MARKET BEHAVIOR AND BEHAVIORAL MENTAL HEALTH MANAGED CARE

1. MARKET BEHAVIORAND BEHAVIORAL MENTAL HEALTH MANAGED CARE UNDERSTANDING MANAGED BEHAVIORAL HEALTH CARE: BUSINESS AND ORGANIZATIONAL PRINCIPLES

2. A DIAGRAMMATIC OVERVIEW MBHO Providers PAYER EMPLOYER David Katz Management + Utilization Review. Professional Services Contractee BASIC MANAGED BEHAVIORAL HEALTH CARE INTER-ORGANIZATIONAL RELATIONSHIPS

3. MANAGED BEHAVIORAL HEALTH CARE (MBHC) IN PROFILE PRINCIPLE FEATURES RAPID GROWTH: Since 1987 virtually every large and most mid-size American companies have come to rely on managed health care plans The same dynamic trend is evident in the public sector. DIVERSIFIEDPRODUCTS: The industry offers a varied product line that includes “carve outs,” “carve ins,” specialized services, EAP managed care, administrative service only products (“ASOs”). The complexity of such arrangements is probably greatest in the public sector. PROFIT OUTLOOK: Fierce competition has helped to restrain industry profits, but the profit outlook is brightened by a number of factors: e.g., continued increases in Medicaid enrollment and an increase in specialized services. STATISTICS MBHC is now a $4.4b industry covering 177m Americans. Since 1993 there has been a doubling in the number of Americans enrolled in mental health/substance abuse (MH/SA) managed care programs. -------------------------------------------------------- --------------------------------------------------------------- 1998 – 1999 industry revenues are projected to decline by approximately half a billion dollars. These losses reflected the overall decline in HMO profits, but are difficult to calculate precisely because many MBHC companies are either privately held or integrated components of larger firms.

4. MANAGED BEHAVIORAL HEALTH CARE BUSINESS BASICS • RISK MANAGEMENT • INDUSTRY TRENDS • “PRESSURE POINTS”

5. UNDERSTANDING THE MANAGED BEHAVIORAL CARE BUSINESS • The typical MSW student has had little exposure to the business side of social work practice. Yet, in addition to being a human services profession, social work is of course also a business---now more so than ever, given the on-going privatization of both the social services and behavioral health care. • It is thus essential that MSW candidates understand the business principles behind managed behavioral health care, especially since they themselves will be obliged to work in that environment. • The module aims to acquaint students with the basic business principles of managed behavioral health care organizations (MBHOs). Since most of the surveyed material have yet to enter the standard MSW curriculum, those familiar with them will presumably enjoy a competitive edge in their new careers.

6. SOME GENERAL RULES OF THE GAME THE DYNAMICS OF MARKET RISK Although an unavoidable fact of business life, prudent firms seek to limit risk through various “risk management” techniques. • In general, the greater the degree of risk assumed, the greater the potential reward. Some portion of profit can thus be regarded as the “fee” earned for successfully taking on a particular degree of risk. By the same token, however, assumption of an imprudently high degree of risk can and not infrequently does result in firm failure---hence the importance of “risk management.” • Risk also increases with the intensity of inter - firm competition. Competitive pressures force firms to offer products or services at prices that reflect those pressures. Thus, by forcing prices lower, harshly competitive conditions also increases risks of bankruptcy, despite prospects for reduced rewards. • As we shall see in the next and in subsequent slides, these “general rules” have specific relevance in MBHO’s strategies.

7. MANAGED BEHAVIORAL HEALTH CARE: A RISKY BUSINESS • MBHO operations are often funded by“all risk” capitationcontracts, whereby the MBHO agrees to provide all necessary behavioral health services for the payer’s enrollees in return for a fixed “per head” fee. Profits thus depend on keeping the total cost of provided services below the capitated funding level. This can be difficult, however, in part because enrollee usage projections----i.e., estimates of which services will be required and in what quantities---tend to be unreliable. In industry lingo, “risk technology” is still evolving, so that there can be significant shortfalls between funding resources and the aggregate costs of providing services. • Risks are further accentuated in competitive markets, in which MBHOs may settle for relatively low rates rather than lose market share. MBHOs may then apply stringent utilization management techniques in order to limit enrollee access to services. Such a strategy is itself risky, however, because it can spark discontent among both payers and enrollees, leading to the eventual loss of business. MBHOs may therefore prefer to focus on lowering provider payments, especially if there is an absolute oversupply of providers or if competition leaves only a few firms (an “oligopoly”), thereby leaving providers themselves with no choice but to accept lower fees. • Sharing risk is another, less controversial, profit-protecting strategy, evident in the widespread preference for “soft capitation” contracts. These reduce MBHO exposure by stipulating that losse or, alternatively, profits are to be shared with the payer. Similar risk – sharing arrangements are often concluded between MBHOs and providers (see # 17 for details).

