Risk-Sharing Arrangements | Costs and Evaluating Plans

Risk sharing is best suited for stronger-form managed care plans, such as HMO and POS plans, since these models rely on the primary care physician (PCP) as the central control point for member health care delivery. The PCP is best positioned to monitor a member's care and to control benefit utilization. Furthermore, integrated delivery systems (e.g., group practices, IPAs, physicians hospital organizations [PHOs]) have shown interest in risk-sharing models because they have the administrative systems to monitor broad levels of member care and can better assume the risks associated with such financial incentives.

The risk-sharing model has to be flexible enough to adapt to local market conditions and to grow and change over time. An effective risk-sharing model should generally include the following conditions:

1. A PCP in place for each member to serve as the entry point for referral and hospital care.
2. Risk pools that include about 10 to 12 PCPs per pool, in order to aggregate claims experience.
3. A given PCP that has a minimum concentration of membership (e.g., 150 to 200 members) in order to make the revenue flow significant enough to be "at risk."
4. Risk sharing within group and IPA HMO models that takes a variety of forms depending on the following conditions:
   1. Receptivity of the provider community.
   2. Membership leverage by the managed care company among its participating providers.
   3. Sophistication of the provider group and the managed care company.

Types of risk-sharing models include:

1. Case management fee where the managed care company pays the PCP a set fee per member for overall case management services. This fee is paid in addition to charges for medical services rendered. It is intended to compensate physicians for the added work of acting as case manager for their membership, but this approach is typically not favored by managed care companies. Many companies feel PCPs should already serve as overall case managers for their membership and should not receive additional compensation. Furthermore, case management fees alone do not provide an effective vehicle to influence specific physician behavior.
2. Physician incentive/bonus rewards positive performance in specific measurable categories, such as financial results (e.g., average monthly costs per member), quality assurance compliance, and member satisfaction survey results. Results are shared with providers on a regular basis to improve effectiveness of performance-based incentives. Some advantages of using bonus plans are that they are relatively easy to develop and establish, and can be administered in conjunction with other risk arrangements. Concerns include whether bonus payments are large enough to outweigh gains from potential plan over utilization and whether comparative systems need to be developed to measure performance among PCPs.
3. Fee-for-service with a "withhold" reduces provider reimbursement by a withheld amount (e.g., 15 percent) at the time the claim is adjudicated, and this withhold is placed in specially assigned risk pools. Cumulative withholds are either returned or retained each year based on the results of the risk pool compared to expected results. Typically, catastrophic claim costs are not charged against the selected risk pool so that they do not unfairly influence the results of the risk pool. Some advantages of the withhold arrangement are that it is relatively easy to develop and administer, and it encourages PCPs to deliver services within its practices rather than refer to other specialists, which helps control utilization. Concerns include the following: There is the possibility of overutilization of physician services to increase revenue in order to offset the withhold; the plan can be "nickeled and dimed" on PCP services; and providers often perceive withholds as part of their discounts and do not put serious effort into adjusting performance to regain the withholds. Effective use of withhold arrangements requires critical information system tools, physician profiling data systems to monitor performance criteria, a limit on the number of specific fees for office visits, and regular communication with PCPs, so they can properly manage their practices.
4. Capitation for defined services provides a fixed monthly payment for each member selecting a PCP, as compared to payment for each service delivered by that physician. It is critical to define exactly what services are to be covered in that capitation payment so that a physician knows what level of care is being covered through the reimbursement. PCP services typically include the following:
   • Office visits, including routine exams and well-baby care;
   • Immunizations and therapeutic injections;
   • Inpatient visits while member is confined in a hospital or other facility;
   • Specific list of routine lab and diagnostic services (e.g., EKGs);
   • Specific list of routine office procedures (e.g., minor surgical procedures);
   To supplement the capitation for defined services, the managed care company also may pay the PCP additional fee-for-service reimbursement for after-hour and emergency treatment to avoid the higher cost of sending the member to the emergency room.
   Capitation rates are usually age/sex specific (e.g., different rates for adult versus child, male versus female) to recognize differences in the member population. It is possible to capitate most types of providers or groupings of providers (e.g., hospitals, IPAs, PHOs, labs, drug vendors), provided there are clear definitions as to the services to be provided and the expectations of the provider. Advantages of capitation for defined services are that it rewards prudent utilization of services (PCPs "keep" excess capitation payments above their actual costs of delivering care), and it eliminates claims processing for low-cost, routine, high-volume services.
   Concerns about capitation models include the following: it can be more difficult to recruit physicians if they are not willing to accept capitated services; and it can be difficult to collect accurate and relevant encounter (claims) data because physicians have no incentive to complete paperwork. Effective audit systems must be established to ensure that services contracted under the capitation agreement are not also submitted and reimbursed as under fee-for-service; physicians must have sufficient financial strength to assume the risk inherent in capitation; and the managed care organization (MCO) must closely monitor the practice to make sure PCPs are delivering appropriate care, rather than simply referring care to other providers (for which the MCO pays additional fees). Thus, critical tools for implementing capitation for defined services include a clear and workable definition of capitated services, monitoring reports to identify inappropriate referrals, systems support to give PCPs information necessary to manage their budgets, and quality screens to protect against underutilization.
5. Capitation with a withhold is the same as capitation for defined services, except that a portion of the capitation payment is withheld as a tool to reduce PCP "triaging" (i.e., making too many referrals) to other providers. The withhold is returned at the end of the fiscal year, depending on PCP performance. The key advantage is that the PCP has a financial stake in properly managing referral care. The same concerns about capitation exist, and recruiting primary care physicians who will accept this model is tricky.
6. Capitation for complete services capitates the PCP for all services rendered to a member, including referrals to specialists and hospital services. The capitation payments are used to establish a PCP budget, against which the costs for all services are charged. The PCP has a stake in managing the total care for assigned members. However, unless PCPs are careful, a string of catastrophic cases can be financially devastating (usually protected against by some type of stop-loss coverage).
7. Budgeted capitation sets up a pool, which is funded directly from premiums, for a group of PCPs. Claims are charged directly against the budgeted pool during the fiscal year; if the pool runs dry, no further monies are paid out for services, but excess monies in the pool at the end of the fiscal period can be available as surplus and shared with providers. Advantages of budgeted capitation include those noted above for other methods of capitation, plus the added feature that medical expenses cannot exceed premiums collected. However, an added concern is that the PCP's average member costs vary by plan group and the PCP has no control over them.
8. Salaried physicians are employed by staff model HMOs. Like capitation models, a key advantage is that the supposed financial incentives for overutilization are removed, and more importantly this "vertically integrated" approach to health care delivery allows for efficiencies not possible in other types of arrangements. However, it is crucial that the appropriate "corporate" goals/policies are developed and broadly communicated to give staff providers direction on utilization and quality.

