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Negotiating Managed Care and Capitated Contracts to Minimize Risks
Negotiating Managed Care and Capitated Contracts to Minimize Risks Carl F. Gattuso MCV Associated Physicians, Richmond, Virginia
Background. Successful negotiation of managed care contracts requires understanding of your managed care organization. Larger physician panels, increased medical costs, and insufficient health care premium rate increases have recently created losses for many managed care organizations. Methods. By negotiating managed care and capitation contracts, managed care organizations can effectively transfer risk to the medical providers, thereby controlling their medical costs. The medical providers are then forced to either reduce medical costs, or accept reimbursement far less than under a traditional fee-forservice agreement. Results. A number of strategies can be employed to minimize the risks physicians face in negotiating managed care contracts: (1) stop-loss protection insurance to
pay excess medical costs, (2) defined limits for risks and profits, (3) reimbursement increases for excess referrals, (4) inclusion of contract cancellation clauses for cause and for no cause, (5) contract renewal that allows for rate escalators, and (6) inclusion of incentives for such items as reduced hospital stays and reductions in drug prescription costs. Conclusions. Physicians must understand and, when possible, limit the risks they assume. They must have a good information system and must know their costs. Once a managed care contract is negotiated, providers should be vigilant in finding better ways to practice effective medicine and control costs.
T
premium increases being paid by employers now no longer exceed annual increases in inflation. In 1990, managed care companies received a 15% increase in the premiums they received from employers, while inflation was at 5%. Simultaneously, the companies were aggressively reducing costs by monitoring and reducing utilization. Consequently, the companies were hugely profitable. But employer executives began to demand price concessions and by 1995 the increase in employer-paid premiums was below the rate of inflation (Fig 1). The prediction for 1998 is that premium payments will increase only by about 4%, very much in line with inflation. Concomitantly, managed care companies are confronting a huge increase in their medical-loss ratio, the percentage of their premium dollars that they have to pay to health care providers. Medical-loss ratios in 1995 to 1996 were significantly higher at major managed care companies than in 1994 to 1995 (Table 1). Managed care companies are no longer profitable once their medical-loss ratios reach about 85%. Forbes magazine recently reported that 40% of the 660 managed care companies in the United States lost money in 1996. However, medical-loss ratios are predicted to decline in 1997. For example, the Morgan-Stanley investment banking and stock brokerage firm recently estimated that the medical-loss ratio at Aetna/US Health Care will decline from 86% in 1996 to 82% in 1997 and to 81% in 1998. At least part of those savings will come from the pockets of hospitals and physicians. Much of the rest of the reduction in medical-loss ratios will occur as the result of an increased pursuit by managed care companies of Medicaid and Medicare business. The annual premium
he negotiation of managed care contracts requires an appreciation of the needs of managed care companies, the market realities in cardiology and cardiothoracic surgery, and the risks entailed in contracting for your services or even making a bid on a contract. This presentation reviews these considerations and suggests ways to minimize specific risks.
The Managed Care Company Perspective Price concessions is the first thing that managed care companies look for. This concern probably is more prominent now than it was some years ago because many companies are either losing money or having great difficulty breaking even. Second, managed care companies seek to transfer risk. In the past, these companies have kept costs down by reducing utilization through utilization management. But these approaches have reached the point of diminishing return, so now companies seek to transfer risk to the provider or hospital. Finally, pointof-service programs have become very popular with employers and employees, so companies seek geographic access. To expand geographic access for their enrollees, companies have moved strongly to convert more restrictive networks into larger ones. Managed care companies need price concessions primarily because, unlike the situation some years ago, the Presented at Risk Management in CABG: Analysis of Critical Issues, San Diego, CA, Feb 1, 1997. Address reprint requests to Mr Gattuso, MCV Associated Physicians, PO Box 980270, Richmond, VA 23298.
