Managed Health Care Pricing
for Provider Arrangements
Presented by Vanessa Olson
Seminar on Health and
Managed Care
October 18, 1999
1
2
Contents
 Objectives
 Introduction
 Provider
 Pricing
to Managed Care
Contracts
Model Variables
 Sample
Pricing Model
3
Objectives
 To
gain an understanding of:

Characteristics of managed care

Impact of managed care on provider reimbursement

Variables and assumptions used in provider
reimbursement modelling
4
Introduction to Managed Care
 Managed
care programs promote the costeffective use of health care benefits through:

Utilization management -- use of Primary Care
Physician

Selective contracting -- small provider networks with
heavily-discounted reimbursement rates

Provider payment/incentive programs -- transfer of
risk to providers
5
Introduction to Managed Care
 Indemnity
Insurance

Complete coverage, freedom-of-choice

Cost varies by level of out-of-pocket payments
(deductibles, coinsurance)

No negotiated discounts with providers

Insurer or purchaser at risk
6
Introduction to Managed Care
 PPO
(Preferred Provider Organization)

Similar to indemnity programs

Two levels of benefits:
Network
(preferred) providers agree to provide services to
covered individuals at a discounted fee in return for
increased volume
Members
pay more out-of-pocket to use non-preferred
providers

Increasing risk to network providers due to
discounted payments if increase in volume does not
materialize
7
Introduction to Managed Care
 HMO
(Health Maintenance Organization)

Care coordinated through Primary Care Physician

Limited access to providers

Low member out-of-pocket costs

Shift of risk to providers through alternative payment
mechanisms (target budgets, capitation)
8
Introduction to Managed Care
 POS
(Point-of-Service)

Hybrid of HMO and PPO products

Like a PPO, two benefit levels:
Enrollees
select PCP who manages all in-network
utilization, as in HMO
Members
pay more for access to non-network providers, no
PCP referral required
9
Introduction to Managed Care
 Health
Type of Plan
Insurance Options
What it offers
Method of
Cost Control
Features
Indemnity
Services from any
provider
None
Freedom to
choose any
provider
PPO
(Preferred
Provider
Organization)
Services from any
provider, but at a
lower cost inside
the provider
network
Discounts
negotiated with
providers
Freedom to
choose any
provider
Prior approval for
hospitalization
Savings when
participating
network providers
are used
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Introduction to Managed Care
 Health
Type of Plan
HMO
(Health
Maintenance
Organization)
Insurance Options (cont’d)
What it offers
Services from
network providers
only
Method of
Cost Control
Features
“Gatekeeper”
Preventive care is
managing utilization covered
and referrals
Low copayments
Negotiated provider
discounts
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Introduction to Managed Care
 Health
Type of Plan
POS
(Point-ofService)
Insurance Options (cont’d)
What it offers
Services from any
provider, but at a
lower cost inside
the provider
network
Method of
Cost Control
Within network,
“gatekeeper”
manages utilization
Features
Freedom to choose
any provider
Savings when
Negotiated provider network providers
discounts
are used
Preventive care is
covered
12
Introduction to Managed Care
 National
Employee Health Care Enrollment
Indemnity
PPO
POS
HMO
Source: William M. Mercer/Foster Higgins
1993
48%
27%
7%
19%
1997
15%
35%
20%
30%
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Provider Contracts
 Fee-for-Service

Payment is made for each service provided based
on negotiated fee schedules

No limit to amount providers can receive

No incentive to limit unnecessary services

High risk for the insurer under fee-for-service
arrangements, little or no risk to providers
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Provider Contracts

Types of fee schedules under Fee-for-Service
arrangements include the following:
Inpatient:
• Per Diem -- fixed amount per hospital day
• DRG (Diagnostic-Related Group)-- fixed amount per
case based on diagnosis
• Percent of Charges
Outpatient
Hospital:
• Percent of Charges
15
Provider Contracts

Types of Fee Schedules (cont’d)
Professional
Services:
• Percent of RBRVS (Resource Based Relative Value
Scale) -- Medicare fee schedule based on procedure
code
Pharmacy
• AWP (Average Wholesale Price) of drug dispensed +
fixed percentage (usually 12-15%)
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Provider Contracts
 Capitation

Flat amount paid to provider in advance for each assigned
member

May vary based on member demographics, benefit plan, or
other risk characteristics

