Posts Tagged capitation

PPACA, Medical Loss Ratios, and Capitation – a Loop Hole Big Enough to Drive an Armored Truck Through

One of the new health reform provisions in the PPACA regulations is a requirement for health insurers to spend a certain proportion of health insurance premiums on actual medical care, thus limiting to some extent the proportion of these premiums that can be allocated to administrative expenses and profits. This proportion is called the medical loss ratio (MLR), and in the regs the proportion that must be spent on care is 85% or higher in large-group markets and 80% or higher in individual and small-group markets. I believe the impetus for this rule is two fold: 1) to try to get insurers to minimize the costs associated with administration of the plan (so as to maximize their profits within the MLR restriction), and 2) to try to insure that any successful cost-effective care strategies that are adopted go directly to reducing the premium costs for enrollees. Insurers that fail to meet this standard must rebate some premiums back to enrolees. It doesn’t take much savvy to imagine that insurance companies executives would, in response to this reform of their market, launch aggressive advocacy strategies to modify these regulations in order to recoup their potential profit margins and maintain their obscene executive salaries.

Great debates have been sparked at DHHS and at the National Association of Insurance Commissioners over a wide range of MLR issues, especially around what types of activities should be included in the definition of ‘medical services provided to enrollees’ (should nurse advice lines and other ‘cost-containment strategies’ count as care?), whether federal taxes should be factored into or excluded from the calculations, to which types of plans should MLR standards apply (should mini-med plans be included?), and a whole host of other accounting, reporting, and procedural issues. Nothing generates gaming the system in Washington like new federal regulations, and health insurance lobbyists are having a field day. I had to laugh when I read that the former director of the Congressional Budget Office and president of the think tank American Action Forum was quoted as saying: “I was surprised to see the members of Congress try to influence this process.” Really?

In all the fuss, some of which has actually made it into the national news media, there appears to be one particular loophole for insurers that seems to have escaped much attention. This loophole is big enough to drive an armored truck through, on the way to the bank (with a brief stop-over in Wall Street to rack up some leveraged premium on the insurer’s stock price). When health plans, particularly HMOs, capitate medical groups and IPAs to service their enrollees, these plans typically pass, via the per-member-per-month cap payment, not only the risk of paying for care, but also much of the cost for managing the program. Capitated medical groups are often delegated the responsibility for paying non-contracted provider claims, credentialing providers, managing prior authorizations, investing in IT, marketing plans to potential enrollees, and a whole host of other administrative tasks normally performed by the plan. Yet in accounting for administrative overhead to meet the MLR requirements, it appears that these plans will be allowed to shift these administrative costs to their subcontracted medical groups and IPAs and count them as ‘medical services’. What a deal for the plans!

At a recent Department of Managed Health Care meeting in California, a representative of a large capitated medical group described the development of one of the first Accountable Care Organizations (ACOs) in the state, in concert with Blue Cross. When I asked this representative, during the public question period, which of the administrative costs associated with management of the ACO would be attributed to Blue Cross when it came time to calculate the MLRs for the plan; he at first hemmed and hawed, then said that the issue had not been discussed with the plan yet. Really? This far into the planning process, you would think that issue would be pretty high on the list. ACOs are not just going to be Medicare Advantage programs, they are going to evolve into the next iteration of commercial health coverage, and you can bet that many plans will skip right over shared savings and similar strategies and go directly to capitation, because there is nothing better for an insurance company than collecting premiums like a health plan, acting like a broker, and shucking all the risk on to the providers. At this same DMHC hearing, CAL/ACEP testified as to how EMTALA obligated providers were being ripped off by these unregulated subcontracting medical groups and IPAs, and left holding bags full of unpaid claims when these risk bearing organizations go belly up. The HMOs, of course, often respectfully decline to take responsibility for these unpaid claims. Remember the term ‘negligent delegation’ when an ACO near you goes bankrupt – it may come in handy.

