume drives pricing power in negotiations • A basic Deming Principle is to limit your suppliers • If price were the only issue, insurers would contract with very few providers with no redundancy • Balancing this is the need for access

18. Managed Care 101 • Total cost = Quantity times unit price • Sounds very simple • But: Managed health care is like squeezing a balloon- if you push on one side, it will bulge on the other • When one alters cost, one cannot assume that quantity will remain constant • Why?: Insurers do not determine utilization, patients and providers do

19. Fee for Service • Business as usual • Providers determine fees: Often based on what the market will bear • Providers depend on their own marketing power to drive volume • Consumers or Third Party Pays • Expenditures determined by cost and quantity • Example: Memorial Sloan Kettering

20. Pros Easy to administer on both sides Physician knows exactly how much s/he is giving up in return for access to participation. No reconciliation needed Cons Charges are arbitrary Charges can be changed. Therefore no real control over price control Inconsistent Payment between providers Discounted Fee For ServicePhysician Accepts Payment Based on Fixed Discount Off Charges Examples: Occasionally used to pay hospitals when it is difficult to contract with them any other way. Was occasionally used as a “reconciliation method” for physicians paid in other ways: i.e. a floor guarantee

21. Pros Reasonably easy to administer Uniform among providers Easy to upgrade fee schedule uniformly Easy for provider to understand percent of discount Cons Amount of discount will vary procedure to procedure Does not control utilization and may aggravate it Discounted FFS- Fee ScheduleProvider agrees to accept insurer fee schedule as a fee max. in return for network participation Examples: Many HMOs, Medicare, Medicaid (Non-HMO); most specialist reimbursement

22. Discussion • Article on Medicare fee cut-backs • Why is this happening? • What are the ramifications?

23. Case Rates • A fixed fee for a particular service or episode of illness, regardless of intensity, frequency, or location of services. • Commonly used for surgery • Good for services where other strategies for managing costs are not always effective (e.g. chiropractic care) • Payment may be re-distributed by the entity accepting the case rate • Controls frequency and intensity of services • Examples: ABMT, fracture care, centers of excellence, CABG • DRGs are actually a form of a case rate

24. Pros Transfers a fair amount of risk to the provider Spurs the provider to be more efficient May improve quality Only the best and most efficient may be capable of accepting case rates Cons Potential underutilization May have to create exceptions protocols Can restrict access Payer must be careful to screen quality and outcomes Case rates

25. DRG (Diagnostic Related Groups) • The most common method of paying hospitals for in-patient services • Created via TEFRA (tax equity and fiscal responsibility act) of 1982 • Hospitals paid a fixed amount, regardless of intensity of services provided within a hospitalization • Trim points (low and high) used to deal with exceptions

26. DRGs • Covers in-patient stays only • Factors in operating costs only • Capital requirements and Graduate Medical Education dealt with separately • Created effective internal utilization management capabilities (instead of occupancy, the critical measures became admission rate and length of stay) • Ambulatory surgery and emergency room care dealt with separately on a cost basis • Some regional variation in payment

27. Pros Created improved operating efficiency with shorter LOS UM management shifted internally Created ability for better comparisons Created a common set of nomenclature Made contracting easier Cons Did not address inefficiencies and inappropriate utilization in ambulatory care Cases were shifted from in-patient to outpatient, where reimbursement was cost-based Concerns about premature discharge DRGs

28. DRGs • Infrastructure to be successful if you are a hospital • Knowledge of what your true costs are • Effective UM, especially discharge planning • Capacity to take new admissions • Excellent coding capabilities • Cooperative medical staff

29. Per Diems • Alternatives to DRGs • Used by many MCOs • Fixed cost per day • Payment independent of intensity of service, although there is often a “front loaded payment • DRGs above and below the trim points are often compensated by per diems

30. Pros Fixed unit cost Control for um shifted to hospitals except for LOS Hospital not concerned about premature disch Rewards hospitals that are efficient Simple- no upcoding Cons Doesn’t control LOS Penalizes inefficient hospitals U/M done externally Per Diems

