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Barry
Eisenberg, FACHE
Executive Director
Sibley Memorial Hospital, Washington, D.C.
Organizational
Information
The capitated system for reimbursing physicians under a professional
risk HMO contract was developed by a physician hospital organization
(PHO). The PHO was a limited liability company that was wholly owned
by a 344-bed community hospital (hospital) and Healthcare Affiliates,
Inc., which is a wholly owned subsidiary of the Hospital. The PHO was
formed in 1995 with the primary business objective to negotiate, sign,
and administer managed care contracts for both physician and hospital
services under capitation, global fees, and preferred provider arrangements.
The PHO was managed by a board of directors that was divided into two
classes: hospital directors and physician directors. There were three
hospital directors-two of them were members of the hospital board of
trustees and the other was the CEO of the hospital. Of the ten physician
directors, six were primary care physicians, three were office-based
specialty physicians, and one was a hospital-based specialty physician.
All decisions and actions taken by the PHO board of directors required
an affirmative vote of a majority of the hospital directors and a majority
of the physician directors. The board regularly met every other month,
or more often if necessary. The PHO, a contract management organization,
represented the hospital and the participating physicians and provided
provider credentialing, contract negotiation, and management. The contract
management functions included claims payment, utilization review, and
quality assurance.
The full-service community hospital provides medical and surgical services,
including intensive care, obstetrics, psychiatry, and emergency services,
but is primarily known as a surgical hospital. In addition to these
inpatient services, the hospital offers special services such as rehabilitation
medicine, a 24-hour emergency room, comprehensive diagnostic and therapeutic
radiology services, an outpatient surgery center, a dedicated endoscopy
suite, and a senior services program offering a package of health and
wellness services.
The hospital, which has been in its current location since 1961, is
a voluntary, not for-profit organization and has a strong connection
to a religious denomination. The hospital is primarily governed by the
executive committee of the board of trustees, which meets monthly except
for August; the full board of trustees, on the other hand, meets semi-annually.
The PHO and parent hospital are located in a major metropolitan area
that includes sections of two states and a third political jurisdiction.
It is located near the border between two political jurisdictions and
next to a river that serves as a boundary with the third jurisdiction.
The PHO shares the same service area as the hospital, which includes
the northwest portion of the jurisdiction where the hospital is located,
the southern part of a county in the neighboring state, and a small
part of the state across the river. Almost 50 percent of the hospital's
patients live in the neighboring jurisdictions. Approximately 750,000
people live in the hospitals' primary service area, and this population
is relatively stable but aging. Over 14 percent of the primary service
area population was over age 65, a higher concentration of elderly than
in the nearest metropolitan area or in the country. The population in
the hospital's primary service area is affluent, well-educated, and
well-insured.
The hospital competes with four other hospitals for patients in their
service area. One of these hospitals is a university teaching hospital,
and the other three are community hospitals of similar size to this
hospital. All of the competitor hospitals had developed PHOs that were
actively seeking managed care contracts. Managed care enrollment began
to increase during the time period covered by this case study, and competition
among the hospitals for patients began to escalate. Risk contracting
was seen as one strategy for building market share in a growing managed
care market.
Brief
Summary of the Problem
Shortly after the PHO was organized, it had an opportunity to sign a
professional risk contract. Eager to enter the market, the PHO board
accepted the recommendations of a consultant, signed the contract, and
adopted a complex capitation model. A number of problems immediately
surfaced once the contract took effect; however, the most serious problem
surfaced nine months into the contract. The PHO was managing far fewer
covered lives than anticipated, and the specialty pools had insufficient
funds to pay the participating specialty physicians adequately for treating
patients under the adopted capitation model. The executive director,
anticipating widespread physician discontent and the real potential
that physicians would drop out of the PHO, modified the model so that
at the end of the first contract year the PHO could tap into all available
capitation funds to fairly pay all physicians who treated patients.
Description
of the Problem
The PHO was formed in the middle of 1995 and immediately had an opportunity
to enter into a full professional risk HMO contract. The key players
involved in the contract analysis, negotiation, and management included
the executive director of the PHO, the PHO board, the hospital, and
the physicians who participated in the PHO. As the executive director
of the PHO, I was directly responsible for managing this contract under
the general guidance of the board. My responsibilities included the
daily operations of the PHO as well as direct management of the capitation
accounting and all provider reimbursement. I identified the problems
discussed in this case report, developed the solutions, presented them
to the board, and then implemented them.
