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