Surviving in a World of Managed Care
Growing Your Practice
Managed Care Reimbursement
Risk Issues
Factors to Consider
Revenue-related Issues
Expense-related Issues
Getting Help with Financial Analysis of Managed Care Contract

Surviving in a World of Managed Care 

With over 100 million Americans enrolled in managed care programs, it becomes important for you to consider participating in managed care plans. According to a recent survey by the American Medical Association, 92% of physicians were part of practices which participated in one or more managed care arrangements. While the term managed care is often used to describe Health Maintenance Organizations (HMOs), it is actually a broad title for a variety of programs which stress proper utilization of health services and usually require some type of financial risk-based or discounted financial reimbursement system. Other common managed care arrangements include Preferred Provider Organizations (PPOs) and Exclusive Provider Organizations (EPOs), and even medical management organizations which review and approve medical or hospital services may also be considered as part of managed care industry. Managed care plans operate in all market segments including commercial, Medicare and Medicaid, self-funded employer and workers compensation insurance.

Providers are willing to sign managed care contracts in return for the promise of seeing more patients which are brought to their practice through managed care plans which market to various market segments. In some markets managed care has become so pervasive that it is very difficult to develop a successful practice without signing managed care agreements. However, by signing up for many managed care plans, physicians also increase their administrative headaches because each plan has its own restrictions and requirements. According to one recent survey, almost 50% of physicians who had signed managed care agreements reported that their practice's overall profitability had declined. It is safe to assume that such a decline is due, at least in part, to increasing practice cost often associated with increased staff and computer-related expenses which are needed to effectively manage the programs within your practice. However, physicians who learn how to integrate the rules of managed care with their operations usually achieve high levels of practice performance.

Growing Your Practice 

In spite of the potential problems associated with managed care, you can benefit by exploring managed care as an option for the growth and success of your own practice. By carefully analyzing the terms offered under managed care contracts (i.e., capitation and reimbursement levels, administrative requirements, etc.) you will be in a better position to evaluate managed care agreements and their impact to your practice. Small practices can still continue to provide high levels of care, but will benefit greatly by learning to negotiate with managed care companies. Stated simply, good managed care contracts can offer you the ability to improve your practice's productivity, operational efficiency, patient base and revenue.

Once managed care is chosen as a strategic option for growth and expansion of your patient base, it is important to find contracts that are appropriate for you and your practice. To discover good contracts you'll need to study different managed care organizations and identify those plans which will contribute the largest amount of patient lives and compensation to meet your practice's growth and revenue needs.

Managed Care Reimbursement 

There are several predominant ways physicians are reimbursed under managed care agreements. Following is a brief discussion of these payment methods.

• Discounted fee-for-service is a traditional means of payment. PPOs and some HMOs commonly use this method. Discounts often vary between 10% and 30% depending on the competitiveness of the market and the ability to deliver large numbers of patients to the contracted providers.
• A fee schedule sets a cap or maximum fee on what may be reimbursed for a procedure. Fee schedules were commonly used by many payers in the 1960s and 1970s and are again becoming more common in various parts of the country today. Medicare's resource-based relative value scale (RBRVS) is an example of setting a maximum fee which will be paid for a given procedure based on the complexity of the procedure times a price per unit of complexity.
• Case rate or package pricing is often used for procedures which involve a professional and a technical (or institutional) charge. Procedures are reimbursed at a fixed rate. For example, a case rate for a hysterectomy would cover the charges from the hospital, the surgeon, the anesthesiologist, the pathologists, as well as pre-operative and post-operative care. Vaginal and C-section deliveries are also a common example of case rate pricing.
• Capitation is a fixed payment which is made on a per-member basis each month. Capitation is used by HMOs for professional services and may also be used as a payment mechanism to hospitals which provide contracted inpatient and outpatient services to HMO members. Primary care physicians are frequently paid capitation by either health plans or through independent practice associations (IPAs). IPAs are physician-owned and managed organizations which contract with health plans for professional services on behalf of their physician members. If the IPA is capitated by the health plan, it becomes financially responsible for providing specified primary care and specialty services. While primary care physicians are most commonly paid by capitation, specialty services may also be reimbursed through capitation.
• Global capitation is also paid on a per-member and per-month basis but it is designed to cover both professional as well as hospital and ancillary services. It is often called "full-risk" because virtually the entire financial risk for patient care is passed to providers who accept the global capitation. By accepting global capitation, providers act much like an insurance company in the sense that they must pay for all patient-related services from the capitation provided. Therefore, while global capitation holds the most risk, it also presents opportunity for the greatest reward if the total cost of care can be managed at a cost less than the global capitation payment. While once very popular among large integrated health systems, providers and payers are becoming increasingly wary of the financial risks involved and are tending to move away from global capitation.

Risk Issues 

As mentioned above, taking risk through capitation presents a number of risks which are transferred from the payer to the providers. Being successful in risk contracting involves an effective medical management system and an understanding of fundamental risk issues which include:

• Underwriting risk occurs by signing up a demographically unfavorable population which may have significant medical needs and ultimately drive up the cost of care.