CONTROLLING PAYROLL COSTS

Pay Review Budgets

Pay review budgets for managers set out the overall increase in their payroll that they are allowed to recommend for their departments to cover the cost of competence and/or performance-related awards. This is the basic control mechanism, and managers should be required to keep strictly within their budgets and own the financial consequences of so doing.

In Bass Brewers, for example, control is exercised mainly through the pay review budget but managers are also expected to use their judgement in controlling progression by reference to a pay policy line based on market rate comparisons and the rates of pay for people carrying out similar jobs in their departments.

Review budgets restrict the scope for managers to make excessive awards leading to unjustifiable grade or band drift. But by themselves they will not prevent drift. Additional control is required by careful monitoring of the distribution of pay in grades or bands to ensure that anomalies and drift do not occur. Peer reviews or moderating processes can be used which enable out-of-line payments to be identified and thus provide for consistency. These involve getting groups of budget centre managers together to exchange information about their proposals and, if challenged by one of their colleagues, justify them. Such reviews should specifically check that the levels of pay for people in similar roles are consistent with the levels of competence and contribution demonstrated by them.

Some companies, such as Zeneca, give managers a pay review budget at the beginning of the year and get them to plan how they can use this most effectively to help them to achieve their business plans. For example, if a manager is controlling a number of key development projects, he or she might reserve some money for awards to project teams when they complete their project satisfactorily or at predefined milestones.

Pay review budgets are usually only concerned with performance or competence/skill-related awards. They may not therefore control the payroll costs arising from new appointments, transfers and promotions. Some companies set budgets which control increases arising from promotions and upgradings as well as variable pay. Others aim to achieve complete control through total payroll budgeting.

Total Payroll Budgeting

The problem with pay review budgets is that they do not control total payroll costs within departments. These are, of course, dependent on the number of people employed in different roles and their rates of pay. Payroll costs vary as a result of changes in those numbers and increases in pay arising from general and individual pay reviews; the amount of pay offered to new, promoted or transferred staff (which, if they replace existing staff, could be higher or lower than the rates paid to those replaced); and the extra pay earned by staff on promotion or upgrading.

A total payroll budget is based on present payroll costs adjusted for forecast changes in the number and mix of those employed in the budget centre and the forecast cost of general and individual pay increases. When budget centre managers are held accountable for their total payroll costs this means that they have to justify the numbers and types of staff they employ and any increases to payroll costs they believe are required to cover pay reviews, promotions and additional costs arising from recruitment or transfers.

When preparing their budgets, managers are issued with guidelines on what they should allow for general and individual pay review increases and they will be expected to keep within these guidelines when preparing the budget and conducting their pay review. If the financial performance of the organization means that more money can be made available to fund competence- or performance-related increases, then these budget guidelines may state the extent to which extra pay costs arising from such increases can be included in the budget.

When submitting their payroll budget proposals, budget centre managers can make out a case for an increase in their budget above the guidelines to cover anticipated extra staff, promotions or increases in responsibility (role enlargements). But they would have to justify these increases in added-value terms; in other words, they would have to prove that the income generated by these additions will exceed the cost of them. Increases must be self-financing. Conversely, if they are able to plan the maintenance or increase of present activity levels and outputs by reducing staff numbers, they can make out a case for using the extra cash thus released to fund competence-related, performance-related or career development increases. These can be used to reward staff for the additional contributions they deliver against rising expectations.

This approach means that some budget centre managers might have more cash than others to reward their staff. This could result in inequities unless the awards are fully justified. Such proposals would therefore need to be subjected to rigorous assessment. Subsequent rewards would also need to be monitored carefully. Payroll budgets can be flexed during the year in response to changes in activity levels or new projects. Many companies have interim reforecasts once or twice a year which require managers to review their original budget in the light of experience to date and amend it as necessary.

Control is exercised over budget expenditures by regular reports analysing variances, which budget managers may be required to explain and deal with.

This type of budgeting procedure can enable effective control to be maintained over payroll costs and restrain managers in a relatively unstructured pay system from overpaying staff. But full control still requires monitoring and peer review (moderating) processes.

The critical pay budgeting issue is the quality of understanding and ownership line managers have of their budgets. For many, this is an area where considerable support from personnel is still needed - a role in which the consultancy skills of HR professionals are increasingly called upon.