Evaluating risk: global fees and episodic care - Managed Care Theory

Doug Emery

Because of the various retreats from capitation--and the precarious financial straits many provider groups now find themselves in--combining the words "provider" and "risk" should be approached with caution.

There are stark contrasts between episode risk contracting from traditional capitation risk. For those concerned that capitation is too risky for physicians to manage, we strongly agree. The problem lies in the fact that traditional managed care has a tendency to view risk as the phenomenon of transferring a portion of medical cost from an HMO to a group of providers for an entire population.

But risk transfer does not necessarily require the wholesale transfer of risk for an entire population; instead, it's possible to identify at least three different types of economic risk that can be more efficiently allocated among the primary stakeholders in health care purchases:

1. Payers

2. Providers

3. Members

Using episode technology, the three elements of economic risk--probability risk, technical risk and choice-utility risk--can be more efficiently allocated among the stakeholders and produce better financial and clinical outcomes than under fee-for-service or capitated arrangements. To understand why this is so, let's look at the nature of these three elements of risk.

Probability risk

Probability risk is defined as the risk associated with pricing future, uncertain states of medical demand and their probable cost. Traditionally, insurance covers the financial risk of an individual or group consuming medical services.

As the managed care industry becomes increasingly aware that there are different types of risk to be accounted for in risk contracting, other names for probability risk are emerging: actuarial risk, insurance risk, frequency risk, population risk or risk of occurrence are all common examples.

But no matter, in strict economic terms it's the risk taken on by one economic agent to protect another from future, costly events before those events become certain. The expected cost for probability risk is generally calculated on per member per month (PMPM) basis. This is an important point to keep in mind.

Because probability risk has to be bought and sold before the covered period begins, protection or indemnification from probability risk is sold in what economists refer to as an ex ante marketplace, (ex ante is Latin for "from before [the fact]") or the market for health insurance benefits. For purposes of clarity, simply refer to this market as the health benefits market.

Another important feature of probability risk is that the risk dollars are based on broad categories like insured populations and medical specialties, neither of which is particularly related to the underlying processes of patient care management.

Because capitation shares all the economic properties of insurance--covering the medical cost for an entire population--it is a method for shifting probability risk from the payer to the contracted providers. Unfortunately, health care providers are not well suited to manage insurance risk,

In order to highlight the absurdity of capitation, consider the reaction body shops would have to receiving a fixed payment for offering coverage to an auto insurance population.

Episodes sift out the probability risk and shift to the providers a type of risk better adapted to the provider technical skill set.

Technical risk

While probability risk represents the risk associated with providing care for an entire population, technical risk in an episode program involves the risk associated with providing care for a single patient.

First, it's important to define an episode of care (EOC) and the global fee associated with an episode. An episode of care is:

* The complete, self-contained sequence of medical interactions between a patient and provider(s) of health care services in pursuit of a defined clinical objective over a specified period of time.

A global fee is the price the payer reimburses an integrated specialty care team for an entire episode of care. It typically includes professional, facility and anesthesia costs, and can include DME, outpatient drugs and rehabilitation.

Some people confuse case rates with global fees, but technically they are different. A case rate usually fixes the cost of one isolated element of care within the episode such as hospital or physician fees, whereas a global fee covers the entire episode as a financially and clinically integrated whole,

Since case rates and global fees do not put providers at risk for the frequency or probability of an episode actually occurring, pricing episodes is not calculated on. a PMPM basis.

At this juncture, it is possible to make a critical observation. Technical risk is fundamentally different from probability risk/capitation in three primary ways:

1. Pricing--Since probability risk is about pricing uncertain future events, it's primarily a statistical artifact, which makes it an actuarial byproduct. Technical risk, on the other hand, is about pricing clinically integrated episodes of care, which makes it the byproduct of physician and facility process production. The first is based on broad categories resulting in a premium-like PMPM; the second is based on discrete clinical processes of care, resulting in a priceable medical product, such as $5,000 for an obstetrical episode or $30,000 for a coronary artery bypass graft (CABG) procedure.

2. Risk management--One of the reasons why physician groups and hospital systems have not fared well under capitation is that capitation, especially global capitation, asks physicians and hospitals to stray far afield from their business expertise. Instead of managing the risk of a single patient, providers must manage and estimate the cost for an entire population under capitation.

