As one healthcare market after another yields to managed care, the art of negotiating and contracting with HMOs and large employers has become a key skill in the effort to assure profitability.
Healthcare providers are forming networks to capture managed-care contracts and retain a competitive share of the market. To succeed, a network must be able to bid lower than competitors without losing money on a contract-settling for discounts in return for enough volume to make up for price breaks over the long haul.
But as managed care rises as a percentage of business, contract concessions are just the first sources of potential losses in revenue. Incomplete execution of contract ins and outs can add up to further shortfalls in reimbursement.
If providers aren't equipped to determine how these intricate contracts translate into reimbursement, they're not capturing all the payment owed for services, industry experts said. Ironically, negotiators' attempts to limit losses by loading contracts with exceptions and payment formulas are backfiring when it comes to settling the bill.
Here's a composite situation faced by a hospital or health network:
The typical number of contracts is about 100 for a hospital in a market with significant managed-care penetration. Each contract has specific per-day or per-procedure payment terms.
But negotiators break out exceptions for costly devices or drawn-out hospital stays. Payers do their own hedging: There's a list of treatments, varying by contract, that must be pre-authorized or the hospital won't be reimbursed.
On top of the complexity of the terms, the hospital must account for thousands of patients hopping from one contract to another. And it has to keep track of contracts being renewed, dropped or renegotiated weekly.
Tracking the payment terms through manual accounting and collection procedures "becomes an impossible task past a certain point," said David Engert, vice president of sales for the managed-care group at HBO & Co., an Atlanta-based healthcare information systems vendor.
Computers to the rescue.The problem is highly recognized in California, which spawned a cottage industry of computer software to track the managed-care contracts that began to dominate the state's healthcare reimbursement in the mid- to late 1980s, said Sandra Smith, a Walnut Creek, Calif.-based consultant with Superior Consultant Co.
Now the demand for contract management ability is running across the country in step with managed care. As a result, established vendors and new entrants are gearing up for sales.
Charles J. Singer & Co., a Wakefield, Mass.-based market research firm specializing in managed-care information systems, anticipates that total annual sales for the contract management software sector will grow from $38 million in 1993 to nearly $170 million by the end of the decade, according to a comprehensive report on managed-care contract management systems. As recently as 1990, the market sector was generating only $9 million in annual sales (See chart, above).
About 500 systems are installed nationwide, up from about 100 in 1990, according to Singer. The report forecasts 2,500 installed systems by the year 2000.
One vendor that started up in the early 1980s, Hospital Cost Consultants of Pleasanton, Calif., has a base of 110 contract management clients in the United States, plus another 30 in the United Kingdom. HCC's total revenues have increased 400% in less than four years, to $8 million in 1994, said Mark Emkjer, the company's president. Mr. Emkjer is projecting annual sales of $14 million to $15 million by the end of 1995.
Another established vendor, Dilts Kappeler Durham & Co., Rocklin, Calif., doubled its number of clients during the past 18 months, to 94 installed systems, and it has 10 pending or in implementation,
said Walter Dilts, president and chief executive officer. DKD recently was purchased by the Medstat Group, an Ann Arbor, Mich.-based data and decision-support vendor (Sept. 19, p. 13).
Many happy returns.Feeding the demand is the contract management systems industry's track record of return on investment.
Purchasing and installing such a system typically costs $200,000 to $400,000. For example, the base system at DKD is $160,000 for the software, about $35,000 in installation costs and $5,000 for the interface to the main information system, said Mr. Dilts.
Clients also must have a minicomputer powerful enough to run the system-an IBM RISC 6000 or a Hewlett-Packard 9000. Maintenance and computer support from DKD costs $2,800 a month per hospital, he said.
According to consultants and users of the technology, the computing and tracking capability of such systems can ferret out enough underpayments to cover the investment within a year or two, depending on the percentage of business represented by managed care.
In fact, some vendors in search of business have offered to take a second look at a hospital's past payment settlements with an eye toward recouping underpayments retroactively. Just that exercise can pay for the system's purchase and installation, vendors claim.
San Antonio Hospital in Upland, Calif., was able to recapture $600,000 in managed-care reimbursement from the 35 contracts it managed prior to purchasing a contract management system, said Bill McMillan, director of business services.
The hospital now manages nearly 100 contracts on the Hospital Cost Consultants system, which was installed over a three-month period beginning in March 1991, he said.
The 318-bed hospital's patient-accounting department had done "a pretty effective job" before the computerized system was in place, he said, but staffers still missed about 3% of gross charges on managed-care business as identified in a review by Hospital Cost Consultants. The review went back as far as October 1989 and examined all bills to managed-care companies during the 18-month period. "For us, that was found money," Mr. McMillan said.