But I digress. My point here is that, for some reason, DHHS seems to have been deterred from closing this ‘capitation-delegation model’ loophole in the MLR rules, and we can only hope they catch on before the rules are finalized.

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Some Additional Thoughts on ACOs

ACOs are coming to a health care market near you. About the only real difference I can see between the ACO model and the ‘managed care model’ is that health plans (or Medicare or Medicaid) will be using incentive payments to promote cost-effective care, rather than (or in addition to) capitation payments as a risk sharing (or risk transferring) strategy. These incentive payments will include aggregate payments negotiated between the ACO and the payers, and incentive payments to individual providers within the ACO that are eligible to receive these incentive bonuses. This may seem like a new approach, but it is really not much different than the ‘risk pools’ that plans once used to incentivize medical groups and IPAs to hold down costs. I guess that everyone assumes that this risk-sharing concept has a better chance to work now that all these sophisticated tools like EMRs and chronic disease management advocates are around to help coordinate care.  Some folks might argue that ACO incentives are about promoting effective care, but trust me, the emphasis is likely to be on COST first, and effective, second.

ACOs are not just meant to exist under the Medicare program, so it is likely that many of the payment methodologies and organizational entities (like IPAs, medical groups, PHOs, and integrated health systems like Kaiser) are going to get into the ACO game on the commercial side as well as the government payer side. Consequently, there might be an opportunity here to rewrite, at the federal and especially the state level, the rules under which commercial and government sponsored managed care has been operating for the last few decades. If you have the chance to influence the way ACOs will operate, and the rules they must follow, in your State, or at the federal level, you might consider promoting some of the following suggestions, which are born of many hard lessons learned from the most abusive and inappropriate practices of managed care plans and provider groups around the country (and especially in California, where managed care took root many years ago).

• A managed care model that limits the percent or number of physicians who have equity ownership of the organization is likely to promote both practice and payment policies that preferentially derive benefits for the equity holders rather than for the providers and their patients. Also, it is easier to get physicians ‘on board the bus’ if they all have an equal stake in the success of the organization. ACOs should have broad, and preferably equal, equity participation among all participating physician providers.

• Physician leadership in ACOs should continue to provide clinical services so that they experience the impact of the clinical practice policies they develop and promote.

• When developing payment policies for different physician specialties and roles in the ACO or Foundation model, consideration should be given to whether the physicians are obligated to take on the care of the under- and uninsured as a part of their practice, and these obligations should be considered part of the practice overhead of these physicians, relative to the physicians in the ACO who can and do decline to take on these responsibilities in their practice.

• Foundations and ACOs that are initiated by, or intimately tied to, hospitals have often and particularly used coercive tactics in negotiating contracts with hospital-based providers. Coercive contracting must be countered by strict rules regarding the development of fair market discount and other payment arrangements with hospital based providers, especially those whose ability to decline participation in caring for ACO patients is limited by EMTALA or by virtue of at-risk departmental staffing contracts with hospitals.

• Carve-outs and selective enrollment and dis-enrollment policies must be strictly limited in order to ensure that ACOs and Foundations do not game government sponsored capitation programs.

• Primary care centered ACOs should not be responsible for the payment of the claims of non-contracted non-elective services, as this will encourage these ACOs to inappropriately pay claims rather than manage patient care as a means of reducing costs and increasing profits.

• ACOs that take on claims payment responsibilities for all professional services should be required to contract for non-elective as well as elective specialty care services, so that the ACO does not have to rely on the EMTALA obligation of ED on-call specialists for non-elective and after-hours care.

• ACOs should not be delegated the responsibility by a health plan for paying the commercial claims of non-participating providers: this should be the responsibility of the health plan, with cap deductions or risk pool arrangements to ensure that the ACO does not over-utilize non-par provider services.

• If an ACO becomes financially insolvent, the health plan should be responsible for unpaid commercial ACO-delegated claims, under the concept of negligent delegation.

