Tag Archives: John Youngs

Alternative Strategies for Provider Networks

In this second article regarding sustainability of provider networks and managing health plan costs, we will focus on carve-out programs, integration of provider delivery models and direct contracting.

As referenced in the first article, the Affordable Care Act (ACA) has hurt re-pricing through preferred provider networks (PPNs). Claim amounts being billed by specialty and institutional providers has escalated to such a level that preferred provider organizations (PPOs) have lost much of their appeal. As a result, the introduction of commercial accountable care organizations (ACOs), direct employer/provider contracting, narrow network arrangements and cost-to-charge methodologies have gained significant market share.

While the self-funded industry has begun applying many of these alternatives, a high percentage of employers are unwilling to fully embrace some of these changes. Instead, we are seeing intermediate steps through the application of network carve-outs, integration of existing PPOs with specialty care vendors and limited direct contracting.

What outcomes do these intermediate steps offer an employer? To start with, a better control of healthcare consumption and lower overall claim costs.

Let’s explore the basics of network carve-out programs. The simplest carve-out is an organ transplant product that removes claims from the underlying medical excess coverage and places them with a separate policy. In most cases, the transplant policy includes a centers of excellence network where the procedure must be completed for 100% of the claim to be eligible for reimbursement. When a non-participating facility provides the service, reimbursement may be limited to a lower percentage of the bill and will in many cases have caps. These products may include individual deductibles, waiting periods and lifetime maximums.

Less common carve-out solutions are non-risk bearing and target specific treatment types, such as renal dialysis or surgical events. A renal or surgical carve-out is accomplished through a change in plan document provisions that move the service to a non-network benefit. This can be a challenge when dealing with national PPOs, which typically include these service providers in their networks.

When considering any form of carve-out program, the client should take care to avoid any reference to a specific disease state and mind the gaps that could potentially exist between the plan document, underlying medical stop loss policy and carve-out policy or provision.

The industry is buzzing with the term “transparency,” yet most people are unable to determine the actual cost of service provided to patients. Solutions include the integration of existing PPO networks and specialty care providers through direct contracting and domestic tourism. Additionally, a number of surgical centers are now publishing fee schedules and treatment outcomes online. This disclosure is enticing patients to acquire services in these facilities. The result is a creation of carve-out referral agreements for self-funded employers with fees significantly lower than the most aggressive PPO contract.

If the initial reports are accurate, then, in addition to significant savings, patients are experiencing shorter recovery times and fewer complications than through traditional networks. We are also seeing an integration of specialty care providers with traditional networks as a cost-effective tool. In our experience, clients have integrated direct contracts with oncologists, orthopedists, surgical centers, dialysis centers and pain management clinics to more effectively manage care and cost. This approach may be challenged by traditional PPO networks, but the outcome is worth the effort.

In a number of cases, we have found it effective to integrate PPOs for institutional services only and contract directly with medical groups based on a capitated model. In other situations, we have contracted with a PPO network for professional services tied to the Medicare Regionally Based Relative Value Schedule (RBRVS) and re-priced the institutional claims on a cost-to-charge or referenced-based pricing scenario. We will discuss reference-based pricing more in a coming article. For PPOs to remain relevant, they must adapt to these emerging innovative solutions.

For some, innovation will start with direct contracting on behalf of our client health plans. The process of direct contracting can be relatively painless when working with an independent practice association (IPA) or multispecialty medical group. The purpose of these groups is to establish and oversee patient protocols, referrals and outcomes management on behalf of their member providers with health plans and health maintenance organizations (HMOs). Medical groups typically contract with payers through discounted fee for service, Medicare RBRVS or capitation (pre-payment).

While direct contracting can take many forms, our discussion will focus on provider engagement through capitation arrangements. Since ACA’s implementation, providers have become more receptive to assumption of risk through direct capitation agreements with employer groups. In its purest form, capitation is essentially a monthly retainer paid to the provider for services to be rendered to the covered member. The provider is then responsible to deliver care with a goal to making a profit from the monthly pre-payment. For this to be effective, the provider must have a patient population whose utilization and medical histories support this methodology.