3. Market differences--Technical risk is sold in a different market than the health benefits market. It's sold at the point of service, after demand for medical care has become certain. This is known as the ex post marketplace (ex post is Latin for "from after [the fact]"), where medical services--as opposed to insurance--are transacted because a patient now requires care. So, far from putting physicians at risk for the frequency of uncertain medical events often beyond their control, globally pricing an episode of care only puts them at risk for complications within their technical skills to control after the patient has decided to seek care. In other words, the risk lies in rendering poor quality care for clinically homogenous episodes adjusted for age/sex-morbidity factors.

Choice-utility risk

Choice-utility risk is the risk all consumers face when they trade dollars in exchange for some good or service and the uncertainty that the sacrifice in dollars will not satisfy their expectations.

This choice-utility decision requires consumers to have sufficient information to make an educated choice within a limited and understandable set of product attributes. Obviously, price alone is not an adequate indicator of the value proposition; quality in return for price is the key to satisfying consumer choice.

In many cases, secondary information markets have been formed to help consumers judge technically complicated products (cars, computers, homes, stereos, etc.) to meet this demand for information. Consumer Reports and Underwriters Laboratory are good examples of suppliers acting in secondary markets.

The Internet is the most likely candidate to meet these demands for quality information in the health care marketplace. If patients seeking care for "big ticket" items like total hip replacement can search the newly evolving medical exchanges for price and quality information, it is certain that their sense of satisfaction and empowerment will greatly increase, especially if their benefits are linked to the choices they make.

But the Internet is not essential. The standard customer benefits service centers can handle the function equally as well (albeit at a higher cost to the payer). By globally pricing integrated episodes, or by case rating the physician or facility components of care, payers can unleash competitive forces in the health care market for providers' services and vastly simplify the financial interface.

After all, what could be simpler than knowing that your procedure will cost X amount of dollars and your out-of-pocket expense will be Y, no matter what happens?

In either case, the choice utility decision has been simplified through episode pricing and built into the underlying plan design with the episodes. Consumers will now have the opportunity to make real health care purchasing decisions that consider the cost and quality of the service in the ex-post health care market place.

Episode contracting

As managed care organizations struggle to lower health care costs, global pricing and case rating are beginning to receive greater attention. Anthem Health Plans and Medicare are good examples.

Such pricing allows employers or health plans to make one payment for each case, if an integrated provider group exists in the contract area, or allows the creation of an episode budget that can be billed against in a fee-for-service format if provider integration is not available, The idea is to transfer to providers the incentive to manage each patient throughout the episode continuum.

This methodology ensures that the provider team will be accountable for the care delivered and encourages the more effective organization of teams to produce lower medical costs and better outcomes. Since the payer is purchasing an anticipated outcome, cost for the episode of care is fixed and predictable. So a global fee is a fee-for-outcome method of reimbursement.

Financial protection for providers

In any contract involving global fees, age/sex adjustment, stop-loss outliers and morbidity risk adjustments that reflect differences in patients' characteristics and condition are crucial for physician buy-in.

Global fees should transfer technical risk to physicians but should shield them from the risk of rare events. A careful delineation between these two types of risk keeps physicians in the business of care management where they belong and out of the business of insurance where they do not belong.

The point is that episode contracting allows for clinically precise risk adjusters that are defensible to physicians and are more likely to be accepted than the coarse assumptions of capitation.

As a result, costs associated with an episode of care that exceed EOC outlier provisions should warrant additional payment. They can also be clinically defined.

For example, in something like 2 percent of CABG procedures, the patient experiences a severe stroke. The incidence of stroke should be regarded as probability risk and excluded as a catastrophic outlier.

To be successful, episodes of care must be defined clearly based on objective criteria or trigger points. Since objective criteria are imperfect, trigger points must allow for exceptions.

Ultimately, patients in consultation with their physicians are the only socially legitimate decision makers regarding the initiation of care. Payment mechanisms that attempt to insert a managed care bureaucracy between patients and physicians will fail as surely as will those that remove all economic restraints on the use of medical resources.

