So You Want to Negotiate a Commercial Risk Contract?
Despite the decline in Medicare risk contracts brought about by the Balanced Budget Act, many sections of the country still face commercial or HMO risk contracts. Even if capitation is not involved, physicians are often at risk via withholds. In an era of fees which never increase and withholds which do, physicians need the best possible contract terms to have any chance of getting their withhold returned, to say nothing of actually earning a surplus.
Virtually every line of a risk contract has to be negotiated individually. Seemingly innocuous language may have implications, or may be referred to and clarified later. Therefore, the adviser needs to pay careful attention when reviewing the document.
Definition of Terms and Carveouts
"Out of area" coverage is a critical definition. In most contract, the Plan is responsible for the cost of any out of area claims by members. This term may be further modified to be "out of area emergency" coverage, in which case the Plan's responsibility may only come into effect if the services are covered under the contract's definition of an "emergency." That definition, may in fact, only appear in the member benefits book or elsewhere, and the adviser needs to be sure to read it. There is a great financial risk when the primary care physician cannot direct the care of a patient who is "out of area."
Geography may be important as well. Be certain that you understand where "out of area" commences. In one recent contract, we found that certain communities in bordering states were considered "in area" while certain remote locations in state were not.
Plans have numerous benefit contracts ("Products") with their insureds. Some contracts may define which patients are covered by the risk agreement based upon the Product Codes. Clearly, you need to know what the Codes are and who they cover to know who it is you are taking risk for. Administrative Services Only (ASO or self-insured) business is often excluded from risk contracts so one should be certain that the Product Codes do not include ASO business unless you intend to take risk for those patients.
There may also be complex language concerning which claims are chargeable against the budget ("chargeable claims"). In one of the more unusual situations we have encountered, the budget was "grossed up" for the expected member co-pays and deductibles, and then this amount was charged against the budget. This has the effect of making the budget look larger than it is, and also puts the physicians at risk for the distribution of services subject to co-pay. For example, assume that a loosely managed gatekeeper HMO has higher utilization than a moderately managed gatekeeper model, and that the co-pays average $5 PMPM. A physician group is attempting to move the panel from loose to moderate management, and create a surplus. The expected levels of co-pay in the loosely managed population are much higher than the moderately managed population, which may have only $4 PMPM. If the gross budget is $150, the net budget will be $145 after the $5 charge-back for expected co-pays based upon historical experience. But, if the physicians only average the $4 PMPM co-pay, they will have succeeded in giving the Plan a $1 PMPM benefit in which the physicians do not participate.
Mental health expenses are typically "carved out" of a budget, particularly if the Plan has subcapitated these costs to a mental health network. However, as always, the adviser needs to be careful about the extent of the carve out. For example, we saw a contract in which pharmacy costs incurred for mental health diagnoses were chargeable against the budget, whether prescribed by PCPs or the "carved out" mental health providers.
Computation of IBNR
This may well be one of the most important contract definitions. The IBNR, or Incurred But Not Reported liability for unpaid claims, often constitutes a major adjustment in the calculation of surplus or deficit. The Plan is supposed to base this computation on actuarially sound principles, but there is substantial variability in how this number is arrived at. Among the many factors influencing the computation include the length of time for a claims "run out" after the end of the contract year (i.e., the "cutoff" adjustment), the period of time for submitting a "clean claim" rule in the Plan's provider agreements, and the quality of the Plan's claim processing. A good rule of thumb is that 3% to 6% of total expected claims expense is still outstanding even after a six month claims run out. If the Plan is experiencing systems problems, however, this rule is of no value whatsoever. It is strongly recommended that the Plan's IBNR computation be reviewed prior to signing a contract and prior to the actual settlement of the contract.
There are two generic strategies for dealing with IBNR. One is to have the estimate computed by the Plan at settlement, and any ultimate difference, positive or negative, is the responsibility of the Plan. The other option is that the ultimate differences is accounted for, and any positive or negative amount is credited or charged against the physicians' in the settlement of the next contract year's budget, or "rolled forward."
Different Risk Pools
Plans often divide the risk budget into two or three components: Inpatient or institutional services, Physician services and pharmacy. The risk in each of these "funds" or pools may be shared differently between the physicians, the Plan, and perhaps hospitals.
The strong economy has led to a period of growth in medical costs not seen for more than a decade. Managed care's success in reigning in spending appears to have come to an end. Clearly, the most problematic risk pool at present is pharmacy. Costs are exploding and historical experience is not a guide to future cost.
One strategy to counter the inordinate risk represented by present circumstances is to negotiate the upcoming year's budget based upon the prior year's historical costs, with the added provision that the upcoming budget will be "trended" for premium increases by the Plan. For example, if actual current year costs were $150 PMPM and the Plan was raising premiums 10%, you would look to negotiate a budget of $165 PMPM.
Stop Loss Provision
Stop loss is critical to a risk contract and the mathematics of how it is computed can radically alter the expected result. Stop loss coverage may be a single threshold amount for all expenses (institutional, physician and pharmacy) or there may be a stop loss level for each risk pool. In some cases, there may be other forms of stop losses built into the overall limit, such as a separately computed stop loss for inpatient days or for NICU (neonatal intensive care) or Ob, with the uncovered costs rolling up into the computation of the overall stop loss level.
Another important definition is that of a patient "stay" and how the stop loss is affected if the "stay" extends across two contract years. For example, assume a patient is admitted to the hospital on December 27, is transferred to a sub-acute facility on December 30, then to Rehab on January 3 and is discharged on January 10. How many "stays" does this constitute? Is it one for each facility the patient is admitted to, or is it considered a single admission? Will all of the costs be aggregated for the stop loss, or will the stop loss clock reset on January 1?
The level at which losses are stopped is important as well. Inpatient stop loss levels are typically in the vicinity of $50,000, with 90% of the costs over that level paid by the insurer. The Health Care Financing Administration (HCFA) has regulations about the allowable stop loss levels for Medicare Risk Contracts that should be reviewed in order to get a sense of the "safe"size of panels..
Age/gender and other budget adjustments
Most Plans have a standard PMPM amount for an enrollee with a 1.0 risk factor. These are typically computed based upon age and gender, such that if the physician's panel is older than Plan's average age, the "weight" given to the panel will be greater than 1.0. If it is less, such as for a pediatric risk unit, the weight will be less than 1.0.
Be cautious with risk units comprised of only adult primary care physicians (PCPs) or pediatricians. Plans may not consistently track the costs and allocate the revenue of such "mixed" services as obstetrics and NICU to the baby or mother's PCP. We are aware of one instance in which a pediatric risk unit had near "best in Network" performance but was losing substantial sums of money due to the allocation of Ob costs to the baby, and the Ob revenue to the mother's PCP. We have also seen the reverse case in a different Plan. This can have catastrophic consequences.
One advantage of a beginning budget based upon historical costs of your own panel is that it can have the effect of adjusting for "adverse" selection. However, if the panel is small, the historical costs may be unrepresentative of the potential for actuarial fluctuation. Remember that costs are very unpredictable for small panels, with the expected variation from an actuarial standpoint quite high.
Conclusion
There is still money to be made in risk contracting, but only in those situations that have been carefully studied and are well understood. Without the proper analysis and a realistic budget, it is far more likely that money will be lost than made. Of course, once the financial work is done, it is still up to the physicians to do the real work of managed care.
Mark O. Dietrich
dietrich@cpa.net
last revised December 26, 2000
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