It all starts with the contract, but let’s face it … most consider provider-payer contracts obsolete on the day they are inked. A managed care contract is the quintessential tornado in a bottle, attempting to fix the terms and conditions that will apply for the course of the contract while the healthcare finance and delivery system rages on. This post will focus on the mechanics of reimbursement and risk contracting in this dynamic environment.

Providers enter into contracts projecting the revenues the contract will produce, and the expenses the delivery of services will entail. The contract must, of necessity, be based on the best information the parties have on the date it is signed. The best contracts try to anticipate, to the extent practicable, how emerging technologies will alter the practice of medicine, how consolidations and closures will affect the competitive environment on both the provider and payer sides, how government programs will change the ways in which they reimburse managed care plans and providers paid directly, and any other issues that may exert influence on the economics of the contract.

Past experience provides some guardrails that can be baked into contracts if the economic assumptions that go into negotiations go sideways, and it is always prudent to consider the potential landmines in the mix when negotiating a new deal.

Defining Reimbursement

Fixed dollar contracts are going the way of the dinosaur. Particularly with the rates of inflation we have been seeing, fixing rates that will extend into the future is fraught with difficulty. Tying increases to some variation of a consumer price index helps but does not account for shifts in the practice of medicine over time for different indications – from inpatient to outpatient, from hospital-based to ambulatory surgery center-based, from ASC-based to doctor’s offices.

An alternative becoming more common is tying reimbursement to Medicare pricing. A hospital contract may pay based on some function of Medicare’s reimbursement for Diagnosis-Related Groups for in-patient services, and Outpatient Prospective Payment Systems for outpatient services, for example. For such reimbursement arrangements, it is important to nail down in the contract which Medicare fee schedule applies (year and geography), how quickly reimbursement is changed as CMS makes updates, and how any trailer or carve-out billing would be treated.

Providers may also be subjected to retroactive review by carriers, who second-guess DRG groupings as billed by facilities, whether hospitals stays are appropriately billed as observation rather than admission, and whether health records support the level of services professionals have billed for. It is important to reach an understanding in the contracting phase as to who makes these determinations and how, and what guidelines the payer will apply (Milliman Care Guidelines, for example). It is also important to understand whether those guidelines may legally be applied – commercial guidelines, for example, can never trump Medicare’s local or national coverage determinations.

When in doubt, document, document, document.

Risk-Based Models

The historical model for provider-payer contracting created adversarial economic incentives between the providers and the payers. Payers look to use their ability to fill hospital beds and waiting rooms to extract price concessions and outright denials based on homegrown medical necessity criteria. Providers who use their best efforts and incur additional expenses to practice consistently with state-of-the-art best clinical practices and who coordinate care with other practitioners saw their overheads increase, while payers reaped all the benefits of more efficiently delivered care.

The concept of gainsharing therefore gained ground. Integrated networks were already catching hold with like-minded professionals and facilities agreeing amongst themselves to utilize best clinical practices for the treatment of patients (or a subset of patients) with a common indication, the use of compatible software to capture and transmit electronic health records within the group, and the capture of data elements which affiliated doctors could use to measure their outcomes.

A common payment model for risk contracting includes payments from carriers in three tranches: fee-for-service payments, advanced performance payments, and shared-savings payments.

Fee-for service payments are “old school” reimbursements billed at the point of service. The carrier holds direct contracts with each participating provider and pays per service. Layered on top of that, a unifying entity is used or created to coordinate payments to participating providers across the integrated network. Advance performance payments are regular fixed payments based on ‘attributed’ members in the network. The intention of the advance payments is to encourage practices that contribute to efficient, effective care that may not be reimbursed through traditional mechanisms. Data showing specific diabetics who are not getting regular A1c tests, or not filling medications timely, can be used to focus communications tailored to the specific patients.

The concept of attribution is key not only to determining the population base for the advance performance payments, but to gain or loss sharing. These may be based on the existing patient panels of participating providers, or a broader population based on geography. Because of this direct connection between attributed members and advanced and risk-sharing payments, any provider would be well advised to ensure the method of attribution is well-defined and well documented in the contract.

Risk-based models got a shot in the arm with the passage of the Affordable Care Act, and the ability and incentive to establish Accountable Care Organizations for enrollees in traditional Medicare. Many organizations that built the infrastructure for ACOs, or created clinically integrated networks, looked around to see how they could leverage those investments to apply to other carrier-based insurance programs.

Most gainsharing models start with an examination of total claims experience for a defined cohort that would resemble the universe of patients to be attributed to the integrated network.  Target total medical expenses are projected based on that past experience, with some adjustments for medical inflation. Gainsharing is calculated by measuring the actual total medical expenses for a measurement period against the target. If the integrated network is successful in bringing down the costs while still meeting quality metrics, the gain may be split with the entity managing the network, which is free to decide how to allocate that amount to participating providers.

Entities that contract with carriers to make networks or joint services available should consult with an attorney knowledgeable about the laws related to Organized Delivery Systems (ODS), even if they do not undertake to assume risk.

Arrangements under which provider groups and healthcare systems band together and take on downside risk bring risk-sharing to the next level. Generally, New Jersey law and regulations prohibit risk assumption by non-insurers. An exception applies to entities licensed by the Department of Banking and Insurance as ODSs. A careful analysis is required to ensure proper navigation of these laws.

Any healthcare system looking seriously at the assumption of downside risk should become familiar with the requirements of and apply for approval as an ODS. Carriers have proven their willingness to offer greater gainsharing to provider groups willing to accept loss-sharing. The general structure is the same as for gainsharing: Target medical costs for an attributed group, measurement of total medical expenses for a measurement period, and payments are based on a deviation. For loss-sharing, the formula may include a corridor that excludes outliers on an individual or aggregate basis, or a flat claim cap, for example, excluding claims that exceed $100,000 per member per year.

Managed care contracts are not for the faint of heart. They require careful consideration as a provider attempts to navigate the many factors and pitfalls that can arise. Providers should strongly consider coordinating their efforts with counsel, consultants, and others familiar with this area of the healthcare industry to ensure they are not stuck with an unfavorable arrangement.