© 1997 by The Society of Thoracic Surgeons Published by Elsevier Science Inc
(Ann Thorac Surg 1997;64:S73–5) © 1997 by The Society of Thoracic Surgeons
0003-4975/97/$17.00 PII S0003-4975(97)01161-2
S74
RISK MANAGEMENT GATTUSO MANAGED-CARE CONTRACT NEGOTIATION
Ann Thorac Surg 1997;64:S73–5
Fig 1. Comparison of increases in inflation rate and increases in health insurance premiums, 1990 to 1996.
paid by states to a managed care company to cover a Medicaid patient is 12% to 55% more than the premium paid by a commercial payer. With many states now forcing Medicaid patients into managed care and with managed care companies anticipating that they can succeed in reducing utilization in this population, the companies foresee finding a windfall in this area. Medicare business is even more lucrative; a Medicare patient is worth about 400% to 500% more to a managed care company than a commercial patient. With huge amounts of money on the table and much overutilization, managed care companies plan to actively pursue the Medicare population. Among other market realities, managed care companies regard heart disease as a high-volume/high-cost area. This is borne out by their data, which show that heart disease and cancer account for about 35% of all the claim dollars they pay out (Fig 2). The percentage is much higher still in the Medicare population. Managed care companies regard the treatment of heart disease as an area in which there is excess provider capacity and much overutilization. And because hospital and physician groups have been very adept at competing for contracts in this area with package pricing, the managed care companies approach the purchase of care for heart disease as the purchase of a commodity.
Risks in Negotiating a Managed Care Contract There are essentially four general types of risk that must be considered in negotiating a managed care contract: demographic risk, catastrophic risk, market risk, and Table 1. Medical-Loss Ratios: Most Recent Reporting Period, 1995–1996 Managed Care Company United Health Care Aetna/US Healthcare Coventry CIGNA Blue Cross/Blue Shield of VA
1994/1995 (%)
Actual/Expected 1995/1996 (%)
82.8 82.0 82.4 73.6 74.2
85.0 86.0 87.9 80.4 82.9
Fig 2. Number of events and claim dollars spent on specific disease states in a typical employer health benefit plan. (HIV/AIDS 5 human immunodeficiency virus/acquired immunodeficiency syndrome.)
operational dysfunction. Demographic risk is the risk of a population developing diseases or conditions or requiring various procedures normal for the age, sex, occupation, and family size of the population. Catastrophic risk is the likelihood of more severe illness occurring in a population and requiring large expenditures of medical effort and dollars for its treatment. Market risk is related to the competition for contracts in the presence of an oversupply of specialists in a specific geographic location. In this situation, it is more likely that a managed care company will pit one group against another and thereby obtain a contract in which rates are substantially lower than what they should be. Operational dysfunction may well be the most significant area of risk. The contract probably is based on the assumption of the presence of some overutilization factor, whether it be 10%, 20%, or 30%. If you fail to reduce utilization to that extent, you will be poorly paid for what you actually do.
Specific Risks and Risk-Minimization Techniques There are various strategies available to help minimize specific risks. Some companies will accede to the protective measures you attempt to make part of your contract with them and others may not; it will depend on the leverage you have with a particular carrier and on the carrier’s agenda. There is a risk in low numbers, because actuarial predictions of the frequency with which various events will occur do not hold true for low numbers. So when dealing with any new plan or capitated agreement, always require some sort of fee-for-service arrangement until member enrollment reaches a certain plateau. This particularly is important when the carrier is new to Medicare and, starting from scratch, must go knocking on doors to sign up seniors one at a time. There is a risk in adverse selection. This involves the likelihood that a benefit plan, hospital, or physician will attract patients sicker than the norm. This happens frequently and predominantly in academic medical centers. Stop-loss coverage is one way to protect against this risk. Stop-loss coverage may be on an incident level, ie, to
Ann Thorac Surg 1997;64:S73–5
protect against the occurrence of unusually high costs in a particular case, which really is protection against catastrophic risk. Or stop-loss coverage may be on an aggregate level, applying to an entire population so that if your total costs are higher than the norm you are able to recover some of the costs. Under- and over-referrals are another specific risk. Overreferrals result from a capitated physician taking undue advantage of another capitated physician. Under-referrals signify that patients are being referred to you later than they should be and are in a sicker state than optimal. Managed care companies commonly will tell you what their referral rates are and that you can expect to see so many patients per hundred or per thousand enrollees. But what a company tells you is not necessarily so. One protective measure is to implement referral protocols with your cardiologists or primary care providers. Another measure is to