31. Infrastructure necessary for hospitals to be successful with per diems

32. Next Week • Reading: Kongsvelt, Chapter,17,26,15 • Physician Integration, Pharmaceutical Benefits Management, Quality Management • Case Study: Phycor, PPMCs- Tim • Case Study: Small Area Variation in Utilization- John Wennberg MD- Lia • Web-site review: doctorquality.com, ncqa.org

33. Debate and Discussion • Should physicians be at financial risk for the costs of health care rendered to their patients

34. Network Contracting Issues • Discounts are driven by the ability to drive business • Hospitals need to refuse the temptation to contract on the margin • Value to a hospital and a specialist is dependent on how exclusive the network is and how large the health plan is • Providers get concerned about being dependent on any one payer • Insurers need to balance cost and access

35. Any willing provider • Many states have enacted any will provider legislation • The laws basically state that any provider that meets the quality and credentialing standards of a health plan and is willing to agree to financial and other terms must be allowed to participate • Upheld in appelate courts • Recently unanimously upheld by the US Supreme Court

36. Discussion • Why can’t health plans chose their vendors just like any other business? • Why did the Supreme Court uphold these constitutionality of these laws?

37. Other Legislative and Regulatory Issues Regarding Managed Care • Gag rules • Termination cooling off periods • Prudent layperson laws • Mandated benefits • ABMT, drive through deliveries, wellness, mental health • Ability to sue health plans for malpractice • Provider significantly at risk

38. Physician Incentives • Purposes • Drive improved (lower) utilization • Drive improved quality • Provide buffers and protection for cost over-runs

39. Types of Incentives • Withholds • Bonuses • Quality Adjustments

40. Withholds • Can be based on individual or group performance • Usually is a combination of both. Usually maximizes at about 20% • Withholds cover cost over-runs in personal, specialty, hospital, and ER budgets • Because the ability to influence magnitude of the withhold return, this is primarily a re-insurance mechanism for the health plan, rather than an inducement for providers to be efficient • Similar to national health plans in Europe

41. Bonuses • Really no different than withholds

42. Quality Incentives • Usually based on preventive health services and patient satisfaction • Often considered a balance to financial incentives • Some disease specific measures • Tend to closely parallel HEDIS measures • Some evidence that they might influence behavior • Examples: Pt. sat., waiting time, mammography and immunization rates, beta blocker use after myocardial infarction

43. Mini Project for May 31 • Accordant Health Services • What is their disease management strategy • Why do you think it is successful? • How do you think they are compensated by insurers?

44. Capitation • Definition • Prospective payment to providers for a defined period of time to provide defined services to a defined population of insured people • Usually paid and calculated on a PMPM basis

45. Varying Levels of Risk • Personal services only • Professional services (PCP and Specialist Care) • Full Risk (Professional services plus acute hospital and ER care +/- Pharmacy +/- long term care

46. Levels of Risk • If you are only at risk for your own services, you basically are at risk for your time • Risk increases dramatically when one accepts risk for other’s services • Providers should only accept risk for those things they can truly control • Otherwise, we have turned doctors into insurance companies

47. How to Calculate the Capitation Rate • Determine the affected population • Determine what services are included • Determine what the projected utilization rate is (A) • Determine what an acceptable level of compensation is for the unit of service (B) • Multiply A*B and divide by 12 to get a PMPM

48. A Very Crude Capitation Determination • PCP cap • Females age 20-39 • Average number of visits per year (3.0) • Reasonable reimbursement per visit ($50) • Co-payment ($10) • Cap is $(50*3)- (10*3)/ 12 = $10PMPM • What is the cap rate if the copay is $20 per visit? (this is a trick question!)

49. Capitation Determination Refinement • Age/ Sex (common) • Case Mix (Number of diabetics/ hypertensives, etc. • Severity of Illness (Ambulatory Care Groupers) • Socioeconomic

50. Types of Capitation • PCP cap: Common • Specialty cap: Used in certain specialties; especially in those where utilization is difficult to control (chiropractic, PT) • Special circumstances (Lab) • Global cap (used with IDS, PHO) In these situations, physicians risks are usually limited