AHM Network Management: Analysis of Market and Health Plan Needs

Objectives

After completing this lesson you should be able to:

Explain how the presence of provider organizations and the level of market maturityaffect network strategies

Explain how a health plan can use a competitive analysis to determine the size of thenetwork

Describe some differences between network needs for large employers versus needs forsmall employers

Describe some of the challenges that health plans face when developing networks in ruralareas

List several different areas for which a health plan should establish goals beforebeginning to develop or revise a provider network

Introduction

To ensure that its members receive appropriate, high-quality care in a cost-effective manner, eachhealth plan tailors its networks according to the characteristics of the consumers, purchasers,providers, and competitors in a particular market. Other considerations for planning the networkare the health plan's own goals for quality, accessibility, cost savings, health plan-providerrelationships, and member satisfaction. Strategic planning for networks is an ongoing process, so,in addition to an initial evaluation of its markets and goals, a health plan must periodicallyreevaluate its target markets and objectives, then modify its network strategies accordingly toremain competitive in the rapidly changing healthcare industry.

In this lesson, we describe the ways in which health plans analyze the network managementaspects of potential and current markets. We also discuss the types of goals that a health planestablishes for a network.

Market Analysis

The structure, composition, and size of the provider network depend in part on the characteristicsof the specific service area. When a health plan considers establishing a provider network, itanalyzes the market for that network. The factors typically included in a market analysis are listedin Figure 2A-1.

Market Maturity

Even though the use of health plans is growing in virtually every area of the United States, healthplan market share and the rate of growth varies greatly among individual markets. For example,as of January 1, 2003, more than 48% of California's population was enrolled in an HMO, whileAlaska had no HMO enrollment, and in six other states (Alabama, Idaho, Iowa, Mississippi,North Dakota, and Wyoming), less than 5% of the population belonged to an HMO.1 Todetermine appropriate strategies for a particular market, a health plan should assess the currentlevel of market share for health plans and how the market share is changing. The level of healthplan penetration in the market is often an indicator of how knowledgeable providers andconsumers are about health plans, how receptive providers and consumers will be to health planprograms, and the level of competition among health plans in the area. Health plan marketmaturity may also provide some indication of which products are most appropriate for a particularregion. For instance, consumers and purchasers in a market with relatively little health planmarket share are likely to be more receptive to loosely managed plans, such as PPOs, than toHMOs.

One recent analysis views health plan market maturity as the result of a combination of 11 marketfactors.2 These factors are listed in Figure 2A-2.

Mature markets will have providers who understand how health plans function, and the providerswill be organized to interact with health plans. For example, the first three factors in Figure 2A-2relate to the formation of provider organizations, which are alliances among physicians orbetween physicians and hospitals that contract with health plans on behalf of the providers.Examples of such provider organizations are an independent practice association (IPA), a grouppractice without walls (GPWW), a consolidated medical group, and a physician-hospital

organization (PHO). (These provider organizations are described in Healthcare Management: AnIntroduction.) The presence of provider organizations may have a profound influence oncontracting strategies and the size and composition of the provider network. Members of theseprovider organizations may be unwilling or unable to contract on an independent basis. Individualproviders may also have formal or informal commitments to refer only to other providers in thesame organization. In many cases, health plans construct their provider networks around existingIPAs, PHOs, or multi-specialty groups.

From the health plan's perspective, contracting with provider organizations has both positive andnegative aspects. On the positive side, integrated organizations of hospitals, physicians, and otherproviders are more likely to have established systems of communication that allow for bettercoordination of care and quality improvement across providers. Wellness, disease management,and case management programs are potentially more effective when implemented by a team ofproviders who are used to working together and who understand the role of each provider in thehealthcare delivery system. In addition, provider organizations are often willing and able tomanage the risk of capitation or other performance-based compensation programs. Under a risk-sharing arrangement, an integrated delivery system (IDS) has greater control of its risk,theoretically, and can make better matches between resources and patient needs than canindividual providers.

On the negative side, the presence of provider organizations can reduce the number of choicesthat health plans have in a market. For instance, the Minneapolis provider community has nowconsolidated into three major provider organizations. Health plans operating in Minneapolis mustchoose from the three organizations for provider contracting. Employer purchasing coalitions inMinneapolis have attempted to "unbundle" these organizations in order to reestablish the range ofchoice they prefer. In addition to limiting health plan choices, the integration of providers intonetworks also limits the ability of health plans to match resources with the needs of patients. Theplan may decide that it needs two of the three provider organizations in a community to have an

adequate supply of primary care physicians (PCPs), but those two provider organizations maycarry with them more specialists than the health plan needs to serve its members.

In addition, the collective bargaining leverage possessed by provider organizations may reduce ahealth plan's ability to obtain favorable or even competitive reimbursement arrangements. This isparticularly true in smaller markets with limited competition among provider organizations. Insome cases, provider organizations have higher average service costs than might be expected dueto the expense of developing and maintaining the organization. Finally, integrated providerorganizations that span urban and rural areas may reduce competition among referral centers forthe patients coming from rural communities, as we will discuss in the section on urban and ruralmarkets.

The Provider Community

A thorough assessment of the provider community is a critical component of the market analysis.The health plan needs an accurate estimate of the supply and location of physicians, hospitalbeds, pharmacies, and other ancillary services. When evaluating a provider's location foraccessibility, a health plan considers the distance between the provider's location and members, aswell as geographical barriers, such as mountains and road patterns, that may affect access. Foreach type of provider, the health plan also examines typical patterns of utilization and averagecosts for selected services. In most cases, physician data is reported by specialty, or at leastdivided into PCP and specialist categories. Because inpatient care is typically more costly thanthe same services delivered on an outpatient basis, a health plan gives special attention to the ratioof inpatient to outpatient utilization.

To research the provider community, health plans may use any or all of the data sources listed inFigure 2A-3.

While aggregate utilization data is usually available, a health plan often experiences difficulty inobtaining reliable utilization information about individual practitioners who have not previouslyparticipated in one of the health plan's networks. Utilization data received directly frompractitioners may be inaccurate if the providers have not developed adequate systems formonitoring utilization.

In addition to determining the number, types, locations, and utilization patterns of providers, thehealth plan needs to understand the existing referral patterns or other relationships in the providercommunity. Even in markets without provider organizations, most PCPs have establishedrelationships with particular specialists and ancillary care providers. The PCPs may be reluctantto refer members to unfamiliar providers, even if those providers happen to be in the same healthplan network. To make sure that their members have access to inpatient care and other hospital-based services, the health plan must also consider which physicians have privileges at thedifferent hospitals in the area. Health plans often lack the time or resources necessary tothoroughly investigate referral patterns, so the extent of research into referral patterns variesamong health plans.

Competitive Analysis

Besides considering the condition of the provider community, the health plan also analyzes itscompetition in the market. It identifies the other health plans operating in the market, the level oftheir market penetration, and the characteristics of successful and unsuccessful health plans, suchas panel sizes and premium levels. This information helps the health plan decide what strategies itshould use in developing its provider network. For example, one way for a health plan todetermine the optimal size for its provider panel is to examine the provider networks of themarket's other health plans. This analysis should answer the following questions:

What are the provider panel sizes, premium levels, and cost-containment strategies of thehealth plans with large or increasing market shares?

What are the physician-to-enrollee ratios of the successful health plans? What are the characteristics of health plans that are losing market share? How satisfied are providers with the competitive plans, and what are the reasons for their

satisfaction or dissatisfaction?

By correlating the current market share and the growth of market share of competitive healthplans with provider panel size, premium prices, and other competitive factors, the health plan canunderstand the competitive dynamics in the market. The health plan needs to know:

Are customers willing to accept a smaller provider panel in exchange for lower prices? What price reduction appears to be required for acceptance of narrower panels? How important are out-of-network benefit features? Are PPO or POS products more successful than HMO products of the same panel size?

Given the competitive characteristics of the market, the health plan can determine how manyPCPs, specialists, facilities, and ancillary providers to include in the network in order to meetmembers' healthcare needs and the expectations of both members and purchasers.

General Economic Conditions in the Market

The economy of the target market can influence a health plan's approach to network developmentin several important ways. The health plan must consider the level of growth or decline in theeconomy, the size of employers, and the types of industry in the market.

Economic Growth

Many times, economic growth in a market indicates an influx of new, often young, workersattracted by employment opportunities. The addition of many young people lowers the averageage of the population. A lower average age influences the healthcare services that will be needed.We discuss the effect of age on the composition of the network later in this lesson. In a tight labormarket, companies tend to increase employee benefit levels as employers compete with eachother for workers. Broader ranges of benefits often mean that health plans will need to increasethe number and types of providers in the network. A growing economy often signals growth inthe medical community as well, with expanded hospital facilities, higher-level diagnostic andprocedure facilities, and more physicians.

A sluggish or declining economy can have the opposite effect on healthcare needs in an area.Young workers may leave the area in search of jobs. The remaining population is likely to beolder and more subject to chronic health problems. As the average age of employees goes up,healthcare premiums will rise to account for the increased healthcare needs of older workers.Employers have turned to health plan programs to respond to rising healthcare costs. Otheremployer strategies designed to address rising costs include increasing employee contributionsfor health plan coverage, especially for traditional indemnity programs.

Depending on the current supply of providers, a declining economy can either stimulate or stiflecompetition for health plan contracts among providers. In a market with a large supply ofphysicians, for example, physicians may be more willing to negotiate with health plan programsto avoid losing patients in a declining economy. On the other hand, a declining economy oftendiscourages new physicians from entering that market. The current supply of physicians mayresist price negotiations in the knowledge that health plans have no alternative providers toinclude in the network.

Size of Employers

The composition of the local economy also influences the provider contracting process. Forexample, the sizes of the businesses in the market affect the types of health programs that will bepurchased. In general, larger companies (those with more than 1,000 employees) have adoptedhealth plans more quickly than smaller companies (those with fewer than 100 employees).Although health plan coverage is less costly than indemnity coverage, small companies have beenslower to contract with health plans. The decision makers in small companies typically have lessknowledge of health plan products. Small companies often lack the administrative or financialcapability to offer multiple health options.

In a market with predominantly small employers, health plans may want to develop broadprovider panels so that small groups will be more attracted to a health plan as the sole healthbenefit program. Products with out-of-network benefits, such as PPO and POS products, are morelikely to be successful in these markets, than an HMO that offers no out-of-network benefits.

A market dominated by larger employers has a different contracting complexion. Although fewerfirms of all sizes are offering employees a choice of health plans, choices among healthcarebenefit plans are still more common in larger firms. In markets where employees have health planchoices, products with relatively small panels may have better growth opportunities. While thegeneral trend in consumer preferences is toward larger provider panels, some consumers arecomfortable staying within a limited provider network and will choose a narrow panel plan if it isless expensive. Employee choice among different health plans allows health plans to reach thisniche market. Narrow panels can have several advantages for health plans, as listed in Figure 2A-4.

In order to make the narrow panels more appealing, health plans serving a market dominated bylarge employers need to ensure the quality of their networks by including quality and membersatisfaction measures in the provider selection process and in provider incentives.

Types of Industries

The industry mix of the target market also has implications for the provider network.Manufacturing companies are more likely than professional or service organizations to negotiateemployee benefit packages with unions. Frequently, union negotiations for healthcare benefitsemphasize preserving the worker's choice among providers. High-wage professionals such aslawyers, accountants, and physicians generally prefer high levels of benefits and unrestrictedaccess to any provider. Service industries such as restaurants, hotels, and laundries typically favorlow-cost, minimal-benefit healthcare plans, if health benefits are offered at all. Health plansselling to the service industry often develop narrow panels and manage access closely in order tocontrol costs.

The type of industry in a market also affects the composition of a network. Manufacturing andheavy industry jobs have more back injuries, while carpal tunnel injuries are more common incomputer-oriented businesses. The differences in the types of injury seen most often influence themix of providers needed for a workers' compensation network.

Rural, Urban, and Suburban Markets

Health plans often adopt different approaches to developing networks in rural, urban, andsuburban markets. The most obvious reason for using different approaches is that the number and

types of providers vary greatly among these markets. Less obviously, the expectations ofconsumers and providers also vary according to the type of community involved. Health plansmust factor in these variables as they develop their provider networks.

Rural Markets

The greatest challenge for the development of health plan networks comes in low- populationrural areas where the number and types of providers are limited. In general, when providersupplies are limited, providers are not likely to offer discounts to health plans in exchange fordirected patient volume. Further, when there is a small supply of providers, the consumer demandfor broader provider panels usually outweighs the value of any additional discounts that the healthplan could obtain through directing volume to a smaller panel.

A small supply of PCPs can make it difficult for a health plan to fulfill its obligation to providecomplete healthcare services for its members. If the number of PCPs is low in relation to the areapopulation, many PCPs may be unable or unwilling to accept new patients from the health plan.In addition, the PCPs may not be able to provide 24-hours-per-day, 7-days-per-week care, so ahealth plan may need to arrange for after-hours services from local urgent care centers or hospitalemergency departments.

Towns with a population of 30,000 or less are likely to have only one hospital or no hospital atall. In smaller towns, the population typically has a large proportion of Medicare beneficiariesdue to the migration of younger people to urban areas. As a result, small-town hospitals areusually heavily dependent on Medicare revenue and may receive county or city tax support. Suchhospitals typically have low occupancy and most have low operating margins. Consequently,rural hospitals are generally reluctant to give price discounts to health plan companies.

Older physicians are less likely to be board-certified and physicians in towns of 30,000 or lesstend to be older than the average physician population. As a result, many family and generalpractitioners in rural areas are not board-certified, so a health plan may need to modify itscredentialing criteria.

Physicians in rural towns generally function as solo practitioners or in small groups. Specialtyservices are frequently provided by a single small group of doctors in a particular specialty or byphysicians from larger cities who periodically travel to the smaller towns. Few effectivelyorganized PHOs or IPAs exist in rural areas, and rural physicians often lack familiarity withcapitation or other risk-sharing arrangements. As a result, rural practitioners often have difficultymanaging financial risk. In addition, the health plan may not immediately be able to directenough patients to the physician to support risk-sharing. Health plans will often need to make fee-for-service (FFS) payments, even in HMOs, until a physician's HMO patient load is sufficient forrisk-sharing. Physicians in rural areas, particularly PCPs, generally charge lower fees thanphysicians in urban areas, so rural physicians tend to resist price discounts. Both hospitals andphysicians in rural areas have fewer resources and less organizational structure for thedevelopment of quality improvement activities. Therefore, health plans should be more involvedin developing and implementing quality improvement initiatives for their rural provider networks.

Creating a competitive advantage through provider contracting in a rural environment ischallenging. Since a rural area may have only a single provider for certain services (onepediatrician, for example), all the health plans competing in this market share the same resourcesfor care received locally; thus reducing each health plan's ability to negotiate for discounted fees.

The low supply of providers makes it very difficult to selectively contract among rural providers.Many rural referral hospitals command substantial monopoly power because consumers in a 100-mile radius may view these hospitals as the only reasonably available source of specialty care.The specialists associated with such rural referral hospitals often share in this negotiatingleverage

Consumers in rural areas often travel to another community for healthcare. Many rural residentsobtain a significant proportion of their healthcare services in another, usually larger, town or city.However, rural consumers usually travel to obtain services not available near their homes or forcare perceived to be better than local services. Even though a health plan may be able to negotiatebetter prices for primary care in a larger town, asking consumers to travel 20 miles for servicessimilar to those available in the consumers' own communities is generally not an effectivestrategy. Federal access requirements for federally qualified HMOs and Medicare health planslimit this practice as well. In addition, rural employers generally feel a community obligation tooffer health benefits programs that include the local hospital and physicians.

Since a significant proportion of healthcare dollars is spent for specialty care received outside therural community, the greatest opportunity to create competition in rural areas is among thespecialty care providers in other nearby communities. Frequently, rural doctors have their choiceamong several larger medical centers when they make patient referrals. If rural doctors haveenough information to choose efficiently, competition among the larger medical centers can beencouraged. Health plans can facilitate this competition by providing information about referralhospitals to the rural PCPs and by negotiating discounts with the nearby specialists and largermedical centers. Health plans should monitor the market for development of urban-ruralintegrated provider organizations that funnel the majority of rural patient referrals to a singleurban center. The development of urban-rural provider networks may minimize opportunities forthe health plan to reduce costs and improve quality through selective contracting. Another optionthat health plans may consider when designing networks for rural areas is telemedicine. Insight2A-1 provides describes telemedicine and how it may be used to enhance rural providernetworks.

Small Cities

Small cities (for the purposes of this course, cities with populations under 500,000) share some ofthe characteristics of rural areas. Employers in a city with two hospitals may be reluctant topurchase a health plan that includes just one of the hospitals because consumer loyalty may besplit between the two facilities. Another frequently cited concern is that channeling patientvolume to one of the hospitals will drive the other out of business and thus reduce local choices.The concern about fewer choices effectively reduces the negotiating power of health plans.Although small cities may have multiple groups of physicians in each specialty, selectivecontracting is still more difficult in small cities than in urban areas. Consumers are more likely tobe aware of the 3 cardiology groups in a city of 250,000 than they would be aware of all 20cardiology groups in a larger city. A health plan may successfully market a network made up ofone-half of the specialists in a large city, while it will encounter market resistance to the sameratio in a small city. However, the health plan's ability to negotiate prices and transfer financialrisk to physicians, hospitals, and other providers increases significantly in cities with populationsabove 150,000.

Large Cities

Larger cities (with populations above 500,000) typically afford significantly more flexibility inprovider contracting. However, even in large cities, health plans must be sensitive to the size ofphysician panels, particularly in primary care networks. Consumers, whether urban or rural, aremore likely to choose a health plan or to be satisfied with the health plan they have, if theirregular physician is included in the panel.

As health plans grow and consolidate, they must serve the needs of larger segments of thepopulation. Having a larger membership inevitably puts pressure on health plans to broadenprimary care networks. The pressure for larger panels, in turn, places greater emphasis on healthplan methods for working with providers to achieve the desired cost, quality, and satisfactiongoals. Geographic access to providers also reemerges as a significant factor in urban areas. Whilenearly every provider is within 30 miles or 30 minutes of most consumers in a city of less than300,000, this is certainly not true in larger urban areas.

Health plans typically have more alternatives when contracting with specialty physicians andother healthcare professionals in urban areas. While patients with significant chronic or acutehealth problems may already have relationships with particular specialists, most consumers donot. Health plans can selectively contract with specialists and other providers who fit the desiredquality and cost-effectiveness profiles, or health plans can contract with integrated providerorganizations that include specialty as well as primary care services. In an urban area, limiting thenumber of specialists on the panel affects the network's market appeal less than limiting thenumber of PCPs, because the majority of consumers are not familiar with the reputations ofspecific specialists.