When properly structured and applied, global fees can create incentives that bring harmony to good clinical practice rather than systematically rewarding specific types of practice regardless of appropriateness. If comparative outcomes and practice patterns are tracked carefully, global reimbursement need not rely on second-guessing individual patients or physicians.

Episodes of care must be tailored carefully to clinically plausible scenarios. Properly implemented, global fees become a powerful tool for reimbursing health care providers without creating perverse incentives and spawning even more perverse systems to counteract the natural consequences of initial miscalculations. Global payments for episodes of care reward effective and efficient care without regard to how outcomes are achieved or resources are consumed.

As long as care is appropriate and achieves satisfactory outcomes, purchasers or fiscal intermediaries need not micromanage clinical decisions.

The Medicare experience

In 1988, the Health Care Financing Administration (HCFA)--now known as The Centers for Medicare & Medicaid Services (CMS)--requested proposals from open-heart surgery programs throughout the country that were interested in participating in a special demonstration project involving Medicare CABG patients.

The intent of the pilot project was to test the feasibility of bundling hospital and physician services into one payment per episode of care. In order to be eligible to apply, a program had to have a minimum of 250 open-heart cases with at least 100 of those cases being Medicare. HCFA requested that hospitals and physicians give some form of financial discount from their current reimbursement.

This demonstration became the impetus for physicians and hospitals to evaluate episodes of care and to begin to understand each other's business from an economic perspective. Traditionally, physicians and hospitals have not been economically integrated. Under the diagnosis related groups (DRG) prospective payment system, a hospital's reimbursement from Medicare is predetermined and does not change with the amount of resources utilized.

Consequently, hospital costs generated by physicians in caring for their patients have no direct financial impact on individual physicians themselves. To the contrary, since physicians receive reimbursement based on Medicare's professional fee-for-service schedule (RBRVS), increased utilization is typically rewarded with additional reimbursement. So HCFA's two-track payment stream works at cross-purposes--a dilemma that often holds for commercial payers.

In an effort to bring the incentives of its payment structure into alignment, Medicare inaugurated a demonstration project to experiment with paying both hospitals and physicians through a unified payment schedule. Moreover, the integrated reimbursement mechanism was to transfer technical risk in such a way that both entities became acutely aware of costs in a synergistic manner.

Global fees are the only way to accomplish this goal with any type of precision, without simultaneously transferring HCFA's social insurance role (probability risk) over to the contracted providers.

Over the first three years of the project, physicians were responsible for a significant amount of the decreases in variable cost. According to the final report, the variable cost at one of the contracted providers, Saint Joseph's Hospital in Atlanta, Ga., decreased by 25 percent in DRG 106 and 41 percent in DRG 107 (both are GABG procedures).

The largest components of variable cost reductions were seen in operating room and intensive care including staffing, drugs and supplies. Although there were some increases in fixed costs during this time period, the substantial decreases in variable costs resulted in additional profit to the hospital.

Before the project, the net income for Medicare DRG 106 was $1,482.00--compared to a net income of $2,126.00 three years into the project. DRG 107 showed even more favorable results. Saint Joseph's Hospital went from an initial net profit of $891.00 to a new profit of $3,513.00 per case.

The physicians enjoyed a similar financial experience. The cardiac surgeons' reimbursement rose by 28 percent of the original discounted rate. Anesthesia saw more than a 20 percent increase in reimbursement from the original Medicare level and cardiology reimbursement was also an average of 20 percent higher.

It is estimated by HCFA that during this same time period, Saint Joseph's Hospital generated $5.5 million in program savings to Medicare; HCFA said that total program savings were on the order of $55 million.

Even with these substantial results, there are continued opportunities to enhance quality and decrease the cost of services provided. So in an episode of care program, the providers have a strong financial incentive to re-engineer the delivery process.

One of the most significant lessons learned was in how the patients perceived this project. All patients were treated the same as any other patient receiving coronary bypass surgery at the hospital. The Gallup Poll Organization was engaged by Saint Joseph's to determine overall patient satisfaction in the hospital and for the patients in the project in particular.

The overall average for the hospital was significantly higher than national standards. The overall satisfaction of the patients in the Medicare project exceeded the hospital's average. And we suspect that if the Medicare beneficiaries understood how the program had saved them and their supplemental insurers out-of-pocket savings--almost $9 million between May 1991 and June 1996--they would be even more appreciative.

