RISK VS. INFORMATION—What Providers Need to Know in Today’s Health Care Environment
Managed health care is expanding throughout the country at a pace not dreamt possible a few years ago. While many factors may have brought this about, there is no question that a national health plan, with managed care as a major component, has strengthened efforts to control health care costs. For physicians, this trend usually resulted in having to negotiate capitation agreements with managed care companies.
In California, where managed health care has been developing for a number of years, a substantial patient population is now covered by managed care plans. As a consequence, physicians who are not participating in these health plans are losing large numbers of patients. Doctors who can no longer get into the new system are virtually out of work. However, physicians in most of the country are still in a position to prepare for and meet the managed care challenge head on. It has become an issue of information—to meet the challenge of managed care contracts, negotiations, and risks.
As a sole practitioner, or in a small group practice, physicians will not do as well as large physician groups, or networks of physician groups, which can negotiate more favorable managed care arrangements. The reason: the bigger the group and the broader the population base controlled for health care delivery. Because of this, physician groups are in a much better position to negotiate with health plans, and may even initiate contractual arrangements such as capitation agreements.
Although small groups may be at a disadvantage, compared with their larger counterparts, when negotiating rates with managed care organizations, they are on a level playing field when seeking to protect themselves from risk. The ability of providers to reduce risk exposure is independent of the size of practice. It is dependents on how well providers know their own practices and how well they understand the applicability of provider excess loss provisions to their practices.
Capitation agreements can provide a stable source of revenue to providers but negotiating these can be a rocky and confusing road. When all goes well and the negotiations are completed diligently, it can be a satisfactory and successful experience for the provider organization. However, when this process is entered into blindly, with little or no knowledge of the potential pitfalls and risks involved in negotiating managed care contracts, the outcome can be unfavorable for the provider and result in substantial financial loss.
Some of the factors providers must consider before and during negotiations are laid out here. They are not intended as legal opinions, which should be obtained in all instances, but as helpful tips about some of the pitfalls of which providers should be aware.
First among these factors is the need to know whether the capitation deal being offered, or sought, will fit into the provider’s current cost of doing business. To determine this, providers should have a system in place that can provide line item costs, patient demographics—especially age and sex—procedures and utilization frequency, and general utilization data for the area (usually obtainable from actuarial consultants). Only when providers know the current per capita cost of doing business can they determine whether the per member payment offered by the health plan will prove profitable.
Generally, the managed care organization eliminates most of its risk by transferring it to the contracted provider. Risk is defined as “financial uncertainty.” When taking on risk engendered under capitation agreements, providers are exposed to that uncertainty, but there are ways to avoid a substantial part of the risk (of that, more later).
Sophisticated managed care companies know their case mix, and the pitfalls in the case mix they are transferring to a physician. Providers should expect to accept all members assigned, those that are disabled, hospital-confined or with potentially catastrophic claims.
Providers may also be required to accept new members transferred from another organization, who may require costly care. Being aware of the potential for such situations places providers in a better position to either negotiate them out of the contract or get properly reimbursed for those high-cost patients.
Providers should also take into account the number and degree of obligations and responsibilities, other than health care delivery, which are being transferred. Such responsibilities include utilization management, quality improvement, credentialing, peer review and complaint resolution, all according to the policies and procedures established by the managed care organization. Providers may also be required to perform these activities for other than members assigned directly to them
In addition, practice managers and or physicians may be required to sit in on managed care organization committees and may be asked to structure plan policy. As committee members, providers may assume liability for such decisions and may not have any protection under their practice’s current liability insurance policies. While coverage can be purchased for this, it should be the responsibility of the managed care organization to ensure that the provider is covered.
There are often other potential responsibilities, such as for emergency claims, out-of-network claims and catastrophic claims, over which providers have little or no control. Just one of these situations can impact a provider’s capitation budget severely. If unable to avoid such situations, there are means to protect providers from their impact.