• ACOs should be accountable to their community, and not just to their assigned patients.

• ACO administrative overhead should be counted against the 85% mandatory health plan medical loss ratio requirements under health reform.

• If an ACO does not have a nurse-advice line or similar mechanism for assisting patients in deciding whether or when to use emergency department services, it should not be allowed to retroactively deny coverage for emergency department services based on the prudent layperson standard.

• Hospitals that participate in, contract with, or develop ACOs should be required to collect data on hospital inpatient and outpatient care services and outcomes that can be accessed and reported by ACO providers in order to meet performance and reporting benchmarks.

Courtesy of a recommendation from a friend, Dr. Joel Stettner, let me also suggest you view the following video, which is very funny, and sadly all too accurate:


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Accountable Care Organizations, Capitation, and Emergency Care Providers – Lessons Learned from California’s Delegated Payer Model

Talk to legislators about factors responsible for the high cost of health care in the U.S., and they will likely bring up the fee-for-service model of physician compensation. I am not sure if this is an issue of a few well-publicized ‘bad apples’, or if no one really believes any more that the vast majority of physicians are motivated first and foremost to provide appropriate care. In any case, the search for an alternative to fee-for-service physician (and hospital) compensation eventually led to the concept of capitation – a mechanism to put providers at risk for the cost of the services they provide, thus countering the incentive to provide questionably necessary services. The concept of capitation achieved its fullest expression in the Knox-Keene law that expanded the HMO concept to incorporate not only the capitation of ‘risk bearing organizations’ or RBOs (medical groups and IPAs),  but also the delegation of payment responsibility to these RBOs. This model effectively allows HMOs licensed under Knox-Keene in California to carve their ‘management overhead’ and profits right off the top of the premium dollar, and delegate not only some or all of the financial indemnity risk of care, but also the responsibility to pay providers who are not contracted or otherwise incorporated as participants in the RBO’s provider network. This model not only incentivizes these RBOs to deny needed services to the enrollees assigned to their network, it also incentivizes the RBOs to underpay non-contracted emergency care providers who are obligated by EMTALA to treat these enrollees whether or not the RBO pays these claims appropriately, or at all.

Accountable Care Organizations (ACOs) have been included in proposals for health care reform in both the House and Senate versions of health care bills now working their way through Congress, as a potential solution to rising health care costs. ACOs are predicated on the idea that ‘the current provider payment system pays for volume rather than value’; and that by addressing both delivery system and provider payment reform simultaneously, ACOs can achieve the value driven objective imbued in the managed care model (see Can Accountable Care Organizations Improve the Value of Health Care by Solving the Cost and Quality Quandaries?) Two basic versions of ACO physician compensation models are being considered in the House version: a shared savings program (SSP) which is fee-for-service based but incorporates an expenditure savings risk pool / quality standards threshold concept, and a population based payment (PBP) model using a ‘partial capitation’ approach involving risk and profit sharing rather than full-risk contracting, similar to the Medicare Prescription Drug Program’s risk corridors to limit potential ACO losses. The proponents of the partial capitation model often point to the ‘success’ of California’s Knox-Keene program as evidence that population based payment is a better alternative than a fee-for-service based model. On hearing of this argument, I felt compelled to point out that the Knox-Keene HMO concept, and particularly the delegated payer model, has been a nightmare for emergency care providers (ECPs) in California.