In reviewing these findings, the coordination between physician and hospital billing was a tremendous advantage to the patient. The patient did not receive bills or paperwork from the physician or hospital.

In a market-oriented arrangement, episode providers would compete for payer contracts and the patient out-of-pocket costs would vary according to the competitiveness of each contracted provider. Spared the flurry of unpredictable and bewildering explanations of benefit, consumers would enjoy the security and simplicity of one, upfront copay. In this way, patients' choice-utilities can be put to work in the health care market where price competition simply does not exist now.

Systems issues

Because few medical providers are laterally integrated along episodes of care, early contracting efforts have to be as unobtrusive as possible for doctor's offices and facility billing units.

Where episodes are contracted, the payer must be able to receive claims electronically or on paper from hospitals, ancillaries and professional offices no different than non-episodic claims. This requires a new backend technology called an episode translator.

When an episode is triggered, claims are entered into a standard claims administration system for the contracting payer, where the data is validated for eligibility and benefit coverage. The validated claims are then electronically routed to a third party integration system (which operates the translator) for grouping to risk-adjusted episode provider contracts.

Each claim line is analyzed by the system to determine whether the trigger point criteria are met for inclusion into a specified episode of care. The translator automatically accumulates claim lines that meet the episode definition criteria against the alcontracted amount for the specific episode of care.

The integration system interacts with the standard claim administration system in a seamless and efficient process. Once a claim or claim line has been identified as part of an episode of care, the claim continues through the benefit adjudication process with a flag indicating to the standard claims system that the claim should be adjudicated against the member's episode benefit and the member payable is waived.

Providers and patients will receive detailed accounting of the episode of care claim payment in the form of explanation of benefits and remittance advices at two levels. After each service is rendered, the provider will receive a remittance advice advising that the payments for the services are associated with a specific episode of care. The member will receive an explanation of benefits stating that the services are a covered benefit.

Upon completion of an episode of care, a final summary document will be distributed to allow both the patient and the providers a comprehensive historical illustration of services and payments included in the episode of care. The summary document is a useful communication tool between the provider, payer and patient. It will facilitate payment reconciliation if required.

Reconciliation of services rendered against the established episode contract amount for a specific episode of care should occur on a periodic basis, In the case of an overpayment where the provision of services exceed the contracted amount for the specified episode of care, the amount exceeded can roll over into the next report cycle, or a withhold amount can be set up within the claims administration system. The overage can then be liquidated by the withhold pool.

The establishment of a withhold also accommodates an outcome where contracted providers have managed the episode under the target budget. In this case, the withhold is returned to the provider, along with a portion of the savings.

EDITOR'S NOTE:

In 1999, two articles in The Physician Executive--"Part I: Global Theory and the Nature of Risk (July-August)," and "Part II: Towards a Choice-Based Model of Managed Care (October-November)"--outlined the flaws of orthodox managed care theory and highlighted the unique advantages of moving to a genuinely market-based model, which included the concept of direct contracting for integrated episodes of care.

This follow-up focuses on comparing an episode contracting system to a traditional capitated program and outlines the features that make this approach much more attractive to physicians, payers, and most importantly, patients.

RELATED ARTICLE: Case study: Kidney stone episode

The genitourinary segment of health care is an excellent diagnostic group within which to design global fees. This physiological region affects a broad age spectrum and can account for a majority of time lost from work.

Using a urologic example, the development process to organize a global fee involves the following steps:

* Designing a product and episode specifications

* Establishing criteria for provider selection and participation

* Conducting provider credentialing and annual recredentialing

* Developing risk-adjusted diagnostic and procedure bundles for pricing models

* Validating clinical pathways with key physician leaders to determine use rates of services by diagnostic or procedure groups

* Designing network software and implementation plans to manage patient flow, provider communication, billing, medical management, claims bundling, reporting, customer service and provider payments

* Educating providers about clinical, service and administrative processes

In most instances, global fees are actually clusters of procedures or services that share similar costs, risks and clinical processes. The concept of clinical homogeneity is critical to pricing episodes of care. These groups may be driven by:

* Diagnosis Related Groups (DRGs) for inpatient care

* Ambulatory Payment Classifications (APCs) for outpatient care

* A specific set of disease or injury codes (ICD-9-CMs)

