Case Rates, Caps, or Fee for Service: Sound Contracting Strategies
Editor’s Note: This is the second part of a two-part article on contract terms within our series on ED strategies for contracting with managed care. This feature focuses on negotiating fees, and covers discounted fee for service, case rates, and capitation.
Probably no other portion of a contract with managed care is more important than the sections dealing with fees and reimbursements. Whether your group is negotiating discounted fee for service or considering case rates and capitation, an understanding of the different reimbursement methodologies and which one is right for your department is essential to maintain the group’s viability in a managed care environment.
"When we talk about the hurt of managed care, part of that is walking into a contract without the proper data or not having the proper terms," says Michael Williams, President of The Abaris Group, an emergency medical consulting firm in Walnut Creek, CA.
In presentations to ED groups across the country, Williams describes the varying reimbursement strategies along a "continuum," with smaller contracts in areas of minimal managed care penetration remaining fee for service and large capitated contracts negotiated by ED groups in areas with high managed care penetration. (See chart page 70.)
As managed care penetration increases, groups with a sound data on a particular population may feel comfortable assuming more risk for those patients’ care and move to another step along the continuum.
"I would urge significant caution," notes Williams. "I see capitated deals being done with 18,000 lives. I hope they are reinsuring for the risk, which can be very expensive. Otherwise, they are not being smart."
The type of methodology chosen depends largely on the market situation, the payer and its interests, and the group’s ability to take risk.
Low-risk: Discounted fee for services (FFS)
Discounted fee-for-service is the anchor payment system for most ED groups across the country, comprising approximately 80-85% of contracts, Williams estimates. Because it is based on a percentage of fees, this methodology is relatively simple. But, ED groups must make sure that both the payer and provider are using the same schedule.
"Typically, they will say you will be paid on RBRVS (Rate-Based Relative Value System), 80% of RBRVS, or some general statement of that nature," he says. "We need more protection. Though RBRVS is a published value and that is good, we want to make sure that we are working from the same schedule that everyone else is."
The contract should stipulate that the plan will use the 1997, or, when the time comes, 1998 RBRVS and include a clause mandating the plan update the schedule every year to make sure that it is current.
"What can happen is they say we will be using the California Relative Value System, and they could be referring to the 1974 system," says Williams, noting that this is not an unusual situation. "This schedule doesn’t have a level 4 or a level 5. There are not (codes for) critical care or after hours."
The plan, using the older RBRVS, would downcode a code that is outside their fee schedule to the next level.
"That may be 40-50% of your charges," says Williams. "You did an 80% (discount) deal, but you’ve lost because you’ve got some codes you can’t bill."
Because emergency physicians are included as specialists in most managed care plans, MCOs may not be used to being so specific about the fee schedule. Many specialists don’t make sure the fee schedule is updated because they bill fewer codes.
"When you get to emergency medicine, if you don’t maximize your codes you lose," Williams explains.
The group must also make sure it is clear what conversion factor will be used to determine payment. The RBRVS schedule assigns relative value units (RVUs) to each code. The conversion factor is the dollar amount multiplied by the number of RVUs to determine reimbursement.
"If we are taking 80% of Medicare, are we using Medicare’s conversion factor?" he says. "Just because they say 80% of RBRVS, you could use 80% but get a higher conversion factor, say $50-$60 per unit value."
If the contract does stipulate that the plan will use Medicare’s conversion factor, it should also stipulate whether or not it will include geographical sensitivity or not.
"RBRVS is based on three factors, one is geographic sensitivity," says Williams. "Depending on where you are in the community, it could have a 10-15% impact on what you get paid."
Groups may be "pushing the envelope" with these questions because many payers are not used to considering them, but providers should assume nothing, Williams emphasizes.
Finally, ensuring that your group bills for the services it provides lays the groundwork when the group is ready to assume more financial risk and move on to another level of reimbursement.
"If you are comfortable with where you are in your fee schedule, it is possible to then go and determine where you are, where you need to be, for case rates or global rates or other fee schedules," he says. "If your current schedule is not up to date or you are not currently charging up to the services you are performing, you are in big trouble."
Many hospitals and physician groups get into trouble because they are not coding up to the level of service they perform. For example, offering level 5 services, but charging level 4.
Payers may know their history and use that historical data to base their contract rates on. If the physicians suddenly make a big jump from those rates, the plan will have a problem.