Hospital contracting is also easier in large urban areas. Overcapacity of inpatient hospitalresources exists in nearly every size market. However, cultural and political factors affect theability of health plans to use this overcapacity to their advantage when contracting with hospitalsin rural and small city markets. In urban centers, the combination of overcapacity and the largenumber of healthcare facilities allows health plans to readily negotiate discounted prices and, insome cases, risk-sharing arrangements with hospitals. In a market with 50 hospitals, a health plancan promote as a broad panel a network that includes two-thirds of the hospitals. In a market withthree hospitals, a two-hospital network may be inadequate for many purchasers. When planningto negotiate with hospitals, health plans must keep in mind that some states have regulations thatmandate hospital reimbursement rates.

The health plan's freedom to negotiate rates does not remove market pressure to include a highlyprominent hospital, health system, or provider organization in the network. Many employers andconsumers evaluate the quality of health plans based on the inclusion of prestigious institutions,such as teaching hospitals or hospitals that serve as regional referral centers. The growingconsolidation of provider organizations can limit a health plan's ability to develop broad-basedhospital networks. In a community in which the healthcare provider market has consolidated intotwo or three large provider organizations, a health plan that wants to have the majority of areahospitals on its provider panel needs to contract with every provider organization. The health planmay have to make price concessions to secure contracts with all three groups since the health plancannot promise directed patient volume in exchange for discounted prices.

Suburbs

The effect of suburban areas surrounding a city on network development depends on the size ofthe urban area. In a mid-sized urban area such as Kansas City, healthcare providers in thesurrounding suburbs and providers in the city itself are viewed as one system by consumers andemployers. Frequently, suburban providers can deliver primary and secondary care, but tertiaryproviders in the core city are necessary to round out the network. In contrast, larger urban marketslike Chicago have suburban areas with medical complexes that rival those in the inner city forscope and complexity of services.

It is possible to have a suburban medical network that is sufficient to serve the needs of suburbanresidents without including the inner-city providers on the panel. Large employers may see theurban area as a unified whole if they have work locations and employees living across themetropolitan area, but they may be willing to offer a health plan with a suburban-based networkas one of several employee choices. Smaller employers often view the healthcare market in morelocalized terms and may choose a suburban plan as the only healthcare benefit option. When ahealth plan creates a suburban-based network, the dynamics of contracting are similar to those insmall cities.

Consumer Demographics

The primary demographic factors that a health plan considers when developing network strategiesare the following:

Number and location of plan members and potential members Income levels Age and gender mix Ethnicity, race, and religion

Number and Location of Members

The actual and potential membership of a health plan is a primary consideration for determiningthe number of providers on the panel. The size of the network must be sufficient to meetmembers' healthcare needs, while providers' geographic locations must be reasonably convenientto members' homes and workplaces.

Income Levels

Health plan products often fit well with the financial needs of low-income consumers. Low-income, working consumers cannot afford high premium contributions, high coinsurance rates, orhigh out-of-pocket maximums. In other words, they need a health plan that provides fairly richbenefits for nondiscretionary services at a low premium cost. While all consumers share some ofthe same concerns about healthcare, low-income consumers are more sensitive to the financialconsequences of receiving healthcare. Low-income consumers, in particular, need the following:

Preventive care that pays for itself Healthcare delivered in the most efficient and effective setting Healthcare delivered at the most effective point in the disease process Healthcare delivered at the most reasonable price

A health plan serving low-income populations has a special obligation to work closely withproviders to meet the goals listed above. Effective working relationships between the health planand its providers are critical in order to serve low-income populations well. The size of the plan'snetwork will be influenced by the plan's ability to provide performance feedback to providers andto maintain local contact with providers. Not surprisingly, low-income consumers want a broadchoice of providers. A health plan must ensure that it has the ability to manage quality,utilization, and costs effectively in a large provider panel. The same financial pressures exist forhealth plans delivering Medicaid managed care products. In the Medicaid segment, however, thepressure to control consumer out-of-pocket costs is replaced by pressure from strained stategovernment budgets.

The specific healthcare needs of consumers also vary with income. Several studies havedemonstrated that low-income groups have a higher incidence of chronic illnesses than higher-income populations. The increased incidence of illness appears to be partially related to lifestyle,since higher smoking, alcohol, and fat intake rates are associated with low-income levels, andpartially due to the stress of low-income life. In any case, low-income populations are more likelyto need more services for cardiac disease, high-risk pregnancy, diabetes, and asthma than higher-income populations.

The health plan should also consider the structure of the local health delivery system for low-income populations. Figure 2A-5 lists questions that health plans often ask about the deliverysystem.

Finally, low-income populations also tend to have lower education levels. Rules and procedureson how to access providers need to be clearly defined and written at an appropriate reading level.Complicated copayment structures and authorization procedures are likely to reduce access tocare rather than achieve the intended goals with this population.

As income levels rise, financial concerns are not eliminated, but other issues assume a moreprominent position. Upper- and middle-income consumers are often less sensitive to out-of-pocket costs and more sensitive to perceived quality and access. The inclusion of prestigiousinstitutions and specialists in provider panels becomes more important as income increases. Themix of services offered may change as well. Higher-income consumers may be willing to pay forsports medicine services and wellness activities that do not have an apparent short-term financialbenefit. Higher-income consumers, like low-income consumers, dislike restrictions on providerchoices and bureaucratic procedures. However, high-income consumers have the economic powerto voice these preferences through purchase decisions. Broad provider networks that includehighly respected providers and fewer restrictions on access are likely to be successful in higher-

income segments. Many health plans offer PPOs and POS options in markets with a significanthigher-income population.

Age and Gender Mix

The age and gender mix of the population affects the development of provider networks inseveral ways. The most obvious differences based on age relate to the mix of services provided.The incidence of many diseases, including cancer, heart disease, asthma, diabetes, and arthritis,varies with age. Typically, younger populations need more pediatrics and obstetrics/gynecology(OB-GYN), while older populations need rheumatology, cardiology, geriatric medicine, homehealthcare, skilled nursing care, and vision care.

The age mix can influence provider networks in other ways. Young adults, particularly men, haveless contact with the health system than other age groups and are less attached to particularproviders. Because they often do not have established relationships with any physician and do notanticipate needing out-of-network specialists, young men may be more willing to join an HMOwith a narrow panel. Young families are also attracted to HMOs because HMOs typically havebenefits for maternity care and well-child care with low out-of-pocket costs. However, healthcarefor young, growing families can be expensive, so a health plan serving young families needscareful management of obstetrical and pediatric costs. Young families usually need providerswith flexible office hours in order to access healthcare.

Because their healthcare needs are increasing, middle-aged consumers are usually very consciousof the scope of specialty services within a provider panel. The attitudes of older workers, retirees,and Medicare recipients toward health plans vary widely depending on past experiences. If healthplans have been recently introduced to a market, older workers may be less inclined to switch tounfamiliar POS and HMO products. In mature health plan markets, older workers may have had adecade of experience with health plans and may be as receptive as younger workers. Even withhealth plan experience, older workers are typically more sensitive than younger workers to thechoice of providers included in the panel, since the older workers are more likely to have anongoing relationship with one or more providers. Comfort and familiarity with health plans varyby age in the Medicare population. The "younger elderly" (under 70 years of age) are more likelyto have had contact with health plans in their work lives, while the "older elderly" are less likelyto have had this experience, and thus are less comfortable with health plans.

The gender mix of the member population affects both the size and composition of the network.Morbidity, the incidence of illness and injury in a population, is higher for females than formales. Therefore, a population with a high proportion of females requires more providers than amembership that is predominately male or a membership with an equal distribution of males andfemales. The proportion of females also determines the need for obstetrical and gynecological(OB-GYN) care and for other women's health programs.

Diversity of the Population: Ethnicity, Race, and Religion

Ethnicity, race, and religion often play important roles in the acceptance of a provider network byconsumers. Some ethnic influences are obvious. A provider network with Spanish-speakingproviders is essential in parts of Florida, Texas, California, and many major metropolitan areas.Immigration from Asia, Eastern Europe, the Middle East, and Africa has created languagechallenges for health plans throughout the United States. Aside from language barriers that hinderunderstanding of conditions and treatment plans, patients are sometimes more comfortable with

providers of their same cultural and ethnic background, particularly if the patient is a recentimmigrant. The comfort issue sometimes applies in reverse as well. Many multigenerationAmericans are uncomfortable receiving care from foreign medical graduates because of languagebarriers (including accents), a lack of cultural affinity, or prejudice. Health plans must becognizant of ethnic, racial, and religious issues in network development, and must work withproviders to accommodate and increase the comfort levels of patients.

Sometimes ethnic, racial, and religious differences extend beyond language or simple comfortlevels. Different cultures and religions often encompass alternative views of disease and healingprocesses. For example, some religious sects resist the use of certain treatments, such as bloodtransfusions. Some ethnic groups believe in traditional treatments that are not recognized bymedical science. In order to serve these populations, providers need to be sensitive to andaccommodate, within the limits of safe practice, folk cures and non-traditional providers of care.The religious beliefs of providers must be respected as well. Provider contracts shouldacknowledge that providers will not be obligated to perform procedures that violate their religiousbeliefs. For example, Catholic physicians and hospitals do not perform abortions or sterilizations.

Finally, racial and ethnic differences can influence the mix of services needed. AfricanAmericans have a higher incidence of low-birth-weight babies regardless of their economicstatus. Plan members of Asian descent have a relatively high incidence of osteoporosis, anddiabetes is more common among Native Americans than in the general population. Health plansshould recognize racial and ethnic differences both in the design of networks and the evaluationof provider performance. For example, if financial incentives are designed around outcomes,physicians serving African American populations should not be penalized for a higher rate oflow-birth-weight babies. However, neither should these providers be exempted from showingoutcome improvements.

We have discussed the impact of the characteristics of the target market on network structure,size, and composition. Next, we will explore how the health plan's goals can affect networkdesign.

Setting Goals for the Provider Network

After analyzing the market and identifying opportunities for developing a provider network, thehealth plan chooses the goals for its network. These goals can be highly specific if the health planis focused on a specific healthcare market, or they can be more general if the development effortis expected to cover a variety of markets and market conditions. Network goals are usuallyestablished for the following areas:

Perceived and measurable quality of care delivered by the network.Health plans typically base quality expectations on five criteria:

1. Credentials the health plan expects its practitioners and institutional providers tohave

2. Types of service capabilities, facilities, and equipment the health plan wants inthe network

3. Standards of care and protocols the health plan expects network providers tofollow

4. Measurable outcomes the health plan expects the network to produce5. Member satisfaction results

Accessibility of the network to consumers.The time and distance members must travel for healthcare, provider hours of operation,and ease of obtaining appointments. These goals also consider the proportion of providerswho already treat plan members that the health plan is able to include in the network.Accessibility goals may be mandated by regulatory bodies or purchasers.

Cost savings produced by the design of the network.

Cost-savings goals are generally based on three benchmarks:

1. The relative cost of healthcare in the area where a network is to be developed.For example, in a market with below-average healthcare costs, an undersupply ofproviders, and low health plan penetration (characteristics of some ruralmarkets), cost-savings goals should be lower than for a market with above-average costs, an oversupply of providers, and some level of health plancompetition.

2. The strength of the current health plan competitors in the market and the level ofcost savings that these health plans are achieving. Most state insurancedepartments require periodic filings of financial information that can give ahealth plan some indicators for the competitive environment and economics.Trade publications also contain some utilization and price benchmarks for thehealth plan industry. Anecdotal information from local employers and providerscan also be a valuable source of information about utilization levels and costsunder competitors' plans.

3. The cost-effectiveness of the health plan's own existing networks. Using theresults achieved by its current networks, the health plan can set goals for anynetworks that it plans to develop.

Style of the health plan's relationship with network providers.These goals usually determine whether the health plan chooses to have tight managementcontrol over its network providers or allows them more autonomy. Goals for relationshipswith providers also influence the nature of incentive programs included in providercontracts.

Patient satisfaction with network providers.Patient satisfaction is usually measured with surveys that ask plan members how they feelabout their interactions with their providers.

Endnotes

1. The InterStudy Competitive Edge, 8.2 (Minneapolis, MN, 1998), 34.2. Peter Kongstvedt and Jean Stanford, Health Plan Market Maturity: A New

Multidimensional Model (Washington, D.C.: Ernst & Young, LLP, 1997), 8-17.3. Health Benefits in 1997 (New York: KPMG Peat Marwick, 1997), 22.4. Health Benefits in 1997, 17.

AHM Network Management: Collecting and Verifying Data for CredentialingPurposes

Objectives:

After completing this lesson you should be able to:

Explain the data collection and verification processes used in credentialing and describetheir importance to a health plan's selection of network physicians.

Describe the role in data collection and verification of:o The American Board of Medical Specialties (ABMS)o The Federation of State Medical Boardso The National Practitioner Data Bank (NPDB)o The Healthcare Integrity and Protection Data Bank (HIPDB)o Provider profiling

Explain the liability issues involved with credentialing decisions, including:o The requirements of the Americans with Disabilities Act (ADA)o Confidentialityo Vicarious liabilityo Violation of due processo Negligent credentialing

Describe how and why health plans delegate credentials verification to third parties Describe the data collection and verification services provided by:

o hospitals and medical facilitieso the Physician Organization Certification (POC) programo Credentials verification organizations (CVOs)

Introduction

After a health plan has identified and recruited a potential network provider, it must verify thatthe provider meets the health plan's standards. Collecting and verifying provider information is acrucial risk management strategy for a health plan. It is also a critical element in obtainingaccreditation. According to the NCQA, "health plans have a greater responsibility to implement arigorous process to select and evaluate practitioners than other health care organizations becausethey assume responsibility for managing the health care of their members. Choosing thepractitioners who will work well in the delivery system is part of this responsibility."1 Bycredentialing its providers, the health plan assures that it is offering a standard of care that isconsistent with the organization's goals.

In this lesson, we will describe the process of collecting and verifying provider information anddescribe its importance in credentialing. We will present some of the methods health plans use toverify providers' credentials and some of the liability issues related to credentialing. We willconclude with a discussion of how health plans delegate the credentials verification to thirdparties.

After a health plan has identified and recruited a potential network provider, it must verify thatthe provider meets the health plan's standards. Collecting and verifying provider information is acrucial risk management strategy for a health plan. It is also a critical element in obtainingaccreditation. According to the NCQA, "health plans have a greater responsibility to implement arigorous process to select and evaluate practitioners than other health care organizations because

they assume responsibility for managing the health care of their members. Choosing thepractitioners who will work well in the delivery system is part of this responsibility."1 Bycredentialing its providers, the health plan assures that it is offering a standard of care that isconsistent with the organization's goals.

In this lesson, we will describe the process of collecting and verifying provider information anddescribe its importance in credentialing. We will present some of the methods health plans use toverify providers' credentials and some of the liability issues related to credentialing. We willconclude with a discussion of how health plans delegate the credentials verification to thirdparties.

The Credentialing Process

The network activities we described in a previous lesson provides a health plan with a means ofassessing plan needs. Credentialing provides the health plan with a way of determining whichindividual providers best meet those needs. The credentialing process begins when a prospectiveprovider completes an application to participate in the network. The health plan reviews theinformation on the application, verifies its accuracy, and assesses the provider's value to the planand its members. The process ends when the health plan makes a decision to include the providerin the network or to deny participation.

Credentialing begins during recruiting and, ideally, should be completed prior to finalizing acontract with a provider. If credentialing has not been completed before the provider and thehealth plan are ready to sign the contract, the contract must include a provision stating that thefinal contract is contingent upon the completion of the credentialing process.2

Application

In order to participate in a health plan network, providers must submit a completed applicationform to the health plan. Application forms vary according to the type of health plan recruitingproviders; however, most application forms ask prospective providers detailed questions abouttheir professional background, training, and experience. Application forms also requestdemographic information about the applicant and information about the applicant's liability claimhistory. The information provided on the application form serves as the initial documentation ofthe applicant's qualification for participation in the network.

The collection and verification of credentialing information can be time-consuming for bothhealth plan and provider-especially for a provider who participates in a number of health plansand must fill out a different application form for each plan. In response to this issue, some statesnow mandate acceptance of a state-approved application by all plans. The use of a standard formfor basic information enables a provider to maintain one application that can be updated andsubmitted to any health plan operating in the state. Depending on the state, a health plan may beallowed to append a form with additional questions or agreements to the state-approvedapplication.

In other states, a number of local medical societies, hospitals, and health plans have agreed to usecommon application forms to simplify the credentialing process for providers. America's Healthinsurance Plans (AHIP) has assisted in this effort by developing a standardized physicianapplication form that requests information essential to credentialing. Appendix 3B-1 contains a

sample of this form. A health plan may request information specific to its own networkrequirements in addition to the basic information on the standard form.

Verification

The next step in the credentialing process involves verifying the accuracy of information includedin the application. A health plan can conduct this step itself through its credentialing or qualitymanagement unit, or it can contract with an independent credentials verification organization(CVO) for these services. Whether the health plan conducts its own investigations or relies on aCVO depends on the type of organization, the size of the network, and the amount of control overthe process the health plan wishes to maintain. In small HMOs with closed panel networks,credentials verification can often be conducted in-house by plan personnel. In PPOs, which tendto have much larger networks, credentials verification is correspondingly more complex andtime-consuming and requires the expertise of CVOs or other credentialing organizations. We willdiscuss ways in which health plans delegate the credentialing function later in this lesson.

The specific tasks involved in verification range from checking the application to make sure allquestions are answered completely and that the application is signed, to a thorough investigationof the applicant's background and employment history. Some of the information on theapplication is subject to primary verification, which involves viewing original documents toconfirm that they are genuine and accurate.

Primary source verification is typically required for: education and training current state licenses board certification current federal Drug Enforcement Agency (DEA) certification or State Controlled

Dangerous Substance (CDS) certification current malpractice insurance coverage, including the scope of coverage and any

limitations Medicare, Medicaid, and federal tax identification numbers Medicare and Medicaid sanctions

Depending on the health plan's credentialing policies and procedures, verification may alsoinclude an interview with the applicant to clarify and validate information, a visit to the potentialprovider's office or facility, and a review of the provider's medical records.