negotiate risk corridors, accepting referrals within a 5% or 10% corridor above or below a given referral rate but insisting that any greater variation requires renegotiation of the contract to provide a higher capitation rate. Inappropriate utilization review and management constitutes a major risk, particularly with regard to Medicare. In Richmond, Virginia, Medicare managed care seeks to put groups at risk for both physician and hospital components, while retaining the responsibility for utilization review and management. We quickly learned that the utilization review and management process is very different with a Medicaid population than with a commercial population, and more critical still with a Medicare population. The absence of appropriate procedures and monitoring can result in severe losses to your hospital pool. Consequently, whenever the managed care company maintains utilization control, it is necessary that your contract clearly define the responsibilities, duties, and required performance of each party. Negotiation of a contract with a managed care company typically is done on the basis of utilization data provided by the company. But we have found that these data are not always correct, sometimes due simply to keying or computer errors, among many other potential sources of error. To illustrate, we have been in a capitated managed care contract for our cardiologists for some time. After we received monthly utilization data from the carrier over a 12-month period, the carrier informed us that the data it had been supplying were overstated by a factor of two. To protect against such errors, it is well worth the effort to verify the data for yourself whenever possible. It also is important to insert a clause in the contract that provides for renegotiation if the data on which the contract was negotiated prove to have been inaccurate. Nonaligned incentives are a source of risk. Ensure that the interests of the managed care company, primary care physicians, specialists, and hospital are all aligned. You need to know what your costs are. When you are bidding on a managed care contract, not accurately knowing what your actual costs are puts you at a distinct disadvantage. Some groups enter into their first contracts without these cost data, thinking that it is a way to break into managed care and that they will learn from experi-
RISK MANAGEMENT GATTUSO MANAGED-CARE CONTRACT NEGOTIATION
S75
ence, but the learning experience can prove quite costly. If you are going to take this risk, make sure the contract represents only a small portion of your practice. Another way to protect yourself is to set a ceiling on the amount of risk you assume. As mentioned above, approximately 250 of the 660 managed care companies in the United States are losing money. Some will go out of business and some will be bought by larger companies, so you need to be concerned about the financial stability of the company you contract with. As protection against the possibility of the company going out of business, insert in your contract a “Continuation of Benefits” limiting clause so that you are not forced to continue care for particular patients until their specific disease or condition changes. Careful attention should be paid to contract provisions, including the length of the contract, renewal terms, and detailed content. The following considerations can minimize risk: include a cancellation clause for “cause” and “no cause.” You can afford to enter into the 3- to 5-year contract often desired by the managed care company so long as you can get out of the contract in 6 months or a year if it proves to be a losing proposition or simply something you do not want to be involved in. Include a rate escalator, even if just to cover increases in inflation, to protect against the contract expiring without new rates having yet been negotiated for the renewal period. Managed care companies typically promise to renegotiate rates after 1 year but then often delay renegotiating; the escalator clause acts as an incentive to bring them to the table and also puts you in a better bargaining position. Avoid any risk that you can not control. Include incentives whenever you can for cost reductions, quality care, and disease-prevention programs that benefit the managed care company. List every procedure for which you are at risk. Exclude supplies, drugs, new technology, and everything not specifically named in the contract. Overall, spell everything out in the contract; leave nothing to chance. Any cost not specifically dealt with in the contract will be claimed by the managed care company to be included in the capitation rate. “Sign-and-forget” puts you at great risk for operational dysfunction. Negotiating and signing a contract is the relatively easy part of a managed care relationship. Diligent work is required to subsequently make the contract functional and profitable for you.
Summary Understand managed care; involve yourself in committees for utilization review and management. Know your costs; this enables you to bid effectively and safely in a competitive marketplace. Maintaining good information systems is critical. Understand the risk you are assuming to minimize your risk. Eliminate inappropriate utilization. To conclude, here is what I describe as the Managed Care Hippocratic Oath: “Finding new and better ways of practicing effective medicine and controlling costs should be a constant vigil and a driving force for any practice participating in a managed care contract.”