Contracting confusion. In traditional charge-based healthcare finance, there was nothing much to miss in the way of reimbursement. Even in the early years of managed-care contracting, HMOs and PPOs bargained for discounts from full charges. "It was not at all complex, and the patient-accounting offices could easily handle it," Ms. Smith said.
But as the discounted payments rose unchecked with the accompanying rise in charges in recent years, managed-care companies and large employers began to bargain for fixed payments such as per-day rates and prospective fees per procedure.
"As providers started to vie for the business that managed care would bring in, the managed-care department had virtually unlimited authority to put in any conditions that would get them the contract*.*.*.*
without regard to administering it," Ms. Smith said.
"These contracts had every weird variation you could think of," Ms. Smith said. She gave an example of what one contract could include:
Standard rate formulas. These per-day rates, the base payment for services, are all-inclusive for treatment, room and supplies. They depend on the intensity of service: A general medical day may be $800, surgery $900, intensive care $1,500, critical care $1,800.
Rate conditions. The standard rate formulas can then be subject to conditions. A particular service may have a raft of payment formulas depending on what's done. In obstetrics, for example, a normal birth may be paid at a rate of $900 a day. But a C-section may be paid at $2,000 per case instead of the per-day rate, with a separate per-day charge for the child's nursery care. If the baby needs neonatal intensive care, that may be paid at a 20% discount from charges or as a case rate.
For heart surgery, there may be a flat rate including all hospital charges, plus the surgeon's fee, which is a significantly different arrangement compared with piling up per-day payments over a long stay.
Pharmacy drugs may be included in the per-day rate except for expensive drugs broken out for special pricing. The AIDS drug AZT, for example, may be paid at a 10% discount from charges. Likewise, lab and radiology expenses may be part of the per-day rate except for big-ticket services such as magnetic resonance imaging, which may be billed at full charges.
Loss-limiting provisions. At a certain point, a hospital invokes measures to limit losses. For example, when a patient's total bill exceeds $25,000, the hospital may get an extra $300 a day. At $50,000, expenses beyond that point may be paid at 80% of charges.
Payment losses.The patient-accounting departments can't keep up with the complexity of payment terms and the proliferating number of such complex contracts, Ms. Smith said.
The result has been revenue slipping through the cracks. Typically this can amount to 4% to 8% of potential contract collections, industry experts said.
For a medium-sized hospital with $100 million in annual revenues and 20% tied to managed care, that's a loss of at least $800,000 a year, Ms. Smith said.
In one example from her client list, a large community hospital in the Southwest was writing off $200,000 in lost revenues every 15 days "because it couldn't bill according to contract terms and couldn't audit to make sure it got paid according to the terms," she said.
In another example, a 300-bed community hospital in California with annual revenues of $100 million found in a retrospective audit that it had lost about $2.1 million in revenues in one year because of underpayments by payers.
Turning it around. That lack of control over contract accounting and monitoring played a significant role in the fiscal 1987 net loss of $19.2 million on revenues of $157.6 million for Mercy Healthcare Sacramento (Calif.), said Vince Schmitz, senior vice president and chief financial officer.
Managed-care competition had already heated up in that region, and the health system's three hospitals were trying to manage about 60 contracts each, plus wrestle for business with Kaiser Permanente's health system and Sutter Health.
Including Medicare and Medi-Cal-California's Medicaid program-Mercy was depending on preset reimbursement for 75% of its business, said Adrienne Edens, Mercy's vice president for information systems.
In 1988, the healthcare network leased a contract management system from DKD. It was one of a number of business moves that also included an ambitious network integration of operations and information systems (Nov. 22, 1993, p. 55).
By fiscal 1991, Mercy had rebounded, posting net income of $15 million on $282.6 million in revenues, said Theresa Ortez, manager of financial reporting. And by fiscal 1992, net income reached $29 million on revenues of $397 million, she said.
The system, which now has five acute-care facilities and a range of physician and specialty sites, has nearly 200 managed-care contracts accounting for nearly 40% of revenues.
In addition, Medicare and Medi-Cal payments are largely fixed-fee arrangements. So fee-for-service payments beyond the reach of private or government contracts make up only 5% of business, Mercy executives said.
The DKD system translates the patient-accounting system's billed charges into expected reimbursement under the patient's contract, and it compares incoming payments from HMOs with the calculations worked out in-house. Follow-up action on underpayments results in the recovery of $400,000 per month, Ms. Edens said.
A retrospective review of selected procedures and contracts, a finer screen "to look for something that might have been missed," recovers another $80,000 per month, said Robert Camarena, Mercy's director of managed-care contracting.
In all, the computer system recovers about $6 million a year in underpayments, Ms. Edens said. The annual software maintenance cost for the inpatient and outpatient operations of five hospitals is about $180,000, she said.
