Medicare risk models offer guidance
Here’s what you can learn from their experiences
Medicare risk contracting looks to become one of the major growth areas for health care systems in the near future. While the rewards can be great, so can the potential downside.
The following models show how physician and hospital providers in two different integrated delivery systems (IDS) have structured their Medicare risk activities, and can provide some good pointers to practices thinking of taking the plunge into this market.
Maryland Health Network (MHN) is an Owings Mill, MD-based integrated delivery system created by five Maryland physician- hospital organizations (PHOs) as an umbrella organization to handle billing, contracting, data processing, accounting, and other administrative functions.
According to Peter Clay, MHN’s president and CEO, out of a $500 per member per month (PMPM) premium, approximately $120 is immediately routed to the PHO to cover administration costs, plus services such as pharmacy and mental health.
The balance of the premium is divided between two different funds for hospital- and physician-related services, of which the hospital receives approximately $240 per month. Clay notes that this rate is unusually high because Maryland law prohibits capitating hospitals. To compensate for the high payments, the hospitals contributed $4 million into an MHN reserve fund last year.
The physician fund has several elements. Each month, MHN builds the bonus pool, a fund used to meet any deficits that might occur. "We take money out up front for the physicians so they are not required to pay out of pocket if the PHO should suffer losses," says Clay. "If there is a deficit, it is covered using money taken in equal parts from the hospital reserve fund [created by the $4 million contribution] and the physician bonus fund."
When there’s a profit, 75% is returned to physicians and 25% to the hospitals. MHN favors the physicians in this equation due to the inequality of the original hospital fund allocation. In addition to the bonus fund, there are also separate physician pools for primary care and specialists.
Costs dropped in fee-for-service model
MHN is also moving aggressively toward a fee-for-service model for its primary care physicians. "Most primary care physicians want fee-for-service, although some physicians prefer the capitated method. We feel the fee-for service model is more advantageous to the IDS," notes Clay. When MHN shifted from a capitated to fee-for-service model for their Medicare interests, for instance, their PMPM costs dropped significantly.
MHN’s fee-for-service payments are subject to a global capitation arrangement using a floating relative value unit (RVU). To calculate these payments, MHN takes the budgeted PMPM amount for the pool multiplied by the number of member months. From this amount, MHN first pays out-of-network claims. Then MHN calculates the number of RVUs for claims submitted by the physicians in its network. Next, an RVU conversion factor based on a Medicare fee schedule for that month is calculated. MHN multiplies the conversion factor by the number of RVUs per physician to determine how much each physician will be paid.
"This method allows the physician to monitor his efficiency," says Clay. Because MHN has placed a ceiling on payments, no physician receives more than 120% of his or her related RVU. Any payments above that are placed in a surplus fund used to meet potential future deficits.
Although this arrangement is still new, Clay says he believes all parties benefit because physicians can expect to receive 100% or more of the Medicare conversion factor during most months. From an organizational standpoint, the new model has allowed them to provide more attractive packages to HMOs. "The [previous] subspecialty capitation [method] prohibited MHN from allowing the HMOs to use specialists from all five PHOs. However, the new floating model permits the IDS to function as one large combined network of primary care physicians and specialists," says Clay.
Mixing capitation with fee for service
Another PHO, New Haven, CT-based Connecticare (CCI), provides an example of how a physician/hospital-run provider-sponsored organization might organize its capitation model.
When CCI received its first Medicare risk contract in August 1997, the organization decided to structure payments to its primary care physicians on a fee-for-service basis, while specialists are paid on a capitated model. This model, coincidentally, is becoming increasingly popular in independent practice associations across the country.
"By capitating the specialists, we hope to reduce bed days by providing them with an incentive to better control costs and consider other means of treatment than surgery, when appropriate," notes Bob Abrams, CCI’s vice president for government programs. Participating providers must complete their billing within 60 days. Payments are processed according to the terms of each contract.
CCI pays the physicians out of a physician’s risk pool. Physician payments are calculated by applying an adjustment factor based on the ratio of money allocated to the physician fund divided by the total number of billings, minus reserves for contingencies. According to CCI’s basic operating plan, physicians should receive close to 100% of Medicare’s RVU fee schedule, even after applying the adjustment factor.
"The benefit of the adjustment factor is that it creates a thermometer for physicians to gauge their own performance and earnings," notes Abrams. If a physician performs aggressively, he or she can potentially collect over 100% of the corresponding RVU. However, if a physician works inefficiently and his or her utilization rates soar, the adjustment factor could cause reimbursement to fall to as low as 75% of the RVU.
As a result, CCI hopes the prospect of reduced payment will prompt physicians to monitor their own productivity and solicit advice from CCI on how to improve their efficiency.
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