May apply to specific services or to all services:
Global
Capitation
Primary
Care Physician (PCP) Capitation
Specialty
Hospital
Etc.
Capitation
Capitation
17
Provider Contracts
 Capitation
(cont’d)

May apply only to certain providers

May be a PMPM (Per Member Per Month) amount
or fixed percentage of total medical premium

Paid whether services rendered to member or not

No additional payments provided

All risk is passed on to providers
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Provider Contracts
 Comparison
of Two Methods
Fee-for-Service
Capitation
Variability
Payment depends on
number and type of
services provided
Payment does not vary
with number or type of
services provided
Timing
Payment received after
services provided
Capitation is prepaid
each month
Risk
HMO is at risk for higher Provider is at risk for
than expected cost and higher than expected
utilization
cost and utilization
Economic
Incentive to
Provider
Perform more services
and more expensive
services
Perform fewer services
and less expensive
services
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Provider Contracts
Range of Provider Risk
No Economic Risk
Full Economic Risk
Reimbursement Methods
 Standard Charges
 Discounted Charges
 Fee Schedules
 Per Diem Rates
 Per Case Rates
 Combination of Above with
Performance Bonus
 Capitation
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Pricing Model Variables
 Utilization
of Covered Services

Projected levels of utilization will be based on historical
provider experience

Historical experience will be adjusted to reflect projected
utilization based on the following:
Benefit
levels
The
nature of provider contracts, including incentive payments and
risk-sharing provisions
Utilization
Changes
management efforts
in medical practice -- i.e. increasing use of outpatient
surgery over inpatient stays
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Pricing Model Variables
 Unit
Cost of Covered Services

Projected unit costs will be based on historical provider
experience

Historical costs will be adjusted to reflect projected costs based
on the following:
Inflation
Changes
Member

in fee schedules
cost sharing (deductibles, coinsurance, copayments)
Units for both utilization and cost will depend on service
category and type of fee schedule
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Pricing Model Variables
 Products
covered

Commercial HMO

Medicare Risk HMO:
Highest
cost population (3-5 times greater than Commercial)
Depending
on volume, may be largest source of revenue for
provider
Payments
to HMOs are controlled by Federal Government
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Pricing Model Variables
 Products
covered (cont’d)

Medicaid HMO

Self-insured business:
Costs
are lower than for fully-insured products
If
capitation is percent of premium, premium needs to be
defined for self-insured business

POS presents additional risk to providers since outof-network utilization cannot be managed
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Pricing Model Variables
 Scope
of services included in contract:

Standard HMO contracts cover Inpatient &
Outpatient Hospital, Professional Services, and
Ancillary Services

Other covered services may include vision care and
dental care

Mental Health/Substance Abuse services are
commonly carved out of contract
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Pricing Model Variables
 Scope

of Services (cont’d)
Inclusion of prescription drugs in capitation or
incentive arrangements increases risk to providers:
Increasing
demand for physician services reduces the
amount of time spent with each patient, driving an increase
in prescription drug utilization
Annual
prescription drug cost inflation of 10+%
For
over 65 population, drugs represent a larger proportion
of overall costs (15-30%) relative to Commercial population
(12-15%)
Drugs
not covered by Medicare -- risk of adverse selection
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Pricing Model Variables
 Risk
Adjusters

Health Status -- Severity

Demographics -- Age, Gender, Area

Contracts should provide for adjustments for specific
provider populations as well as for changes over
time
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Pricing Model Variables
 IBNR

Provider contracts usually apply on an incurred
12/paid 15 or similar arrangement

Claims paid after settlement date will run into next
year’s contract
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Pricing Model Variables
 Credibility

Historical experience can be used to project cost,
utilization, and IBNR if population is large enough

Risk increases in absence of credible data
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Pricing Model Variables
 Provider
Stop Loss

Used to protect at-risk physicians and/or hospitals
from catastrophic claim experience