ECPs are obligated by EMTALA to provide care to HMO and subcontracted RBO enrollees no matter how inappropriately these providers are paid for the services provided to these HMO enrollees. With the prohibition of balance billing imposed by the California Supreme Court; Governor Schwarzenegger’s veto of SB 981, a bill designed to establish a fair payment rate and dispute process for non-contracted emergency physician services; and the Department of Managed Health Care’s reticence to enforce AB 1455 fair payment regulations: ECPs have nearly lost all leverage to obtain fair payment for non-contracted services, and to obtain reasonable rates in contract negotiations with both plans and RBOs. We have become the ‘indentured servants’ of the HMOs in California. The delegation of payment responsibility to the HMO’s capitated medical groups and IPAs was the rancid icing on this cake.  Here is how capitation and the delegated model have screwed ECPs in California:

1. HMOs are directly regulated by the DMHC, but unregulated medical groups and IPAs that subcontract to the for-profit HMOs often pay less than half what the plans pay, because they are insulated from the DMHC’s direct regulatory oversight.

2. Many on-call specialists have cited, as a reason for leaving on-call rosters, having to fight medical groups for fair payment of their claims. These medical groups are happy to have the on-call specialists take care of the group’s patients in the ER at 3 am, but these very same medical groups often decline to refer patients to the on-call specialist during regular office hours

3. The EMTALA mandate puts emergency care and hospital based providers at a real disadvantage in contract rate negotiations – if you can’t say no, you have no leverage. Further, some RBOs have the equivalent of a monopsony in their local markets, and use this leverage to get hospitals to coerce their hospital-based physicians into accepting below market contract rates with the RBO. Coercive contracting is supposed to be illegal in California (CA Health and Safety Code Section 1322, Stark II, Anti-trust, etc) but violations are difficult to prove, retaliation is a real threat, and the laws are hard to enforce.

4. Many capitated medical groups and IPAs routinely down-code 50% of ER physician claims, and some even down-code 100% of the claims for the care of our sickest patients. The DMHC has been reticent to respond to numerous complaints from providers, and the Department’s claims adjudication process is flawed and expensive.

5. Capitated medical groups and IPAs that are on the verge of bankruptcy from poor risk management put emergency care provider claims at the end of the list of claims to be paid because they know these providers must continue to see their patients even if payments are withheld. When the medical group or IPA finally goes bankrupt, the contracting HMOs refuse to take responsibility for these unpaid claims. Emergency care providers have lost millions as a result of delegation to financially insolvent subcontracting medical groups.

6. Several ER groups have been forced to go to court to obtain fair payment from capitated groups, and this has undermined otherwise positive and long-standing collegial relationships. Amazingly, some staff at the DMHC have actually encouraged this approach.

7. Many capitated medical groups do not have the resources to employ certified coders for claims review: and inappropriately down-code, bundle, and deny payment of legitimate emergency care claims; have great difficulty complying with AB 1455 prompt payment regulations; and rarely submit their payment practices to outside reviewers to verify compliance.

8. The RBOs have resisted giving up paying for ECP claims, citing that if the HMOs have to pay these claims, the capitated medical groups will have no incentive to keep their patients from using the ED, and the RBOs will also lose the capitation revenues they retain by keeping their patients out of the ED. However, ED usage risk pools can provide incentives for capitated physicians to provide access for after hours urgent care and to manage their chronically ill patients so they don’t need to use the ED for exacerbations. Risk pools incentivize medical groups to do the right thing – profit by managing their patients; payment delegation incentivizes the RBOs to do the wrong thing – profit by underpaying legitimate claims.

9. Capitated medical groups say that if the plans have to take back the responsibility for paying emergency care provider claims, they will take back too much of the capitation payments to cover those claims. If the success of these medical groups is predicated on being able to derive unearned profits off the backs of ECPs by taking advantage of their EMTALA obligation, sidestepping fair payment regulations, and systematically down-coding, underpaying, and denying their claims: this would be an unsustainable business model in a fair market.

10. Several HMOs (like Kaiser) and RBOs have been paying ECP claims in CA appropriately, but this puts them at a competitive disadvantage compared to the for-profit HMOs and RBOs, and they are under significant pressure to follow in the path of easy unearned revenues and profits established by less principled payers.

If capitated ACOs end up being promoted through national health care reform legislation; you, too, may well experience these same vexing issues in your ED.

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