A summary of the key contract terms and the capitation model are critical
to understanding the problems that the PHO faced. Under this contract
the PHO would be at risk for all outpatient professional services provided
to individuals who chose one of the PHO's primary care physicians to
manage their care. This included all office-based care provided by the
participating primary care or specialty physicians. Any subscriber who
chose one of the PHO primary care physicians was required to use one
of the specialists in the PHO to receive full HMO coverage. In addition,
the PHO would be at risk for all outpatient radiology and laboratory
services, immunizations, and chemotherapeutics. The PHO would also share
risk with the HMO for inpatient and ambulatory surgery services. A number
of carve outs to the contract included mental health care, eye care,
pharmacy, home health, and durable medical equipment. Under the contract,
the HMO would pay the PHO a monthly capitation amount and then would
contribute a capitation amount to an inpatient pool from which the HMO
would pay for all inpatient and ambulatory surgery facility services.
The PHO board felt some urgency to sign this contract so that the organization's
physicians could be listed in the provider directory for the coming
open season of the major employer in the community. Neither the board
nor executive director of the PHO had experience with managing a risk
contract, but had been working with a consultant on the development
of the PHO. The next step in the development process would have been
to study various capitation methods and choose the most appropriate
model for the participating physicians and the market. However, as a
result of the urgency of signing the HMO contract and the necessity
of having a physician panel in place when the contract was signed, the
board adopted within two months the consultant's recommended capitation
model with very little serious study. The one-year contract was signed
in late August 1995 with an effective date of January 1, 1996.
The PHO accepted the HMO's offer of a monthly capitation fee of $46
per member per month (PMPM) based on the consultant's recommendation.
The board also accepted the consultant's recommendations of the capitation
model and proposed distribution of the capitation to the various specialties.
The payment model recommended by the consultant was a combination of
direct monthly capitation and department capitation. The following providers
agreed to accept direct capitation: primary care physicians; hospital-based
physicians, including radiologists, emergency room physicians and pathologists;
the reference laboratory; and the parent hospital for the facility component
of selected outpatient services. These providers received a payment
each month based on the number of covered lives being managed by the
PHO and their specific capitation amount. The consultant recommended
that the primary care physicians receive, on average, $13.50 PMPM, which
the physicians thought was very reasonable.
The specialty physicians were paid according to a department capitation
model. In this model, all funds for each specialty were placed in a
separate pool and all participating physicians in a particular specialty
divided the assets of the fund depending on utilization. The office-based
specialists were allocated a total of the $10.30 PMPM. This was distributed
among 25 specialty pools and ranged from $0.04 for hand surgery to $1.10
for orthopedic surgery. Each month an amount was contributed to each
pool equal to the product of the capitation amount and the number of
covered lives. Assets in each fund accumulated until the pool was used
to pay a physician. Each pool could only be used to pay the corresponding
specialist-for example, the orthopedic pool was used to pay orthopedic
surgeons.
Many of the participating physicians, and in particular the specialists,
had very little experience with capitation. While the figures seemed
low, a sufficient number of PHO specialty physicians agreed to participate
in the contract. Their agreement was due in large part to the reputation
of the hospital and the physician's trust that the PHO (and also the
hospital) would treat them fairly. A sufficient amount of physicians
were willing to experiment with risk contracting to develop a large
enough physician panel to enter into the contract. However only 14 primary
care physicians, including only two pediatricians, agreed to the contract,
which was considered by our consultant as the minimum acceptable number
for participation in the contract.
The remaining capitation amount the PHO received was allocated to the
following categories:
- Outpatient
ancillary services,
- Hospital
outpatient services,
- Out-of-network
services,
- Chemotherapy
and immunizations,
- Administrative
expenses,
- Primary
care bonus pool, and
- Risk
pool for inpatient services.