Some may ask how capitation is possible without an HMO license. In some states, such as California, laws allowing the creation of HMOs do not require licensing for pre-payment arrangements when risk-sharing between various medical groups and institutions does not exist. Therefore, if a medical group contracts without sharing in a profit or risk pool with other not-related practices, capitation may be allowed. This approach has been implemented and successfully tested through the Department of Managed Healthcare in California.

With this in mind, I would caution employers from running out to look for a willing medical group. The challenge is to find the right medical group that can meet all of the client’s healthcare needs. Will the capitated approach work with institutional providers? The simple answer is yes, though in our experience the process is difficult because many facilities struggle to clearly identify cost of care, and hospitals do not control direction of care.  In settings where capitated institutional models are not practical, we have utilized hospital-only PPO carve-out and referenced-based reimbursement solutions with varying degrees of success.

Providers are rushing to establish community risk assumption models, resulting in the elimination of traditional insurance contracts. We will address the provider direct model more in the following article.

While we have focused on direct contracting through capitation, I want to briefly introduce another successful approach that integrates current PPO contracting methods with HMO-type protocol management and measurements. The measurements may include average length of stay, bed days per thousand, re-admission and encounter frequency, delivery setting, prescription dispensing and adherence to published standards of care. Practice management providers may participate in profit sharing even in a self-funded plan.

This model is not commonly available through third-party administrators (TPAs) because most systems are not equipped to support the protocol and outcomes management required for risk-sharing models. The TPAs with the greatest potential for administering these programs are those that are owned by hospital or provider organizations and that manage risk on behalf of HMO contracts. That being said, we have identified several TPAs that offer these services to self-funded employer plans.

The topic of provider contracting will be debated for years to come, and the number of opinions are as great as the options they represent. The challenge for us today is to move the needle of cost management and improved outcomes forward.

How to Best Use Provider Networks

We are all familiar with preferred provider organizations (PPOs), and many have utilized either subset networks (exclusive provider organizations) or other iterations to control escalating medical claim costs. While these approaches to provider networks had proven successful between 1970 and 2010, based on the impacts of the Affordable Care Act (ACA) they may no longer be sustainable in their current configuration.

There are simple strategies that build on the current model for provider networks and that may help improve a health plan’s performance, and I will get into those shortly. But first let’s develop a common understanding of how PPOs contract.

The marketability of a PPO is based on reducing the cost of claims and providing access to a large number of providers. Typically, PPOs use a variety of cost mitigation techniques including discounts, per diems, case or global rates and relative value schedules (RVS). For a PPO to negotiate its greatest savings, it must enroll a large number of members and be able to steer utilization.

When negotiating for professional services, a PPO typically works with two models, though a third could be added when specialty care is involved. The first model is a discount off billed charges. This is a relatively easy agreement to secure because it doesn’t affect the provider’s practice unless highly utilized. The second model is based on a relative value schedule (RVS), which was implemented in the late 1950s when the California Foundation for Medical Care established a cost for services and applied factors by region. This model was known as the California Relative Value Schedule (CRVS). A similar approach was implemented by Medicare under the title of Regionally Based Relative Value Schedule (RBRVS), which has become a standard for contracting of professional services today. As a result, most professional contracts are now based on Medicare RBRVS plus 10% to 30% depending on the region, type of provider and enrollment population. In some cases, specialty providers may contract based on fixed fees, or a variation of other methods.

Contracting with institutions is very different. In a traditional PPO, hospitals may contract through either a discount off what is billed, fixed per diems for room and board, ICU or CCU or a combination. The discount model is relatively straightforward. A contract that includes per diems will typically have a number of variations such as an “outlier.” The outlier or hospital deductible is a dollar threshold that, when exceeded, triggers re-pricing. In outliers’ purest form, the claim reverts back to a discount off billed charges to first dollar. Some contracts may allow the re-pricing to begin with amounts above the outlier, but this is not the standard.

In situations where treatment is standardized, such as childbirth and knee replacement surgery, a PPO may contract on a case rate basis, which establishes a fixed reimbursement for all care associated with the event. Some of the charges that may fall outside of the event would be physical therapy, durable medical equipment and medications. There will be other treatments, including transplantation, that may include case or global rates. While case and global rates may appear similar, they can vary greatly by network and provider organization. In some cases, the application of a case rate does not limit the claim liability to the contracted amount. As an example, we had an experience with a national network where the $1.8 million transplant charge was paid at $1.3 million even though the PPO had a $250,000 case rate.