8. MBHO COST/RISK REDUCTION TECHNIQUES: SUMMARY AND COMMENTARY • REDUCE VOLUME OF SERVICES THROUGH INTENSIFIED UTILIZATION REVIEW---BUT THIS MAY LEAD TO INCREASED COMPLAINTS ABOUT QUALITY AND EVENTUAL LOSS OF CONTRACT. • REDUCE PROVIDER PAYMENTS – POSSIBLE ESPECIALLY IF PROVIDER MARKET IS OVERSUPPLIED OR IF THE MBHO IS AN OLIGOPOLY. • ALTER PROVIDER BEHAVIOR BY REWARDING EFFORTS TO REDUCE SERVICE VOLUME. A CONTROVERSIAL STRATEGY, HOWEVER, SINCE IT MAY INVOLVE ETHICAL CONFLICTS OF VARIOUS KINDS. • REDUCE COSTS THROUGH ASSURING THAT MEMBER USE AND PROVIDER PRACTICE PATTERNS ARE IN LINE WITH COST PROJECTIONS. HOWEVER, AS NOTED, “RISK TECHNOLOGY” IS STILL UNDER DEVELOPMENT MOREOVER, MAKING SUCH CALCULATIONS REQUIRES STATE-OF-THE ART MANAGEMENT INFORMATION SYSTEMS (MIS), WHICH ARE VERY EXPENSIVE, SO THAT MARGINALFIRMS MAY NOT BE ABLE TO AFFORD THEM---A “CATCH – 22” SITUATION. • RECRUIT AND/OR RETAIN ONLY THOSE PROVIDERS WITH EXCELLENT RECORDS OF QUALITY CARE AND RESOURCE MANAGEMENT.

9. INDUSTRY TRENDS • Managed behavioral health care is a relatively new industry----its growth over the past decade has in fact been phenomenal: since 1993 alone the number of Americans enrolled in a mental health/substance abuse health plan has doubled. • Managed behavioral care has had its share of mergers and bankruptcies during this intensely competitive phase, with collective losses of over $760m in 1997 alone, mostly in risk-based contracts. • Nor are competitive pressures likely to ease. The market is now increasingly dominated by a handful of very large MBHOs, but payers’ insistence on lower prices will require continued cost-cutting by these surviving companies. • Nevertheless, many Wall St. analysts predict that the industry is now moving into a more stable developmental phase, marked by more specialized product lines and a more sophisticated approach to risk management. Indeed, most sources agree that payer and popular demands will result in quality of service becoming an increasingly important MBHO consideration. • Finally, long-term prospects for growth look promising, not least because there are still so many people to be covered---notably, the nearly 45m Americans without heath coverage of any sort and the 35m Medicare recipients (85% of the total) not yet enrolled in managed care plans. Future government programs are likely to extend managed care coverage to members of both groups.

10. MBHO “PRESSURE POINTS” Although a fairly new phenomenon, managed care has generated considerable controversy over its methods and purposes. • As the following slide (#9) makes clear, MBHOs have experienced pressures from many different quarters, with some conflicting demands being difficult to reconcile: e.g., quality and cost savings. • The industry is also been challenged by humanistic individuals often unacquainted with business realities and unwilling to grant the necessity for realistic restraints on expenditures. • The industry has also come under increased scrutiny from government, in part because politicians correctly perceive health care as a priority issue among many voters. • Nor has the industry itself been blameless. It is well to keep in mind, however, that managed care has only recently emerged as the dominant form of health care, so that all parties to it---providers, patients, payers, and business, too---are still in an intense learning phase of industry evolution.

11. FIELDS OF FORCE: THE MBHO AND ITS “PRESSURE POINTS” State the main ideas you’ll be talking about Lower prices 1. MARKET PRESSURES MBHO 3. GOVERNMENT PRESSURES 4. PATIENT PRESSURES Privacy & other regulations More services 2. PAYER PRESSURES Lower prices & Higher quality

12. FIELDS OF COUNTERFORCE: MBHO RESPONSES State the main ideas you’ll be talking about Increased Utilization Review (UR) Lower Provider Rates MARKET PRESSURES PATIENT PRESSURES MBHO GOVERNMENT PRESSURES Relaxed UR and more elastic clinical guidelines Lobbying PAYER PRESSURES Lower Provider rates + Enhanced Quality Assurance

13. THE MANAGED BEHAVIORAL CARE SYSTEM: HOW ITS COMPONENTS FIT TOGETHER

14. BASIC SYSTEM COMPONENTS David Katz MBHO Providers PAYER EMPLOYER Management + Utilization Review. Professional Services Contractee

15. PAYER EMPLOYER MBCO Providers David Katz Management Utilization Review. Professional Services Contractee FOCUS A: PAYER – MBCO RELATIONS

16. PAYER EMPLOYER BMCO David Katz ASO Contract Cap. Contract PERFORMANCE RANGE ASO + PERFORMANCE “Soft” Full Risk VARIATIONS IN PAYER - BMCO CONTRACTUAL ARRANGEMENTS

