The Alphabet Soup of Managed Care Organizations: Provider Perspective







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Session 16:

The Alphabet Soup of Managed

Care Organizations:

Provider Perspective

Society of Actuaries 1997 Annual Meeting Monday, October 27 10:30 a.m. - 12:00 noon






















Provider MCO’s - What Are They?

Q A provider organization which contracts

with an HMO

– On a capitated or risk-bearing basis – Or otherwise

Q A provider organization which accepts risk


Examples: “Carve Out” MCO’s

Q PBMs - Prescription drugs

Q BHO - Behavioral Health Organization Q Laboratory

Q Radiology

Q Capitated Specialties - e.g. Cardiology Q HIV/AIDS


Examples: General Providers

Q Primary Care Physicians

Q Multi-Specialty Group Practices Q Hospitals & Health Systems


Examples: Integrated Groups

Q MSO’s - Medical Service Organizations Q PHO’s - Physician Hospital Organizations Q IDS - Integrated Delivery Systems

Q PSO’s - Provider Sponsored Organizations Q Alphabet Soup - ISDN, CISN, PSN, etc.


Actuarial Roles - Provider MCOs

Q HMO’s - Capitation Negotiations Q Employers - Direct Contracting Q HCFA - Medicare + Choice

Q State DHS - Medicaid Program

Q Insurance Department - PSO Formation Q Reinsurer


Basics: Actuarial Pricing Model

Q Capitation rate is calculated as:

– Utilization x Cost per Service = PMPM

Q Utilization rate assumptions taken from:

– Historical results

– Projected Managed Care improvements

Q Cost per service reflects provider costs and


Basics: Shifting Sites of Care

Q Managed care often shifts sites of care

Q Utilization decreases at one site, increases at


Q Service Intensity often increases at both


Q Ideally, care is shifted to the most


PHO Formation

Q Hospital and Physicians form PHO

Q PHO contracts with HMO’s or employers to

accept risk on a capitated basis

Q Entities within the PHO don’t always trust

one another

Q How do you divide the capitation dollar? Q How do you align incentives?


PHO Capitation Split

Q Negotiated process

Q Actuarial pricing model under various

scenarios of reimbursement, utilization

Q Selection of assumptions is part of the



PHO: Aligning Incentives

Q Need to align incentives to:

– Put providers most at risk for the services they provide directly

– Put providers at risk for services they can influence directly or indirectly

– Encourage use of most appropriate site of care – Reward providers for favorable results overall


Premium Funds Flow

Primary Care Pool


Care Pool Hospital Pool AdministrativeExpenses ExpensesOther Health Entity 14% 28% 32% 12% 14% Includes: • Family Practice • Internal Medicine • Pediatrics Includes:

• All other physician services not included in primary care • OB/GYN Includes: • Inpatient Hospital Expenses • Outpatient Hospital Expenses Includes: • Tertiary Care • Prescription Drugs • MH/SA • Home Health • DME • Ambulance • Out-of-Area • Transplants


PCP Pool Fund Distribution

PCP Pool Health Entity Withhold Pool PCP Bonus Hospital Specialist Physician A Physician B Physician C 19% of Premium 85% × Capitation 15% × Capitation Offset Deficit Offset Deficit Balance 10% of Surplus 20% of Surplus


Specialist Pool Fund Distribution

Specialist Pool HealthEntity Specialist Bonus Reserves PCP Hospital 20% of Surplus 20% of Surplus 23% of Premium 80% × Fee Schedule* 50% of Surplus Withhold Pool 20% × Fee Schedule* Offset Deficit Balance Offset Deficit 20% of Surplus Physician A Physician B Physician C Health Entity 10% of Surplus


Hospital Pool Fund Distribution

Hospital Pool HealthEntity Withhold Pool Hospital Bonus Reserve PCP Specialist 20% of Surplus 10% of Surplus 32% of Premium 80% × DRG Schedule* 20% × DRG Schedule* Offset Deficit 40% of Surplus Offset Deficit Specialist 20% of Surplus Hospital A Hospital B Health Entity 10% of Surplus


Competitive Capitation Pricing:

Challenges for the Actuary

Q Excess supply of providers/specialists Q HMO’s are using competitive bidding Q 300-500,000 lives to a single vendor

Q Providers face gain/loss of market share Q Assisting these providers presents some


Competitive Capitation Pricing

Challenge #1: Data Quality

Q HMO may provide only demographic data Q HMO does not want bids based on historical

costs and utilization

Q Challenge to identify normative utilization Q Challenge to identify “best practices”

Q Will the provider be able to achieve the


Competitive Capitation Pricing

Challenge #2: Unit Costs

Q Marginal pricing may be appropriate for

incremental volume

Q Restructuring may be required to reduce

costs - Can this be achieved?

Q Can the provider serve all the members


If not, can they subcontract at the same unit price level assumed in the bid?


Competitive Capitation Pricing

Challenge #3: Optimal Price

Q Increasing capitation price bid:

– Decreases likelihood of winning the bid

– Increases risk of losing current market share

Q Decreasing capitation price bid:

– Increases likelihood of winning the bid – Decreases profitability if the bid is won


Competitive Capitation Pricing

Challenge #4: Documentation

Q New standard of practice

Q How do you document all of this?

Q Not as simple as putting together a pricing


Competitive Capitation Pricing

Challenge #5: Professional Risk

Q Provider will lose market share if the bid is


Q Provider is most likely to win the bid if

costs are underestimated

Q Many uncertainties in estimating the costs Q Need for appropriate communication with



Q Relevant ASOP’s: 5, 8, 16, 23, 25, New Q BBA of 1997

Q Medicare: Provider at Risk Rules Q NAIC: RBC for MCO’s


For Further Information


On the web:


Phone: (715) 381-1345 Fax: (715) 381-0075





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