* A set of procedure codes (CPT-4s and HCPCs Level II)

Using a simple renal calculus as an example, the diagnostic cluster for this urologic procedure could involve the following scenario:

I. Case History

A 30-year-old female presents to the local emergency department complaining of left sided flank pain and nausea. These symptoms have been worsening over the past several hours. She has no prior medical history. Her past surgical history is significant for an appendectomy at the age of five. Her last menstrual period was one week prior to this visit. She is sexually active and using contraceptives. She denies smoking, drinking or drug use. She has no allergies to medications and is not taking any currently.

Her physical examination reveals a well-developed, well-nourished female in no acute distress. She is afebrile. Her remarkable clinical findings are left sided flank pain, tender to palpation. Her abdomen reveals an old appendectomy scar. There is no rebound or guarding. Her pelvic exam is unremarkable.

Her urinalysis shows microscopic hematuria and crystals are present. There are no bacteria seen on the gram stain. Pregnancy test is negative.

Her KUB demonstrates a 1 x 2 cm radio opaque mass in the left upper quadrant. An intravenous pyelogram (IVP) shows that this is a non-obstructing stone in the ureteropelvic junction of her left kidney. There is mild hydronephrosis.

A urology consult is obtained. The treatment options are explained to the patient. She elects to go home and be followed in the urologist's office with the understanding to return to the ER if symptoms progress or worsen. She was discharged on analgesics.

She went for a follow-up visit to the urologist's office one week later. At that visit, the Roentengrams were reviewed and treatment options discussed. As she was pain free, she elected to have an extracorporeal shock wave lithotripsy (ESWL). Arrangements were made to have this be performed at a freestanding clinic two weeks later.

One week before the ESWL, she met with the anesthesiologist and completed her pre-operative testing. The day of the procedure, the urologist performed a cystoscopy and stent placement to facilitate the passing of stone fragments. She then underwent the ESWL without incident. After the procedure, she went to the recovery room and was discharged home. She was given prescriptions for antibiotics and analgesics.

She went to the urologist's office one week after the procedure, with mild complaints of left sided pain, but an otherwise uneventful post procedure course. She was given a filter in case she passed any stone fragments. The following week, in the urologist's office, she had a cystoscopy and stent removal under local anesthesia. Some stone fragments were seen in the bladder, these were collected and sent to an outside laboratory for evaluation.

One month later, she returned to the urologist's office. At that visit, she was informed that she had a calcium oxalate stone. Treatment options were discussed. She collected a urine specimen for chemical analysis. She was referred to her internist for follow-up.

II. CLINICAL CODING SYNOPSIS of KIDNEY STONE EPISODE

ER VISIT

A. FACILITY COMPONENT:

                           CPT SERVICE  REVENUE
DESCRIPTION                   CODE        CODE

EMERG ROOM                                450
LAB - hCG                    84702        300
LAB/CHEM - SMAC              80048        301
LAB/HEMOTOLOGY - CBC         85025        305
LAB/UROLOGY - UA             81001        307
LAB/UROLOGY - C&S            87086        307
IV SOLUTIONS                              258
DRUGS/OTHER                               259
DX OTHER - IVP & KUB         74400        329

B. PROFESSIONAL COMPONENT

ER MD EVALUATION             99281

RADIOLOGIST READ             74400.26
AND INTERPRETATION

UROLOGY ER CONSULT           99244

UROLOGY OFFICE VISIT         99243

PREOPERATIVE W/U:

A. PROFESSIONAL COMPONENT


EKG reading/report  93010

The facility component for the EKG, PT/PTT will be included in the
facility charges for the day of outpatient procedure due to the
preoperative 72 hour rule. It is not billed as a separate event.

The anesthesiologist's evaluation preoperatively will be included in the
global fee for the anesthesia on the day of surgery. It is not billed as
a separate event.