17. PAYER EMPLOYER MBHO Providers David Katz Management Utilization Review. Professional Services Contractee FOCUS B: MBHO – PROVIDER RELATIONS

18. MBHO PROVIDER David Katz FEE FOR SERVICE (INDEMNITY) CAPITATION CASE RATECONTRACT WITHOLDS PARTIAL SUB VARIATIONS IN BMCO - PROVIDER CONTRACTUAL ARRANGEMENTS

19. MBCO – PROVIDER CONTRACTUAL ARRANGEMENTS (2) FEE FOR SERVICE (FFS): TRADITIONAL INDEMNITY COVERAGE, WITH PROVIDERS PAID ON PER SERVICE BASIS. • Risk of overpayment as providers seek to maximize income by providing as many services per contracted group member as possible. Also, lack of adequate utilization controls may result in excess member demand. Relatively costly FFS coverage provided incentive for creation of current managed care system, and is now fading in importance. CAPITATION: FIXED PER MEMBER FEE FOR A SPECIFIED PERIOD. • Risk to provider if total cost of services exceeds contract revenues based on faulty usage projections. This is a real danger since “risk adjustment technology”---in plain language, the ability to predict future usage patterns based on the demographics (e.g., age, past illnesses, etc) of the covered population---is still not reliable. MBHOs may accordingly limit the number of providers, in order to assure that each is responsible for a sufficient number of members. Doing so substitutes a purely quantitative ”random chance” model for a more qualitatively sophisticated but relatively less reliable one. The principle involved is simple: the larger each provider’s group, the less risk that the total usage pattern will exceed projections; under-use by some will simply balance out overuse by others. “Sub” or “partial” capitation contracts also lessen risk by sharing it between providers and MBHOs, much as “soft” and “full” capitation contracts do likewise between payers and MBHOs.

20. MBHO – PROVIDER CONTRACTUAL RELATIONS (3) WITHOLDS: PART OF CAPITATED PAYMENT TO PROVIDER MAY BE “WITHELD,” WITH PAYMENT DEPENDENT ON MEETING CRITERIA ESTABLISHED BY THE MBHO. “Withholds” are in effect bonuses paid to providers demonstrating exemplary skill in saving money while also satisfying member need for quality care. That at least is the theory, but critics charge that “withholds” can actually subvert prospects for quality care by encouraging providers to skimp on or indeed even “withhold” clinically desirable treatment. CASE RATE CONTRACT: PROVIDER AGREES TO A PER CAPITA RATE COVERING A SPECIFIC PATIENT FOR A SPECIFIC PERIOD OF TIME. Case rate contract fees might in principle appear more reliable than group rates: after all, such fees can be based on detailed individualized assessment of symptamology and usage history. But in fact, as with capitation in general, inaccurate projections of future treatment costs are a real possibility, especially when the patient is afflicted with multiple behavioral disorders, which necessarily complicate any attempts at projecting the frequency or intensity of future treatment needs. Thus, here, too, it is prudent for the provider to share risks with the MBHO, perhaps by “bundling” such contracted members together so that volume can once again be used to arrive at roughly accurate mean estimates of total usage. However, this can be difficult to achieve if the number of covered patients sharing similarly severe problems is small.

21. MBHO – PROVIDER RELATIONS:UTILIZATION MANAGEMENT (UM) • Simultaneously the most critical and most controversial feature of MBHO operations: as G. Mihailik/M.Scherer (1998)* note: “Managed care, or utilization that is implicitly or explicitly regulated, can be seen as the defining service provided by MHBOs. [italics added]” • In other words, UM is the “management” in managed care: it is the process whereby providers receive authorization to initiate and continue treatment according to a provider diagnosis validated by MHBO utilization managers. Once medical necessity for treatment has thereby been established, UM may also require that treatment itself conform to MHBO clinical practice guidelines (CPGs) intended to promote clear therapeutic outcomes efficiently arrived at. MBHOs may also retain outside consultants to assure that providers are pursuing these same results. (See next slide for a diagrammtic representation of the entire UM process.) • Since UM involves consultation between providers and MHBO utilization managers, some critics regard it as tantamount to provider “deskilling.” Certainly UM helps to “define” the quality of MBHO operations: excellent MHBOs “walk the fine line” between, on the one hand, excessive intrusion on the provider – patient relationship and, on the other, meeting their obligations to payers, who seek both quality and cost – effectiveness. * Fundamental mechanisms of managed behavioral health care, J. of Health Care Finance, Spring, 1998, 1-15.

22. MBHO – PROVIDER RELATIONS:UTILIZATION MANAGEMENT (UM) N.B. UM is a broader concept than utilization review (UR). The former refers to a broad array of mechanisms designed to control access to care and regulate such care as is authorized and provided. UM may, for example, include design of scaled co-payments aimed at discouraging excessive treatment. In contrast, UR usually refers more particularly to the monitoring & supervision of provider performance. Utilization Management Provider profiling Clinical research Pre- Certification* concurrent review outside consultants CPGs *Pre-certification required to determine the nature & severity of the patient’s illness. Provider