Office Evaluation

Many health plans that contract directly with individual practitioners include an on-site evaluationof the practitioner's office in the credentialing process. An office evaluation helps a health plandetermine whether a medical practice can provide plan members with high-quality services andadequate access to care. During an office evaluation, a provider relations representative (or otherappropriately qualified health plan staff member) can assess quantitative factors, such as hours ofoperation and the number of appointments available within one day, two days, a week, or severalweeks, as well as qualitative factors, such as the cleanliness, comfort, and general appearance ofthe facility.3 The health plan staff member gathers information about access and appointmentavailability by

asking the practitioner how many plan members the practice will accept as new patients verifying the hours of operation of the practice checking the appointment schedule for appointment availability for routine, preventive,

urgent, and emergency care needs

The health plan then compares the provider's appointment availability and capacity to accept newpatients to its own standards for access. For example, can a member with an acute medicalproblem see the practitioner within 24 hours? How long will a new patient have to wait for anappointment for a routine health maintenance visit? What evening and/or weekend hours does thepractice offer? Does the practice have the capacity to accept the required minimum number ofnew patients?4

The provider representative also assesses the safety, cleanliness, and overall appearance of theentire office or facility. Treatment areas should be comfortable and adequately equipped todeliver routine care and deal with any urgent situations or emergencies that might arise. Forexample, does the office or facility have the necessary equipment to deliver emergency care for apatient who experiences cardiac arrest? Administrative staff areas should be well organized andset up in a manner that facilitates the protection of patients' confidential medical information. Inaddition, all of the staff in the office should display professional appearances and attitudes.

The patient waiting area should be neat and clean, with adequate seating. The representative alsochecks for any barriers that may impede handicapped access into the office and, in somelocations, adequate patient parking.

Review of Medical Records

Health plans typically conduct two types of record reviews: an evaluation of the provider'smedical record keeping practices and a medical record review. Medical record keeping (MRK)refers to the policies, procedures, and documentation standards the provider follows to create andmaintain medical records. It does not cover the content of specific patient records. Health plansusually perform MRK evaluations during credentialing, but not during recredentialing. NCQArequires site visits with an examination of MRK for initial credentialing of PCPs and OB/GYNs.

Medical record review (MRR) is a systematic review of the content of individual patient recordsto ensure that the records conform to accepted, professional medical practices and appropriatehealth management standards. MRR also provides the health plan with insight into the quality ofthe care delivered by a provider. Medical directors or health plan quality management nursestypically perform MRR. Maintaining confidentiality of the information reviewed is key becauseof the sensitive nature of patients' health information. During MRR for prospective networkproviders, the protection of patients' identities and medical information is absolutely essentialbecause health plans have no legal right to access confidential medical records.5 Becausereviewing the records of patients who are not members of the contracting plan raises concern overthe confidentiality of patient information, health plans typically conduct MRR only forrecredentialing established network providers.

Health plans also evaluate provider information from other sources. Among the most important ofthese sources are the American Board of Medical Specialties, the Federation of State MedicalBoards, the National Practitioner Data Bank, the Healthcare Integrity and Protection Data Bank,and provider profiles.

Board Certification

The American Board of Medical Specialties (ABMS) is the umbrella organization for a family ofmajor board organizations that offer physician certification. Organizations included under theABMS umbrella cover most medical specialties. Many health plans consider board certification abenchmark for selection of qualified physicians and most health plans require network physiciansto be board certified, or at least board eligible. Board certification is a status attained byphysicians who have completed a residency in their field of specialization and have passed aqualifying examination in that field. A physician is board eligible when he or she has completedthe required residency but has not yet passed the certification examination. In most states,physicians who are classified as board eligible are required to pass the certification examinationwithin a specified period of time, typically five years, after completing their residency.

A number of other independent organizations also offer certification, usually in non-traditionalspecializations such as sleep disorders and treatment of chronic pain. These organizations,however, are typically self-created and do not have the same credibility as ABMS familyorganizations.

Federation of State Medical Boards

Another source of information about physician performance is the Federation of State MedicalBoards, which maintains a database of reports on physicians who have been subject todisciplinary action by their state medical boards. The Federation-along with several otherorganizations-offers data verification of an individual physician's education, training, andlicensure. These services are purchased by physicians, who present the reports to health plans andother healthcare organizations as proof of their credentials. Some specialty boards andassociations have also begun programs that verify the quality of a physician's medical care, aswell as the quantifiable facts of the physician's background.

National Practitioner Data Bank (NPDB)

As you recall from Environmental Considerations for Network Management, the NationalPractitioner Data Bank (NPDB) is a database maintained by the federal government that containsinformation on physicians and other medical practitioners against whom medical malpracticeclaims have been settled or other disciplinary actions have been taken. It was established toidentify and discipline medical practitioners who act unprofessionally and to restrict their abilityto move from state to state without disclosure or discovery of damaging or incompetentperformance. Most of the information included in the NPDB relates to licensed physicians anddentists. However, information about other practitioners who are licensed, certified, or registeredby a state to provide healthcare services is also included. Reporting entities are responsible fordetermining which types of healthcare practitioners are licensed by the state.

The NPDB gathers information from medical malpractice insurers, state licensing boards,hospitals, and professional societies. Other healthcare entities, such as HMOs, prepaid medical ordental practices, group practices, nursing homes, rehabilitation centers, hospices, renal dialysiscenters, and freestanding ambulatory care and surgical service centers, can also contributeinformation to or request information from the NPDB if they meet NPDB eligibilityrequirements. NPDB eligibility is based on two criteria. First, the organization must providehealthcare services. Second, the organization must evaluate practitioner performance through a

formal peer review process. A healthcare entity such as a health plan must satisfy both criteria tomeet eligibility standards.

Reportable actions against practitioners fall into two categories: medical malpractice paymentsand actions that adversely affect clinical privileges. Medical malpractice payments must involvean exchange of money and must result from a written complaint or claim based on a practitioner'sprovision of or failure to provide healthcare services. Healthcare entities must report malpracticepayments regardless of whether the complaint or claim was settled in or out of court or througharbitration. Reports regarding clinical privileges must be based on a practitioner's professionalcompetence or on conduct that adversely affects the health or welfare of a patient. Healthcareentities must report any action that restricts, suspends, or revokes the practitioner's privileges.Figure 3B-1 summarizes the NPDB's reporting requirements.

NPDB guidelines also specify actions that should not be reported, including

censures, reprimands, or admonishments matters not related to professional conduct or competence (e.g., advertising practices,

competitive activities, salary arrangements) restriction or denial of privileges resulting from changes in a healthcare entity’s eligibility

criteria investigations of possible misconduct or professional incompetence (surrender or

restriction of privileges during or in avoidance of investigation, however, is reportable)

NPDB also specifies the entities that are eligible to request information from the data bank andthe conditions under which requests are allowed. Figure 3B-2 provides an overview of the requestprocess. In general, the same entities that report information to the NPDB are eligible to requestinformation. There are exceptions, however. For example, a plaintiff in a malpractice actionagainst a hospital or the plaintiff’s attorneys are allowed to request information from the NPDB ifthe hospital named in the action fails to do so. Practitioners are also allowed to requestinformation about themselves. Medical malpractice insurers, who are required to report adverseinformation to the NPDB, are not allowed to request information. Information is also notavailable to the general public.

Entities that meet NPDB eligibility requirements are allowed to request the following informationabout licensed, certified, or registered practitioners:

Medical malpractice payments Adverse licensure actions Adverse clinical privileges actions Adverse professional society membership actions

Healthcare Integrity and Protection Data Bank (HIPDB)

In 1999, under the direction of the Health Insurance Portability and Accountability Act (HIPAA),the federal government launched a data bank to combat fraud in the healthcare industry. Designedas a complement to the NPDB, the Healthcare Integrity and Protection Data Bank (HIPDB) is anational healthcare fraud and abuse data collection program for reporting and disclosing certainfinal adverse actions taken against healthcare providers, suppliers, or practitioners. (The phrase"healthcare providers, suppliers, or practitioners" refers to any licensed or certified healthcareprofessionals, such as physicians, dentists, nurses, physical therapists, and so on.) The HIPDBcollects these **types of information about these healthcare professionals.

However, settlements in which no findings or admissions of liability have been made must not bereported to the HIPDB.

Health plans and certain federal and state government agencies (e.g., agencies that license orcertify healthcare providers or agencies that administer or provide payment for healthcare) arerequired to report all final adverse actions taken against healthcare providers, suppliers, orpractitioners since August 21, 1996. A health plan that fails to report required information onadverse actions is subject to monetary penalties of up to $25,000 for each adverse action notreported. The Secretary of Health and Human Services (HHS) publishes the names of governmentagencies that do not report information as required.8

*********

Healthcare delivery-related civil judgments in state or federal court, except thosejudgments resulting from medical malpractice

Healthcare delivery-related civil convictions by a state or federal court Adverse actions by federal or state agencies responsible for licensing and certifying these

healthcare professionals, excluding clinical privileging actions Exclusions from participation in federal and state healthcare programs Any other adjudicated actions or decisions as established in regulations7

The information in the HIPDB is available to health plans, federal and state agencies, licensingboards, and law enforcement agencies for use in investigations of healthcare providers. However,these entities are not required to query the HIPDB. Healthcare providers may conduct self-queries, but HIPDB information is not available to the general public.9

HIPDB information may be requested for use in the following situations:

Privileging, contracting, and employment determinations Professional review, licensing, certification, or registration determinations Determinations of certification to participate in government programs Fraud and abuse investigations Civil and administrative sanctions

All information submitted to or obtained from the HIPDB is confidential and the informationmust be used only for the purpose for which it was requested.10

The purpose of the HIPDB system is to alert information users that a comprehensive review of ahealthcare professional's past actions may be warranted. HIPDB information is not intended toserve as the sole basis for a determination. Rather, health plans, government agencies, and otherinformation users should use HIPDB information to augment information from other sources.11

Provider Profiling

Health plans can take credentialing a step further by performing provider profiling to evaluatehow well a candidate's practice patterns meet the organization's standards. Although providerprofiling is more commonly used for evaluating the performance of established networkproviders, this type of comparison can give the health plan a picture of how well a potentialprovider meets the health plan's standards. A number of software programs are available toperform provider profiling, when the appropriate data are available. We will discuss providerprofiling in more detail in Managing Provider Performance.

Granting Privileges

After the health plan completes its investigation and verifies the applicant's credentials, it eitherhires and/or contracts with and grants privileges to the provider, or denies privileges. Anyprovider who receives an adverse recommendation must be granted the right to a hearingaccording to due process requirements.

All providers entering a network are required to undergo the full credentialing process. Inaddition, participating providers must undergo recredentialing on a regular basis. Duringrecredentialing, the health plan or CVO reviews current, updated application information as wellas performance reports and peer reviews. The applicant's education and prior work history are notusually reviewed during recredentialing.

Credentialing Issues in Health Plans

The following section includes an excerpt from Managing the Risks of Managed Care, whichprovides a more detailed discussion of the credentialing process and of some of the liability issuesrelated to credentialing in health plans. As you read this excerpt, you should be aware that theterm participant is used instead of plan member. You may also want to refer to Figure 3B-3 forthe definitions of some of the terms used in this excerpt.

Documentation

When the health plan determines the credentials required of the practitioner to safely provideappropriate and quality care to the patients, these credentials need to be documented in one ofthree different ways:

1. Specify the credentials in the bylaws for the organization.2. Develop policies and procedures.3. Detail the requirements in the contract with the practitioner.

The governing body needs to determine who will review and approve the bylaws or policies andprocedures regarding credentialing. The responsibility for performing the reviews may bedelegated by the governing body to a committee or peer review group. The reviewing processneeds to be documented in the form of committee minutes.

If the health plan defers the credentialing function to the hospitals within the network, it isnecessary to ensure that the process used by the hospital is consistent with the agreements andcontracts of the health plan. The health plan should feel comfortable with the credentialing andreappointment processes used by all facilities within the network and should be assessed toascertain that privileges are granted to qualified practitioners with valid licenses, appropriateeducational degrees, demonstrated clinical skills, and continuing competence to practice withinthe range of their expertise and abilities. There should be philosophical agreement aboutcredentialing among all organizations.

A software program can be invaluable to assist with documentation of the credentialing processand data. A number of commercial software programs for practitioner profiling or credentialingare available. In addition, commercial insurance companies or consulting companies may providethe software to their clients. If there is in-house computer expertise, a program can be customizedon Lotus or other software, to provide a tickler system for renewing information and generatingreports on the practitioners. **Figure 3B-4 provides an example of a tickler form that can be usedto document the steps taken in the credentialing process. Having a report on each practitionergreatly facilitates the review work of a credentialing committee.

Credentialing Standards

As consumers continue to demand even higher standards of quality in health care, morepurchasers are requiring that health plans secure accreditation from recognized organizations.Quality improvement and credentialing go hand in hand. Credentialing is the most objective wayto verify that providers and facilities meet minimum levels of competency and quality. As part ofthe quality management system, credentialing criteria are defined to help identify highlycompetent providers. These standards need to be considered when developing and implementingthe credentialing process within the health plan.

National Committee for Quality Assurance

The National Committee for Quality Assurance (NCQA) is a nonprofit, national accreditationorganization for the prepaid health plan industry.12 There is a section on “Credentialing” in theirmanual.

Joint Commission on Accreditation of Healthcare Organizations

If the health plan is accredited or is considering accreditation by the Joint Commission onAccreditation of Healthcare Organizations, the guidelines outlined in the Accreditation Manualfor Healthcare Networks need to be incorporated.13 Specific credentialing criteria are identified inthe lesson on Management of Human Resources and are integrated within various other lessons.

American Accreditation HealthCare Commission/URAC

Some states now require health plans to be accredited by the American Accreditation HealthCareCommission/URAC (the Commission/ URAC). Also, a growing list of major corporations requirethat managed care plans secure accreditation by organizations such as the Commission/URAC.

Review and Evaluation of Applicants

Application

An application needs to be completed by physicians and other licensed practitioners, whether inthe setting of a staff model (employed) or an integrated practice model (contracted). The broadcategories of qualifications to request on each application are as follows:

demographic data basic education completed graduate education and residency completed all states where licensed to practice board certification Drug Enforcement Agency (DEA) certification clinical experience affiliations at hospitals and other health plans affiliations at other institutions (including military) complaints, investigations, and/or disciplinary actions from local, county, state, and

national licensing boards professional liability claim history employment and work history professional recommendations

Verification of Data

Verification of all of the data on the application is a labor intensive but necessary task. In additionto assessment of the items noted on the checklist that appears later in this chapter, the applicationshould also be evaluated for completeness. Are all questions answered fully, and is theapplication signed? Are the requested copies of supplemental information provided? One recentstudy indicated that 24 percent of physicians claiming to be board certified were not. It has beenestimated that 60 percent of the applications require follow-up. Therefore, the application formshould state that the burden of providing correct information is with the applicant.

There is a liability in trusting the credentialing process of another health care organization, suchas a hospital where the physician may be on staff. The health plan may be held liable for failing tocarefully select health care providers or, by neglecting to review their performance, failing toensure quality care.14

The background of each applicant must be investigated, and the data on the application verifiedprior to granting privileges. The following tasks are necessary:

Verify diplomas for both basic and graduate educational programs. Be aware of problemswith graduates of unaccredited programs or bogus schools.

Write to the chiefs of all medical departments where residency programs were completed.Rather than a general letter of reference, consider a format with a list of questions, withspecific yes and no answers required. Were residencies completed in the same specialty,or did the applicant shift programs?

Inquire with each state medical board or commission or the department of professionalregulations where the applicant is licensed. Be alert for practitioners who have movedfrequently from state to state, often practicing in rural settings or as locum tenens.

Check the status of clinical privileges at the hospital designated by the practitioner as theprimary admitting facility.

Request the actual DEA or CDS certificate to view for primary verification; thenmaintain a copy for the file.

Follow up on any gaps in employment or staff appointment. If the application does notask for all appointments or employment, the applicant could legitimately omit a referencewhere his or her performance was marginal or ended unsatisfactorily.

Request information from the National Practitioner Data Bank. Request a copy of the current certificate of malpractice insurance if required by the

contract. Review for previous sanction activity by Medicare and Medicaid.

The applicant should be thoroughly investigated, and all data should be validated. This procedureshould follow the policies and procedures for this review process. Often, a credentialingcommittee reviews the application and all information received. Depending on the policies andprocedures of the health plan, the applicant may be personally interviewed. At the interview,information on the application can be further validated and clarified and questions answered. Allapplicants should be interviewed according to the same guidelines. A recommendation for hiringor granting privileges is then made.

Based on the recommendation, the following options may be followed:

1. The application may be further investigated and additional information obtained.2. The applicant may be hired or contracted and granted privileges as requested.3. The applicant may be hired or contracted with a modification in the privileges.4. The applicant may be denied privileges and notified of the right to a hearing.

Under the Health Care Quality Improvement Act (HCQIA) of 1986, the physician has a right to ahearing when an appointment or reappointment of privileges is denied.15 The act requires thephysician to be notified of the proposed review action, the reasons for the proposed action, thefact that he or she has the right to request a hearing, the time limit within which to request such ahearing, and a summary of the rights during the hearing. If the physician does not request ahearing, that right is presumed to be waived.

If a hearing is requested, the physician must be provided notice of the place, date, and time of thehearing at least 30 days before the scheduled date of the hearing and given a list of witnessesexpected to testify on behalf of the professional review body. The act further describes how thisspecific type of hearing should be conducted.

Granting Privileges

Provisional Privileges

The privileging step involves granting permission to candidates to perform specific services,treatments, and procedures, as designated within the health plan’s contracts and agreements, priorto the applicant providing patient care services. The initial appointment should be for aprovisional period, usually six months or one year. The provisional period allows the health planto evaluate clinical performance, communication skills with patients and staff, adherence topractice standards, and peer review of the documentation in the medical record. Privileges shouldbe revised as necessary at the end of the provisional period, and full privileges granted, ifappropriate.

Temporary Privileges

While it is not recommended as a routine practice, the health plan may have policies andprocedures for authorizing temporary or short-term clinical privileges in special circumstances.An example of when a practitioner may receive temporary privileges is if only one health careprovider has a specialized skill and that provider becomes ill or disabled. In order to meet thehealth care needs of the patient population, a qualified practitioner may be given temporaryprivileges to provide this service while his or her credentials are being reviewed. The temporaryprivileges should be granted for a specific period of time, and the parameters of the temporaryappointment should be indicated.

Professional Performance

As part of the periodic recertification or reappointment of providers, the NCQA requires anorganization to conduct periodic performance appraisals.16 The performance review shouldinclude the following data:

patient complaints results of quality reviews utilization management member satisfaction surveys malpractice claim information

As part of the evaluation activities, a visit to selected sites can be helpful to reviewdocumentation, office practices, and clinical practices for conformity with the health plan’sstandards. Feedback is given to the health care provider regarding strengths, and suggestions forimprovement are made.

