Imagine you're playing poker and don't know what cards you're holding. You might have a royal flush. Then again, you might be on the verge of being flushed out of the game. You don't know if you should call, and you are completely dependent on the dealer.
That's no way to play the game, right? But if your group or hospital is working with multiple HMO contracts, chances are the risk you're facing in that game is similar.
Two key risks for providers are easy to imagine: the potential for an unexpectedly high number of catastrophic illnesses within a given patient population, and the potential for overutilization of services as a patient population ages or undergoes lifestyle changes.
The challenge for providers is to avoid being financially decapitated by capitation agreements. Over the past several years, a couple of key strategies have emerged to help providers protect themselves.
By the numbers.In negotiating capitation arrangements, access to actuarial data is a major advantage. With increasing frequency, physician groups and hospitals are turning to actuarial consulting firms that can offer financial forecasting models and rate management information tailored to specific needs of providers. If everyone involved in negotiating a contract-providers and HMO alike-knows what the risk factors are for a given patient population, healthcare will be delivered at the best possible price.
In 1986, the medical group of Alta Bates Medical Center in Berkeley, Calif., entered into its first capitated contract with an HMO. Knowing that the physicians didn't have the necessary data to properly evaluate the capitation contract, the medical center's director of managed-care contracting, Ed Berger, turned to an actuarial consulting firm for guidance.
"The actuarial study serves as an important benchmark in determining if what you're being offered under capitation is reasonable," Mr. Berger said.
Alta Bates receives actuarial data for commercial HMOs, Medicare HMOs, point-of-service plans and, most recently, Medicaid HMOs. The studies indicate how the anticipated premium money will be spent.
"The actuarial data provide a reasoned estimate of claims costs likely to be incurred for hospital, physician, ancillary and prescription expenses for a given population during a specific period of time," Mr. Berger said. "It is astounding how accurate a good actuarial study can be in predicting the future. When hospitals or physicians are confronted with their first capitation agreement, the potential risk of exposure can be intimidating. Solid actuarial data can provide chief executive officers, chief financial officers and boards of directors with the assurance that they are making a sound business decision."
Adds David Wilson, co-founder and managing director of Princeton, N.J.-based Apex Management Group: "What you're seeing is a chance to play on a level playing field. With this information, providers are more likely to be able to negotiate a contract they can live with."
Taking risk.During contract negotiations, risk-sharing strategies can be developed and agreed upon. Risk sharing involves defining what percentage of financial liability providers take on. For example, are the providers responsible for just their services? Or, in the event of a more complicated healthcare situation, are they responsible for total hospital costs, including tests and the fees of specialists? Is there a way to define how other areas of the healthcare delivery system interact without placing the initial provider at unfair or inappropriate levels of risk?
With these questions resolved, providers can pave the way for sharing the revenues gained if a given patient population utilizes care at levels below those expected.
Extra protection.The second major strategy for providers participating in capitation involves what's known as excess-loss coverage. Simply stated, it protects providers against possible risks on specific contracts. For example, one HMO contract might deliver more intensive-care patients than can possibly be anticipated, resulting in catastrophic losses.
Increasingly, physician groups and other providers are protecting themselves against such risks by contracting with insurance companies offering coverage for expenses in excess of contract-predicted costs, as well as other services.
Beyond offering standard provider excess-loss coverage, which is now commonly built into many HMO contracts, insurers can offer additional value, said Robert Trinka, vice president of John Alden Provider Markets Group, a Miami-based excess-loss coverage firm.
"By turning to experienced insurance companies, vs. obtaining it as part of an overall HMO contract, providers gain the added value of economies of scale, a more far-reaching actuarial database, and a track record that gives providers confidence that the coverage offered will meet their present and future needs," Mr. Trinka said.
After using reinsurance purchased from various HMOs, Alta Bates earlier this year decided to buy coverage from one carrier. "When we were buying (excess-loss coverage) from the HMOs, each one had different trigger points, premiums, claims-valuation methods and levels of service," Mr. Berger said. "By centralizing our reinsurance, we have established consistency for all of our covered lives at a price of less than half of what we had paid the HMOs."
While current needs can be fairly well-defined within a given patient population, sudden shifts in risk factors for that population can take place as enrollees are added.
"Contracts get negotiated based on everyone's best information about who you will serve today, not necessarily on who they will be. Should some change occur in the patient population, that can be a costly lack of foresight," Mr. Trinka said.
Proper negotiation up front, and the proper amount of excess-loss protection for down the road, are smart strategies for playing the capitation game.