Limits the amount of claims that can be charged
against budgets/capitation payments
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Sample Pricing Model
 Key
PMPM =
Formula:
(Annual Services Per 1,000 Members) x (Avg. Cost/Service)
12 Months x 1,000 Members
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Sample Pricing Model
Service Category
Inpatient Facility (excl. MH/SA)
Outpatient Facility
Emergency Room
Outpatient Surgery
Diagnostic X-Ray
Diagnostic Laboratory
Other Outpatient Facility
Total Outpatient Facility
Exp. CY2000
Utilization
per 1,000
250
Exp. CY2000
Avg Cost
Per Service
$1,200
Exp. CY2000
Gross
PMPM
$25.00
Copay
$0
Exp. CY2000
Net
PMPM
$25.00
153
75
210
300
250
$280
1,250
275
40
200
$3.57
7.81
4.81
1.00
4.17
$50
0
0
0
0
$2.93
7.81
4.81
1.00
4.17
$20.72
Physician Services
Office Visits
Surgery
Maternity -- Deliveries
Radiology
Laboratory
Other
Total Physician Services
2,945
420
15
800
2,800
1,520
$50
300
1,800
75
15
135
$12.27
10.50
2.25
5.00
3.50
17.10
$10
0
0
0
0
0
$9.82
10.50
2.25
5.00
3.50
17.10
$48.17
Pharmacy
Brand
Generic
Total Pharmacy
4,050
2,700
$50
15
$16.88
3.38
$12
7
$12.83
1.80
$14.63
Subtotal
Age/Gender Adjustment
Grand Total -- Projected Capitation Requirement
$108.52
1.007
$109.32
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Sample Pricing Model -- Utilization
 Inpatient
Days per 1,000
Incurred CY98
Paid @2/99
Inpatient Days
1,952
Completion
Factor
0.9
Total CY98
Incurred
2,169
Member
Months
100,000
Annual
Days/1,000
260
Trend:
Midpoint (7/1/98) to Midpoint (7/1/00) = (.98)^24/12 = .96
Projected CY2000: Annual Days per 1,000 x Trend
= 260 x .96 = 250
Annual
Trend
-2%
Projected
CY2000
250
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Sample Pricing Model -- Utilization
 Office
Visit Utilization:
# Visits
Incurred CY98
Paid @2/99
270
210
1,100
1,560
525
210
425
4,360
8,800
3,850
1,100
CPT-4 Code
99200
99201
99202
99203
99204
99205
99211
99212
99213
99214
99215
Total
Member Months
Office Visit Utilization/1,000 Per Year
Completion
Factor
0.95
0.95
0.95
0.95
0.95
0.95
0.95
0.95
0.95
0.95
0.95
Total CY98
Incurred
284
221
1,158
1,642
553
221
447
4,589
9,263
4,053
1,158
23,589
100,000
2,831
Annual
Trend
2%
2%
2%
2%
2%
2%
2%
2%
2%
2%
2%
Projected
CY2000
296
230
1,205
1,708
575
230
465
4,775
9,637
4,216
1,205
24,542
100,000
2,945
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Sample Pricing Model -- Cost
 Inpatient
Hospital Cost/Day:
Admission
Type
Medical
Surgical
ICU
NICU
Normal Delivery
C-Section
Projected CY2000 Total Payments
Projected CY2000 Total Days
Avg. CY2000 Per Diem
Proj. CY2000
Total Days
885
255
126
83
506
253
$2,530,400
2,108
$1,200
CY2000
Per Diem
$1,050
$1,250
$1,900
$2,050
Proj. CY2000
Total Cases
CY2000
Case Rate
211
77
$2,750
$3,800
35
Sample Pricing Model -- Age/Gender Adjustment
Factor
Age
0-5
6 - 15
16 - 25
26 - 35
36 - 45
46 - 55
56 - 65
65+
Female
0.85
0.40
1.10
1.30
1.30
1.50
2.20
2.30
CY1998 Member Months
Male
0.85
0.40
0.50
0.60
0.70
1.00
2.30
2.60
Total Member Months
Total Factor
Change in Age/Gender Factor (1.029/1.021)
Female
4,725
6,750
7,100
7,780
12,650
6,720
3,780
1,550
Male
4,770
6,380
7,125
7,880
13,020
5,905
2,920
945
Proj. CY2000 Member Months
Total
9,495
13,130
14,225
15,660
25,670
12,625
6,700
2,495
100,000
1.021
Female
4,650
6,550
7,045
7,930
13,050
6,800
3,990
1,625
Male
4,800
6,420
7,175
8,025
13,190
6,045
3,100
975
Total
9,450
12,970
14,220
15,955
26,240
12,845
7,090
2,600
101,370
1.029
1.007