Background. Successful negotiation of managed care contracts requires understanding of your managed care organization. Larger physician panels, increased medical costs, and insufficient health care premium rate increases have recently created losses for many managed care organizations. Methods. By negotiating managed care and capitation contracts, managed care organizations can effectively transfer risk to the medical providers, thereby controlling their medical costs. The medical providers are then forced to either reduce medical costs, or accept reimbursement far less than under a traditional fee-forservice agreement. Results. A number of strategies can be employed to minimize the risks physicians face in negotiating managed care contracts: (1) stop-loss protection insurance to
pay excess medical costs, (2) defined limits for risks and profits, (3) reimbursement increases for excess referrals, (4) inclusion of contract cancellation clauses for cause and for no cause, (5) contract renewal that allows for rate escalators, and (6) inclusion of incentives for such items as reduced hospital stays and reductions in drug prescription costs. Conclusions. Physicians must understand and, when possible, limit the risks they assume. They must have a good information system and must know their costs. Once a managed care contract is negotiated, providers should be vigilant in finding better ways to practice effective medicine and control costs.
T
premium increases being paid by employers now no longer exceed annual increases in inflation. In 1990, managed care companies received a 15% increase in the premiums they received from employers, while inflation was at 5%. Simultaneously, the companies were aggressively reducing costs by monitoring and reducing utilization. Consequently, the companies were hugely profitable. But employer executives began to demand price concessions and by 1995 the increase in employer-paid premiums was below the rate of inflation (Fig 1). The prediction for 1998 is that premium payments will increase only by about 4%, very much in line with inflation. Concomitantly, managed care companies are confronting a huge increase in their medical-loss ratio, the percentage of their premium dollars that they have to pay to health care providers. Medical-loss ratios in 1995 to 1996 were significantly higher at major managed care companies than in 1994 to 1995 (Table 1). Managed care companies are no longer profitable once their medical-loss ratios reach about 85%. Forbes magazine recently reported that 40% of the 660 managed care companies in the United States lost money in 1996. However, medical-loss ratios are predicted to decline in 1997. For example, the Morgan-Stanley investment banking and stock brokerage firm recently estimated that the medical-loss ratio at Aetna/US Health Care will decline from 86% in 1996 to 82% in 1997 and to 81% in 1998. At least part of those savings will come from the pockets of hospitals and physicians. Much of the rest of the reduction in medical-loss ratios will occur as the result of an increased pursuit by managed care companies of Medicaid and Medicare business. The annual premium
he negotiation of managed care contracts requires an appreciation of the needs of managed care companies, the market realities in cardiology and cardiothoracic surgery, and the risks entailed in contracting for your services or even making a bid on a contract. This presentation reviews these considerations and suggests ways to minimize specific risks.
The Managed Care Company Perspective Price concessions is the first thing that managed care companies look for. This concern probably is more prominent now than it was some years ago because many companies are either losing money or having great difficulty breaking even. Second, managed care companies seek to transfer risk. In the past, these companies have kept costs down by reducing utilization through utilization management. But these approaches have reached the point of diminishing return, so now companies seek to transfer risk to the provider or hospital. Finally, pointof-service programs have become very popular with employers and employees, so companies seek geographic access. To expand geographic access for their enrollees, companies have moved strongly to convert more restrictive networks into larger ones. Managed care companies need price concessions primarily because, unlike the situation some years ago, the Presented at Risk Management in CABG: Analysis of Critical Issues, San Diego, CA, Feb 1, 1997. Address reprint requests to Mr Gattuso, MCV Associated Physicians, PO Box 980270, Richmond, VA 23298.
