Benchmarks offer reality check in contracting
Compare your revenues and expenses nationwide
Certain benchmarks are important to keep an eye on in capitation contracting. Comparing proposed revenue numbers to national benchmarks helps you determine if you're being offered a fair deal.
InterStudy, the Minneapolis-based group of managed care analysts, recently released these benchmarks that can be useful in your capitation contract comparisons.
· Per member per month expenses and revenues. Overall PMPM expenses averaged about $122 for all metropolitan standard areas at the end of 1996, with physician PMPM expenses ranging from $44 to $46, and inpatient amounts ranging from $31 to $32.
Revenues vary widely by payer
Compare this to average revenues, which range from $138 to $142. Even more important is the difference in expenses and revenue when you break out by type of payer. (See charts on p. 60 for an illustration of this important distinction.)
This signals the need to be wary of agreeing to a single PMPM amount for Medicare, Medicaid, and commercial beneficiaries, warns Philip L. Beard, principal with ProSTAT Resource Group in Overland Park, KS. (See related story in Physician's Managed Care Report, January 1998, p. 10.)
· Medical expense ratio. The average medical expense ratio (the percentage of total dollars spent on medical expenses as compared to administrative expenses) for all metropolitan standard areas is 91%. The ratio doesn't vary much according to market size - 92% for large areas, 90% for medium-sized areas, and 91% for small areas.
· Administrative expense ratio. This ratio has a broader swing - from less than 10%, to 20% to 30%. This is also reflected in HMO operating margins. Most HMOs' margins have suffered lately unless they were good investors (and thus gained money from investment income) or found other non-premium based income sources, says Jason Brown, one of three InterStudy authors of the report.
Overall operating margins for HMOs have declined since January 1995 from about 7% to about 5% in December 1996.
If a payer cites an inordinately high medical expense ratio or administrative expense ratio, this may indicate that the group is suffering financially and may be a high-risk partner, Beard warns. InterStudy findings indicate which payers are within favorable medical expense ratios, according to Beard's assessment. If that ratio drops below the mid-80s, the insurer is giving away too much profit and won't be likely to stay in business. At levels in the 90s, they are acting as good business partners, he suggests.
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