Tiptoe toward taking global risk contracts
Find a partner and start with partial risk
Entering into a global risk contract may be a frightening prospect, but experts say it will be less scary if a hospital or physician's group goes into the arrangement aware of the possible risks.
"The way not to learn is to take on a risk contract and see at the end of the year how you did because most of the providers who do that lose their shirts," says Lou Pavia, MBA, executive vice president for McManis Associates, a subsidiary of MMI Co. in Washington, DC. The company provides health care consulting for providers, managed care organizations, and other health care companies throughout the country.
But there are some tried and true methods for testing the global risk contract waters and setting up a trial period, according to Pavia and other experts.
1. Make sure you understand capitation and global capitation.
Health care providers need to understand the different parts to capitation, says Joy Diffendal, MBA, executive director of Empire Physicians Medical Group in Rancho Mirage, CA. The medical group has contracted since June 1992 with North American Medical Management in Nashville, TN, which had a proven managed care risk track record.
Capitation typically refers to a negotiated per capita rate to be paid, usually on a monthly basis, by an insurer to an organization - i.e. medical group or independent practice association (IPA) - which is responsible for delivery of defined health care services for a covered person. (For more information, see the quick guide to capitation, p. 45.)
If a provider group has a full-risk or global- risk capitation contract, this means the providers assume the risk and have the potential for any profits or losses in covering an entire population.
"It's just like playing the stock market; if you go for global risk, you can gain or lose. The more risk, the more potential for gain or loss," says Ginger Sullenger, CHE, director of managed care services for Elkhart (IN) General Hospital/Elkhart Medical Organization. The network, which has no risk contracts, has more than 200 providers serving 40,000 members in Indiana and Michigan.
Sullenger explains how the system works: For example, the provider group is paid a $100 capitation rate per employee per month. That $100 covers all physician care and all hospital care within that network or IPA. Of that amount, the physicians could receive $50, and the hospital could receive $50.
The physicians' rate also pays for all specialists and primary care work, including work done by other IPAs or networks.
"So there are incentives in place for the physician to provide as much care locally as possible, as opposed to sending patients out of the area at a higher cost against their global capitation," Sullenger says.
2. Try a shadow risk arrangement.
Under this arrangement, a hospital or physician's group takes the current HMO and PPO business and tracks it as though they were already in a full-risk contract, Pavia explains. "This way the group can learn how to do it differently without losing money."
The hospital or physician's group should create a profit and loss statement for each patient, based on who pays for the care and the payment policies, says James Reynolds, president of Reynolds & Co. in New York City. This documentation will show providers whether they would lose or make money on a particular patient, based on how long the patient stayed in the hospital and what kinds of nursing services were used.
Establish a small pilot program
Next, the provider could start a pilot program that involves full risk for a small population of patients. But Pavia advises providers to enter into this program with extreme caution because the smaller the pilot population, the more likely there will be anomalies that seriously affect the bottom line. "You could have one bad cancer case that could throw off that group," Pavia says.
On the positive side, a pilot program may help providers discover some inefficiencies in their current systems.
For example, a hospital could have standing orders that include unnecessary steps, Pavia says. Or it might identify certain physicians whose patients typically have higher costs than other physicians.
3. Find a committed and disciplined partner.
Strong, committed, and visionary physician leadership is crucial, Diffendal states. "You have to have a real partnership with people who share that vision."
Desert Hospital in Palm Springs, CA, closely assessed various physician groups for their patient management skills before deciding on a partnership with Empire Physicians Medical Group, says Robert Minkin, chief executive officer of Desert Hospital.
"There are other medical groups in Coachella Valley [the greater Palm Springs area], and we don't capitate with them because we are not convinced they know how to do it," Minkin adds.
It's crucial the physician's group has adaptive, real-time, patient information management systems in place, Minkin says. This will include physician utilization trends that are broken down for every service a population of patients has used and that demonstrate the physicians' clinical discipline.
"From a clinical and financial standpoint, [Empire Physicians] could tell us which doctors were doing the job and who needed to improve," Minkin adds.
"Every time their physicians admitted a patient, I could compare and contrast their patients in our systems by how many days they stayed on average and how many services they used of what types while here," Minkin says. "You'd be amazed at the variability of clinical practice over the same diagnoses."
Pavia advises hospitals to determine which physicians are the most cost-effective for any particular skill because this is an effective way to select physician partners and a way to assign privileges to those within the partnership. "You don't want all of those doctors doing everything," he says.