© 1997 by The Society of Thoracic Surgeons Published by Elsevier Science Inc
(Ann Thorac Surg 1997;64:S73–5) © 1997 by The Society of Thoracic Surgeons
0003-4975/97/$17.00 PII S0003-4975(97)01161-2
S74
RISK MANAGEMENT GATTUSO MANAGED-CARE CONTRACT NEGOTIATION
Ann Thorac Surg 1997;64:S73–5
Fig 1. Comparison of increases in inflation rate and increases in health insurance premiums, 1990 to 1996.
paid by states to a managed care company to cover a Medicaid patient is 12% to 55% more than the premium paid by a commercial payer. With many states now forcing Medicaid patients into managed care and with managed care companies anticipating that they can succeed in reducing utilization in this population, the companies foresee finding a windfall in this area. Medicare business is even more lucrative; a Medicare patient is worth about 400% to 500% more to a managed care company than a commercial patient. With huge amounts of money on the table and much overutilization, managed care companies plan to actively pursue the Medicare population. Among other market realities, managed care companies regard heart disease as a high-volume/high-cost area. This is borne out by their data, which show that heart disease and cancer account for about 35% of all the claim dollars they pay out (Fig 2). The percentage is much higher still in the Medicare population. Managed care companies regard the treatment of heart disease as an area in which there is excess provider capacity and much overutilization. And because hospital and physician groups have been very adept at competing for contracts in this area with package pricing, the managed care companies approach the purchase of care for heart disease as the purchase of a commodity.
Risks in Negotiating a Managed Care Contract There are essentially four general types of risk that must be considered in negotiating a managed care contract: demographic risk, catastrophic risk, market risk, and Table 1. Medical-Loss Ratios: Most Recent Reporting Period, 1995–1996 Managed Care Company United Health Care Aetna/US Healthcare Coventry CIGNA Blue Cross/Blue Shield of VA
1994/1995 (%)
Actual/Expected 1995/1996 (%)
82.8 82.0 82.4 73.6 74.2
85.0 86.0 87.9 80.4 82.9
Fig 2. Number of events and claim dollars spent on specific disease states in a typical employer health benefit plan. (HIV/AIDS 5 human immunodeficiency virus/acquired immunodeficiency syndrome.)
operational dysfunction. Demographic risk is the risk of a population developing diseases or conditions or requiring various procedures normal for the age, sex, occupation, and family size of the population. Catastrophic risk is the likelihood of more severe illness occurring in a population and requiring large expenditures of medical effort and dollars for its treatment. Market risk is related to the competition for contracts in the presence of an oversupply of specialists in a specific geographic location. In this situation, it is more likely that a managed care company will pit one group against another and thereby obtain a contract in which rates are substantially lower than what they should be. Operational dysfunction may well be the most significant area of risk. The contract probably is based on the assumption of the presence of some overutilization factor, whether it be 10%, 20%, or 30%. If you fail to reduce utilization to that extent, you will be poorly paid for what you actually do.
Specific Risks and Risk-Minimization Techniques There are various strategies available to help minimize specific risks. Some companies will accede to the protective measures you attempt to make part of your contract with them and others may not; it will depend on the leverage you have with a particular carrier and on the carrier’s agenda. There is a risk in low numbers, because actuarial predictions of the frequency with which various events will occur do not hold true for low numbers. So when dealing with any new plan or capitated agreement, always require some sort of fee-for-service arrangement until member enrollment reaches a certain plateau. This particularly is important when the carrier is new to Medicare and, starting from scratch, must go knocking on doors to sign up seniors one at a time. There is a risk in adverse selection. This involves the likelihood that a benefit plan, hospital, or physician will attract patients sicker than the norm. This happens frequently and predominantly in academic medical centers. Stop-loss coverage is one way to protect against this risk. Stop-loss coverage may be on an incident level, ie, to
Ann Thorac Surg 1997;64:S73–5
protect against the occurrence of unusually high costs in a particular case, which really is protection against catastrophic risk. Or stop-loss coverage may be on an aggregate level, applying to an entire population so that if your total costs are higher than the norm you are able to recover some of the costs. Under- and over-referrals are another specific risk. Overreferrals result from a capitated physician taking undue advantage of another capitated physician. Under-referrals signify that patients are being referred to you later than they should be and are in a sicker state than optimal. Managed care companies commonly will tell you what their referral rates are and that you can expect to see so many patients per hundred or per thousand enrollees. But what a company tells you is not necessarily so. One protective measure is to implement referral protocols with your cardiologists or primary care providers. Another measure is to