The PHO
board, and in particular the finance committee, was concerned that during
the first months of the contract, when the number of covered lives would
be small, all participating specialists would equally share the financial
risk during a payment period. Consequently, a complex set of procedures
were developed to guide the payment of specialists during the first
contract year. Each specialist sent a claim to the PHO for each episode
of care, and the PHO converted each bill into Medicare RBRVS units based
on the CPT codes listed on the claim form. The assets in each specialty
pool were to be distributed every six months based on a complex formula,
which calculated the average dollar value per unit based on the number
of RBRVS units generated and the total funds residing in the pool. Each
specialty physician received a partial payment after three months, and
then all the funds in the pool were distributed at the end of six months.
Maximum reimbursement for any CPT code was set at 120 percent of current
Medicare reimbursement. Any funds remaining from one six-month period
would carryover into the next six-month period.
A number of problems arose as a result of this capitation model and
the speed in which the PHO signed the contract. The first problem was
that we were unable to get physician participation in a number of key
specialties, including dermatology, infectious disease, and allergy.
However, we were obligated under our contract to provide physician coverage
in these specialties. By far, the most serious problem facing the PHO
was paying specialty physicians a fair amount for treating patients.
This problem did not become apparent until nine months into the contract.
The small number of primary care physicians, in particular the number
of pediatricians, did not attract a large number of HMO subscribers.
The physicians were located in areas of low HMO enrollment, and few
HMO subscribers chose them as their primary care physicians. Thus the
number of covered lives started very small and grew slowly. At the end
of the first two months of the contract, the PHO only had 20 covered
lives, and by the end of nine months, the total number of covered lives
was only 79. As a result, the amount of money allocated each month to
each individual specialty pool was small. This became a major problem
as specialists began to treat patients. The PHO was fortunate that during
the first six months of the contract operations almost no specialty
visits were made for which the PHO received a bill.
The magnitude of the problem did not become clear until I started to
process the specialty payments for the July through September time period.
The capitation schedule was far too complex for the number of lives
the PHO was managing. Between July and September, there was specialty
utilization in gastroenterology, gynecology, and otolaryngology.
At the end of the first nine months under the contract, the specialty
pools had a total of $5,761. This amount was subdivided into 25 distinct
specialty pools; therefore, at the end of September, there was only
$405 in the gynecology pool. Two obstetrician/gynecologists had seen
patients during this period, and the total charge generated by one of
them was $1,005 based on the PHO's fee schedule. Based on the reimbursement
methodology that was adopted, this obstetrician received a check for
$266.21 for all the patients seen during the July-through-September
period. While this represented only a partial payment from the pool,
full payment would still only pay 35 percent of the PHO fee schedule.
I knew that we would lose physicians if we did not treat them fairly.
I spoke with the specialists who had seen patients and had been reimbursed
at this low level, and they were very concerned about the situation.
Overall the money allocated to all the specialty pools was insufficient
to reimburse the physicians given the current utilization levels. I
felt strongly that we had to develop a fair way to ensure that the physicians
received at least the current Medicare reimbursement by the end of the
year.
Administrative
Decision
The problem of having no participating physicians in key specialty areas
was relatively easy to fix. Because the physicians did not want to assume
any financial risk, I developed special agreements with a dermatologist
and an infectious disease group practice in which the PHO guaranteed
a minimum level of reimbursement for treating patients. This process
required ongoing and intensive negotiating with the physicians, developing
reimbursement agreements with fee schedules, and then presenting the
fee schedules to the finance and contracts committee and the PHO board
for approval. The PHO was obligated to pay for these services if they
were required by an HMO subscriber, so the only alternative was to pay
the physician's fee schedule. I was able to get these physicians to
accept Medicare reimbursement at the guaranteed level, which was less
than their usual and customary charges. While the PHO board preferred
to avoid special agreements, they recognized that provision of this
coverage was necessary and agreed to my proposals. We were unable to
identify an allergist who would participate in the contract under any
terms and had to pay for these services at the customary level.
By far, the most difficult problem to address was specialty physician
reimbursement. The level of reimbursement was unacceptably low as a
result of paying the first specialty physician bills; therefore, I conducted
a detailed analysis of the specialty pools to determine if there was
an error in the funding. After completing this analysis, I determined
that we needed to modify the capitation model and develop a fairer way
of ensuring that physicians received at least the current Medicare reimbursement
for the patients they treated, using the available money in unused specialty
pools. I decided that the best time to make the adjustment was at the
end of the year after receiving all claims for 1996.