From the physician's standpoint, it's important to establish your criteria for selecting a hospital partner well in advance, Diffendal says. "Look at who is helping you manage costs better and how they manage their own cases inside the hospitals." The physician's group should obtain a year's worth of data from the potential partner and find out if the hospital has its own house in order and a good performance history.
"You also need to share core values and a common understanding of what your objectives and reasons for doing this are," Diffendal says.
4. Create the management and financial infrastructure.
"This is a high-risk business, so you have to know what you're doing," Diffendal says. "There is little margin for error in managed care contracting."
Diffendal suggests providers begin by seeking assistance from a proven experienced consultant who is knowledgeable about managed care risk contracting and management. Ideally, they should seek help from a team of professionals.
Hospitals and physicians also will need to work together to develop a risk and reimbursement model that defines how the dollars are going to be distributed and how the risks and rewards will be shared, says Stephen Goldstone, MHA, senior vice president of First Health Associates Inc. in Colorado Springs, CO. "Then they have to decide what management resources are going to be required, and that's when you get into potential expenses with computer equipment and staffing."
The infrastructure could be costly
Setting up the information and management infrastructure can be expensive. Desert Hospital has spent several years and about $10 million developing its information system, which also serves as the main infrastructure for the entire organization, Minkin says.
"The typical IPA or medical group wanting to do that generally needs to plan on an expenditure of $250,000 to $500,000, plus hiring staff to run it."
The financial infrastructure should include mechanisms that give physicians incentives to reduce costs of care, Reynolds says.
This could be accomplished by setting up risk pools in which a certain percentage of the dollars from global capitation are placed each month, Reynolds says. These risk pools could be divided between the primary care physician's risk pool, the specialty physician's risk pool, and the hospital's risk pool.
"At the end of the year, if there is any money left in those pools, you distribute it," Reynolds says.
The pools also could be used to create incentives for other providers to reduce referrals. For example, the primary care physicians might be given a percentage of any surplus in the specialty physicians' pool as incentive to reduce referrals to specialty physicians. Likewise, Reynolds says, physicians could share in the hospital's pool surplus as an incentive to use fewer hospital services. "This begins to align the incentives of the doctors and hospital to manage the care well," Reynolds explains.
5. Set up operational processes.
Operational processes include:
- credentialing;
- utilization review;
- case management;
- quality management;
- referrals;
- claims payment management;
- eligibility management;
- all provider relations and marketing.
"They should control all possible aspects because they then have their hands on their own business," Diffendal explains. "A lot of people outsource all of that, but I don't recommend it because you need control of your own destiny, and this is what creates the basis for moving forward successfully."
If set up correctly, the operations can be profitable, Diffendal says. But it does mean the organization has to attend to every last detail, including checking on physicians' licenses to ensure they are up to date.
Plus, it means the organization must set up a process to review all referrals between primary care physicians and specialists. Reynolds recommends providers also set up clinical protocols for various diagnoses because these will help reduce costs.
6. Establish ongoing analysis and review of performance.
These might include monthly meetings at which physicians and hospital administrators review financial reports and look for red flags. The Empire Physicians and Desert Hospital partnership also has a utilization management committee that meets weekly, Diffendal says.
Empire Physicians has its own quality management committee, and it reviews member satisfaction survey results each month. "We also look at hospital utilization on a daily basis," Diffendal says. "We do exit surveys of people who are leaving us to find out why, and we're active in marketing and public relations in our community."
Providers also could review their member base to make sure they know who their high-risk patients are, Pavia suggests. "It's pretty typical that the 80-20 rule applies where 20% of the patients will consume 80% of the health care resources."
"So if you could identify those patients who are at most risk for heart attack or cancer, then you could catch the cancer early or prevent the heart attack and reduce costs considerably," he explains.
Further, providers will need to continually review their performance with the healthy members to make sure these patients are satisfied and will stay in the network.
"What attracts healthy patients is they want convenience, choice, and information to make their own choices," Pavia says. "You don't want to make them wait in a doctor's office for an hour when it's a routine checkup."
If a member's child has a rash, the member might prefer being able to call up the physician to obtain advice over the telephone, rather than having to rush down to the doctor's office for a minor problem.
Providers who have full-risk contracts can make their own rules regarding whether patients need to come into the office to obtain a prescription refill, for instance, or whether it can be approved more conveniently and more cost-effectively over the telephone.
"Providers can define the system to make it convenient for patients and know that doctors are not going to abuse the rules," he adds.
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