Managed Health Care Pricing for Provider Arrangements

1. Managed Health Care Pricing for Provider Arrangements Presented by Vanessa Olson Seminar on Health and Managed Care October 18, 1999

2. Contents • Objectives • Introduction to Managed Care • Provider Contracts • Pricing Model Variables • Sample Pricing Model

3. Objectives • To gain an understanding of: • Characteristics of managed care • Impact of managed care on provider reimbursement • Variables and assumptions used in provider reimbursement modelling

4. Introduction to Managed Care • Managed care programs promote the cost-effective use of health care benefits through: • Utilization management -- use of Primary Care Physician • Selective contracting -- small provider networks with heavily-discounted reimbursement rates • Provider payment/incentive programs -- transfer of risk to providers

5. Introduction to Managed Care • Indemnity Insurance • Complete coverage, freedom-of-choice • Cost varies by level of out-of-pocket payments (deductibles, coinsurance) • No negotiated discounts with providers • Insurer or purchaser at risk

6. Introduction to Managed Care • PPO (Preferred Provider Organization) • Similar to indemnity programs • Two levels of benefits: • Network (preferred) providers agree to provide services to covered individuals at a discounted fee in return for increased volume • Members pay more out-of-pocket to use non-preferred providers • Increasing risk to network providers due to discounted payments if increase in volume does not materialize

7. Introduction to Managed Care • HMO (Health Maintenance Organization) • Care coordinated through Primary Care Physician • Limited access to providers • Low member out-of-pocket costs • Shift of risk to providers through alternative payment mechanisms (target budgets, capitation)

8. Introduction to Managed Care • POS (Point-of-Service) • Hybrid of HMO and PPO products • Like a PPO, two benefit levels: • Enrollees select PCP who manages all in-network utilization, as in HMO • Members pay more for access to non-network providers, no PCP referral required

9. Introduction to Managed Care • Health Insurance Options

10. Introduction to Managed Care • Health Insurance Options (cont’d)

11. Introduction to Managed Care • Health Insurance Options (cont’d)

12. Introduction to Managed Care • National Employee Health Care Enrollment Source: William M. Mercer/Foster Higgins

13. Provider Contracts • Fee-for-Service • Payment is made for each service provided based on negotiated fee schedules • No limit to amount providers can receive • No incentive to limit unnecessary services • High risk for the insurer under fee-for-service arrangements, little or no risk to providers

14. Provider Contracts • Types of fee schedules under Fee-for-Service arrangements include the following: • Inpatient: • Per Diem -- fixed amount per hospital day • DRG (Diagnostic-Related Group)-- fixed amount per case based on diagnosis • Percent of Charges • Outpatient Hospital: • Percent of Charges

15. Provider Contracts • Types of Fee Schedules (cont’d) • Professional Services: • Percent of RBRVS (Resource Based Relative Value Scale) -- Medicare fee schedule based on procedure code • Pharmacy • AWP (Average Wholesale Price) of drug dispensed + fixed percentage (usually 12-15%)

16. Provider Contracts • Capitation • Flat amount paid to provider in advance for each assigned member • May vary based on member demographics, benefit plan, or other risk characteristics • May apply to specific services or to all services: • Global Capitation • Primary Care Physician (PCP) Capitation • Specialty Capitation • Hospital Capitation • Etc.

17. Provider Contracts • Capitation (cont’d) • May apply only to certain providers • May be a PMPM (Per Member Per Month) amount or fixed percentage of total medical premium • Paid whether services rendered to member or not • No additional payments provided • All risk is passed on to providers

18. Provider Contracts • Comparison of Two Methods

19. Provider Contracts

20. Pricing Model Variables • Utilization of Covered Services • Projected levels of utilization will be based on historical provider experience • Historical experience will be adjusted to reflect projected utilization based on the following: • Benefit levels • The nature of provider contracts, including incentive payments and risk-sharing provisions • Utilization management efforts • Changes in medical practice -- i.e. increasing use of outpatient surgery over inpatient stays

21. Pricing Model Variables • Unit Cost of Covered Services • Projected unit costs will be based on historical provider experience • Historical costs will be adjusted to reflect projected costs based on the following: • Inflation • Changes in fee schedules • Member cost sharing (deductibles, coinsurance, copayments) • Units for both utilization and cost will depend on service category and type of fee schedule

22. Pricing Model Variables • Products covered • Commercial HMO • Medicare Risk HMO: • Highest cost population (3-5 times greater than Commercial) • Depending on volume, may be largest source of revenue for provider • Payments to HMOs are controlled by Federal Government

23. Pricing Model Variables • Products covered (cont’d) • Medicaid HMO • Self-insured business: • Costs are lower than for fully-insured products • If capitation is percent of premium, premium needs to be defined for self-insured business • POS presents additional risk to providers since out-of-network utilization cannot be managed

24. Pricing Model Variables • Scope of services included in contract: • Standard HMO contracts cover Inpatient & Outpatient Hospital, Professional Services, and Ancillary Services • Other covered services may include vision care and dental care • Mental Health/Substance Abuse services are commonly carved out of contract

25. Pricing Model Variables • Scope of Services (cont’d) • Inclusion of prescription drugs in capitation or incentive arrangements increases risk to providers: • Increasing demand for physician services reduces the amount of time spent with each patient, driving an increase in prescription drug utilization • Annual prescription drug cost inflation of 10+% • For over 65 population, drugs represent a larger proportion of overall costs (15-30%) relative to Commercial population (12-15%) • Drugs not covered by Medicare -- risk of adverse selection

26. Pricing Model Variables • Risk Adjusters • Health Status -- Severity • Demographics -- Age, Gender, Area • Contracts should provide for adjustments for specific provider populations as well as for changes over time

27. Pricing Model Variables • IBNR • Provider contracts usually apply on an incurred 12/paid 15 or similar arrangement • Claims paid after settlement date will run into next year’s contract

28. Pricing Model Variables • Credibility • Historical experience can be used to project cost, utilization, and IBNR if population is large enough • Risk increases in absence of credible data

29. Pricing Model Variables • Provider Stop Loss • Used to protect at-risk physicians and/or hospitals from catastrophic claim experience • Limits the amount of claims that can be charged against budgets/capitation payments

30. Sample Pricing Model • Key Formula:

31. Sample Pricing Model

32. Sample Pricing Model -- Utilization • Inpatient Days per 1,000 Trend: Midpoint (7/1/98) to Midpoint (7/1/00) = (.98)^24/12 = .96 Projected CY2000: Annual Days per 1,000 x Trend = 260 x .96 = 250

33. Sample Pricing Model -- Utilization • Office Visit Utilization:

34. Sample Pricing Model -- Cost • Inpatient Hospital Cost/Day:

35. Sample Pricing Model -- Age/Gender Adjustment