negotiate risk corridors, accepting referrals within a 5% or 10% corridor above or below a given referral rate but insisting that any greater variation requires renegotiation of the contract to provide a higher capitation rate. Inappropriate utilization review and management constitutes a major risk, particularly with regard to Medicare. In Richmond, Virginia, Medicare managed care seeks to put groups at risk for both physician and hospital components, while retaining the responsibility for utilization review and management. We quickly learned that the utilization review and management process is very different with a Medicaid population than with a commercial population, and more critical still with a Medicare population. The absence of appropriate procedures and monitoring can result in severe losses to your hospital pool. Consequently, whenever the managed care company maintains utilization control, it is necessary that your contract clearly define the responsibilities, duties, and required performance of each party. Negotiation of a contract with a managed care company typically is done on the basis of utilization data provided by the company. But we have found that these data are not always correct, sometimes due simply to keying or computer errors, among many other potential sources of error. To illustrate, we have been in a capitated managed care contract for our cardiologists for some time. After we received monthly utilization data from the carrier over a 12-month period, the carrier informed us that the data it had been supplying were overstated by a factor of two. To protect against such errors, it is well worth the effort to verify the data for yourself whenever possible. It also is important to insert a clause in the contract that provides for renegotiation if the data on which the contract was negotiated prove to have been inaccurate. Nonaligned incentives are a source of risk. Ensure that the interests of the managed care company, primary care physicians, specialists, and hospital are all aligned. You need to know what your costs are. When you are bidding on a managed care contract, not accurately knowing what your actual costs are puts you at a distinct disadvantage. Some groups enter into their first contracts without these cost data, thinking that it is a way to break into managed care and that they will learn from experi-
RISK MANAGEMENT GATTUSO MANAGED-CARE CONTRACT NEGOTIATION
S75
ence, but the learning experience can prove quite costly. If you are going to take this risk, make sure the contract represents only a small portion of your practice. Another way to protect yourself is to set a ceiling on the amount of risk you assume. As mentioned above, approximately 250 of the 660 managed care companies in the United States are losing money. Some will go out of business and some will be bought by larger companies, so you need to be concerned about the financial stability of the company you contract with. As protection against the possibility of the company going out of business, insert in your contract a “Continuation of Benefits” limiting clause so that you are not forced to continue care for particular patients until their specific disease or condition changes. Careful attention should be paid to contract provisions, including the length of the contract, renewal terms, and detailed content. The following considerations can minimize risk: include a cancellation clause for “cause” and “no cause.” You can afford to enter into the 3- to 5-year contract often desired by the managed care company so long as you can get out of the contract in 6 months or a year if it proves to be a losing proposition or simply something you do not want to be involved in. Include a rate escalator, even if just to cover increases in inflation, to protect against the contract expiring without new rates having yet been negotiated for the renewal period. Managed care companies typically promise to renegotiate rates after 1 year but then often delay renegotiating; the escalator clause acts as an incentive to bring them to the table and also puts you in a better bargaining position. Avoid any risk that you can not control. Include incentives whenever you can for cost reductions, quality care, and disease-prevention programs that benefit the managed care company. List every procedure for which you are at risk. Exclude supplies, drugs, new technology, and everything not specifically named in the contract. Overall, spell everything out in the contract; leave nothing to chance. Any cost not specifically dealt with in the contract will be claimed by the managed care company to be included in the capitation rate. “Sign-and-forget” puts you at great risk for operational dysfunction. Negotiating and signing a contract is the relatively easy part of a managed care relationship. Diligent work is required to subsequently make the contract functional and profitable for you.
Summary Understand managed care; involve yourself in committees for utilization review and management. Know your costs; this enables you to bid effectively and safely in a competitive marketplace. Maintaining good information systems is critical. Understand the risk you are assuming to minimize your risk. Eliminate inappropriate utilization. To conclude, here is what I describe as the Managed Care Hippocratic Oath: “Finding new and better ways of practicing effective medicine and controlling costs should be a constant vigil and a driving force for any practice participating in a managed care contract.”