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Managed Health Care Pricing for Provider Arrangements. Presented by Vanessa Olson Seminar on Health and Managed Care October 18, 1999. Contents. Objectives Introduction to Managed Care Provider Contracts Pricing Model Variables Sample Pricing Model. Objectives.

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managed health care pricing for provider arrangements

Managed Health Care Pricing for Provider Arrangements

Presented by Vanessa Olson

Seminar on Health and Managed Care

October 18, 1999

  • Objectives
  • Introduction to Managed Care
  • Provider Contracts
  • Pricing Model Variables
  • Sample Pricing Model
  • To gain an understanding of:
    • Characteristics of managed care
    • Impact of managed care on provider reimbursement
    • Variables and assumptions used in provider reimbursement modelling
introduction to managed care
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
introduction to managed care1
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
introduction to managed care2
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
introduction to managed care3
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)
introduction to managed care4
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
introduction to managed care5
Introduction to Managed Care
  • Health Insurance Options
introduction to managed care6
Introduction to Managed Care
  • Health Insurance Options (cont’d)
Introduction to Managed Care
  • Health Insurance Options (cont’d)
introduction to managed care7
Introduction to Managed Care
  • National Employee Health Care Enrollment

Source: William M. Mercer/Foster Higgins

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
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
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%)
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.
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
Provider Contracts
  • Comparison of Two Methods
pricing model variables
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
pricing model variables1
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
pricing model variables2
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
pricing model variables3
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
pricing model variables4
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
pricing model variables5
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
pricing model variables6
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
pricing model variables7
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
pricing model variables8
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
pricing model variables9
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
sample pricing model utilization
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

sample pricing model utilization1
Sample Pricing Model -- Utilization
  • Office Visit Utilization:
sample pricing model cost
Sample Pricing Model -- Cost
  • Inpatient Hospital Cost/Day: