Kevin Patrick Carey, FACHE
Regional Manager, Program Development
Olympic Health Management/AON Corporation
Bellingham, Washington

Organizational Information
During my tenure with the healthcare group as its director of managed care and PHO executive director, the group served as one of nine healthcare groups in a geographically dispersed, not-for-profit, Catholic hospital system, and participated in a not-for-profit health alliance with six other not-for-profit hospitals in the region. In its more than 30 years of operation, the group had developed a full continuum of care, including acute care inpatient and outpatient services, a home health agency, a long-term care facility, and hospital-based durable medical equipment (DME) services. The healthcare group operated 112 acute care beds and 104 long-term care beds, had annual revenues of approximately $52 million, and employed a staff of 578 employees. It serviced 8,000 admissions per year and 47,000 outpatient visits per year, and ran an average occupancy rate of less than 50 percent. Over half of its business was to Medicare patients. Two for-profit hospitals competed in the healthcare group’s primary service area: one was located directly across the street and the other across a river separating two distinct towns within the same county. During my employment, the healthcare group was preparing for a merger and subsequent consolidation with another not-for-profit, non-religious hospital located within its extended market. Significant steps taken by the management team and a host of external factors would make the healthcare group the dominant provider of healthcare services in its primary and extended service areas within a few short years.

In 1994, the healthcare group’s primary and extended service areas had virtually no managed care penetration. Service area population had grown to 137,450, of which 42,078 or 31 percent were Medicare eligibles. None of those eligible for Medicare were enrolled in Medicare Risk Health Maintenance Organizations (HMOs). As Florida had just instituted mandated Medicaid enrollment, a fair number of Medicaid recipients—approximately 1,000 recipients, or 5 percent penetration in the physician-hospital organization’s (PHO) service area—had enrolled in Medicaid HMOs. Commercial managed care penetration had grown to about 3 percent, with the majority of those enrolled electing commercial Preferred Provider Organization (PPO)–type plans. The predominant payment mechanism at the time was discounted fee for service; no providers operating in the area were being paid on an at-risk basis. This picture was to change dramatically in the ensuing years. With Medicaid and commercial managed care gaining a foothold in the healthcare group’s service area and $241 million in AAPCC (Average Annual Per Capita Cost) revenue at stake in Medicare managed care contracting, the healthcare group knew managed care was well on its way and knew it had to take certain steps to effectively position itself.

Between 1994 and 1996 the healthcare group made great strides toward effectively positioning itself for an evolving managed care environment. These steps included: creating a PHO to serve as the managed care arm for the healthcare group and its affiliated physicians, increasing the operational efficiency across the healthcare group’s continuum of care, extending its relationships with quaternary medical centers and rural primary care hospitals, and participating in a regional not-for-profit health alliance for regional managed care contracting initiatives. The healthcare group recognized that these steps were only a beginning to the work necessary to effectively position the group for the challenges presented by a higher-level managed care environment. The healthcare group knew it needed to make the transition from a Stage 1 managed care market to a Stage 2 managed care market in a very short period of time (See Table 1).

Table 1: Stages of Managed Care

Adapted from Coile, R. C., Jr. 1995. Hospital Strategy Report.

Brief Statement of the Problem
Based on changing market dynamics and the results of an internal managed care readiness audit, the healthcare group determined it was ill-equipped to respond to the evolving managed care marketplace. Senior management directed me as executive director to develop a game plan to transition the healthcare group and its affiliated providers toward an increasingly evolving managed care environment.

Description of the Problem
Certain market dynamics in the healthcare group’s primary and secondary service areas led senior management to conclude that the healthcare group needed to do more to prepare for managed care. These dynamics included:

• Increasing provider and payer consolidation: Payers and providers alike were increasingly consolidating to gain desired benefits from economies of scale, increased leverage, and process streamlining.
• Market demands for “one-stop” shopping: Purchasers were demanding that insurers and providers prepare to compete under “managed competition” scenarios wherein integrated delivery systems would operate a linked comprehensive continuum of care and healthcare financing system, and both could be held accountable and compete with alternatives in the marketplace on the basis of quality and value.
• Purchaser preference for “managed” health benefits: More and more purchasers of healthcare services were demanding lower cost, higher quality healthcare services. Managed care penetration was on the rise in the healthcare group’s primary and extended service areas.
• Transference of risk from payers to providers: Increasingly, managed care arrangements between payers and providers were including elements of risk-sharing between the two.

Relying on an internal managed care readiness assessment, senior management concluded that it needed to prepare for and take advantage of market opportunities offered in the evolving managed care marketplace. This audit evaluated the healthcare group’s capability for service integration across a comprehensive continuum of care and examined utilization management and quality assurance tools used to manage and improve the actual delivery of care at every point on the continuum. It then examined the underlying cost structures in place in the current delivery system. The audit found the healthcare group was ill-prepared for a managed care approach to healthcare delivery because it had no experience working under at-risk contracts, did not effectively manage lengths of stay for acute care admissions, had no data tracking system in place, and had no experience with cost or care guidelines or protocols. Therefore, although the healthcare group was capable of making the full continuum of care available to its patients through provider entities operating within the healthcare group and through affiliations with providers participating in the regional not-for-profit health alliance, it was not equipped to effectively manage the care provided nor control the costs associated with the provision of such care.

The audit found that physician readiness for managed care could improve. The physician community within the healthcare group’s service area was segmented and disorganized. Most physicians practiced exclusively under fee-for-service arrangements. Some organized contracting had occurred through the PHO, but even hospital-based physicians were not complying with the provisions of hospital-executed or PHO-executed contracts. Physician service availability and utilization practices were inadequate as well. The ratio of primary care physicians to specialists was 40 to 60, which is the exact opposite of the recommended proportions. Further, the healthcare group’s affiliated physicians were not used to physician profiling and were not interested in adopting a practice philosophy that placed importance on improving the health of populations on an epidemiological basis.

The audit also found that although the PHO provided the legal and organizational framework for managed care contracting, not all providers within the healthcare group were contracting through the PHO—some continued to contract on their own. Finally, resources necessary to operate the entity were lacking.

Administrative decisions
As the “local managed care expert” and the employee responsible for all managed care–related initiatives, my recommendations weighed heavily in senior management’s decision-making process. Most senior management decisions regarding managed care originated as recommendations from the managed care department and PHO. Given the requirement to better prepare the group for the evolving managed care marketplace and the state of our internal readiness to engage in and perform under managed care arrangements, senior management took the following position.

The philosophical direction and approach to managed care would be formed and guided by its traditional Catholic values and its vision for regionally integrated healthcare delivery and financing. Although some argued that the service area was characteristic of a Stage 1 managed care market, senior management held that the healthcare group should be positioned to respond to the market as if it were a late Stage 2 or early Stage 3 managed care market and that two overriding goals be present in all managed care planning activity: (1) the system will possess the absolute highest quality (value) provider network in the region, and (2) only value-added systems, processes, and services would be designed into the system. It was agreed that, long-term, the regionally integrated healthcare system would contain the following functional elements: network management, insurance services, information services, financial services, case management, claims, encounter management, member services, sales and marketing, and communications.

Senior management mandated that during the following two-year period, the healthcare group would need to maximize revenue through prudent and effective managed care contracting while aggressively targeting specific managed care organizations for long-term partnering. Senior management also mandated that all managed care contracting be handled through the PHO in accordance with an agreed-on set of payer selection criteria and within an agreed-on set of contracting parameters.

Senior management also mandated that an action plan be designed to accomplish the following goals over the course of a two-year period:

1. Ensure that key personnel throughout the organization have a baseline understanding of managed care and how it affects them, the healthcare group, and the community it serves.
2. Implement a proactive and consistent approach to identifying, selecting, and partnering with managed care organizations (MCOs).
3. Ensure that the PHO’s infrastructure is adequately capitalized and capable of meeting the needs of managed care and establish PHO as the single signature entity for the entire healthcare group.
4. Integrate physicians more significantly in managed care initiatives and grow the PHO’s gross revenue through developing and providing managed care services for physician practices.
5. Ensure that the healthcare group’s overall charge structure and pricing in the market is competitive, and enhance the healthcare group’s cost effectiveness by acquiring certain functional components such as contract compliance and data management information technology.
6. Increase the healthcare group’s clinical effectiveness by evaluating clinical services within the healthcare group and filling in any gaps.
7. Grow the healthcare group’s gross revenue through effective managed care contracting.
8. Grow the healthcare group’s gross revenue through developing joint venture relationships with other payer and provider entities.
9. Analyze various alternative managed care models and make recommendations on how best to restructure or expand the PHO/MSO.
10. Merge managed care organizations and consolidate functions at the healthcare group and newly acquired not-for-profit hospital in the extended market.
11. Form a steering committee and assume a leadership role in new regionally integrated healthcare delivery system.

On acceptance of the managed care strategic plan document (developed by the author) that contained detailed work plans designed to accomplish the above goals, successive implementation of the plans began immediately. During my tenure with the healthcare group, goals one to five were addressed.

As a means of ensuring that key stakeholders throughout the organization had full understanding of managed care and how it affects them, a managed care summit was held and a series of in-services followed. General understanding of managed care, its affect, and how each stakeholder could ensure the healthcare group’s managed care success increased immediately. To address the need for a proactive and consistent approach to identifying, selecting, and partnering with MCOs, the author developed a selection criteria and contracting parameters checklist (to view this list, visit www.ache.org). To ensure that the PHO’s infrastructure was adequately capitalized and capable of meeting the needs of managed care and to establish the PHO as the single signature entity for the entire healthcare group, a PHO business plan was completed, presented, and accepted by senior management. Significant efforts were taken to more fully integrate physicians in managed care initiatives. Physicians were actively involved on the PHO’s managed care contracting committee, through which the author and participating physicians drafted our own managed care contract and were subsequently successful in getting three national organizations to execute our agreement instead of using their own with the healthcare group. This early success went a long way toward bringing our affiliated physicians more fully into the fold. Barriers and obstacles had to be overcome at every turn; however, through dogged persistence, trust-building with a core group of physician leaders, a willingness to share information with interested parties, and plain hard work, progress toward the stated goals was readily apparent.

Results
As expected the market has changed dramatically since I first reported for work at the healthcare group. Managed care penetration has grown significantly, particularly Medicare managed care. New payers have come into the market, while others have either been swallowed up by more dominant payers or have left the market outright. All key stakeholders within the healthcare group have a better appreciation for managed care, how it affects them, and what they can do to help ensure the healthcare group’s success. Physicians remain a challenge. Nevertheless, the healthcare group is much better equipped today than it was four years ago to respond to and take advantage of the opportunities that managed care is creating in the marketplace.

Source Material
Resolution to the above identified problem and development of a transition plan was achieved through the efforts of the author, senior management, participating physicians, and staff. This case report has been written from the author’s unique vantage point as lead and participant in the described administrative decisions and actions. Most of what has been reported in this case study is from personal, first-hand observation and knowledge. Data cited in this report was acquired from standard industry references such as The AHA Guide, HCIA’s Profile of U.S. Hospitals; working process documents of the Catholic Health Association of the United States, and proprietary organizational documents.

Appendix 1

Payer Selection Criteria
At a minimum the following information will be collected, filed, maintained, and evaluated, initially and on an ongoing basis for all current and prospective payers/managed care organizations under contract with the healthcare group:

• NCQA Accreditation Status
• Financial status (annual report, 10k, P-U-L-S-E, FHA HMO Indicators)
• Billing process and experience
• Insurance coverage and experience
• Reinsurance coverage and experience
• Objectives and plans to contract with competing providers
• Benefit construction and targeted purchasing groups
• Administrative, clinical, and management staff background and experience
• References from other contracted providers
• Information pertinent to member eligibility process and experience
• Utilization management protocols
• Strategic and business plans
• Marketing and sales plans and program information

Payer Contracting Parameters

• Contracts will define the terms “covered services” and specify the services the providers are responsible for providing.
• Contracts will specify a process to verify patient eligibility and authorize provision of services; contracts will stipulate fiscal responsibility for erroneous verification and/or authorization for services; contracts will not allow for retroactive denials of payment for previously determined medically necessary services.
• Contracts will stipulate that payer is responsible for obtaining patient consent to release prior to release of information from the medical record; contract will specify the terms and conditions under which the payer can inspect medical records; contract will stipulate that payer is responsible for costs associated with duplication of medical records; contract will specify compliance with State regulatory requirements and physician office policy regarding confidentiality of medical records.
• Renewal of contracts and revision of rates will be completed together; contracts will specify the term of the contract and the procedure and notice period for renewal; if applicable, contract will provide for sufficient means to terminate the contract unilaterally without cause after a 120-day cancellation notice; contracts will allow for immediate termination for significant breaches; contracts will include provisions for curing contract breaches.
• Contracts will define the following terms—medical necessity, emergency services, inpatient services, outpatient services, claims, participating provider, non-participating provider and employer or subscriber group, member or participants as well as other terms unique to the contracting situation.
• Contracts will define the rights guaranteed to patients.
• Contracts will stipulate the right of providers to refuse to treat disorderly and/or problematic patients.
• Contracts will define the term “coordination of benefits” (COB), will stipulate who is responsible to assume risk for COB and will specify how provider will be paid if payer is secondary or claim is subrogated.
• Contracts will require the contracting party to provide a copy of the summary plan document to provider.
• Contracts will specify the performance reporting obligation of the provider to payer, and the reporting requirements of the payer to provider including the time-frames for providing information.
• Contracts will include steering mechanisms as incentives for enrollees to use healthcare group providers.
• Contracts will require that the payer receive prior approval from the healthcare group for use of name, logo, trademark, etc. in all promotional material and follow any applicable requirements in the use of such information.
• Contracts will not require that the healthcare group provide an exclusive arrangement with payer.
• Contracts will specify the payment and pricing arrangements for the providers.
• Contracts will require payment for provider services within 30 days of receiving a clean claim and within 90 days for a claim pended for COB or additional information. Claims not paid in a timely fashion shall be paid billed charges.
• Contracts will allow providers the right to bill for copayments, deductibles, and non-covered services at the time of service.
• Contracts will specify a method for renegotiating provider payment rates. The preferred position is to have a fixed-term contract rather than a contract with an automatic renewal provision. If automatic renewal is required for renegotiating the rates, the contract should allow for an interim adjustment to the rates if the new reimbursement terms cannot be agreed to prior to the renewal date of the contract. Another option for contracts with automatic renewal provision would be to give notice of termination prior to the renewal date and start negotiations of contract renewal and rates at that time.
• Contracts will include provisions for interim billing of patients for provider services.
• Contract will provide for EOB (explanation of benefits) explaining differences between paid and billed.
• Contract will grant providers right to compensation after termination or bankruptcy for services rendered under contract.
• Contracts will allow for a time limit on claims submission of 120 days.
• Contracts will require electronic billing.
• Contracts will allow for compensation based on: capitation, percent of premium, or discounted fee for service.
• A methodology for increasing the minimum provider fee schedule on a year-to-year basis will be incorporated into the contract. New procedures or CPT4 (current procedural terminology) code fees will be reviewed and reimbursement levels will be mutually agreed upon.
• Provider payment schedules that involve greater discounts than originally agreed on will need to go to each individual provider for approval.
• For withhold arrangements, contract should provide for withhold amount to be returned to the healthcare group in aggregate form for distribution to physicians.
• Risk contracts, including contracts with withhold arrangements, should delineate a clear relationship between risk, reimbursement, and factors that providers can control. Providers should not be at risk for the following factors:
  • services not provided by provider
  • out-of-area care
  • patient-referred care
  • actuarial error or underfunding
  • lack of information
  • inadequate membership base
  • prescription drugs
  • mental health and chemical dependency services
• Stop-loss provisions should pertain to certain diagnoses, certain services, and catastrophic cases.
• Year-end settlements on risk contracts including contracts with withhold arrangements should take place within 120 days following the end of the contract year.
• The settlement formula be clear and reasonably simple and should include some underwriting philosophy for IBNR (incurred but not reported).
• Contracts will specify that provider credentialing, sanctions, and appeals will be solicited through the healthcare group and the healthcare group has the first right to de-participate and sanction providers.
• Contracted requirements regarding credentialing, sanctions, and appeals, must be consistent with those established by the healthcare group.
• Ancillary providers to be excluded because of competition with the healthcare group affiliated providers should be identified in the contract.
• Contracts will be accompanied by a copy of the utilization review/quality assurance (UR/QA) requirements specifying standards and scope of functional requirements of the UR process. Payment will be required for all precertified services or services authorized during a current stay.
• If an external vendor is used for UR/QA activities, the contract will specify and stipulate that the healthcare group is not responsible for decisions regarding authorization of benefits by the vendor, if the healthcare group assumes responsibility for conducting UR/QA, contract will specify compensation for the healthcare group; amendments to the UR/QA program will be made at the mutual consent of the healthcare group and payer.
• Contracts will specify an appeal procedure within the UR process.
• Contracts will specify standards for staffing, training, and experience of utilization review personnel.
• For managed care organizations that contract on behalf of multiple payers, contract will allow the healthcare group the right to review and approve the addition of any new payer and should also allow the healthcare group to terminate the contract with an individual payer without terminating the entire agreement.
• The contract should include dispute resolution procedures in which the parties will be notified and will attempt to make good faith efforts to remedy the dispute. The dispute resolution process should specify the types of disputes to which the process applies (e.g., patient care, financial); the composition of the dispute resolution body; if the outcome is binding; a timeframe for the resolution process; and should allow the healthcare group medical director to be involved.
• If an indemnification clause is written into the contract, it must at a minimum be a bilateral indemnification clause and the language must be acceptable by the provider’s liability insurance carrier.
• Contract will provide for amendments to the contract by mutual agreement only.
• Contracts will specify compensation terms and except for well-documented reasons and subsequent approval by the healthcare group the contracting committee should not be less than the following fee ranges indicated below:

Acute Care Facility

Skilled Nursing Facility

Home Health Agency

Hospice

Kevin Patrick Carey, FACHE, is regional manager in program development for Olympic Health Management Systems, Inc., a subsidiary of AON. In his position, Mr. Carey is currently responsible for establishing statewide provider networks in the Midwest region. Mr. Carey has also served as executive director for Bon Secours-St. Joseph Healthcare Group in Point Charlotte, Florida, where he provided oversight, management, and coordination of all managed care initiatives and managed the operations of the PHO. He holds a masters’ in health services administration from The University of Kansas and was awarded the National Defense Medal for contributions during Operation Desert Storm. He received an honorable discharge after serving eight years in the United States Navy as a hospital corpsman.

Mr. Carey has been a member of ACHE since 1987 and achieved Fellow status in 1999. This case study represents a part of his Fellow project and was voted one of the best case studies in 1999.