The health network had no way to compare what it was losing before the contract system took over, but Mercy didn't need a benefit study to justify the cost at the outset, said Mr. Camarena. "We knew a handful of claims would pay for it," he said.
Juggling act.San Antonio
Hospital's Mr. McMillan said he knew in 1990 that the growing contract load called for computer help. "If not, we were going to have to add staff by the droves, and then there's no guarantee we'll be able to figure out contracts and bill them correctly," he said. "We needed something to make sure we weren't leaving money on the table."
No jobs were replaced by the computer system. It simply allowed the patient-accounting department to handle the managed-care end of the business with existing staff, Mr. McMillan said.
Besides managing the complexity of terms and conditions during the life of each contract, the software helped keep a handle on new contract activity affecting those terms and conditions-changes that the 12-person clerical force might not be apprised of in time, he said. "Every week we're adding contracts, there's other contracts we're not renewing. So it's pretty much a moving target."
At Saddleback Memorial Medical Center in Laguna Hills, Calif., one employee handles the entire managed-care billing effort, said Terry Hargadon, vice president for managed-care services.
The 221-bed hospital has 97 contracts that generate charges of $54 million. Mr. Hargadon declined to disclose total collections because it would reveal the level of discounts granted.
"By reading the contract accurately, usually we collect $100,000 a year in billing that manual methods tend to miss," he said. By comparison, the total annual cost of the contract management operation is $96,000. The cost includes leasing a system from HCC, consulting with the vendor on day-to-day problems and paying for the one employee.
That's just about a break-even situation, but it doesn't include the labor cost saved. "Other methods might require upwards of six billing personnel," Mr. Hargadon said. The timing of the computerization, at the start of the contract explosion, headed off the hirings that would have been necessary to deal with increasing managed-care complexity and volume, he said.
How it works.The systems marketed by contract-management vendors take information from the patient-accounting and other central information systems and feed it into a separate computer with a database of all the terms, per-diems, exceptions and coverage limits hammered out by negotiators, Ms. Smith said.
After daily patient treatment activity is loaded into the contract computer from the main information system, typically overnight, the software compares charges with contract information and reprices the bills. The product of those comparisons is a "face sheet" attached to the universal billing form explaining the repricing, she said.
The system also keeps track of effective dates for contracts, assigning charges to the proper contract year when they border the renewal date-even adhering to whether a patient straddling the new contract date is billed according to admission or discharge date, Ms. Smith said. The renewal-date monitoring also gives negotiators notice to gear up for the next contract session.
Contract management systems fortify the efforts of negotiators in two ways, consultants said:
The terms-tracking capability improves chances that intricate loss-limiting features introduced into a contract by bargainers won't be ignored in practice because the patient-accounting system couldn't keep track.
A computer-modeling ability helps determine how the contract is performing under current terms as well as how the hospital would do under scenarios floated in new negotiations.
For example, a model might show that hip-replacement surgery would lose money on a largely per-diem payment basis proposed by an HMO. In that case, said Mr. Hargadon, hospitals typically can get the HMO to separately reimburse for the actual implant device up to a maximum, say $10,000, in addition to a payment of perhaps $1,000 a day.
However, if the billers don't know about the separate billing opportunity, the hospital ends up forfeiting the extra $10,000 that was supposed to limit its loss, Mr. Hargadon said.
The contract software provides enough information and quick response for Mercy Healthcare Sacramento to use just two negotiators for its five hospitals' 200 contracts, Mr. Camarena said. He's one of those negotiators.
Dealing with payers.Information about contracts has changed the complexion of the billing and auditing process. Under manual procedures, employees were inclined to send out traditional charge-based bills and rely on payers to reimburse according to contract terms, Ms. Smith said.
But that usually led to underpayments. "The payers had no incentive to pay correctly, and the providers couldn't keep track of what they were owed," she said.
Billing personnel could make spot checks and do some auditing. But even with contracts in hand, the terms were dizzying. "Basically you have clerical employees trying to interpret legal contracts," said Mr. Emkjer, HCC's president.
Now the tables are turned, and it's the well-researched provider that presents the contract system's "adjudication letter" to payers, said HBO & Co.'s Mr. Engert. "The insurance companies don't really have the same capability of figuring this out on their system," he said. "They're trying to figure out what they owe the provider manually."
Most managed-care companies will accept these adjudication letters and "make payment accordingly once they have developed a comfort level that your data system is accurate and reliable," said Saddleback's Mr. Hargadon.
In fact, payers ask for the face sheet if it's left off the pages of printouts from a patient-accounting computer, said San Antonio's Mr. McMillan. "They're taking our word for granted," he said.