To assist
me in identifying potential solutions to the problem, I discussed with
an actuary and colleagues in other PHOs the structure of the capitation
model and the method of paying specialists. They suggested that a more
manageable way to pay specialists would be to have one large pool for
distributing this money to reimburse physicians. I shared my concern
and analysis of the situation and proposed solutions with the finance
and contracts committee at the end of October and together we crafted
two motions to address the situation. One option was to modify the capitation
schedule myself, relying on the advice of colleagues in other PHOs and
whatever resources were available. The second option was to hire an
actuary to fix the capitation schedule and address these problems. Given
the low number of covered lives and the fact that the PHO was operating
at a loss, the finance and contracts committee felt the more prudent
approach was to have me modify the capitation schedule and reimbursement
methodology. At my recommendation, the committee approved two motions
to present to the PHO board. The approach we decided to take was to
get the board's approval on the proposal to modify the current payment
methodology to allow for end-of-year adjustments and a proposal to alter
the capitation model for the second contract year. Once I had their
support for the changes, I would develop the new procedures for reimbursing
physicians and bring them back to the board for their approval.
At the November 1996 board meeting these two resolutions and my supporting
analysis were presented for board approval. One resolution stated that
any specialty physician participating in the HMO contract who saw patients
in 1996 and was reimbursed from a specialty pool would have their reimbursement
adjusted at the end of 1996 using the available money in unused specialty
pools so that their total reimbursement would be equal to at least current
Medicare reimbursement if possible. The second resolution was to recommend
that the 1997 payment system for specialty physicians participating
in the HMO contract should be modified to have only one specialty pool
from which all specialist would be paid. Both resolutions were unanimously
passed by the PHO board. Implementation procedures were to be presented
at the following board meeting.
No alternative to this course of action remained. Without modification
of the reimbursement procedures, a significant amount of unused funds
would have remained in a large number of specialty pools and funding
in the few pools from which payment had to be made would prove inadequate
to reimburse the service providers. With the support of the board through
these resolutions, I was able to contact all specialists who had seen
patients from July through November and assure them that they would
be treated fairly. I had been keeping close watch on the funding of
the specialty pools and was reasonably certain that if I combined all
the funds from all the unused specialty pools, I would be able to bring
all physician reimbursement up to at least Medicare levels. Throughout
the last quarter of 1996 I made myself available to all the specialty
physicians. I listened to their concerns, and assured them that the
board was taking steps to correct these problems. Generally speaking,
while the physicians were unhappy about the level of reimbursement they
were receiving, they were pleased that we were responsive to their concerns,
were modifying our reimbursement structure, and were ensuring that all
physicians would be treated fairly.
During the next two months I developed the procedures for adjusting
the reimbursement of office-based specialists and for modifying the
capitation model for the second contract year. The procedures were unanimously
approved by the PHO board. The procedures for adjusting the reimbursement
of office-based specialists were fairly straightforward. The procedures
were designed to raise each physician's total reimbursement for the
year to Medicare reimbursement levels. If this couldn't be achieved
from the money in the specialty pool, then money was taken from a specialty
adjustment fund to meet this goal. This money was funded from excess
or unspent funds left in the other specialty pools.
The changes to the capitation model for the second contract year primarily
involved specialty physician capitation and reimbursement procedures.
These changes were the result of extensive discussions with the participating
physicians, colleagues in other PHOs, and insurance companies. All office-based
specialists would be paid from one specialty pool funded by an amount
equal to the sum of all 25 specialty pools. In addition, the radiology
capitation would be added to this pool and radiologists would be paid
like any other specialist. The payment rules would remain the same,
but now the pool would be larger. We also made some important modifications
to the payment rules in response to requests from the participating
physicians. We agreed to pay primary care physicians from the specialty
pool for performing flexible sigmoidoscopies and limited radiology procedures.
In addition we established obstetric case rates for newborn deliveries,
which was consistent with the prevailing practices in the market.