Reappointment

Policies and procedures should define a process for reappointment, recredentialing, orrecertification on a regular basis, either annually or every two years. This should be an ongoingprocess of collecting data on such aspects as license renewal, additional education completed, andchanges in hospital privileges. At the specific time designated for reviewing the credentials, the

practitioner needs to show continued competence and eligibility for employment or contractrenewal. The data reviewed will include the following:

an application for reappointment clinical information from peer review, quality improvement, and patient satisfaction reports from any committees that review patient care provided by the practitioner, such as

infection control, utilization review, and risk management medical record documentation additional education completed information obtained from the National Practitioner Data Bank performance reviews status of physical and mental health

While it may seem like a tedious and redundant task, new information should again be verified.When all of the current data on the health care provider have been collected, they are thenreviewed by the credentialing committee. A meeting between the committee and the practitionermay occur to clarify and validate data. A recommendation is made to the chief executive officeror governing board on any changes to the privileges, based on the review of data. Documentationof the process should be performed. The practitioner is informed of the status of thereappointment and any changes made, in writing.

Liability Issues

The credentialing and privileging process involves some liability issues. The process exposes thehealth plan to risks associated with compliance with the Americans with Disabilities Act, as wellas confidentiality, vicarious liability, violation of due process, and negligent credentialing.

Americans with Disabilities Act

In general, the Americans with Disabilities Act (ADA) states that an employer may not“discriminate” against a “qualified individual with a disability,” because of the disability, withregard to job application procedures, hiring, advancement, training, compensation, or discharge orterms, conditions, and privileges of employment. 17 While it is clear that discrimination isprohibited against any qualified employed physician or health care provider with a disability, thisact probably would also cover practitioners who are given staff privileges on a contractual basis.Where a physician has been able to prove that employment with a professional corporation isdependent on staff privileges or that the ability to attract and retain patients is dependent on staffprivileges, the physician has been considered an employee.18

Steps to take to avoid violating the act include the following:

Do not require a medical examination prior to accepting the application. After aconditional offer has been made, an examination may be done, prior to granting specificstaff privileges.

Do not ask questions on the application such as health status, last physical examination,hospitalizations, use of alcohol or drugs, and any mental or physical limitations.

Do not withdraw an offer for privileges on the basis of the results of medical information,unless the reason is job related or the practitioner’s condition is a threat to his or herhealth and safety or the health and safety of others.

Violation of Due Process

Within the policies, procedures, bylaws, or contracts, there should be documentation of all phasesof the credentialing process, specific time frames within which each step occurs, and proceduresfor a fair hearing in the event of adverse decisions or recommendations. When privileges aredenied to a new applicant or current practitioner, he or she must be able to discover the basis forthe denial and have the opportunity to contest it. The decisions made by the credentialingcommittee should be based on objective criteria, rather than subjective data. There should also beobjective documentation in the minutes of the reviews and decisions made by the credentialingcommittee.

Negligent Credentialing

With respect to granting privileges to a practitioner for certain high-tech procedures, the healthplan could be held liable for negligent credentialing of privileges if they were granted to apractitioner who was not adequately trained or experienced to operate a particular piece ofdiagnostic or therapeutic equipment. The patients trust that trained, competent practitioners willprovide their care and conduct procedures. A well-designed and documented credentialingprocess will assist in granting privileges only to those qualified and will provide evidence for thedecisions made.

As new medical procedures and technologies are developed, they bring with them new risks. Inorder to minimize these risks, the credentials needed by practitioners to perform new proceduresshould be carefully determined. Prior to granting privileges, the practitioners’ credentials need tobe evaluated in accordance with the requirements set by the health plan.

Economic Credentialing

Economic credentialing refers to the use of economic indicators or efficiency standards inevaluating providers for the purpose of granting or renewing staff appointments. Sources ofinformation might include hospital utilization data, such as number of admissions, length of stay,numbers of surgeries or procedures performed, frequency with which various tests are ordered inrelation to DRG and severity of the patient’s condition. Consideration may be given to correlationof patient outcomes with cost or charge data. The critical pathways for clinical practice mayfurther provide documentation of how cost-effective a provider is in treating a patient.

The impact of these data on the credentialing decisions may be covert or overt. Depending on theterms and process used, the data may serve an educational and peer review purpose or may be ameans of selecting practitioners who will provide the most cost-effective care. If the primaryconsideration is to select cost-effective health care providers, there needs to be a sensitivity toviolation of antitrust laws.

Credentialing Checklist for the Risk Manager

Addressing the hazards and liabilities of credentialing becomes a key function in managing therisks of a health plan. The following is a checklist for the risk manager to keep in mind:20

Review credentialing criteria for compliance with state statutes, Standards for ManagedCare Organizations, the Joint Commission standards, Medicare conditions ofparticipation, and court decisions.

Review policies, procedures, bylaws, and contracts to ensure that all credentialing criteriaare clearly stated.

Review application forms for compliance with standards, and local, state, and federalregulations.

Review credentialing policies and procedures of other hospitals, facilities, and externalcredentialing services whose credentialing decisions are used instead of an internalprocess.

Review protocols for investigating and verifying an applicant’s credentials. Do theseprotocols minimize the risk of inadequately screening and verifying the credentials ofpractitioners?

Observe the methods by which these protocols are applied in reviewing individualapplicants. Are protocols applied equally to all applicants whether they are well known ornot?

Evaluate the organizational structure of the credentialing process. Are checks in place tominimize the involvement of direct economic competitors in the credentialing process?Does the structure minimize the risk of antitrust liability?

Review due process provisions to ensure that practitioners who are denied medical staffmembership or have had privileges restricted are afforded a fair hearing in accordancewith federal and state laws and standards.

Require all practitioners to report claims, disciplinary proceedings, or adverse actionstaken at other facilities or hospitals. Ensure risk management access to these records.

Ensure that regulations of the HCQIA are complied with and that information from theNPDB is appropriately used in credentialing and privileging determinations.

Establish rapport with practitioners to facilitate open communication, education, andresourcefulness regarding risk management issues.

Credentialing Non-Physicians

As you have seen in this lesson, health plans have access to a great deal of credentialinginformation about physicians and dentists who participate in health plan networks. Fewercredentialing elements are available for credentialing non-physician practitioners, such as dentalassistants, nurse practitioners, physical therapists, speech therapists, or optometrists. Even fewerelements are available for credentialing non-traditional or alternative healthcare providers. Forexample, although the NPDB requires medical malpractice insurers to file reports of paymentsresulting from claims against non-physician practitioners, reports from other sources are optional.In addition, licensing requirements vary from state to state and from specialization tospecialization, making uniform practice standards difficult to establish. Tracking practitionerperformance across states is also difficult.

Without uniform credentialing standards for non-physician practitioners, health plans mustestablish policies for determining which practitioners will be credentialed and how they will beevaluated. In some cases, it is possible for health plans to modify traditional credentialingprocesses. For example, a health plan could use established standards to verify the education,licensing and/or certification, and work history of any appropriately licensed and registeredpractitioner. In other cases, particularly those dealing with alternative healthcare providers, it maybe necessary for the health plan to design new policies and procedures

Delegating Data Collection and Verification

In Delegation of Network Management Activities, you learned that health plans sometimesdelegate data collection and verification to a third party. The amount of delegation dependslargely on the qualifications of the particular delegate. In all cases, the authority to grant or denyprivileges remains with the health plan.

Standards for Delegating Data Collection and Verification

Both NCQA and the Commission/URAC have established guidelines for delegating credentialingactivities. These standards are outlined in Figures 3B-5 and 3B-6.

The delegation agreement between the health plan and the delegate organization lists a variety ofresponsibilities for both the health plan and the delegate.21 The health plan typically agrees toassume the following **responsibilities.

**Responsibilities

Reviewing the delegate’s credentialing policies and procedures for compliance with thehealth plan’s standards, state and federal laws, and accreditation agency regulations

Providing the delegate with the health plan’s credentialing policies and procedures

Maintaining the confidentiality of the delegate’s files, reports, and recommendations, andpermitting access only to authorized parties

Sharing with the delegate any UM, QM, member satisfaction, and member complaintinformation that relates to the delegated credentialing or recredentialing activities

Retaining the right to approve, reject, suspend, or terminate any individual provider orhealthcare delivery site not in compliance with the health plan’s policies and procedures

Notifying the delegate prior to the termination of a provider or site Determining the effective date and the termination date of all providers added to the

network by the delegate Performing an annual audit of the delegate’s credentialing and recredentialing program

and records to assess effectiveness and compliance with regulations

Under the delegation agreement, the delegate generally accepts the following responsibilities:

Reviewing the health plan’s policies and procedures and conducting the delegatedcredentialing and recredentialing activities in accordance with these policies andprocedures

Providing the health plan with the delegate’s policies and procedures Maintaining the confidentiality of documents, reports, and other information provided by

the health plan, and permitting access only to authorized parties Allowing the health plan to review the minutes from meetings of the delegate’s

credentialing committee or other designated decision-making body Providing specific information about all individual providers in the network and revising

the information on a monthly basis Notifying the health plan immediately of any provider who has been terminated or placed

on probation, or whose practice has been restricted in any way Notifying the health plan immediately of any provider who fails to meet credentialing or

recredentialing standards, or who has been sanctioned by a hospital, licensing board,professional association, or regulatory agency

Sharing with the health plan any information about UM, member satisfaction, claims, orother functions that may be relevant to the health plan’s QM program

Potential Delegates

The specific credentialing activities an health plan can delegate are frequently governed byvarious state laws and accreditation requirements. For example, both NCQA and theCommission/URAC require health plans to maintain oversight programs for all delegatedactivities and to accept ultimate accountability for all services performed by the delegate. Healthplans that serve Medicare and Medicaid beneficiaries are subject to CMS requirements. Withinthese limits, however, the health plan is free to choose the vendor it considers most appropriatefor the specific credentialing task.

Hospitals and Medical Facilities

Hospitals and other medical facilities are required to credential their medical staffs in order toobtain JCAHO accreditation. Health plans contracting with these facilities typically delegate allor part of the credentialing of medical staff to the facilities’ administration as part of the terms ofthe contract. This type of delegation eliminates costly and time-consuming duplication of effort.It also allows the health plan to take advantage of existing expertise. For example, a health plan

that carves out mental health benefits to an MBHO can benefit from the MBHO’s experience incredentialing mental health practitioners.

Physician Organization Certification (POC) Program

The NCQA has established a Physician Organization Certification (POC) program to certifymedical groups and independent practice associations for delegation of certain NCQA standards,including data collection and verification for credentialing and recredentialing. The POC processevaluates a physician organization’s ability to meet specific categories of NCQA standards and itscapacity to accept delegated responsibilities. A health plan considering a certified physicianorganization for inclusion in the health plan’s network can delegate the activities which thephysician organization is approved to handle.22

Credentials Verification Organizations (CVOs)

Credentials verification organizations (CVOs) are also commonly used as credentialing delegates.The NCQA and the Commission/URAC have certified a number of CVOs that have met theirrequirements for performing certain activities of the credentialing function. A health plan thatdelegates designated credentialing activities to an NCQA- or Commission/ URAC-certified CVOis exempt from the due-diligence oversight requirements specified in the NCQA or Commission/URAC credentialing standards for all verification © 2001, Academy for Healthcare Management,L.L.C. All rights reserved. Services for which the CVO has been certified. CVOs can be certifiedto verify credentials in the following categories:

Licensure Hospital privileges DEA registration Medical education and/or board certification Malpractice insurance Liability claims history NPDB queries Medical board sanctions Medicare/Medicaid sanctions Provider application

The CVO may be certified to verify all of these categories or only a few. Before delegating acredentialing activity, the health plan should be aware of the CVO’s scope of certification.23

Delegating credentialing functions to a CVO offers a number of advantages. CVOs typicallyknow the provider market and have experience in gathering and verifying provider information.This is particularly valuable for a health plan entering a new market. CVOs can also offer fast,cost-effective services. Insight 3B-1 provides a description of how credentialing entities are usingtechnology to streamline the credentialing process.

Conclusion

Whatever method a health plan uses to credential potential providers, it is imperative for theorganization to ensure that network providers will give quality medical care to the health plan’smembers. When the health plan has selected a provider that meets the standards for inclusion inits network, the negotiation process can begin, with the goal of establishing a contract betweenthe health plan and provider.

Endnotes

1. National Committee for Quality Assurance, Accreditation ‘99, Standards for theAccreditation of Health Plans (Washington, D.C.: National Committee for QualityAssurance, 1998), 69.

2. Peter R. Kongstvedt, M.D., “Primary Care in Open Panel Plans” in Essentials ofManaged Health Care, ed. Peter R. Kongstvedt, M.D., 2nd ed. (Gaithersburg, MD:Aspen Publishers, Inc., 1997), 105.

3. Peter R. Kongstvedt, M.D., “Primary Care in Managed Health Care Plans” in Essentialsof Managed Health Care, ed. Peter R. Kongstvedt, M.D., 4th ed. (Gaithersburg, MD:Aspen Publishers, Inc., 2001), 96–97.

4. Ibid.5. Ibid., 97.6. Sheryl Tatar Dacso and Clifford C. Dacso, M.D., Health Plan Answer Book, 2nd ed.

(New York: Panel Publishers, 1997), 2-48.7. National Council of State Boards of Nursing, Inc., “Healthcare Integrity and Protection

Data Bank,” 24 February 2000, http:// www.ncsbn.org/files/publications/issues/vol204/hipdb204.asp (26 April 2001).

8. National Practitioner Data Bank/Healthcare Integrity and Protection Data Bank, “FactSheet on the Healthcare Integrity and Protection Data Bank,” 8 August 2000,http://www.npdb-hipdb.org/pdf/ nh017fs.pdf (26 April 2001).

9. Ibid.10. Office of the Inspector General, Office of Public Affairs, “Healthcare Integrity and

Protection Data Bank Set to Launch,” News Release, 25 October 1999, http://oig.hhs.gov/press/hipdb.htm (25 April 2001).

11. National Council of State Boards of Nursing, Inc.12. National Committee for Quality Assurance, Manual (1994), 23–26.13. Joint Commission on Accreditation of Healthcare Organizations, Accreditation Manual

for Healthcare Networks (1994).14. Sedgewick et al., Healthcare Liability Desk Book, April 1993, at 95.15. Health Care Quality Improvement Act of 1986. P.L. 99-660; 42 U.S.C. 11101- 11152.16. National Committee for Quality Assurance, Standards for Health Plans, 1994,

Washington, D.C., 23–26.17. Physicians and the ADA. Hospitals, 5 May 1993, 36, 38.18. Ibid., at 38.19. M. Herligy and S. Angelo, Health Plan Administrative Risks, Proceeding from the 16th

Annual Conference of the American Society for Healthcare Risk Managers, Seattle, WA,1994, 28.

20. Hagg-Rickert, S., Medical Staff Credentialing and Privileging Determinations: TheEmerging Role of the Risk Manager, Perspectives in Healthcare Risk Management,Summer 1991, 11(3) 2–4.

21. The information about health plan and delegate responsibilities was adapted fromPrimeHealth, Inc., “Delegated Practitioner Credentialing Agreement,” Addendum 6 toDelegation Oversight Program (December 1997). Used with permission of PrimeHealth,Inc.

22. National Committee for Quality Assurance, “Guidelines for Advertising and Marketingfor NCQA-Certified Physician Organizations,” 1998, http://www.ncqa.org/pages/policy/certification/poc/pocads.htm (4 June 1998).

23. National Committee for Quality Assurance, “CVO Certification,” http://www.ncqa.org/pages/policy/certification/cvo/cvotext.htm (24 February 1998).

AHM Network Management: Compensation Arrangements Between Health Plansand Providers

Objectives

After completing this lesson you should be able to:

Explain how a health plan transfers financial risk to providers through reimbursementarrangements.

Describe the primary advantages and disadvantages of fee-for-service, salary, andcapitation payment systems.

List and describe four types of capitation. Explain how health plans use incentives in compensation arrangements. List and describe four ways to manage a provider's financial risk. Describe some factors that influence the way a health plan compensates its providers.

Introduction

Because the costs associated with delivering healthcare are substantial, the compensationarrangements between a health plan and a provider are an important consideration for bothparties. In many cases, these arrangements go far beyond merely paying for services rendered. Ahealth plan's approach to provider compensation can also influence the utilization of healthcareresources by providers and the cost-effectiveness of the care that they deliver.

In Healthcare Management: An Introduction, we introduced the basic provider paymentprograms used by health plans. Now, in this lesson, we provide more information oncompensation arrangements and describe the advantages and disadvantages of the variousmethods. We also discuss financial incentive programs, as well as ways providers and healthplans may negotiate methods of protection against financial loss. To conclude this lesson, wediscuss factors that influence how a health plan chooses to compensate the providers in itsnetwork.

Although this lesson explores issues related to compensation for various types of providers, itfocuses mainly on the compensation arrangements for primary care physicians (PCPs). We willaddress the reimbursement of specialists, healthcare facilities, and other providers in more detailin Network Management Considerations for Different Types of Providers. As you read thisinformation, keep in mind that, in many cases, the health plan contracts with and reimbursesprovider organizations rather than individual practitioners or facilities. In these situations, theprovider organization must consider many of the same issues as a health plan in order todetermine the best compensation arrangements for its practitioners and facilities.

Types of Provider Compensation

Although many approaches to provider compensation already exist, numerous variations on thesebasic approaches are constantly evolving in response to changing conditions in the health planindustry. However, compensation arrangements are usually based on one of the following threepayment methods:

Fee-for-service

Salary Capitation

Many compensation agreements also include some type of incentive program that affects the totalfinancial compensation for a provider.

Health plans frequently negotiate compensation arrangements that transfer some or all of thefinancial risk associated with delivering healthcare services to network providers. Financial riskin the healthcare industry is the possibility that the actual costs of a plan member's care will begreater than the projected costs. Providers who share financial risk stand to gain or lose incomebased on the volume and nature of the healthcare services they deliver, so risk-sharing encouragesa health plan's providers to consider cost-effectiveness when choosing among care options forplan members. We will discuss the role of financial risk for each reimbursement approach and forincentive programs.

Fee-for-Service Payment Systems

In a fee-for-service (FFS) payment system, the health plan reimburses the health plan member orthe provider an amount based on the actual medical services delivered. An FFS system is aretrospective payment system, or one that pays after the service has been provided. FFS paymentis the method that has traditionally been used to compensate healthcare providers for theirservices, and most health plans still rely on some form of FFS, at least to some extent.

