Comparative Reimbursement Analysis and Contract Optimization

1. Managed Care Decomposition Analysis MCDA Comparative Reimbursement Analysis and Contract Optimization Prepared for Tampa General Hospital Tampa, Fl July 26, 2000

2. Introduction In today’s Managed Care environment, expected reimbursement is a function of Managed Care Organization (MCO) specific rules that are executed at the patient-level based on each patient’s characteristics as defined in the MCO’s contract. The goal of Managed Care Decomposition Analysis (MCDA) is to clearly define and quantify this expected reimbursement process in terms of patient characteristics (master attributes) and expected reimbursement (reimbursement attributes) so that the healthcare executive may identify and potentially optimize net income within existing managed care contract parameters. Managed Care has brought radical changes to the healthcare industry with respect to how providers are paid for patient services. Payments that were once derived from significant charge-based methodologies are being reduced by intricate Managed Care Organization (MCO) contract methodologies designed to pay providers for profiles of services deemed clinically necessary. Payments for hospitals are less based on the charge master and more based on MCO contract specifications.

3. Market Space Clinical Product Lines Marketing Product Lines Hospital Patient Population Charge Master Shift to Managed Care MCO brings in New Patients and Proposed Contract Predicted MCPL’s MCO Contract Master Inherent MCPL’s MCO Contract Accepted (Payor Specific) A hospital exists within a market space that is, to a large extent, controlled by Managed Care Organizations (MCO’s) that represent various groups of patients. The hospital executive is motivated to increase market share while negotiating favorable contract terms with respect to fair payments for anticipated patient groups (Managed Care Product Lines or MCPL’s) that are being offered by an MCO. The MCO is, of course, motivated to negotiate favorable payment terms such that cost and utilization of services are reduced while still maintaining a certain level of quality of care. In a nutshell, the hospital wants to maximize payments and the MCO wants to minimize payments. And, in today’s environment, it is the contract specifications that control payments to the hospital. Through this process of MCO contract negotiation, hospitals have been left with a complex aggregation of contracts and contract terms which generate payments based on patient characteristics. Contracting systems have been in use for some time within hospitals to allow for product definition and related contract payment specification. These systems assist the hospital in terms of modeling contracts based on specified product lines so that expected reimbursement by MCO can be modeled for both contract negotiation and contract management. These systems, however, are “payor specific”, i.e., each patient (and associated characteristic) is modeled based on his payor’s reimbursement method. MCDA takes a different view in that payor boundaries are abolished so that we can examine and model based on patient characteristics irregardless of payor.

4. How Contracts Are Interrelated MCO Contract Master Patient Characteristics Reimbursement Characteristics What are the MCPL’s defined by the contracts? How are the MCPL’s reimbursed? A patient or patient group can have more than one characteristic. A patient or patient group can have more than one reimbursement possibility based on characteristics. Once an MCO contract is defined and executed, its mathematical specifications are stored within a contract management system so that as patients come to the hospital, expected reimbursement by MCO can be modeled and managed. Basically, a patient’s clinical characteristics (e.g. DRG 370-375 or REV Code 110-169) drive how much an MCO will pay (e.g. $1230 per day or $950 per line item). Within MCDA, we define this mathematical matrix as the MCO Contract Master. At any point in time, this is the complete definition of actual reimbursement methodology that is in place for all MCO’s. It is this MCO Contract Master that we want to clearly define and optimize in terms of patient characteristics (as defined by contracts) and reimbursement possibilities based on these characteristics. By looking at the MCO Contract Master in total (rather than limiting ourselves to payor-specific models) we can identify specific areas within the MCO contracts where changes to either patient characteristic specification or payment methodologies can yield favorable net income increases. This is analogous to Charge Master Redesign where charge descriptions are now patient characteristics and price is MCO payment methodology. MCDA makes certain that the optimum MCO payment is achieved for given patient’s characteristics. MCDA also makes certain that the optimum patient characteristics (remember, there can be more than one) are being used to drive MCO payment.