LITHOTRIPSY:

A. FACILITY COMPONENT

                             CPT SERVICE  REVENUE
DESCRIPTION                     CODE       CODE

ESWL SUITE -LITHOTRIPSY         50590       790
PHARMACY                                    250
IV SOLUTIONS                                258
LAB/HEMATOLOGY - PTT            85210       305
LAB/PATHOLOGY                               310
OR SERVICES - CYSTO & STENT     52332       360
ANESTHESIA                                  370
EKG/EEG                         93000       730
RECOVERY ROOM                               710

B. PROFESSIONAL COMPONENT
UROLOGY SURGEON

CYSTOSCOPY/STENT PLACE          52332
ESWL                            50590

ANESTHESIOLOGIST

CYSTOSCOPY/STENT PLACE          00918
ESWL                            00873

ANCILLARY LAB COMPONENT

CHEMICAL STONE ANALYSIS         82360
24-HR URINE COLLECTION          81050
  CREATININE                    82530
  CALCIUM                       82340
  OXALATE                       83945

UROLOGY FOLLOWUP

(Surgical package includes any postoperative
follow-up visits.)

OFFICE CYSTOCOPY/STENT

REMOVAL                         52310
OFFICE SUPPLIES                 99070

INTERNAL MEDICINE F/UP

OFFICE VISIT                    9213

Once this group is established, the surgeon and surgical facility can be paid a single global fee for any combination of services provided from the above ICD-9 and CPT-4 lists, or an episode administrative system can group the fee-for-service bills against these clusters for retrospective payment adjudication where provider delivery system integration is not available.

The global fee is intended to be all-inclusive for the procedure. As such, the rate covers virtually all provider fees for services; facility, surgeon, consulting physician, anesthesiology, pathology, radiology, implant devices, ancillary services, and in many cases, the entire post-acute or post-surgery follow-up, including durable medical equipment and physical therapy. Alternatively, sections of the episode may be carved out and replaced with case rates.

Urologic global fees are almost always established using time elements that begin the morning of surgery and extend for 90 to 120 days depending on the type of surgery. In these models, the payer has an advantage because the single global fee or the contracted episode budget covers all urologic services provided in this time.

In addition, orthopedic global pricing structures usually include the post-hospital services of inpatient rehabilitation, skilled nursing facility, home health, and outpatient rehabilitation services. But here, again, these can be carved out and case rated.

Risk Transfer Under Episode Program

Risk Category        Risk Taker

Probability Risk     Insurance Company

Technical Risk       Provider

Choice Utility Risk  Consumer

The Advantages of Going Global

Here's a look at some of the advantages of an episode-of-care program.

* Limits the actual risk providers bear, keeping it to the technical risk of managing a clinically homogenous pathway to high quality outcome

* Keeps physicians and hospitals out of the business of insurance and controlling unmanageable risk and in the business of autonomously managing patient care

* Permits patient choice at the point of service while at the same time preserving some of the "channeling" properties of a provider network

* Rewards provider initiative to re-engineer care processes (as the Medicare example proved) by imposing a financial penalty if the cost of care exceeds the global fee

* Attaches a common metric for matching the cost of care with the outcome of care so genuine value-based purchasing can be achieved

Doug Emery is an independent consultant living in Paris, Kent. He can be reached by phone at (859) 484-3528 or by e-mail at demery@adelphia.net.

Kurt J. Wrobel, ASA, MAAA, is a director of actuarial pricing and policy at pacificare Health Systems. He is primarily responsible for developing and pricing new medical products. He can be reached at (714) 825-2403 or by email at kurt.wrobel@phs.com.

Russell D. Robbins, MD, MBA, is the chief medical officer for Symmetry Health Data Systems, Inc., Phoenix, Ariz. Previously, he was the medical director for Health Market. He can he reached by calling (602) 840-1910 ext. 116 or by e-mail at rrohbins@symmetry-health.com.

Lorraine Tully, RHIT, is the director of health information management at HealthMarket Inc., Norwalk, Conn., and a member of the American Health Information Management Association as a registered health information technologist. She can be reached by calling (800) 248-7390 ext. 1062 or hy e-mail at ltullv@healthmarket.com.

Lisa Schulte, MBA, is vice president, administration at HealthMarket. She has more than 10 years of leadership experience in the health care industry. Prior to joining HealthMarket, Schulte was a senior manager with Ernst & Young's health care consulting practice, specializing in business and technology strategic transformation, operational efficiency, program management and financial analysis. She can he reached by e-mail at LSchulte@HealthMarket.com.

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