Healthcare providers are measured on certain performance metrics that dictate their payment amounts under value-based contracts. Risk adjustment plays an integral role in determining financial performance. In order for these contracts to be equitable for insurers and providers, risk adjustment must accurately capture changes in population morbidity to effectively measure the provider’s true cost impact.
In this article, Milliman’s Rong Yi, Howard Kahn, and Jared Hirsch highlight common data issues that affect risk scores. They also discuss practices that can improve coding efforts related to risk adjustment.
Alternate payment contracts (APCs) are being employed to shift utilization risk from payers to providers in an effort to align financial compensation with provider performance. As a result, regulators may require that healthcare providers quantify their financial exposure and maintain adequate reserves to reduce their risks of insolvency. In this paper, Milliman consultants outline items that actuaries consider when reviewing a provider’s APCs and also provide perspective on modeling appropriate levels of financial reserves.
Here is an excerpt:
…The actuary will likely build a model to estimate the appropriate level of financial reserves required for the risk exposure borne by the provider through the APCs. Taking the above points into consideration, a deterministic model can be built to estimate the expected APC’s surplus or deficit based on projected claims and budget. The larger the projected surplus, the less likely random fluctuation from adverse events will cause financial strain on the provider, which will lower the level of required reserves.
A stochastic simulation can be built on top of this model to assign probabilities that the provider’s APC produces a deficit as a result of unforeseen events. A claims probability distribution can be created either from the provider’s actual APC historical claims data or another similar source.
Two main sources of claims variation that should be modeled in the simulation include:
• Mis-pricing. It is possible (probable) that the projected claims cost will not come in as expected because of inaccurate trend setting/assumptions.
• Random fluctuation. Even if the trend assumption is correct, there is always the possibility of chance events from year to year (i.e., larger-than-expected high-cost claimants).
In an effort to reduce healthcare expenditures and improve quality and coordination of care, there has been a push for price transparency and realignment of provider accountability. As part of this push, there are now many risk-sharing agreements between providers and payers, all of which are attempting to move providers’ payments away from the fee-for-service model. This paper authored by Chris Dugan, Howard Kahn, and Rob Parke provides a “checklist” of key contractual provisions found in many risk-sharing arrangements, developed from work with both providers and payers.
The use of risk adjustment in provider reimbursement arrangements has increased as alternative payment arrangements are becoming more widespread in health insurance. Risk adjustment has been used by Medicare Advantage and managed Medicaid programs to reimburse health plans for the unique risks and populations in their care. More recently, as carriers have transferred utilization risk to providers through alternative payment arrangements such as global budgets and bundled payments, risk adjustment has been used to reflect a provider’s patient’s severity. Also, under the Patient Protection and Affordable Care Act (ACA), beginning in 2014 risk adjustment will be used to transfer payments among all fully insured individual and small group plans.
Many existing risk-adjustment methodologies have been developed and used on populations that include a mix of adults and children. Because adults form a larger proportion of the average population, the disease states recognized in these methodologies were optimized with greater emphasis on adults. A chosen risk-adjustment methodology should reflect the characteristics of the underlying patient population, so organizations such as children’s hospitals, pediatric provider groups, and health plans that enroll a large proportion of children have begun to question these standard risk-adjustment models.
Milliman consultants Howard Kahn, Rob Parke, and Rong Yi explore this topic in their paper, “Risk adjustment for pediatric populations.”
With accountable care organizations (ACOs) soon to serve more than a million Medicare patients, it is clear that this model of care delivery is receiving an unprecedented test of its viability, and, if it works as intended, may reshape how healthcare is paid for on a larger scale. Cigna alone plans to have more than a million people enrolled in ACOs by 2014, and says it believes that ACOs are going to be important regardless of the Supreme Court’s ruling on the Patient Protection and Affordable Care Act (PPACA).
With so much focus on the topic, it’s worth taking a look back at some of the research and analysis on ACOs published by Milliman on the topic over the past couple of years.
First, for a good summary of ACOs—what they are and how they work—start with this overview video featuring a number of Milliman experts.
For many observers, the key question about ACOs is whether they represent a financially viable model compared to fee-for-service. Effective financial management will be key to success. Milliman has produced a number of relevant papers:
With all the attention on Medicare ACOs, it’s easy to forget that they exist in the private market, as well. For more on such entities, look at “ACOs Beyond Medicare,” which describes the potential advantages for providers who partner with a private insurer rather than with CMS. A 2011 Managed Healthcare Executive roundtable featuring Milliman consultant Rob Parke also discussed ACOs in the private market.
A number of other papers have also been published discussing various aspects of ACOs such as:
Many health plans allow members to receive covered services from providers who are not part of the plan’s contracted network. However, a plan will often limit the amount it pays to a specific percentage of an amount called “usual, customary, and reasonable” (UCR). Historically, the UCR amounts have been determined by reference to commercially available schedules representing prevailing physician charges by types of service and geographic regions. Some plans have recently replaced the use of such schedules with Medicare’s resource-based relative value scale (RBRVS) schedule.
The differences in reimbursement levels between fee schedules based on Medicare’s RBRVS and benchmark data based on prevailing charges have led to some unexpected results for both members and physicians. These unexpected results still exist even if the change is designed to produce similar levels of aggregate reimbursement under both methods.
This issue is explored in more detail in this new Milliman white paper.