The
Results
The PHO ended 1996 with only 100 covered lives; this number was far
fewer than projected or hoped. Final end-of year-payments were delayed
until March 1997 to ensure that all claims for 1996 dates of service
had been received. With the new reimbursement procedures, the available
funds in the other specialty pools were used to bring almost all physician
reimbursement up to current Medicare fees. Only two physicians did not
receive the Medicare level of reimbursement, but their reimbursement
came very close to that amount.
The specialty physicians who saw patients in 1996 were pleased that
we were able to reimburse them at least at Medicare levels. As a result
of low medical utilization, the PHO was able, even given the small number
of covered lives, to generate $615 more in a capitation revenue than
was spent on all medical expenses in 1996. Therefore, I considered the
modifications made to the capitation system during the first contract
year to be successful.
I was able to negotiate an increase in our capitation rate from the
HMO, and the PHO decided to continue the contract for a second year.
During second year of operation the number of covered lives continued
to increase slowly. By the end of 1997 we had 198 covered lives. While
the higher capitation rate and the new capitation model made more money
available per member per month with which to pay physicians, the balance
in the specialty pool was still relatively small because of the number
of covered lives. To compound this situation, physician visits and utilization
increased dramatically. Consequently, the specialty pool was inadequately
funded to pay specialists at least Medicare reimbursement levels. Specialty
physicians were not happy about the level of reimbursement that they
received in 1997. As a result of significant medical utilization in
1997, the PHO spent $18,000 more for medical expenses than it received
in capitation revenue. Specialty physicians were paid at a rate that
was far below current Medicare levels despite the modifications to the
capitation and payment models.
Looking back on the situation, I believe that we responded appropriately.
Making the end-of-year adjustments for 1996 claims was the right thing
to do. If we had not done it, most of the specialty physicians who had
seen patients would not have continued their participation in the contract.
Revising the capitation model for the second contract year was also
the correct solution; unfortunately, the revisions did not prevent the
specialty physicians from receiving inadequate reimbursement given the
small number of covered lives and high medical utilization.
With the number of covered lives far below projections, and the recognition
that the PHO would never be able to be financially self-sustaining with
such a low number of covered lives, the PHO board decided to end the
HMO contract at the end of 1997. This decision was made in mid-1997
and corresponded to the hospital's investment in a competing physician
network, which had a significantly greater number of primary care physicians.
Fifty percent of the network's participating physicians practiced primary
care, and the network had far more covered lives with the same HMO than
the PHO did.
Although the physicians were upset about the reimbursement they received
in 1997, they were pleased that the PHO was terminating the contract.
For most physicians, the number of patients they treated was relatively
small and although they were paid far less than Medicare rate for the
patients, the fact that the PHO had decided to terminate the contract
and limit their losses reduced their anger. The physicians felt that
the PHO had made a wise business decision and respected the organization
for not taking advantage of them. When the hospital originally undertook
to develop the PHO, the physicians were told that it would be used as
the organizational vehicle with which to experiment with risk contracting.
The experiment had failed and we were terminating the contract to limit
everyone's losses. The physicians respected this position.
A number of mistakes were made by the PHO that severely hampered its
ability to succeed in this risk contract. The first mistake was not
taking the time to study the capitation method. If we had studied the
consultant's recommendations more carefully, particularly the effect
on reimbursement levels if the number of covered lives did not reach
projections, we might have changed the system before entering into the
contract. The other major mistake was entering into the contract with
too few primary care physicians. This small number of physicians severely
limited the number of covered lives.
These critical lessons helped me tremendously when we later evaluated
whether or not to enter into a full-risk Medicare HMO contract with
the same HMO. These lessons are also valuable to any healthcare organization
that considers entering into a risk contract.
References
1. Sibley
Health Network Board of Directors Meeting Materials and Minutes, 1995,
1996, 1997
2. Sibley Health Network Finance and Contracts Committee Meeting Materials
and Minutes, 1995, 1996, 1997.
3. Sibley Health Network Medical Advisory Committee Meeting Materials
and Minutes, 1995, 1996, 1997.
4. SHN Capitation Rate Development, Michael Steinberg & Associates,
1995
5. Healthcare Corporation of the Mid-Atlantic IPA Service Agreement
between CareFirst and Sibley Health Network, L.L.C.
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