Assuming risk: Case rates
Some providers and payers decide to negotiate a case rate to resolve any possible disputes about billing the appropriate level of service, says Mason Smith, MD, President and CEO of LYNX Medical Systems in Bellevue, WA.
Case rates are a negotiated flat fee that covers the entire spectrum of treatment for a single ED visit.
This type of reimbursement removes the case-by-case challenge of whether the bill was increased or decreased unfairly.
"It means they won’t argue about the level of assignment if they agree it’s a legitimate case," says Smith.
The difficult part in negotiating this type of reimbursement is in knowing the acuity of the patients the physician will be seeing. The case rate for a population with higher average acuity would be different from a population that historically displayed low acuity.
"That is really the crux of the matter in negotiating case rates. What type of cases am I going to get?" says Smith. "You don’t have to worry about volume, because if you do more work, you are going to get more money. It’s not like capitation. Volume is not a problem. Acuity is."
Population size is a big factor as well. "Are we talking about 2000 lives or 10,000?" he says.
A typical assumption is that ED utilization rates will be one ED visit per 1000 members, says Smith. "That is probably a little high, but it is a pretty standard commercial rate. If they know the population is sicker it might be a little higher."
Though volume is not a major factor in affecting case rates, utilization of services is a concern, says Williams. "We have to obviously know how many of the members we will be capitated for will be using the ED. But if we do global rates or case rates, we are going to be wondering more about the laboratory services we are using."
For example, on average, how many labs are ordered per patient or how many labs are ordered per 1000 patients.
The mistake many groups make, however, is to base their rate calculations on global data and not on the specific payer populations.
"Different payers have different acuity levels and different utilization factors," says Williams.
The important thing to remember, Williams says, is to have very focused data regarding utilization rates of the population that will be covered by the case rate.
Groups should also realize that negotiating a case rate is not a guarantee of payment, says Smith. The ED visit must still be authorized and considered an emergency situation. "It’s not a guarantee that you are going to get paid. People get confused about that."
Capitation in the ED
Capitated contracts for ED services are a rare occurrence, involving complicated assessments of volume and utilization patterns by both the providers and the payer.
"The problem with capitation is the issue of visit distribution because you as an individual hospital do not know what percentage of the workload you will get," says Smith. "The reverse side of that from a payer perspective, is they don’t know what you will get."
The plan’s only way of mitigating risk is to pay a very low cap level.
"The problem is, they don’t know how to set a rate and when they do set a rate the docs aren’t interested," says Smith.
The average professional fees in southern California serve as a good example, he explains. "If you say there are going to be 100 visits per 1000. For each, let’s assume, you have one visit per month and they pay you $75 per visit. That’s one facility and on a per member per month basis that would be $0.75. But, the going (capitated) rate in California is $0.25 per member per month."
Physicians working at the hospital next door that don’t have a contract with that MCO are going to get the full rate if they see the patient and it is a legitimate emergency, Smith adds.
Because the ED group will be getting a flat per member per month (PMPM) fee for all of the patients in a population, volume and acuity are both key factors in influencing a group’s ability to profit under a capitated deal.
For example, if the average acuity level goes up, physicians have no way of recouping the higher level of professional time needed to manage the patients, Smith says.
"The hospital bill also dramatically affects the way in which the managed care plan reacts to controlling volume," Smith adds. "If [the ED groups] have a cap rate and the hospital is also on the cap rate, then you are in a situation where you have to worry about dumping."
Smith cites an example of a Colorado hospital that signed a capitated deal with Kaiser. Once the deal was complete, the MCO closed an urgent care clinic they had been operating across the street from the hospital, letting those patients use the hospital ED for services.
Under a capitated contract, the plan has transferred its volume risk for both the ED professional fees and the hospital facility fee to the providers, and the volume will probably increase, he says.
Protective measures
Many ED groups build in "risk corridors" to their contracts to protect them from dramatic shifts in the payer population, says Smith.
"One of the things that is commonly done when there are big unknowns in the way of volume or sometimes price, but usually volume, is set a risk corridor," he says. "It says that if volume stays within this range, that the price is good. If the volume exceeds the set range, we get a different deal."
The length of the contract can also serve as some protection, says Williams.
"If you are not sure (about a deal) and there is a lot of risk, obviously you want to go for the short haul," he says. "Be cautious though. The short haul often means annual contracts and most of us are too busy and we don’t have the systems in place to monitor short-term contracts. So, you see a lot of bad short-term contracts just roll over."
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