Providers are generally familiar with FFS payment and, in many cases, strongly prefer FFSsystems because the level of reimbursement is directly related to the volume and intensity ofservices delivered. That is, the provider can expect to be reimbursed each time a plan memberreceives services, and the amount of reimbursement depends on the amount of time and otherresources used to deliver the services. For example, a physician who spends an hour with apatient and uses expensive equipment and supplies to perform tests or treatments typicallyreceives more compensation than a provider who talks to a patient for fifteen minutes andperforms no diagnostic or therapeutic procedures.

In many cases, total healthcare costs under an FFS system are relatively high. The connectionbetween the volume of services and income does not provide any incentive for providers tosupply only those services that are medically necessary. Excessive medical services result inhigher total healthcare costs and, in many cases, do not offer any additional benefit to the planmember. Further, a system that rewards providers for each service rendered does not directlyencourage them to practice preventive medicine or to promote wellness.

Utilization Management with FFS

Excessive services under FFS often take the form of churning. Churning occurs when a providersees a plan member more often than necessary or provides more diagnostic or therapeutic servicesthan necessary in order to increase revenue. For example, a provider might direct a member toschedule monthly visits for cholesterol check-ups when quarterly visits would suffice. Planmembers typically lack the knowledge to detect churning and tend to do what their providers tellthem to do.

To prevent churning, health plans often include a contractual requirement that providers use anauthorization system to obtain prior approval from the health plan for selected tests and

treatments, or use profiling data to detect any patterns of churning. An authorization system helpsthe health plan to monitor and manage provider utilization. The contract usually states that thehealth plan is not required to pay for services that were not authorized by the health plan. Ahealth plan contract may also include a requirement that providers participate in periodicutilization reviews. The contract should provide financial incentives to both reward a provider'sappropriate utilization of services and penalize excessive utilization and underutilization. Peerreview is sometimes an effective way to encourage more appropriate utilization of medicalresources. In fact, providers may negotiate to assure that the contract specifies that theirutilization patterns will be evaluated by another medical professional.

Providers should have a contractual right to know the standards that will be applied to theirutilization of services. As we mentioned in the previous lesson, the contract, its accompanyingexhibits, or the provider manual should make the provider aware of any benefit limitations orcoverage requirements. Some states mandate that utilization standards be included in the providercontract itself.

Improper Coding Under FFS

FFS payment methods are also subject to the misuse of coding systems. Except under unusualcircumstances, providers under FFS arrangements submit charges for services using codes, suchas the American Medical Association's Current Procedural Terminology (CPT) code system. Acode system provides a uniform method of communicating about the services and proceduresperformed. Unfortunately, a code system is subject to abuses such as upcoding and unbundling.Upcoding is a type of false billing in which a provider submits a code for a procedure with ahigher level of reimbursement than the procedure actually performed. For example, a providermight submit the code for a comprehensive office visit, when the services provided actuallyrepresent an intermediate level of service. Unbundling is submitting separate charges for thedifferent components of a service rather than one charge for the service as a whole in order toincrease the level of reimbursement. For example, a surgeon might unbundle his fee for removinga gallbladder by submitting three separate charges for the preoperative physical examination, thesurgical procedure, and postoperative care, which should all be included in the code for thesurgical procedure itself.

The health plan-provider contract or the provider manual should specify the code system that theprovider should use and should state clearly the health plan's policy on upcoding or unbundling ofprocedures. Some health plan claims administration departments use computer software that isspecifically designed to review claim codes and detect uncoding and unbundling so that claimsprocessors can determine the appropriate amount to be paid.

Because cost management is a primary goal of network management, health plans rarely pay fullFFS charges to providers. In most cases, providers are willing to accept less than full FFS in orderto gain access to the health plan's members. In addition, many providers prefer receiving the feespaid directly by a health plan-even if they are lower-over billing and trying to collect full chargesfrom patients who are not under health plans. The most common types of FFS reimbursementcurrently used by health plans include these.

Discounted fee-for-service payment systems Fee schedules, including relative value scale payment systems

Payment systems that "bundle" related services together for payment purposes and pay aset fee based on the type or amount of care delivered, such as case rates and per diempayments

Discounted Fee-for-Service

A discounted fee-for-service (DFFS) payment system is a payment system in which the healthplan negotiates with the provider a percentage discount from the usual FFS charges. Discountedfee-for-service (DFFS) payment systems were one of the first methods developed by health plansto manage the costs of provider reimbursement. The discount is a typically a specified percentagethat is applied to fees traditionally paid under a FFS system. The base fees may be derived fromone of several sources, including

the standard fee schedules of indemnity health insurers the usual, customary, and reasonable (UCR) fees determined to be prevailing in a given

market the usual fee schedules of the provider or health plan the standard fee schedule of a major insurer, such as Medicare

The negotiated discount for DFFS is applied across all procedures contained in the designated feeschedule. Most providers and payors can adapt their claim systems to administer DFFS becausethere is a direct correlation between payment and the service rendered. The health plan calculatesthe discount based on whichever amount is lower-the billed charge or the DFFS.1 For example, ifthe provider charges $100 for a procedure, but the discounted FFS is $90 (90% of the provider'susual fee), the health plan will base its payment on the DFFS, which is lower than the provider'sbilled charge. Conversely, if the provider charges only $80 for the procedure, the provider willreceive payment based on the submitted charge, because it is lower than the DFFS.

For a health plan, the primary advantage of DFFS payment is that it pays providers lower feesthan under standard FFS. However, using DFFS does not always guarantee overall cost savings.If the DFFS is based on a percentage of the provider's standard charges, providers may simplyraise their "standard" charges so that the DFFS payment approximates the desired reimbursement.In addition, because a DFFS system affects the cost per service but not the level of utilization,providers may attempt to make up the decreased revenue for each service by performing a greaternumber of services. DFFS is attractive to providers because the majority of financial risk remainswith the health plan and minimal risk is transferred to the provider. Providers' contractualcommitment to participate in utilization management and quality management is vital to assuringthat they are treating members appropriately.

DFFS discounts for specific services or procedures may be calculated on a sliding scale based onthe volume of services the provider performs. For example, an obstetrician's DFFS percentagemight be 10% for performing 0 to 5 deliveries in a month, but rise to 15% for 6 or more deliveriesin a month. The sliding scale offers some protection to the provider that has a low volume ofservices or a small member base.

The DFFS reimbursement method is typically used in markets with low health plan penetration,as well as in situations where health plans and providers have low patient volume. DFFS can be atransitional reimbursement method as providers and health plans establish relationships andhealth plan penetration increases.

Some health plans include a controversial element known as silent PPOs in their overall strategyfor managing DFFS payment. A silent PPO is an arrangement in which an entity that negotiatesdiscounts with providers sells access to those discounts to other, unrelated health plans to usewhen paying for services provided to the unrelated health plan's members. Silent PPOs are alsocalled nondirected PPOs, blind PPOs, discounted indemnity plans, and wrap-around PPOs.2

Silent PPOs are used as a means to reduce the cost of provider services by health plans that eitherdo not have a specified provider panel or offer coverage for out-of-network services as a means toreduce the cost of provider services.

Obtaining a discount through a silent PPO may occur through a broker according to thissequence.3

Opinion is divided about the ethical aspects of using silent PPOs. Healthcare providers and manyhealth plans oppose the use of silent PPOs on the grounds that this practice allows health plans toclaim discounts to which they are not contractually entitled. However, silent PPOs are not illegaland some health plans view them as a way to reduce the cost of reimbursing providers. SilentPPOs are currently under review by various regulatory and accrediting agencies, and this issuehas been referred to the courts.

1. Patient A is a member of Health Plan B, which allows access to any provider.2. Patient A receives treatment that costs $1,000 from Provider C, who is not affiliated with

Health Plan B.3. Provider C submits a claim for the full amount of charges ($1,000) to Health Plan B.4. Health Plan B contacts a discount broker, typically a PPO or a third party administrator

(TPA), that has access to a list of the provider's discounted reimbursement arrangementswith various health plans. Discount brokers typically purchase lists of contractedproviders and their reimbursement rates from area PPOs.

5. The discount broker finds that Provider C has a contract with PPO D (the silent PPO inthis situation) for a 20% discount off standard charges, and informs Health Plan B of thisarrangement.

6. Health Plan B applies the 20% discount to the $1,000 claim and remits the resulting $800to Provider C, along with an explanation of benefits (EOB) that cites Provider C'sarrangement with PPO D. Unless Provider C rechecks Patient A's records for verificationof health plan coverage, Provider C will not realize that Patient A was not a member ofPPO D and that Patient A's charges were not subject to PPO D's discount.

7. Health Plan B pays an access fee to the discount broker and retains the remainder of thediscounted fee.

Fee Schedule System

A fee schedule is the fee determined by the payor (a health plan or the Medicaid or Medicareprograms) to be acceptable for a procedure or service, which the provider agrees to accept aspayment in full. A fee schedule may also be called a fee allowance, fee maximum, or capped fee.A fee schedule system is simpler for a health plan to administer than a DFFS system since thepayment for each service is the same for all providers in the network. Thus, providers cannotmanipulate the cost for a service included on a fee schedule. However, they may still be temptedto increase the number of services performed to make up for the lower payment per service.Nonetheless, health plans continue to use various types of fee schedule systems, several of whichare described below.

Relative Value Scale Payment Systems

A relative value scale (RVS) payment system is a system that assigns a weighted unit value to theCPT code for each medical procedure or service based on the cost and intensity of that service.The weighted value is multiplied by a conversion factor to determine the fee that a health planwill pay to a provider. The conversion factor represents the dollar value of each unit of service.The conversion factor is typically based on the health plan's historical experience with costs andmay be updated periodically to reflect growth in actual expenses. Services requiring greaterresources are assigned a higher number of units and, therefore, are awarded higher fees. Forexample, assume that a health plan has a conversion factor of $10 per unit. A service that isassigned a unit value of 10.0 will be reimbursed at $100 (10.0 units x $10 = $100), while aservice with a unit value of 15.0 will be reimbursed at $150 (15.0 units x $10 = $150).

Unfortunately, the straight RVS system has an important drawback. In practice, RVS unit valuesfor procedural services, such as surgeries or diagnostic tests, have generally been higher than theunit values for cognitive services, such as office visits or research on medical conditions. Becausemany of the services provided by PCPs are cognitive, PCPs typically have not fared wellfinancially under a straight RVS system. In order to address the imbalance between payments forprocedural and cognitive services, many health plans use the Resource-Based Relative ValueScale (RBRVS).

A Resource-Based Relative Value Scale (RBRVS) is an RVS payment system that attempts totake into account all resources that providers use in the delivery of care, including physical orprocedural, education, mental (cognitive), and financial, when assigning a weighted unit value toeach medical procedure or service.

Originally developed by the Centers for Medicare and Medicaid Services (CMS) for Medicareuse, RBRVS offers these advantages.4

However, because RBRVS was developed around the needs of the senior population, this systemdoes not include weighted unit values for all types of procedures, such as childhoodimmunizations. Further, RBRVS does not include any codes for anesthesia. Some health plansuse the McGraw-Hill unit value scale to supplement RBRVS or in place of RBRVS. TheMcGraw-Hill RVS has codes for all procedures listed in the CPT manual except anesthesiology.Health plans that use the RBRVS or McGraw-Hill systems usually obtain codes for anesthesiaprocedures from the RVS system published by the American Society of Anesthesiologists.5

RBRVS relates each listed service across the entire spectrum of specialties that mayperform the service.

It uses current CPT coding and is updated annually. RBRVS was developed by a third party with physician input, and it continues to include

physician input in updates. Each update of the system is available to all interested parties in advance of

implementation in the next year.

Another method that health plans may use to compensate PCPs at a more realistic level is toestablish separate conversion factors for different types of services, such as primary care, surgicalservices, and nonsurgical services. The primary care conversion factor may take intoconsideration the complexity of the cognitive ability required for PCPs to diagnose, prescribe,and coordinate treatment for a patient with multiple problems.

Either the health plan-provider contract or the provider manual should specify the relative valuescale that will be used in calculating payments to providers. The health plan should also give theprovider information regarding the source of the conversion factor, as well as the method forupdating the conversion factor. While most unit values for procedures typically are not subject tonegotiation, the provider may seek to negotiate the value of conversion factors.

A continuing disadvantage of fee schedule systems for health plans is that they do not transfer asignificant amount of financial risk to the provider, because reimbursement is still made for eachservice and the providers can increase their reimbursement by performing a greater number ofservices.

Case Rates

A case rate is a single fee that the health plan pays the provider for all services associated with anentire course of treatment. A case rate may also be called a package rate. Examples of particularepisodes of care that may be reimbursed by case rates are removal of a cataract, a hospital stay fortreatment of pneumonia, or the delivery of a baby.

A case rate system transfers risk to the provider for the intensity of services delivered. Theprovider stands to gain or lose on each case based on the number and type of tests and treatments,the use of specialists, and, for inpatient care, the length of stay at a healthcare facility. Case ratesoffer providers the incentive to take an active role in managing cost and utilization. Providers canincrease their net income from a case rate by improving the efficiency of treatment andmaintaining quality of care. If the provider is able to treat a patient at a cost that is less than thecase rate, the provider will increase the income generated by the case. Providers that haveaccurate accounting systems that allow them to identify fixed costs may use this information tonegotiate case rates. Providers may also seek to negotiate higher case rates for memberpopulations, such as the elderly, that have higher levels of disease and disability, therebyincreasing the complexity of case management.

Health plans must consider a number of critical issues in negotiating case rates. First, case ratesdo not provide the opportunity for payors to benefit from the provider's cost savings. Theprovider will receive the same payment for the case, regardless of the costs the provider incurs fortreating the patient. Therefore, the health plan must take care in developing each case rate, asdescribed below, to accurately reflect the typical costs in treating a particular illness or injury.

Although a case rate system is fairly straightforward to administer, initial development of therates is complex. A case rate should reflect how difficult and time-consuming a course oftreatment is relative to other available courses of treatment. The health plan must determine

which individual services will be included in a particular case rate the probability that each service will be required during the case and the number of times

each service is required per case appropriate fees for each service component

The standard case rate may be adjusted for severity of the patient's condition or complicationsthat arise because of a patient's multiple medical problems. Given this information, the healthplan can calculate weighted payments for each possible service, and then add the servicepayments to obtain a case rate.6 When a health plan pays providers case rates, the contract shouldstate the methodology used to establish the case categories and case rates.

Case rates are often based on CPT codes or, for inpatient care, Medicare's Diagnosis-RelatedGroups (DRGs). The Diagnosis-Related Group (DRG) system, also called the Diagnostic-Related Group system classifies hospital patients into groups according to a variety of factorssuch as primary and secondary diagnoses, surgery and other procedures, complications, age, andgender. The DRG payment is based on the average expected use of hospital resources for aspecific DRG in a given geographical area. The hospital receives a fixed payment for eachpatient, regardless of the actual length or cost of the hospital stay. Some health plans use the DRGsystem to compensate hospitals, however, because DRGs were developed primarily to reimbursehealthcare services for the senior population, DRG rates and diagnoses may not be appropriate forall populations. DRGs are discussed further in further lessons.

A case rate system eliminates problems with unbundling and upcoding, because the package ratecovers all components of the treatment. Health plans often monitor the quality of care deliveredunder case rates to reduce any provider temptation to cut corners on the services provided.

The health plan also retains the risk that a selected course of treatment may not have beennecessary at all. Utilization management programs are a necessary adjunct to a case rate system toensure that providers are treating only the cases for which medical intervention is indicated.

Per Diem Payment Systems

Health plans often pay hospitals and other healthcare facilities for inpatient care on a per diempayment system, under which a health plan pays a specific negotiated fee to a hospital for eachinpatient day. Because the hospital receives a set fee per day regardless of the actual servicesdelivered, a per diem system places the healthcare facility at risk for controlling utilization andcosts internally. The use of per diem rates is described in more detail in further lessons.

Salary Payment System

The most obvious difference between a salary system and other types of provider compensationsystems is that the salary system changes a provider's status from an independent contractor to anemployee of the health plan that pays the salary. The salary system, which offers advantages forboth providers and health plans, is used most often by staff model HMOs.

Paying salaries to providers simplifies a health plan's administration of reimbursement. Receivinga salary also relieves the administrative burden on the provider, who no longer has to submitclaims or bill patients to receive payment. Salaried providers are required, however, to submitinformation about patient treatment for the health plan's utilization and quality managementprograms. A salary system simultaneously stabilizes expenses for the health plan and income forthe provider. Further, salaries eliminate much of the financial incentive that providers might haveto perform unnecessary services under a FFS payment agreement.

One important disadvantage to a straight salary system is that this type of reimbursement does notreward providers who work efficiently and effectively nor penalize providers who have excessiveutilization. In order to avoid decreased productivity and poorer quality of service from providers,health plans may institute a salary system with salary ranges or incentive plans that considerindividual performance. For salaried providers, incentive plans often measure hours worked andhours on call as well as patient satisfaction. However, the addition of incentives makes the salarysystem more complex to develop and administer.7

Most of the risk under a salary system stays with the health plan. The health plan must assume therisk that operational costs, including salaries, may exceed revenues. Further, the salary systemitself creates a high fixed cost. Even if plan premiums or membership levels are lower thananticipated, the health plan must continue to pay provider salaries.

A health plan that pays providers through a salary system may also increase its risk of liability,because, as employees, the providers are agents of the health plan. The courts have generally heldthat the control a company has over the actions of its employees is greater than the control acompany has over the actions of independent contractors. As a result, a health plan that employsproviders may face greater liability for its providers' acts of negligence.8

The only risk assumed by the provider under a salary system is service risk, which is the risk thatpatients will demand more services than had been anticipated when the salary schedule wasdesigned. Therefore, if member demand for services is greater than originally expected under thesalary arrangement, providers must spend the extra time and effort necessary to deliver therequired services without receiving additional compensation. Unlike financial risk, service riskdoes not affect the level of compensation to a provider.

The salary plus any benefits paid to a particular provider should approximate the income of localproviders of the same specialty who are compensated under one of the FFS arrangements. Thetotal value of the benefit package usually equals 20% to 30% of the salary. The benefits thataccompany a provider salary are usually comprehensive, but the specific components vary fromone reimbursement arrangement to another and may be subject to negotiation between the healthplan and the provider. Figure 5B-1 shows the elements commonly offered in benefits packagesfor salaried providers.

Capitation

Unlike FFS reimbursement arrangements, capitation is a prospective payment system, and theamount of the compensation is independent of the actual volume and cost of the servicesprovided. As a result, capitation eliminates a provider's incentive to provide unnecessary services.Capitation also encourages providers to practice preventive medicine in order to improve planmembers' health status and decrease the need for more intensive medical services in the future. Inaddition, the use of capitation allows the health plan to transfer a greater proportion of risk toproviders than does the use of FFS or salary systems.

