Managed Health Care Pricing

for Provider Arrangements

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Contents

 Objectives

 Introduction to Managed Care

 Provider Contracts
 Pricing Model Variables
 Sample Pricing Model
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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
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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
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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
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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
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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)
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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
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Introduction to Managed Care

 Health Insurance Options

Method of
Type of Plan What it offers Cost Control Features
Indemnity Services from any None Freedom to
provider choose any
provider

PPO Services from any Discounts Freedom to

(Preferred provider, but at a negotiated with choose any
Provider lower cost inside providers provider
Organization) the provider
network Prior approval for Savings when
hospitalization participating
network providers
are used
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Introduction to Managed Care

 Health Insurance Options (cont’d)

Method of
Type of Plan What it offers Cost Control Features
HMO Services from “Gatekeeper” Preventive care is
(Health network providers managing utilization covered
Maintenance only and referrals
Organization) Low copayments
Negotiated provider
discounts
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Introduction to Managed Care

 Health Insurance Options (cont’d)

Method of
Type of Plan What it offers Cost Control Features
POS Services from any Within network, Freedom to choose
(Point-of- provider, but at a “gatekeeper” any provider
Service) lower cost inside manages utilization
the provider Savings when
network Negotiated provider network providers
discounts are used

Preventive care is
covered
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Introduction to Managed Care

 National Employee Health Care Enrollment

1993 1997
Indemnity 48% 15%
PPO 27% 35%
POS 7% 20%
HMO 19% 30%

Source: William M. Mercer/Foster Higgins

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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
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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

OutpatientHospital:
• Percent of Charges
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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%)
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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.
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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
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Provider Contracts
 Comparison of Two Methods
Fee-for-Service Capitation

Variability Payment depends on Payment does not vary

number and type of with number or type of
services provided services provided

Timing Payment received after Capitation is prepaid

services provided each month

Risk HMO is at risk for higher Provider is at risk for

than expected cost and higher than expected
utilization cost and utilization

Economic Perform more services Perform fewer services

Incentive to and more expensive and less expensive
Provider services services
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Provider Contracts

Range of Provider Risk Reimbursement Methods

No Economic Risk  Standard Charges
 Discounted Charges
 Fee Schedules
 Per Diem Rates
 Per Case Rates
 Combination of Above with
Performance Bonus
Full Economic Risk  Capitation
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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
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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
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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
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Pricing Model Variables

 Products covered (cont’d)

 Medicaid HMO
 Self-insured business:
Costs are lower than for fully-insured products
Ifcapitation 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
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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
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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
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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
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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
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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
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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
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Sample Pricing Model

 Key Formula:

PMPM = (Annual Services Per 1,000 Members) x (Avg. Cost/Service)

12 Months x 1,000 Members
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Sample Pricing Model

Exp. CY2000 Exp. CY2000 Exp. CY2000 Exp. CY2000
Utilization Avg Cost Gross Net
Service Category per 1,000 Per Service PMPM Copay PMPM
Inpatient Facility (excl. MH/SA) 250 $1,200 $25.00 $0 $25.00
Outpatient Facility
Emergency Room 153 $280 $3.57 $50 $2.93
Outpatient Surgery 75 1,250 7.81 0 7.81
Diagnostic X-Ray 210 275 4.81 0 4.81
Diagnostic Laboratory 300 40 1.00 0 1.00
Other Outpatient Facility 250 200 4.17 0 4.17
Total Outpatient Facility $20.72
Physician Services
Office Visits 2,945 $50 $12.27 $10 $9.82
Surgery 420 300 10.50 0 10.50
Maternity -- Deliveries 15 1,800 2.25 0 2.25
Radiology 800 75 5.00 0 5.00
Laboratory 2,800 15 3.50 0 3.50
Other 1,520 135 17.10 0 17.10
Total Physician Services $48.17
Pharmacy
Brand 4,050 $50 $16.88 $12 $12.83
Generic 2,700 15 3.38 7 1.80
Total Pharmacy $14.63

Subtotal $108.52

Age/Gender Adjustment 1.007

Grand Total -- Projected Capitation Requirement $109.32
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Sample Pricing Model -- Utilization

 Inpatient Days per 1,000

Incurred CY98 Completion Total CY98 Member Annual Annual Projected

Paid @2/99 Factor Incurred Months Days/1,000 Trend CY2000

Inpatient Days 1,952 0.9 2,169 100,000 260 -2% 250

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
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Sample Pricing Model -- Utilization

 Office Visit Utilization:

# Visits
Incurred CY98 Completion Total CY98 Annual Projected
CPT-4 Code Paid @2/99 Factor Incurred Trend CY2000
99200 270 0.95 284 2% 296
99201 210 0.95 221 2% 230
99202 1,100 0.95 1,158 2% 1,205
99203 1,560 0.95 1,642 2% 1,708
99204 525 0.95 553 2% 575
99205 210 0.95 221 2% 230
99211 425 0.95 447 2% 465
99212 4,360 0.95 4,589 2% 4,775
99213 8,800 0.95 9,263 2% 9,637
99214 3,850 0.95 4,053 2% 4,216
99215 1,100 0.95 1,158 2% 1,205
Total 23,589 24,542
Member Months 100,000 100,000
Office Visit Utilization/1,000 Per Year 2,831 2,945
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Sample Pricing Model -- Cost

 Inpatient Hospital Cost/Day:

Admission Proj. CY2000 CY2000 Proj. CY2000 CY2000

Type Total Days Per Diem Total Cases Case Rate
Medical 885 $1,050
Surgical 255 $1,250
ICU 126 $1,900
NICU 83 $2,050
Normal Delivery 506 211 $2,750
C-Section 253 77 $3,800

Projected CY2000 Total Payments $2,530,400

Projected CY2000 Total Days 2,108
Avg. CY2000 Per Diem $1,200
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Sample Pricing Model -- Age/Gender Adjustment

Factor CY1998 Member Months Proj. CY2000 Member Months

Age Female Male Female Male Total Female Male Total

0-5 0.85 0.85 4,725 4,770 9,495 4,650 4,800 9,450
6 - 15 0.40 0.40 6,750 6,380 13,130 6,550 6,420 12,970
16 - 25 1.10 0.50 7,100 7,125 14,225 7,045 7,175 14,220
26 - 35 1.30 0.60 7,780 7,880 15,660 7,930 8,025 15,955
36 - 45 1.30 0.70 12,650 13,020 25,670 13,050 13,190 26,240
46 - 55 1.50 1.00 6,720 5,905 12,625 6,800 6,045 12,845
56 - 65 2.20 2.30 3,780 2,920 6,700 3,990 3,100 7,090
65+ 2.30 2.60 1,550 945 2,495 1,625 975 2,600

Total Member Months 100,000 101,370

Total Factor 1.021 1.029

Change in Age/Gender Factor (1.029/1.021) 1.007