Tag Archives: Rob Parke

Alternate payment contracts introduce “insurance” risk for healthcare providers

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).

Payer and provider “checklist” for alternative payment arrangements

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.

Medicaid benefits for the developmentally disabled is going DISCO

The model for delivering care to the developmentally disabled (DD) population is likely to undergo fundamental change, financially impacting the agencies and healthcare providers serving this market. One of the strategies New York state is developing in response to the high cost of Medicaid benefits for DD beneficiaries is the establishment of licensed managed care organizations that will coordinate care for this population on a capitated basis. These organizations will be called Developmental Disabilities Individual Support and Care Coordination Organizations (DISCOs).

In this paper, Milliman consultants describe the upcoming changes to the Medicaid benefit framework and some of the challenges facing the managed care organizations and providers serving this population. Here is an excerpt:

There has been much speculation about the financial structure of the DISCO program, and the state has not released many details. One possibility, consistent with New York’s other Medicaid managed care programs, is a system of capitation payments. Capitations are predetermined amounts paid to the managed care plans to cover the full amount of benefits, regardless of the amount of services a particular individual uses. These capitation payments are often risk-adjusted based on risk-assessment tools, in the case of the Managed Long-Term Care (MLTC) program,2 or based on members’ health claim diagnosis codes and other data, in the case of the Medicaid Managed Care program.

Although the state has been testing various risk-assessment tools over the past few years, there is currently no risk-adjustment mechanism for DD Medicaid beneficiaries in New York. Without a proven risk-adjustment tool, DISCOs may incur a great amount of risk because benefit costs vary widely among individuals, as seen in Table 1. Until such a mechanism can be developed, some experts suggest that DISCO premium rates should be based on member characteristics such as age, residential needs, and other factors that will more accurately predict their benefit costs. A major drawback of this approach, however, is that too many premium variations (or rate cells) could provide little incentive for DISCOs to truly transform the system.

A risk corridor program is another approach that could mitigate the risk for DISCOs until a risk-adjustment mechanism is in place. This approach has been used as part of the New York’s MLTC program for new members under mandatory enrollment. CMS is also using risk corridors as part of the individual and small group exchange programs in the commercial market. A typical risk corridor program establishes a per-member-per-month
(PMPM) budget, and if a plan’s actual costs are less than the budget, the plan retains a percentage of the savings, and the remainder is paid back to the state (or CMS). If actual costs are greater than the budget, then the state (or CMS) will share a portion of the losses with the plan.

Capital requirements for DISCOs are also a matter of speculation, given the high average cost of benefits per member. In New York, both start-up and ongoing capital requirements for Article 44 managed care plans are based on a percentage of premium or capitation revenue. In the case of MLTC plans, the capital requirement is set at a fixed rate of 5% of premium. However, other managed care plans are required to hold 5% of premium in the initial year of operation, and the required percent of premium increases by one percentage point each subsequent year until reaching 12.5%. The state has hinted that the capital requirement for DISCOs may be less than other types of managed care plans, but actual details have not been released.

Risk adjustment for pediatric populations

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.”

Double the ACOs

Yesterday, Health & Human Services announced 89 new accountable care organizations (ACOs), doubling the number of Medicare ACOs.

With this in mind we’ve pulled together all of our ACO research into a single location. Here you go:

Also, this video offers a nice overview of the ACO concept.

Strategic implications: The cost problem persists. What can be done about it?

The final post in our “Ten strategic considerations of the Supreme Court upholding PPACA” blog series looks at the perplexing question facing American healthcare: What do we do about increasing healthcare costs?

PPACA focuses on expanding coverage and insurance reform, and in some cases it shifts costs from one party to another, but it does not directly affect the unit costs and utilization that are among the major underlying drivers of healthcare costs.

Certain aspects of PPACA have the potential to affect costs. The option to implement an accountable care organization (ACO)13 reprises the managed care movement of the ’80s and ’90s, but with better technology and information, and by transferring the financial risk onto the provider to create an incentive for efficiency. With many potential ACOs already establishing the tools required to succeed,14 this reinvigorated movement is already in motion. The nuts and bolts of an ACO are still the parts needed for a more efficient system.

Most of PPACA’s explicit ACO efforts center on Medicare, and while the Medicare Shared Savings Program (MSSP) and Pioneer Programs will continue, the potential for commercial ACOs15 may prove just as significant.

Accountable care is not a solution to everything that ails the entire healthcare system, but it offers some hope and, to the extent it can meaningfully control unit costs and utilization, it just may work.

Rob Parke and Kate Fitch discuss accountable care organizations here. For more on ACOs, consider reading “ACOs Beyond Medicare” and “Nuts and Bolts of ACO Financial and Operational Success: Calculating and Managing to Actuarial Utilization Targets.” You may also be interested in the Milliman Medical Index.