A capitated provider who delivers quality care in a cost-effective manner can benefit from thesystem. However, providers may be at risk for loss if they have as patients plan members withserious illnesses or injuries, especially if the provider's member base is limited. While a providerwith a large number of plan members receives enough per member per month (PMPM) paymentsfor relatively healthy members to cover a few expensive cases, a provider with fewer planmembers could suffer financial loss from one catastrophic case. Later sections in this lessondiscuss strategies for reducing providers' exposure to such risks.

In most cases, capitation is easier and less expensive for a health plan to administer than an FFSsystem since there are no claims to process or adjudicate. Because the capitation payment rateremains consistent from month to month, the only variable is the number of members covered fora particular provider. A standard PMPM payment generally makes the health plan's expensesmore predictable.

A health plan contemplating the use of capitation faces two potentially serious challenges. First,because the level of payment per patient remains the same regardless of the actual servicesdelivered, capitation has the potential to induce providers to underutilize medical resources, thatis, to delay or deny medically indicated treatment. Second, providers may also be tempted toinfluence members who require a great deal of time or costly treatments to switch to anotherprovider, thereby reducing the original provider's utilization and costs. Fortunately, such patternsof practice are rare, and health plans make efforts to educate and work with providers to preventthis type of situation.

Because capitation eliminates the need for claims, a health plan must establish another method tocollect data on patients and services rendered. Health plans typically require capitated providersto submit encounter reports to supply information for QM, UM, and performance management.The health plan-provider contract or the provider manual should be specific on the types ofreports the provider must submit.

Types of Capitation

Because the scope of services may vary from one provider to another, the capitation contractshould specify which services are covered by the arrangement. Capitation may be applied toprimary, specialty, facility, and ancillary care settings, and there are numerous capitationvariations that include some or all of these types of providers. The most common approaches tocapitation are

partial capitation -Partial capitation is a capitation payment that includes only primarycare services. Partial capitation is the most common type of capitation. It is used by manyindependent practice association (IPA) model HMOs to pay their primary care providers,thus it is also known as PCP capitation. A typical PCP capitation arrangement coversoffice visits, minor procedures performed in the office, provider visits to hospitalizedmembers, supplies, and care management. Such capitation usually excludes radiology,laboratory testing of blood or other specimens, immunizations, and drugs,9 which may bereimbursed under a separate payment plan. Figure 5B-2 depicts PMPM payment under apartial capitation arrangement in which a health plan contracts with an IPA.

The simplest approach to partial capitation is to standardize the basic PMPM rate and theservices included in the rate across all PCPs in the network. Many health plans adjust thebasic rate according to the age and sex distribution within a particular provider'spopulation. Some health plans, however, have flexible capitation agreements thatconsider the capabilities of individual providers. For example, a health plan that does nottypically include radiology under capitation may authorize PCPs with radiologyequipment to perform simple radiology studies in exchange for a higher PMPM rate.11

The services to be covered under partial capitation may be a point of negotiation betweenthe health plan and the provider. Generally, capitation "works" for PCPs when theprovider's panel size approaches 100 members

specialty capitation- Specialty capitation pays individual specialists or a single-specialtygroup on a capitation basis to provide a specified set of specialty services to all the plan'smembers. The most commonly capitated specialties are cardiology, orthopedics,radiology, and eye care. Expensive procedures are often excluded from the capitation andare reimbursed on some type of FFS basis. Specialty capitation is less common than PCPcapitation because the number of patients seeing any one specialist is often too low toadequately spread the risk of catastrophic cases. For specialty capitation to be areasonable financial option, a commercial health plan should offer a member base ofbetween 15,000 and 25,000.13 We discuss capitation of specialists further in furtherlessons.

professional services capitation -Professional services capitation is capitation thatcovers all physician services. Professional services capitation can be accomplished in oneof two ways. With the first method, the health plan contracts with a medical group, clinic,or multi-specialty IPA that assumes responsibility for the costs of all physician servicesrelated to a patient's care. Under the second model, the health plan pays a PCPorganization a capitation amount that covers all physician services. In addition toproviding primary care, the PCP provider organization arranges for and compensates allspecialty care services delivered to the PCP organization's members. Some PCPorganizations may object to bearing full risk for specialty care services that are not underthe organization's control and may negotiate for a method of reimbursement that willshare risk with the health plan.

global capitation- Global capitation, also called integrated delivery system capitation orfull-risk capitation, is a capitation payment that covers virtually all of a member'sinpatient and outpatient medical expenses, including primary and specialty care,facilities, and some ancillary services. Global capitation arrangements transfer virtuallyall of the financial risk for healthcare services to the provider organization. In a globalcapitation arrangement, a provider organization- in many cases, an integrated deliverysystem (IDS) either provides all healthcare services needed by members or subcontractswith other providers for the necessary care. The IDS must pay for the subcontractedservices out of its global capitation payment.

Provider organizations that accept professional services capitation or global capitation typicallynegotiate for capitation rates that compensate them adequately for the additional risk they areassuming. Both the health plan and the provider organization must determine if the providerorganization's internal structure and financial strength are adequate to assume this level of risk.Some providers may retain consultants or actuaries to help them negotiate risk contracts.

Financial Incentive Programs

In addition to their basic compensation arrangements with providers, many health plans also usefinancial incentive programs. Although cost savings is a major focus for incentives, a health plantypically considers more than financial outcomes when deciding how to structure incentiveprograms. Health plans often rely on incentive plans to promote desired behaviors such as regularprovision of preventive healthcare services, compliance with UM programs, or participation onthe health plan's medical management committees. In many cases, a portion of a provider'sincome depends on how well the provider meets the health plan's expectations.

By linking a portion of payment to specific performance measures, the health plan can align thefinancial goals of providers with the health plan's ultimate goal of delivering high-quality care inthe most cost-effective manner. Figure 5B-3 shows an example of a health plan's incentive plan toencourage PCPs to provide full service to members.

Financial Incentive Programs

The performance measures included in incentive programs vary greatly depending on the healthplan's priorities, the type of provider, and the plan's previous experience with incentive programsas a means of modifying provider behavior. Some measures that health plans often use as basesfor incentives are listed in Figure 5B-4.

Traditionally, incentive programs were built around cost management and compliance. However,the majority of health plans now include measures of quality in the incentive structure. Figure5B-5 shows an example of a quality incentive clause that might be included in a health plan-provider contract. In many cases, network providers participate in choosing the performancefactors to be included in the incentive plan.

A health plan's approach to incentives may reward the provider for achieving the desired resultsor may punish the provider if the desired results are not achieved. Withholds and risk pools aretwo common ways to motivate providers to control costs while providing appropriate, high-quality care.

Withhold Arrangements

A withhold is a percentage of providers' payment that is held back during a given period to offsetor pay for any claims that exceed the budgeted costs for referral or hospital services. At the end ofthe period, any unused funds are paid to the providers. A withhold places providers at risk oflosing a portion of their base income if their actual utilization and costs exceed the health plan'sprojections. Under a typical withhold arrangement, the health plan holds back 10% to 20% of thenegotiated payment.14 If providers keep costs within the budgeted amount, the health plan usuallydistributes the entire amount of money in the withhold to them. The health plan retains part of thefinancial risk because the health plan is typically responsible for making up any deficit if costoverruns exceed the amount of money in the withhold.

Withholds should be thoroughly explained to providers in order to have the desired effect. Someproviders view a withhold as nothing but an additional discount to the health plan and do not tryto improve their utilization and cost management, thus ignoring the incentive offered by theprogram. Although withhold arrangements are typically not complex, the process of setting up thewithhold system and monitoring actual costs requires some extra effort and resources from thehealth plan. The contract between the health plan and the provider should clearly describe anywithhold arrangements, including

how and when the funds will be withheld where the withheld funds will be deposited the conditions for distributing the withheld funds at the end of the specified period

Risk Pools

A risk pool is a fund that is established at the beginning of a contract period to cover claims forspecified services, such as specialty care. Any claims approved for payment are paid out of theappropriate risk pool. At the end of the period, the health plan may use remaining funds in onepool to cover overruns in another pool. After all pools are reconciled, the health plan distributesany remainder to the providers who funded the pools. The health plan may retain a portion of thesurplus. If there is a deficit after reconciliation, the providers or the health plan or the two partiestogether make up the difference, depending on the terms of the incentive arrangement. Thefunding of the pools, services covered by a pool, and the distribution of surplus and deficits varyamong health plans and specific products. The contract should describe the details of the risk poolarrangements.

The most common types of risk pools are for 1) referrals for specialty care, 2) use of inpatient,outpatient, or emergency services at healthcare facilities, and 3) ancillary care, such as laboratoryservices, radiology, and pharmacy. Some health plans set up risk pools that focus on morespecific types of care, such as cardiology or pharmacy, according to projected utilization of thoseservices15 Capitation arrangements often include one or more risk pools. Figures 5B-6 and 5B-7illustrate how risk pools may be used with two types of capitation arrangements.

The use of risk pools for out-of-network services is an area of controversy. Some health plansinclude out-of-network services in risk pools in the belief that this approach will discourage out-of-network referrals. Other health plans and many providers object to covering out-of-networkservices through standard risk pools for the reason that out-of-network referrals are sometimesnecessary, and neither the health plan nor its providers have any control over the charges of thenon-network providers.16

Considerations for the Size and Composition of Risk Pools

When incentives are based on the performance of the entire panel of providers or on a largesubset of that panel, the performance of individual practitioners is not highlighted. HMOs andPOS options that base incentives on aggregate performance may encounter problems withpractitioners who do not meet performance standards for quality, utilization, or cost-effectiveness,but still receive the benefits of the incentive plan based on the overall performance of the groupof providers. In essence, the poor performers obtain a "free ride" based on the efforts of otherproviders. A situation in which poor performance receives the same rewards as good performanceappears inequitable and can create dissension among providers and dissatisfaction with the healthplan.

Because of the potential for "free riders," provider selection for health plans with group-basedincentives should focus on selecting providers with practice patterns that match the health plan'sgoals. The health plan can explore practice patterns during the application process with specificquestions about utilization, quality management, and average costs of services. However, thisapproach requires a strong local presence that regional or national health plans may not be able to

provide. Determining practice patterns is much easier if the provider has already participated inone of the health plan's other networks.

Health plans that structure incentives on an aggregate basis should also monitor individualpractitioners' performance to detect poor performers and address the deficiencies. One way toencourage better performance is to individualize the risks and rewards of the risk pool. Forexample, a PCP whose own utilization is too high is not eligible for any surplus funds from riskpools. However, because many individual providers have too few members to dilute the risk of adisproportionate number of catastrophic cases, many health plans base risks and rewards only onaggregate results.

Health plans can also lessen the "free rider" problem by distributing performance-basedincentives to smaller provider pools. Poor performance will be more apparent in a smaller groupbecause each practitioner's results have a greater impact on aggregate results as the size of thegroup decreases.

One way for the health plan to reduce the size of performance pools is to contract with providerorganizations, such as IPAs, PHOs, or group practices, and base the incentive on theorganization's performance. While the HMO or POS may find it difficult to influence individualperformance through an incentive plan based on an entire service area, the health plan caninfluence smaller provider groups that act as an economic unit. Under HMOs and POS options,members tend to follow predictable paths to obtain care. Most members visit a PCP first for mostcare, even in open access HMOs. If they need further care, members generally follow therecommendation of their PCP. Patients with chronic conditions generally see the same providerson a routine basis. If providers are organized into a PHO, multi-specialty group, or IPA, manypatients are likely to stay within that provider organization for all care. If an HMO or POS hassufficient data on the frequency of member use of the provider group or organization, the healthplan can statistically assign members to the separate organizations.

Financial incentives to improve costs, quality, access, and satisfaction can then be built aroundthe patient base for each provider organization rather than around the entire plan membership.

Although a risk pool should not be too large, the number of providers covered by a pool must begreat enough to compensate for random fluctuation in the incidence of costly cases. A pool of 10to 20 providers allows for effective peer review and coaching of inefficient providers to improvetheir performance. Peer review works best among providers who already have establishedworking relationships, so the health plan should consider existing provider affiliations whensetting up risk pools.17

Because risk pools allow the health plan to share risk and reward with providers, they canfunction as a negative incentive, a positive incentive, or both. An incentive arrangement that putsproviders at risk for both gain or loss along with the health plan can create a greater sense ofcollaboration and shared goals than do withholds or bonus pools.

Bonus Pools

A bonus pool, also called a reward pool, is a type of risk pool that pays providers over and abovetheir usual reimbursement at the end of a financial period based on the performance of

the plan as a whole

a group of providers within the plan the individual provider

A bonus pool is essentially the opposite of a withhold because a bonus pool contains no risk ofloss for the provider. Bonus pools are funded by savings generated from actual costs compared tothe health plan's projected costs for a specified set of services.18 For example, a health plan thatcapitates PCPs may have a bonus pool for hospital funds. If the actual amounts that the healthplan pays for hospital services are less than the projected amounts, the difference becomes thebonus pool. A hospital bonus pool is usually split between the health plan and PCPs. The healthplan receives a portion of the bonus because it is at risk for excessive hospital claims, and thePCPs are entitled to a portion because their efficient management of hospital costs makes thefunds available for the bonus. The amounts paid out from a bonus pool may be equal across allproviders or linked to individual performance.

Bonus pools based on savings realized by the plan as a whole are somewhat easier to administerthan bonus pools based on the performance of specific providers. On the other hand, such plan-wide pools inevitably achieve some of their savings from outcomes that are beyond the individualprovider's control, such as membership growth. Thus, plan-wide bonus pools may offer a lesspowerful incentive to providers than do pools based on individual practitioner or provider groupperformance.

Methods of Limiting Provider Risk

Even providers who practice efficiently and comply with health plan utilization standardssometimes exceed the health plan's capitated payments. For example, a region may experience ahigh incidence of influenza with symptoms so severe that many plan members needhospitalization. A PCP may be responsible for the care of a plan member who developscardiomyopathy and needs a heart transplant. There are many other situations in which providerscan incur unexpectedly high costs that are beyond their control. To protect providers againstbusiness losses, many health plan-provider contracts include provisions to help providers managefinancial risk. The most common methods of managing provider risk are carve-outs, stop-lossprovisions, reinsurance, and risk adjustment.

Carve-Outs

A carve-out is a medical service that is removed from the scope of services covered by the basicpayment method and is reimbursed under a separate payment mechanism. Carve-outs are mostoften associated with capitation, and a health plan may establish carve-out funds through smalldeductions from capitation payments.19 However, carve-outs can be used with other risk-sharingcompensation arrangements, such as per diem payments to hospitals or case rates. Providers maywish to negotiate with the health plan regarding the extent of carve-outs and the effect they haveon the amount of compensation paid to the provider.

Health plans sometimes use disease-specific carve-outs in which the services for high-costdiseases such as AIDS or procedures such as organ transplants are delivered by providers whospecialize in the appropriate services, thus protecting the normally capitated providers fromunexpected service costs. A disease-specific carve-out usually requires the plan member to obtainthe service from a given provider, who may be capitated under a separate agreement or may bepaid under a different reimbursement method than the plan's PCPs

In addition to carving out specific diseases, health plans also carve out entire fields of care thatrequire specialized knowledge and skills not possessed by the typical PCP. Behavioral healthcare,vision care, and dental care are types of healthcare that health plans typically remove from thescope of PCP services. This type of arrangement is known as a specialty services carve-out, andwe discuss this arrangement in more detail in later lessons.

A third type of carve-out, called a specific-service carve-out, is usually associated with acapitation arrangement. With a specific-service carve-out, the capitated provider still provides thecarved-out service, but receives additional reimbursement on a case rate or DFFS basis. Forinstance, health plans often carve out immunizations from PCP capitation. Health plans find itadvantageous to exclude immunizations from capitation for several reasons. First, immunizationsare a service that health plans want PCPs to perform routinely. Immunizations are a component ofthe Health Plan Employer Data and Information Set (HEDIS), which is an important measure ofquality for many health plans. In addition, paying DFFS for immunizations ensures that not onlywill PCPs be diligent about performing immunizations, but they will also promptly submit theinformation for payment. Finally, immunization drugs and supplies can cost between $30 and $40per member visit, so the extra reimbursement offsets the high costs incurred by the PCP.20

Stop-Loss Provisions

Providers who are compensated on risk-sharing bases such as capitation, case rates, or per diemsoften negotiate a stop-loss provision in their contracts. A stop-loss provision specifies that oncethe costs for a particular case have reached a certain threshold, costs beyond that point will bereimbursed under a different payment method, such as DFFS. For example, a hospital that acceptscase rates may find that costs quickly exceed reimbursement for a patient with severecardiovascular disease who requires an extended intensive care unit stay, blood products, multipleantibiotics, and sophisticated cardiac support devices. A stop-loss provision is not the same asstop-loss insurance, which we describe next in this lesson. A contractual stop-loss provisiontransfers risk back to the health plan after the provider has incurred a specific level of costoverrun.

Stop-loss insurance is insurance purchased by an individual provider, a provider organization, ora healthcare facility to protect itself against all or part of the losses that it may incur in the processof providing healthcare services to a health plan's members under a risk-sharing arrangement.Stop-loss insurance is also known as provider excess insurance or medical provider reinsurance.