5. The Three Theoretical Stages of MCO Management Stage 1: Contract Negotiation Stage 2: Contract Monitoring Stage 3: Contract Optimization

6. Predicted Patients Offered Contract Rules Predicted Reimbursement Stage 1: Contract Negotiation

7. Actual Patients Contract Rules Expected Reimbursement Stage 2: Contract Monitoring

8. Stage 3: Contract Optimization OSI MCDA Actual Patients Alternative Characterization Alternative Reimbursement and/or Possible Net Revenue Impacts OSI evaluates the Financial impact, both gross and net, of all findings. MCO Contract Modifications

9. MCO Contract Master MCO Contract Master Patient Characteristics Managed Care Product Lines or MCPL’s Reimbursement Characteristics • DRG • UB-92 REV Code • CPT-4 Code • ICD-9-CM Code • Covered Charges • APC’s • Age/Sex • Percent of Charges • Per Diem • Time Sensitive Per Diem • Discharge Amount • Line Item Amount How much? What? The hospital exists in the center of a theoretical market space. Each contract is negotiated between the hospital and a given MCO based on predicted patients or MCPL's. MCPL's can be defined by the following patient characteristics or Master Attributes: DRG UB-92 REV Code CPT-4 Code ICD-9-cm Code Covered Charges A particular contract defines how an MCO agrees to reimburse each MCPL based on one of the following reimbursement characteristics or Reimbursement Attributes: Percent of Charges Per Diem Time Sensitive Per Diem Discharge Amount Line Item Amount

10. Managed Care Decomposition Analysis MCO Contract Master Actual Patients MCDA Data Base Contract Rules Patient Characteristics Reimbursement Characteristics Managed Care Product Lines Expected Reimbursement Master Attributes Reimbursement Attributes What is being purchased? How is it being purchased? Each contract defines, for a particular MCO, the "items being purchased" (patient characteristics, MCPL's, or Master Attributes) and the "amount paid" (reimbursement characteristics or Reimbursement Attributes) All MCO contracts taken together form the MCO Contract Master. To summarize, we are allowing the actual patients and the contract rules to define the MCO Contract Master and the MCDA database. This allows us to analyze all logical interrelationships between actual patient Master Attributes and actual Reimbursement Attributes for the purpose of MCO contract optimization.

11. Hospital Contract Management System Managed Care Decomposition Analysis Contract 2 Contract 3 Contract n Contract 1 MCO Contract Master MCDA defines this as Reimbursement Characteristics Patient Characteristics • Process: • 1. Standardize the hospital’s MCO contracts to allow for modeling and future • comparative analysis • 2. Reveal alternative reimbursement scenarios that, if implemented, would • increase net income • 3. Reveal alternative patient characterizations that, if implemented, would • increase net income • 4. Quantify all alternative scenarios in terms of net income OSI consultants completely define the hospitals MCO Contract Master through extensive data collection from the Hospital Contract Management System augmented by a thorough Managed Care contract review. The hospital's actual patient population can then be evaluated (using proprietary OSI software) against the MCO Contract Master to create an MCDA database. An MCDA matrix is created such that each patient in the sample to be studied is completely characterized and defined by Master Attributes and associated Reimbursement Attributes. By studying the interrelationships between the various patient attributes, both Master and Reimbursement, OSI can recommend specific contract modifications and quantify resulting positive incremental changes to the bottom-line.

12. MCDA Alternative 1 Unbundle DRGs and Pay Case Rates DRG 370-371 @ $3000 Per Case DRG 372-375 @ $2000 Per Case CHANGE IN NET=$38,988 *Supported by attributes in Lifeguard HMO MCDA Alternative 2 Unbundle DRGs and Pay Per Diems and Case Rates DRG 370 @ $1230 Per Day DRG 371 @ $1145 Per Day DRG 372-375 @ $2130 Per Case CHANGE IN NET=$49,500 *Supported by attributes in Blue Shield HMO, Cigna HMO, and One Health PPO Example Aetna Open Choice pays $1040 per day for DRG 370-375 Old Contract Step 6- If DRG 370-375, Per Diem=1040.00 MCDA Contract Optimization New Contract Step 6- If DRG 370, Per Diem=1230.00 Step 7- If DRG 371, Per Diem=1145.00 Step 8- If DRG 372-375, Case Rate= 2130.00 CHANGE IN NET=$49,500