This method is not characteristic of case or global rate practices, but consultants and clients should be mindful of exposure as it could affect the plan’s claim reserves and medical excess coverage.

The Affordable Care Act continues to affect claim costs in both fully insured and self-funded environments. Overall claim trends appear to be manageable, although some specialty care and acute care hospitals have changed billing practices as a result of unlimited lifetime benefits. An example is dialysis, where the total cost per patient has skyrocketed. In an audit of dialysis claim costs, we have identified two national provider groups as being abusive in the billing of services. Claims that prior to implementing ACA would average $28,000 to $40,000 per patient per month are now ranging between $60,000 and $105,000 per patient per month. These patients have not been of major concern to PPO contracting managers because of the low volume of claims. As a result, networks have settled for discounts of 15% to 35% off billed charges. Depending on the patient’s diagnosis, Medicare pricing could come into play, resulting in allowable charges closer to $10,000 per month, which may stabilize the group’s overall health plan spending. These and other tools will be discussed in future articles.

In addition to contracting for cost control, most PPO agreements include claim filing requirements and auditing authority. In today’s electronic age, the use of clearing houses such as WebMD have significantly improved claim submission and processing times. As a result, many PPO contracts may require the professional provider to submit claims within 30 to 90 days of treatment, or sacrifice reimbursement. The same principle may apply to institutional contracts, though the timeline for submission may be 90 days. In some cases, a PPO contract may allow an institutional provider to submit claims for a premature birth or transplant patient as long as 150 to 180 days following discharge. Risk managers, consultants and claim payers need to be aware of exceptions to the claim submission rules as they could create a non-reimbursable event if the medical stop loss policy run-out period ends before the processing of the claim.

As part of the due diligence process, it is in the client’s best interest to identify any barriers to audits of financial and medical appropriateness. A number of provider networks surrender the client’s audit authority to secure greater pricing concessions. While pricing concessions are important to the overall claim spending, it only takes one catastrophic claim to hurt a health plan’s performance. Many leaders in the PPO industry understand the need for transition, but it could take a few years to re-engineer existing provider contracts in the areas of auditing for appropriate pricing and care setting, cost to charge, captitation or other non-discounted approach to re-pricing, as well as a reduction in network size to efficiently manage the consumption.

Now that we have a common understanding of PPO contracts and we agree that change will take time to implement, let’s briefly discuss simple strategies using the current PPO model that may help improve a health plan’s performance. A strong PPO can assist clients in controlling costs when the plan design encourages people to use in-network providers. Therefore, when offering a PPO, it is appropriate to include a minimum 20% differential benefit between in- and out-of-network providers. Additionally, providing for deductibles and out-of-pocket amounts will drive patients to network providers. To avoid emergency room frequent fliers, a health plan should have an appropriate co-payment as an inducement to have patients seek care in a clinical setting.

In reviewing our block of business, which includes commercial employers, public agencies and healthcare clients, we have determined that over-utilization is not a significant concern. We have identified a number of areas where a properly crafted plan document coupled with specialty vendors may aid in the control of high-dollar claims. For example, implementing a dialysis management program can reduce average claim cost by 70%.

Beware of vendors who require a percentage of savings, as their fees could double the net claim amount. Consider the addition of domestic medical tourism. While medical tourism is a hot topic, and many of these vendors redirect care outside of the U.S., a number of employers are finding local solutions through direct contracting of specialty care and adding these under domestic tourism provisions.

An employer might include the addition of cost-plus or in-network allowable amounts and the maximum allowable reimbursements for out-of-network claims. One final concept is to utilize an exclusive provider organization-type plan design packaged with a PPO network. Essentially, the health plan would only offer in-network benefits unless care is on an emergency based outside the network’s service area.

This is the first in a series addressing all forms of provider networks. Future articles will introduce the reader to establishing local networks, direct provider contracting and capitation of medical groups, which generates provider engagement in health outcomes and financial management. Recent discussions with leaders of a number of national PPO networks found that many are currently attempting to apply these principles with varying success.