IDENTIFY BUSINESS ASPECTS OF PRACTICE AND COST-EFFECTIVE CARE - Class 2
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Some Considerations for Physicians Entering into Capitated HMO Agreements
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Factors that affect a physician’s financial performance in a HMO contractual arrangement include:
(1) Utilization.
For example, adverse selection where the HMO enrolls an inordinate number of patients requiring services greater than the premium established.
(2) Physician and hospital costs.
Providers must be able to manage costs. This means providers must shift from a total cost to marginal cost method for managing their practice. This requires increased administrative sophistication, particularly to track the incurred but not reported (IBNR) liabilities incurred through referral of HMO patients to specialists.
(3) HMO underwriting proficiency.
In a market with limited capitated HMO saturation, physicians may expect significant enrollee growth. In a more mature market, physicians begin to examine each HMO contract to compare capitation received from one HMO to another. This may lead to consolidation by physicians of the HMOs in which they participate to maximize revenue.
(4) Sales
Physicians may begin to consider discounting participation in an HMO if its growth flattens or the capitation received becomes less appropriate in proportion to the costs of providing care. For capitation, it is not how many deals you sign, it is the potential profitability of the contract.
Three major areas of exposure for providers taking risk, according to the article by Frances M. Prescott, "Improve – Rather Than Lose – Your Risk-Taking Entity", Healthcare Financial Management (February, 2000), are: (1) medical costs, (2) pricing and underwriting strategy, and (3) efficiency of administrative infrastructure. Regular reviews of the key performance indicators in each of these areas can help identify potential problems and facilitate action to mitigate financial loss.
Information is crucial to good management. According to the article by Lisa Scott, "After the Fall; New Tactics Offer Hope for Battered California Physicians," Modern Physician (May 1, 2000), there is great hope at a large provider network in California, Brown and Toland, that Internet-based information processing and communications will make healthcare more efficient. Lowering administrative costs can be significant, because administrative costs consumes as much as 25% of healthcare dollar. A pilot program is in effect with system supplier of Healtheon/WebMD of Internet-based information system for claims processing, eligibility checks and referrals to virtually all of its 1,300 physicians by midyear. Estimates of a 10% reduction in its administrative costs when the system is fully deployed and physicians could save 3 times that amount.
Another important issue for risk taking entities is to create a framework to analyze if managed care contracts are within expectations. A part of this includes linking payments with clinical processes as described in the article by Joseph M. Kemka, "A New Risk Management Paradigm for Managed Care," Healthcare Financial Management: Clinically based risk-adjustment models links clinical and financial aspects of care to serve as a foundation of management systems that support clinical pathways, product-line management and case management.
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