• Price level risk involves accepting a fixed payment for services but having to deal with increasing costs due to changes in subcontracted fees or escalation of non-negotiated medical costs.



• Utilization risk is associated with the inability to control the utilization of healthcare services and directly involves the effectiveness of the medical management system.



• Environmental and legal risks involve changes in governmental regulations, mandated benefits, changes in competition and market forces, and risks associated with legal suits dealing with patient quality and outcomes.



• Marketing risks most commonly involve achieving a lower level of membership than anticipated thereby lowering the positive impact of larger margins.

Factors to Consider 

If you decide to participate in managed care plans you will need to assess the financial and operational impact such contracting will have on your practice. While the revenue numbers are relatively easy to forecast, increased administrative costs related to treating a higher patient volume and administrative requirements imposed by contracting organizations (IPAs, etc.) or health plans are less obvious. Thus, you should explore some of the following basic issues prior to signing a contract:

Revenue-related Issues: 

• Adequacy of compensation
• Timeliness of payments
• Ability to re-negotiate payment rates
• Stop loss, risk-share arrangements and structure of withhold pools
• Ability of health plan to deliver an increased number of patients




Expense-related Issues: 

• Getting accurate eligibility information in a timely manner
• Administrative requirements relating to referrals and hospitalizations
• Additional medical management requirements
• Site visits by health plans
• Increased phone calls, requests for appointments and follow-ups

Contracting with managed care organizations can be a difficult and an unpleasant experience if you don't know what to expect and understand some of the ground rules for negotiating contracts. Here are some tips:

Become part of a larger physician group as opposed to negotiating by yourself. Many physicians contract through IPAs which allow them to retain a great deal of practice autonomy while still reaping the advantages of being part of a larger group of providers for negotiating purposes. The old saying that there is strength in numbers is true when it comes to exerting leverage on HMOs and other managed care plans. Studies by the AMA have demonstrated that success in contracting increases as the number of physicians involved in the network also increases.

Don't be afraid to pass up a bad contract. Recent experience has demonstrated that a bad contract may cause physicians to financially fail in their practice. As health plan margins have decreased, managed care plans have been under increasing pressure to tighten up on provider reimbursement levels. This coupled with an increased administrative burden on the practice can make life under managed care miserable.

Get good contracting advise. Managed care agreements have a tendency to be long and complicated. Often times the language and terms are unfamiliar to most physicians. Remember that managed care agreements are written by managed care plans and offer terms that are not always in your best interest. Critical terms which directly affect you include such issues as time for payments, submission of clean claims, amendment processes exclusivity, termination, and administrative and medical requirements. Solid legal and/or consulting advice from experienced professionals can save you a good deal of grief after the agreement is signed.

Get some insight about how other physicians like dealing with the managed care plan. Physicians who already have contracts in place can be a great source of information. The managed care plan's provider directory is a good source of names and phone numbers of other physicians who are currently working with the plan. Call a few - particularly those from your own specialty.

Getting Help with Financial Analysis of Managed Care Contract 

ExpertPractice.com has developed two simple worksheets to analyze managed care contracts and assess their financial impact on practice revenue. By performing a simple analysis, physicians will be able to understand the financial terms of the contract, as well as develop an easy tool for accurately summarizing operations each month related to managed care lives.

The following worksheets allow you to track revenue that should be received for capitated lives. Completing these worksheets requires only reference to the managed care contract that is being analyzed in order to get some of the contract's key terms. This type of analysis should be made for each contract as well as for each type of patient (i.e., Medicare and Medicaid beneficiaries, commercial, etc.).

It is important that you understand how well you are performing under your managed care agreements. This can easily be done by comparing your gross billed charges (or net charges) with your receipts for each managed care plan in which you participate. Let's get a few basic terms down. (Refer to the Accounts Receivable Management section of the PracticeAdvisor Resource Guide™ for more information.)

Gross charges are your customary fees for procedures that would have been billed to patients had they not been part of a managed care contract. Net charges are gross charges less total adjustments (such as contractual discounts). Net collections represent the actual payments received from the payer plus any cash received from patient co-payments.

The net collection percentage is net collections divided by net charges. This ratio is an indication of the amount of allowable charges for which the payer will reimburse the physician. The ratio should be no less than 90%.

Finally, the net charge percentage is net charges divided by gross charges. This ratio should fall approximately in the 65% to 75% (depending on specialty) and is an indication of the opportunity cost of doing business with a plan provider. In other words, holding all else constant, this ratio should be similar to the gross collection percentage for fee-for-service billings.

Remember also that only a portion of the premium collected by the managed care plan is passed along to physicians. The rest will remain with the payer in a medical pool which is setup to pay for the other medical expenses of the patients. You or your contracting organization (i.e., IPA) should track these fund balances since you may be entitled to an incentive payment at the end of the year if a surplus exists after all claims expenses are paid. The opposite, however, may be true as well. That is, you may be financially responsible for making up any shortfall if claims expenses exceed the premium collected. However, proper financial, operational, and utilization management of the care process usually eliminates the risk of negative medical fund balances.