Stop-loss insurance comes in two forms. The form of insurance that protects providers fromlosses associated with healthcare for an individual member during a given time period (usuallyone year) is individual stop-loss coverage, which is often called specific stop-loss coverage orper-patient stop-loss coverage. Stop-loss insurance against cumulative losses from healthcareservices delivered to all plan members during a specified time period is aggregate stop-losscoverage. Each stop-loss insurance program typically covers one particular type of care such asprofessional services or hospital services, so providers may need multiple stop-loss insuranceagreements to protect against loss.22

Under individual stop-loss coverage, the provider group or facility assumes sole responsibility forall medical costs up to a specified dollar amount, known as the attachment point. The providerand the stop-loss insurer share costs in excess of the attachment point, up to a specified maximumamount. The portion of costs that the provider pays in excess of the attachment point is thecoinsurance. The intent of the coinsurance component is to keep the provider attentive to costs

even after the attachment point has been reached. As an example of how individual stop-losscoverage works, suppose that a provider group purchases individual stop-loss coverage forprimary and specialty care services with a $5,000 attachment point and 10% coinsurance. If theaccrued cost for the primary and specialty care treatment of a patient is $8,000, the providergroup assumes responsibility for the first $5,000 (the attachment point) plus 10% of theremaining $3,000 (the coinsurance) for a total of $5,300. The insurer would reimburse theprovider group for the remaining $2,700.23

If a provider purchases aggregate stop-loss coverage for certain services, the insurer isresponsible for a stated proportion of the provider's costs that exceed a given threshold.Aggregate stop-loss insurance agreements usually state the threshold amount as a percentage ofthe total projected costs for the provider for a certain period, usually one year. Suppose that aprovider group with 5,000 plan members purchases aggregate stop-loss coverage for its hospitalrisk pool with a threshold of 115% of projected costs and a 10% coinsurance provision. Theprovider group funds a hospital risk pool at $40 PMPM. The estimated risk pool (projected costsfor hospital care) for the year would total $2,400,000 ($40 x 5,000 members x 12 months). Thestop-loss insurer would reimburse the provider group for 90% of hospital costs in excess of$2,760,000 (1.15 x $2,400,000). If actual hospital costs are $3,000,000, the insurer reimburses theprovider group for $216,000 (0.90 x [$3,000,000 - $2,760,000]).24

In most cases, the health plan acts as the stop-loss insurer for its providers. Providers who obtainstop-loss insurance from the health plan may pay for the insurance by direct premium paymentsor by deductions from their monthly capitation payments. Due to state regulations on the sale ofinsurance, some agreements between health plans and providers for stop-loss insurance call thearrangement "capitation protection" or "income guarantee programs." Other providers purchasestop-loss insurance from a commercial insurance carrier and pay premiums to that carrier.Providers who contract with more than one health plan may find it less expensive to buy a singlestop-loss insurance policy from a commercial company to cover all their risk-sharingarrangements than to make separate stop-loss insurance arrangements with each contracted healthplan. Providers with very large health plan patient bases (usually more than 30,000 members)may be able to provide their own stop-loss protection by accumulating enough funds throughPMPM payments to cover any excess costs.

In most cases, capitated PCPs who assume risk only for primary care services do not need stop-loss insurance because they are unlikely to incur very high costs. However, a providerorganization that accepts a significant amount of risk (either global risk or professional servicesrisk) and then has several catastrophic cases could incur crippling losses unless the providerorganization has obtained stop-loss insurance to absorb part of the loss. Generally, if a provideraccepts risk for services outside the scope of the provider's capabilities, the provider needs stop-loss insurance. For example, suppose that a small group of obstetricians is capitated for allprofessional and hospital services. If one of the group's patients delivers triplets prematurely, theresulting hospital and specialty care costs could escalate rapidly. The group is likely to experiencea large financial loss on the case unless they have stop-loss insurance.

Because the health plan has a vested interest in providers' continued financial viability, it is wiseto clarify the responsibility for obtaining stop-loss insurance coverage.

Case-Mix/Severity Adjustment

Health plans may adjust capitation rates according to the characteristics of a provider’s patientpopulation or of a particular patient. The characteristics that influence the payment adjustmentinclude the following factors:

Demographics (age/sex) Patient health status Serious illnesses or chronic health conditions Geographic practice variations

An adjustment for case mix or severity is a statistical adjustment that is made for an individualprovider’s patient population in order to compensate for utilization and clinical variances createdby the factors listed above. Case-mix/severity adjustment, also known as risk adjustment, affectscompensation rates, performance measurement, or both.

When rates are adjusted, providers typically receive a higher PMPM rate for members under theage of two years or over the age of 50. Adjusted rates are higher for females than males at mostages. In addition, national and regional plans may adjust their basic capitation rates to reflectgeographical practice differences that influence utilization and healthcare costs. Health plans mayalso adjust payment rates and standards for performance measurement if the provider specializesin high-cost medical conditions. Some providers, such as regional referral centers or providerswho have a reputation for excellence in a specific field, attract a disproportionate number ofpatients requiring high-cost treatments.

Selecting Reimbursement Arrangements

No single approach to provider reimbursement is best for every situation. Health plans typicallymodify reimbursement arrangements to meet their own specific needs and often combine basicpayment methods with incentives in several different ways. A variety of factors influence a healthplan's decision on how to compensate its providers. These factors include the following:

Legal and regulatory requirements Type of provider Level of health plan market maturity Effects of compensation on provider relations

Legal and Regulatory Requirements

While health plans should guard against rewarding more care at the expense of better care, healthplans must also avoid compensation methods or incentives that lead to underutilization. Medicareand Medicaid programs and some states regulate provider compensation in order to reduce therisk that a provider may deny medically necessary care in order to cut costs. These regulationsand laws prohibit health plans from offering providers financial inducements to limit medicallynecessary services for an individual plan member. In addition, Medicare, Medicaid, and somestates require health plans to disclose information about physician incentive arrangements to theappropriate governing body (CMS, the state Medicaid agency, or state insurance commission)and to plan members on request. Health plans should also monitor their compensation

arrangements for compliance with the Stark laws, state laws on corporate practice of medicine,and Medicare/Medicaid fraud and abuse regulations.

State insurance laws may limit a provider's ability to enter into risk-sharing arrangements. Somestates view provider organizations that accept financial risk for the delivery of healthcare servicesas insurance companies and regulate them accordingly. When determining if a providerorganization is functioning as an insurance company, state insurance regulators consider severalfactors. Among the most important factors are the level of risk that the provider organizationaccepts and the extent to which the provider organization is at risk for the cost of care beyond itsown scope of services.26

In order to ensure that payment and incentive plans motivate appropriate, efficient use ofresources rather than the rationing of services, many health plans incorporate QM performancemeasures into their reimbursement arrangements. These QM components often address bothservice quality and healthcare quality. Another way that health plans discourage underutilizationis by limiting the amount of payment placed at risk through withholds and bonuses to a certainpercentage of the provider's base compensation.

Type of Provider

A health plan often uses a variety of reimbursement arrangements to meet the needs of thedifferent types of providers in a network. For example, a health plan may capitate PCPs, payspecialists DFFS, pay hospitals on a per diem basis, and use case rates for some ancillaryservices. The health plan may also tailor the reimbursement approach to suit individual providerorganizations and hospitals.

Most health plans and provider organizations compensate PCPs through some form of capitationor FFS, often in conjunction with withholds, risk pools, or both. Network model and group modelHMOs sometimes capitate PCPs for all professional services, while PPOs almost always payPCPs on a DFFS, fee schedule, or case rate basis. Staff model HMOs typically pay PCPs on asalary or salary-plus-bonus basis. A salary system is best suited to a health plan with a limitednumber of practice settings. In general, having a few centralized locations for care promotesscheduling and operating efficiencies as well as more effective management of utilization. Healthplans with less structured practice settings, such as IPA model HMOs, typically favor a risk-sharing payment system for PCPs to encourage compliance with UM and QM programs.

Specialty care providers most often receive DFFS payment, although the use of capitation isgrowing in some specialty fields. Specialty capitation is usually more appropriate for large groupsof specialists who see enough plan members to dilute the risk of catastrophic cases.

Health plans sometimes reimburse healthcare facilities on a DFFS, DRG, or capitation basis, butper diem rates are most common. A further lesson addresses specific concerns for reimbursinghealthcare facilities.

Ancillary service providers typically receive some form of FFS payment, although the use ofcapitation for ancillary care is growing. Capitation is often appropriate for low-cost ancillaryservices that members frequently use, such as laboratory analysis of blood samples. Onecharacteristic of ancillary services that has important contractual and financial implications for ahealth plan is that most patients gain access to ancillary services through a referral from a primaryor specialty care provider. Some health plans build guidelines for ancillary service referrals into

their incentive plans to encourage their primary and specialty care providers to use ancillaryservices judiciously.

Level of Health Plan Market Maturity

In less mature health plan markets, many providers are in solo or small group practices and oftenmay not choose to contract with a health plan. These providers may not have a goodunderstanding of capitation or how to manage care under capitation. In these markets, a healthplan may need to offer a FFS-based payment system, at least at first, in order to attract the desiredproviders to contract with the plan. Once providers become familiar with the health plan's costmanagement, UM, and QM programs, they are more likely to accept a risk-sharing arrangementsuch as a withhold, risk pool, or even capitation.

Capitation is more prevalent in markets in which providers have already formed their ownorganizations. These providers are usually more knowledgeable about and receptive to healthplan concepts. They are also more likely to have the necessary information systems and skills tomonitor and improve costs, UM, and QM.

Compensation Arrangements and Provider Relations

A health plan wants to develop and maintain long-term, mutually beneficial relationships with itsproviders and accordingly will offer compensation at a level appropriate to the

type of provider needs of the plan's members specific geographic region

The health plan will also seek to balance risk with reward. Providers will be more motivated toaccept financial risk in a reimbursement system if they are adequately rewarded for doing so. Ifproviders perceive that the payment approach is fair, they are more likely to put forth their bestefforts for the health plan's members and to renew their contracts with the health plan. Retaininggood providers improves the continuity of care for members and saves the health plan the costs ofrecruiting new providers.27 Finally, the reimbursement system must be simple enough for theaverage provider to understand in order to avoid any misunderstandings that could disrupt therelationship between the health plan and its providers.

Endnotes

1. Nancy L. Raven and Kathy S. Patterson, "Analyzing Financial Arrangements," in HealthPlan Contracting: A Guide for Health Care Professionals, ed. Wendy Knight(Gaithersburg, MD: Aspen Publishers, Inc., 1997), 88.

2. Judith E. Belt and J. Bruce Ryan, "Combating Silent PPOs," Healthcare FinancialManagement (February 1998): 44.

3. Ibid.4. Richard Ferreira, "Health Plan Contracting and Reimbursement for Physician

Organizations in a Capitated and Risk-Sharing Environment," in Building and ManagingEffective Physician Organizations Under Capitation, ed. Douglas Goldstein(Gaithersburg, MD: Aspen Publishers, Inc., 1996), 244.

5. Raven, 94-97.

6. Edric B. Engert and Cindy Fore, "As Specialists Regain Control, How Should They BePaid?" in Medical Network Toolkit, ed. Therese M. Droste (Santa Barbara, CA: CORHealthcare Resources, 1998), 62.

7. Adapted from Health Plan Finance (Washington, D.C.: Academy for HealthcareManagement, 1999).

8. Ibid.9. The InterStudy Competitive Edge 8.1 (Bloomington, MN: Decision Resources, Inc.,

1998), 65.10. Michael Backus, "Health Plan Contracting: Primary Care Physician Capitation," Health

Plan Contracting Signature Series (Health Plan Resources, Inc., 1997), online, Available:, 25 November 1997.

11. Ibid., par. 10.12. Michael S. Backus, "Health Plan Contracting: Reimbursement Models," Health Plan

Contracting Signature Series (Health Plan Resources, Inc.,1997), online, Available: , 25November 1997.

13. Ibid.14. Raven, 111.15. Peter R. Kongstvedt, M.D., "Compensation of Primary Care Physicians in Open Panel

Plans," in Essentials of Managed Health Care, 2nd ed., ed. Peter R.Kongstvedt(Gaithersburg, MD: Aspen Publishers, Inc., 1997), 121-122.

16. Raven, 115.17. Ibid., 114.18. Ibid., 112.19. Ibid.,125.20. Backus, par. 9.21. Raven, 116-17.22. Ibid.23. Ibid., 117.24. Julie A. Jacob, " Protect Your Practice from Catastrophic Loss," American Medical News

(March 23/30, 1998): 15-16.25. Sheryl Tatar Dacso and Clifford C. Dacso, M.D., Health Plan Answer Book - 1998

Supplement (New York: Panel Publishers, 1998), 12-30.26. Carol K. Kane et al., "Physician Health Plan Contracting," in Socioeconomic

Characteristics of Medical Practice 1997/1998 (Chicago: American Medical Association,1998), 7.

27. Mark Buchanan, "Structuring a Physician Compensation Plan That Rewards Performancein the Health Plan Environment," in Building and Managing Effective PhysicianOrganizations Under Capitation, ed. Douglas Goldstein (Gaithersburg, MD: AspenPublishers, Inc., 1996), 129.

AHM Network Management: Considerations and Strategies for Specialty Services

Objectives

After completing this lesson you should be able to:

Explain some of the different carve-out arrangements that a health plan may use toarrange access to specialty services

Describe the criteria a health plan uses to select a sole-source provider for specialtyservices

Explain how the role of the PCP in behavioral healthcare varies among health plans Explain a health plan’s options for arranging access to clinical eye care and routine eye

care Distinguish between ophthalmologists, optometrists, and opticians List some reasons health plans often find the development and management of alternative

healthcare networks to be challenging List some ways in which a home healthcare agency can prepare itself to accept capitated

contracts

Introduction

Health plans typically include one or more types of specialty services in their benefit plans.Specialty services are services that lend themselves to being separated out or packaged as aseparate benefit, network, or program. Cardiac surgery, radiology, behavioral healthcare, anddental care are examples of specialty services. Ensuring that plan members have adequate accessto high-quality specialty services can be especially challenging for a health plan. Although manyspecialty care providers are physicians, many others are not, so a health plan’s basic approachesto provider selection, credentialing, and contracting may not apply to specialty care providers.Specialty services often involve very specialized knowledge or differences in delivery systemsthat further complicate the processes for network development and management.

This lesson begins with a discussion of carve-outs as a means to arrange member access tospecialty services. Next, we discuss considerations for contracting with a single provider ororganization, rather than with multiple providers, for a specialty service. We also explore networkmanagement considerations for several types of specialty services, including behavioralhealthcare, dental care, vision care, alternative healthcare, and home healthcare.

General Considerations for Specialty Care Networks

Health plans often have multiple options available for arranging the delivery of specialty services.These options may include carving out the specialty service, sole-source contracting, or both.

Using Carve-Outs for Specialty Services

In some cases, health plans build and manage their own provider panels for delivery of a specialtyservice. This approach is common for cardiac surgery and radiology services. However, becausemost specialty services require different approaches to network management, UM, and QM,many health plans remove (carve out) the specialty service from the scope of their own networksand arrange access to care through a separate network that focuses on the particular specialty

service. A health plan may use any of the following carve-out approaches to arrange access to aspecialty service network:

Leasing an existing network of specialty service providers Contracting with a network management company for the development and, perhaps, the

continuing management of a specialty service provider network Contracting with a provider organization or another health plan that specializes in the

particular service

The network carve-out options available to a health plan vary according to the type of specialtyservice and the specific geographic area. Some network rental companies and networkmanagement companies do not provide any services beyond identifying specialty providers andestablishing a reimbursement agreement with them. In this type of arrangement, the health plan isresponsible for credentialing providers, as well as for all other network and medical managementfunctions.

In a comprehensive carve-out arrangement, the health plan transfers authority for virtually everyaspect of healthcare delivery to the provider organization or specialty health plan. For example, ahealth plan that contracts with a managed behavioral healthcare organization (MBHO) oftenrelies on the MBHO to develop and manage a network and to perform all other activitiesnecessary to ensure the timely delivery of quality behavioral healthcare to the health plan’smembers. The MBHO usually assumes financial risk as well.

Between these two extremes are network arrangements under which an organization outside thehealth plan assembles the network and accepts delegation of selected UM and QM functions.Figure 6D-1 illustrates the continuum of options for carving out specialty service networks andthe amount of authority that is transferred to the network under each option.

No matter which approach to network development and management that a health plan chooses,the health plan retains the ultimate responsibility for the quality of care and service delivered byits specialty service providers. Even if the service is carved out of the health plan’s scope ofservices, regulatory and accrediting agencies hold the health plan accountable for the properperformance of any delegated functions. With the exception of MBHOs, there are no nationallyrecognized accreditation programs for specific types of specialty health plans, network rentalcompanies, or network management companies. Therefore, it is important that health planscarefully evaluate the policies, procedures, and capabilities of any organizations that supplynetwork management and medical management functions before delegating these functions. Ahealth plan must continue to monitor the contracted organization’s quality of care andperformance of delegated functions throughout the term of the contract.

Sole-Source Contracting

Health plans often use a sole-source contracting approach to arrange access for specialty services.Under sole-source contracting, a health plan negotiates a contract with a single organization,such as a provider organization or a specialty service health plan, to provide a specific set ofservices to all of the health plan’s members in a defined market.1 Sole source contracts typicallyinclude a capitation compensation arrangement. Choosing an appropriate organization to be thesole provider of specialty services can be complex. ***This discussion of sole-source contractingis excerpted from Health Plan Contracting by Wendy Knight.†

In the first section of this lesson, we discussed general network strategies (carveouts and sole-source contracting) that health plans may apply to various specialty services. Next, we focus onconsiderations for specific types of specialty service networks, beginning with behavioralhealthcare.

***Criteria in Establishing a Sole-Source RelationshipThe criteria a health plan uses in establishing a sole-source arrangement are usually specified inthe Request for Proposal (RFP) that the health plan distributes to selected vendors. The healthplan will request a comprehensive proposal from each vendor based on the parameters establishedin the RFP. The principal criteria for selection are described in the following sections.

PartnershipBecause the health plan is replacing multiple providers with one in a sole-source contract, itwants to ensure that the selected provider is suitable as a long-term partner. The health plan willlook for the demonstrated ability of the provider to work collaboratively with the health plan,including modifying its systems and strategies to better align with those of health plan firms. Inaddition, the health plan wants assurance that the provider embraces the concept of health plansand has the clinical and administrative capacity to accommodate the expanded health planbusiness.

Customer ServiceThe health plan seeks a provider that can meet or exceed the service expectations of the healthplan and its clients, contracted providers, and members alike. This would include the ability of theprovider to

solicit, respond to, and track patient complaints or comments staff customer service lines prepare and distribute member education materials produce reports on various performance measures

QualityHealth plans are very concerned about a provider’s quality assurance activities, especially in asole-source arrangement. This includes how a provider hires and trains its clinical staff, the extentto which it uses contracted personnel, its applicable accreditation status, its process for measuringquality, and the use of patient satisfaction surveys. In conjunction with affiliated providers, manyhealth plans are developing specific patient care programs based on evolving clinical practiceguidelines and are interested in contracting with health care professionals who have the interestand capability of establishing clinically-based, patient-centered programs.

Information SystemsThe key to successfully managing and administering a capitated arrangement is access to currentdata and sophisticated information technology. The prospective sole-source provider must havethe sophisticated information systems necessary to obtain, input, track, and monitor capitationpayments, enrollment data, claims payments, and related data. Moreover, the provider mustpossess or acquire the system infrastructure that is indispensable in capturing and analyzingphysician referral patterns, utilization statistics, patient risk factors, and other essential clinicalinformation. The provider’s ability to manage a capitated contract of this size using compatibleand sophisticated information systems is an important issue in sole-source contracting.

ExperienceProviders considering sole-source arrangements should have significant experience in deliveringthe specified services, particularly in a health plan environment. Health plans will look forproviders with an established track record of providing high-quality services and with experiencein capitated contracts. Providers lacking considerable health plan experience should createalliances with providers more experienced in working under capitated contracts.