According to Phillip L. Beard, there are four specific issues to keep in mind when reviewing capitation agreements.*
Beard’s first issue, “Clarification Points,” relates to clauses that are generally rather than specifically stated, and may or may not lead to additional expenses. More specific language should be requested by providers. Terms such as “quality improvement” or “designed” should raise red flags. Who is financially responsible for what aspects of quality improvement? What aspects will be designed by whom? What does the design process entail for the physicians’ organization? What does it obligate providers to do? Another dangerous word may be “resolve.” Again, what will be providers’ obligations in getting problems resolved?
Second, “Additional Documents to Request” are those referred to in the capitation agreement and which obligate a practice to comply, cooperate or participate. If the providers’ contract reads, “The company and the (provider group) shall adhere, as a minimum, to the standards of such programs as set forth in the handbook,” then obviously, a copy of “the handbook” should be asked for and reviewed to determine the standards of such programs.
Third, “Negotiating Points” are those contract items that Beard believes may be exceedingly demanding or obligating but can be modified to be less burdensome. The contracted parties (the managed care organization and the physician group practice) may agree, for example, that, in the event of termination of a capitation contract, the obligations of the provider group and the managed care organization under this contract shall continue in full effect with respect to existing covered members for a period not to exceed one year. The parties, however, may also agree to an earlier termination date. One year may be excessive. Why not 60 days?
Fourth, Beard refers to “Deal Killers”“as those clauses that make unrealistic and or inordinately expensive demands on providers. These clauses may also be interpreted to obligate providers to more than the practice would knowingly agree. An example: “Maintaining a sufficient number of participating physicians in medical specialties to guarantee its ability to deliver health care services to covered persons.” It would be best to have an objective standard agreed upon up front. Otherwise, this clause may require a group to hire more specialists than necessary and could result in excessive expense.
Once involved in capitation contracts, providers have the option of purchasing safeguards which can greatly protect their practices from the risks involved with these arrangements.
Regardless of how intelligently the capitation agreement has been negotiated, catastrophic loss can occur. Claims for transplants, severe trauma, dialysis and neo-natal care are in this category. Stop-loss coverage can protect providers from the severe stress on the capitation budget which can be caused by one or more catastrophic claims.
Many times the capitation agreement offered by the managed care organization will contain a provision to stop the providers’ losses at a specific point. But the design of such coverage is usually inflexible and the program costly. The managed care organizations generally purchase this coverage from an insurer, and then pass the cost on to the providers, often after adding a considerable surcharge.
Providers can purchase stop-loss coverage directly from insurers if they are knowledgeable about risks, insurance policy clauses, and the claims and administrative procedures that are required for claims reimbursement.
There are several questions providers should raise when purchasing stop-loss coverage:
- What is the insurer’s rating by such companies as A.M. Best, Standard & Poor’s or other independent rating agencies?
- Is the insurer based in the United States?
- Is the insurer admitted to do business in the state where the provider practices?
- What is the insurer’s claim history?
- What is the claims payment period? Claims reimbursements can take up to a year with some HMOs and insurers.
- Are there clauses in the policy that absolve the insurance company from paying certain types of claims?
- Are there “no coverage” clauses, such as for pre-existing condition?
- What is the provider’s “run-out” time to report and/or pay claims after the end of the policy period?
In order to answer many of these questions, capitation and stop-loss expertise is essential. Providers must either have this expertise in-house or go outside to get it. Unfortunately, there are very few experts who understand both managed care contracts plus the insurance industry and, specifically, stop-loss coverage.
As any member of the industry knows, health care is rapidly changing. Providers are inheriting the risks which were once assumed by insurers, but at the same time, providers cannot be expected to understand every facet of managing risk. Therefore, health care providers must seek advice from the experienced industry members including insurers’ brokers, and actuaries. The most powerful tool has now become information, and the providers who understand capitation risks and safeguards such as the provider stop-loss coverage will be the ones left standing in the end.