Other Considerations for Sole-Source ContractingA sole-source contract is a major endeavor for the health plan and provider alike and involves avariety of contractual and operational issues that both should explore thoroughly. These issuesinclude

covered services product lines network development and subcontracting reimbursement utilization management reporting

Network Management for Behavioral Healthcare

A managed behavioral healthcare organization (MBHO) , sometimes called a managedbehavioral health organization, is an organization devoted to providing behavioral healthcareservices by implementing health plan techniques, such as referral authorization systems,utilization review, and clinical practice guidelines. Some health plans develop and manage theirown behavioral healthcare (BH) panels, but more often health plans carve out BH and contractwith MBHOs for these services. Health plans often look for NCQA accreditation of an MBHO asan indication of the overall quality of the MBHO. MBHOs usually receive delegated authority fornetwork development and management, UM, and QM functions along with accepting a great dealof financial risk for BH services. Health plans generally compensate MBHOs on a capitationbasis, paying either a flat rate per member per month (PMPM) or a percent of total monthlypremiums.

There are varying opinions on carving out BH benefits. Proponents of carving out BH believe thata contract with an MBHO results in faster access to care and more specialized services formembers. However, a BH carve-out potentially can decrease continuity of care due to lack of carecoordination between the BH provider and the member’s PCP. For this reason, some BHproviders advocate keeping BH within the scope of services offered by the health plan’s ownnetwork. These providers feel that mental wellbeing and physical health are very closely linkedand that separating BH providers from the rest of the network significantly reduces providercollaboration.3 As of 1999, NCQA accreditation programs for both health plans and MBHOsassess the coordination of BH with medical care4 and look for demonstrated oversight of theMBHO if the health plan elects to carve out these services.

Types of BH Providers

The severity of psychiatric and addiction disorders varies greatly among patients and for the samepatient over time. These conditions typically persist for long periods of time, sometimes even forthe life of the patient. Many patients have both mental illnesses and chemical dependencies.Therefore, a BH provider network must be able to deliver the entire continuum of BH services forboth mental illness and chemical dependency, from an inpatient level of care to a full range ofoutpatient services, including crisis intervention and stabilization. Although the use of inpatientfacilities for BH has decreased greatly in recently years, an health plan must still have inpatientfacilities available if any inpatient treatment is included in the benefit plan.5

The benefit plan often specifies the types of BH providers that members may see. The followingtypes of healthcare professionals are commonly included in BH networks:

Psychiatrists Psychologists Social workers Psychiatric nurses

Counselors Marriage and family therapists

Psychiatrists are physicians who may prescribe medical treatment and medication for BHconditions in addition to conducting psychotherapy. Psychologists hold a Ph.D. in psychologyand typically are licensed to perform psychological testing in addition to conductingpsychotherapy. Licensed psychological counselors also perform psychotherapy and typically haveat least a master’s degree in psychology or counseling. The other types of BH practitioners havevarying levels of education, although many social workers, psychiatric nurses, and counselorshave master’s degrees and generally are independently licensed by the state in which theypractice. BH practitioners may also hold certification in specialized treatment modalities such aschemical dependency counseling, family therapy, or biofeedback. Individual responsibilities varyaccording to the practice setting and the scope of practice allowed by the individual practitioner’sstate license and certification.

The cost of BH therapy varies according to the type of service rendered and the type of provider.For example, a psychotherapy session with a psychiatrist (M.D.) carries a higher charge than thesame service rendered by a psychologist (Ph.D.), which, in turn, is more costly than a similarsession with a psychiatric nurse, a social worker, or a counselor. Generally, individual therapysessions cost more than group therapy sessions. MBHOs frequently utilize non-physicianproviders for psychotherapy and counseling to manage costs, as well as to better meet members’needs. However, seriously mentally ill patients frequently need the services of a psychiatrist whocan treat any contributing medical conditions with medical intervention as well as psychotherapy.

Role of the Primary Care Provider in BH

The role of the PCP in BH varies from one health plan to another. In some health plans, a PCPwho suspects mental illness or chemical dependency can refer the member directly to a BHprovider after obtaining any necessary referral authorization from the plan. Other health plansrequire the PCP to refer the member to a BH case manager who assesses the member and, ifindicated, channels the member to the appropriate BH provider. The BH provider is stronglyencouraged to work in concert with the PCP and to keep the PCP informed of relevant diagnostic,clinical, and treatment information. Many MBHOs now include this coordination of care with thePCP as a requirement in their policies and procedures for BH providers.

Still other health plans authorize PCPs to diagnose and treat BH problems, especially commonconditions that are generally uncomplicated, such as mild depression,6 with the PCP typicallyrendering treatment under preestablished clinical guidelines.

Since the PCP already has a relationship with the member, the member may be more comfortablereceiving BH treatment from the PCP than seeing an unfamiliar specialist specifically fortreatment of a mental illness or addiction. However, the reverse may also be true, with themember being more comfortable receiving such treatment from a provider who is not alsoresponsible for his or her ongoing medical care. PCP treatment of BH does enhance continuity ofcare. However, without additional training specific to BH, most PCPs lack the clinical expertiseto detect, diagnose, and treat mental disorders and chemical dependency, 7 which may presentwith symptoms similar to other medical disorders. Some BH specialists also feel that PCPs whotreat BH conditions rely too much on drug therapy.

Assembling the BH Network

Regardless of whether the health plan or an MBHO assembles the network, the basic process fordeveloping a BH network remains the same. The health plan or MBHO determines theappropriate composition and size for the network and, on that basis, selects the providers who arebest suited to meet the needs of the health plan and its members.

Network Composition and Size

Because patients with behavioral disorders often do not need around-the-clock nursing care,behavioral healthcare lends itself to alternative care levels and settings. Further, managedhealthcare generally encourages treatment in the most medically appropriate, least restrictive, andleast intrusive setting feasible for a particular patient. As a result, health plans typically offercoverage for a variety of BH care levels and settings. Figure 6D-2 describes some of the levels ofcare and care settings that health plans may include in their behavioral healthcare benefits. Thelevels of care are listed in order from the most intensive and restrictive to the least intensive andrestrictive.

Health plans and MBHOs often use both inpatient and outpatient care options to meet the needsof individual patients, such as hospitalization for an acute episode followed by outpatienttreatment to prevent recurrent acute episodes.

Network Composition and Size

The composition of the network should reflect the different care levels and settings, as well as thedifferent diagnoses (e.g., depression, anxiety disorders, alcoholism, drug addiction), and clinicalinterventions (e.g., medications, individual therapy, group therapy) that are covered in the benefitpackage. Health plan networks typically include facilities that can deliver different levels of care,a variety of treatment modalities, and a multidisciplinary panel of practitioners. The compositionof the practitioner panel is often based on the following set of model guidelines:

Up to 30% psychiatrists 0 to 30% doctoral-level psychologists 40 to 60% Master’s degree-level providers, such as psychologists, nurses, social workers,

and counselors8

The needs of a specific plan’s membership also affect the composition of the network. Healthplans typically seek BH generalists whose training and experience qualify them to diagnose andtreat a broad range of common BH conditions. In addition, a health plan typically needs BHspecialists with expertise in problems such as eating disorders or substance abuse,9 adolescent orpediatric BH services, and drug therapy. Health plans also consider how general BH services,such as treatment of minor depression or attention deficit hyperactivity disorder (ADHD), areprovided on a regional basis. In some areas, PCPs screen for BH conditions and then referpatients to mental health professionals for treatment. In other areas, PCPs are trained to treatminor conditions. Understanding the regional relationships among medical generalists andspecialists is important to the success of a health plan’s BH program.

One standard guideline for the size of a BH network is to include at least 1 individual practitionerfor every 1,000 members. 10 However, the number of providers actually required may be higher

or lower, depending on the projected incidence of BH problems in a particular patient population.The locations of facilities and providers’ offices relative to members’ homes and workplaces alsoaffect the size of the network. Plan members’ driving times to access BH services should notexceed

1 hour to a full-service hospital 30 minutes to an emergency room 30 minutes to an outpatient substance abuse program 30 minutes to an individual provider11

A health plan typically needs a larger network if the member population is widely dispersed.

Selection of Practitioners

The patient-provider relationship is important to the success of BH treatment, so health plansconsider existing patient-provider relationships when recruiting providers for a BH network. Topromote communication and coordination of care across providers, health plans also take intoaccount the current referral patterns of network PCPs to BH providers in the community.Employee assistance program counselors can often identify the BH providers who are currentlyproviding care for a specified group of plan members.

Overall, the steps for credentialing BH practitioners are similar to those for credentialingpractitioners for a medical panel: application, verification of data, and granting of privileges.However, because approaches to BH diagnosis and treatment vary greatly among providers, ahealth plan considers a variety of factors specific to BH as well as standard credentialing criteriawhen selecting BH providers. In addition, a health plan must tailor the credentialing process toaccommodate the varying backgrounds and skill sets of different types of BH practitioners.

Applications for participation in a BH network are extensive and detailed, typically requiringinformation such as populations treated, experience in different BH specialties and subspecialties,specific treatment methods used, specific credentials to support those areas of selective expertise,the approximate number of treatment cases completed in a typical month, willingness toparticipate in case management and utilization review, and availability for crisis intervention.12

One primary goal for provider selection is to choose providers whose utilization and qualitymanagement approaches are consistent with the goals of the health plan. Health plans, therefore,focus their attention on those practitioners and provider organizations whose practice patternsdemonstrate appropriate

use of outpatient therapy versus inpatient treatment use of group versus individual therapy sessions length of treatment or number of therapy sessions for certain conditions

Two important measures of BH provider quality are patient satisfaction and clinical outcomesassessments, including the rate of relapse and the incidence of adverse events, such as self-destructive behaviors, suicides, homicides, and other criminal acts. Other quality indicators thatmay prove useful in the selection of BH providers are (1) the provider’s reputation among localhealthcare professionals and consumers and (2) quality assessments performed by accreditingagencies.

Network Management for Dental Care

Although indemnity insurance is still the most common form of dental care coverage, manageddental care is rapidly expanding. You will recall from Healthcare Management: An Introductionthat managed dental care typically takes the form of a dental HMO (DHMO), a dental PPO, or adental POS option. A health plan may establish and manage its own DHMO, dental PPO, ordental POS option, or it may contract with an existing dental managed care organization. In eithercase, the health plan must be sure that the dental network allows members adequate access toservices. Patients should be able to receive routine dental care within two to four weeks of therequest for an appointment and emergency care within 24 hours of the member’s request.

The structure of the dental provider community differs from that of medical providers. Dentistsare typically solo practitioners; however, the number of multi-dentist offices is growing.13 Insome areas, dental IPAs have emerged to contract on behalf of individual practitioners, but dentalIPAs are the exception, rather than the rule, in most regions of the country.

Because so many dentists are in solo practice and dental IPAs are not yet widespread, dentalnetwork development often occurs on an office-by-office basis. Health plans and managed dentalcare organizations usually need more time to assemble a dental network than to put together acomparably sized physician panel. In addition, many dentists in solo practices or partnerships areunaccustomed to health plan concepts and may require extensive education before they will agreeto a health plan contract. For example, dentists are typically unfamiliar with the processes of peerreview and may be wary about this aspect of performance management.

Currently, there are no nationally recognized standards for quality in managed dental care. TheNational Association of Dental Plans (NADP), a trade association for DHMOs, is gatheringinformation on how to establish an accreditation program for managed dental care organizations.

Types of Dental Care Providers

The vast majority of dental care focuses on just two diseases: tooth decay and gum disease. Likehealth plans, dental care places a strong emphasis on prevention. More than 80% of dentists aregeneral practitioners and they deliver the bulk of dental care services to health plan members. 14

Although there are eight dental specialties, such as orthodontics, oral surgery, and periodontics,referrals to dental specialists are relatively infrequent. However, if the specialist’s services arecovered by the benefit plan, the health plan or managed dental care organization must alsoinclude dental specialists in its network.

Almost all dental services are delivered in an ambulatory care setting. Therefore, the networkneeds very few healthcare facilities. Nonetheless, it does need to have access to some inpatientfacilities because urgent and emergency situations do occasionally arise. If admission to aninpatient facility is required for a specific dental procedure because of an emergency situation ora concomitant medical condition, the health plan will usually cover the cost of the inpatientadmission and confinement as long as proper preauthorization is obtained.

Selection of Dental Care Providers

Managed dental care is not federally regulated, and there are no accreditation programs for dentalnetworks, so processes for selecting dental care providers vary greatly according to stateregulations on managed dental care networks and the health plan’s standards. Health plans and

managed dental care organizations typically require the following credentials of dental networkproviders:

Current dental license valid in the state of practice Certification of any specialty education and training Verification of board certification or board eligibility for specialists Drug Enforcement Agency (DEA) license Proof of professional liability insurance Clinical privileges at inpatient or outpatient facilities for oral surgeons or other providers

as appropriate

In most cases, the party assembling the network also checks with the National Practitioner DataBank (NPDB) for the provider’s malpractice history or other negative reports and with the stateboard of dental examiners for any sanctions against the provider.17

In many cases, DHMO personnel perform a site visit and chart review as part of the selectionprocess. Dental PPOs do not usually conduct site visits. Figure 6D-3 lists factors that aretypically assessed during a site visit.

Contracting with Dental Network Providers

Health plan contracts with dentists are quite similar to those for medical service providers. Dentalprovider contracts typically specify the services that are to be provided by general dentists and theconditions that should be referred to specialists. DHMO contracts sometimes require dentists toobtain prior authorization for certain procedures.

Compensation for Dentists

The method of compensation for dentists varies with the type of managed dental care plan. DentalPPOs usually pay dentists on a discounted fee-for-service (DFFS) or fee schedule basis. On

average, a provider in a dental PPO receives from 75% to 85% of the full fee-for-service (FFS)rate.18

Staff model DHMO dentists are usually salaried, but most other DHMOs, such as IPA-modelDHMOs and group model DHMOs, capitate general dental practitioners. Capitation agreementssometimes include withholds based on referrals to dental specialists.19 The capitation rate forgeneralists is usually between 60% and 70% of the FFS equivalent for generalists in the localarea.20 Specialists in DHMOs typically receive payment on a DFFS, fee schedule, or case ratebasis. Some DHMOs include a contract provision that guarantees a minimum total payment permonth for capitated dentists or a minimum rate per hour for dentists who are paid on some type ofFFS basis.21

Network Management for Vision Care

A health plan’s approach to network management for vision care depends in great part on thevision benefits offered by the health plan. Vision coverage may include only clinical eye care;that is, medical and surgical services for eye diseases, such as glaucoma, and eye injuries. In othercases, vision benefits also offer partial or full coverage of routine eye care. Routine eye careincludes general eye examinations to test vision, prescribe corrective lenses, and screen for eyedisease and, perhaps, payment for the corrective lenses as well.

Despite the fact that 60% of Americans need corrective eyewear, most health plans do not includeroutine eye care as a standard benefit. Employers who offer a vision plan often contract separatelyfor this benefit or have their health plan add it to the basic health benefit plan. However, manyhealth plans are in the process of adding routine eye care to their benefits or are at leastinvestigating the possibility. The increased interest by health plans in providing full vision care(clinical and routine eye care) coverage for members stems from several factors.

Many consumers and employers view complete vision coverage as an attractive benefit. As theaverage age of the population increases, so does the incidence of presbyopia, a condition whichdecreases the ability to focus and affects near vision. 22 In addition, the growing use of computersin the workplace has increased the frequency of vision problems such as eye pain and irritation,headaches, blurred vision, double vision, excessive tearing, and dry eyes.23

The coverage of routine eye care is especially appealing to Medicare beneficiaries. Medicare doesnot require managed care plans to offer vision benefits; however, many health plans view eyecare benefits as a selling point that may be useful in competing for Medicare membership.Medicaid health plans must offer eye examinations and corrective eyeglasses to children, andmany states also require similar benefits for adult Medicaid recipients.24

Structure of the Vision Care Network

Most health plans already include providers of clinical eye care in their networks. Health plansthat also offer coverage for routine eye examinations or corrective lenses have several options forarranging access to these services. A plan may choose to

add providers who perform routine eye examinations and dispense lenses to its ownnetwork

include in its network a provider organization that offers both clinical eye care androutine eye care

carve out routine eye care by contracting with an eye care organization, such as amanaged vision care organization (MVCO)

carve out both clinical and routine eye care by contracting with an MVCO or amultispecialty provider organization that offers all services related to eye care

A managed vision care organization (MVCO) is an organization devoted to the delivery ofroutine eye care, including examinations and corrective lenses, or both routine eye care andclinical eye care, by implementing health plan concepts such as credentialing, authorizationsystems, clinical practice guidelines, utilization review, and QM. MVCOs that provide the fullscope of vision care (clinical and routine) frequently conduct their operations in a manner similarto that of an HMO. Other MVCOs, especially those that offer only routine care, function as PPOs.

When a health plan carves out routine eye care or all eye care services, the health plan typicallydelegates credentialing, QM, UM, medical records, and administrative functions to the MVCO orprovider organization. The health plan must adhere to the delegation standards of the applicableaccrediting agencies when establishing the delegation agreement and monitoring the functionsperformed by the delegate.

None of the major accreditation organizations have established an accreditation programspecifically for MVCOs. However, MVCOs typically follow these accrediting agencies’ generalstandards for quality, credentialing, and network management when developing and managingvision care networks.

Types of Vision Care Providers

Because most PCPs have little training in diagnosing and treating vision problems, the PCP’s rolein vision care is usually limited. Many PCPs, especially pediatricians, perform basic visionscreening to detect vision deficiencies. PCPs also treat minor eye conditions, such asconjunctivitis, and remove foreign objects from the eye. They typically refer other eye careconcerns to a specialist, either an ophthalmologist or an optometrist.

Ophthalmologists are physicians with special education and training to treat eye disease andinjury. Ophthalmologists may subspecialize in glaucoma, retinal disease, ocular plastics or neuro-ophthalmology. An ophthalmologist’s skills also include conducting routine eye examinationsand prescribing corrective lenses, but many ophthalmologists primarily see patients with moreserious eye conditions. Health plan members usually see an ophthalmologist on a referral from aPCP or an optometrist.

Optometrists are healthcare providers who are specifically trained to perform eye exams,diagnose vision problems, and prescribe corrective lenses. Some states also authorizeoptometrists to treat minor eye infections and remove foreign objects. An optometrist’s fees forroutine eye care are usually significantly less than an ophthalmologist’s charges for the sameservices.26

Optometrists in multispecialty MVCOs that offer clinical and routine eye care often function asgatekeepers. Depending on the results of the eye examination, an optometrist may refer the planmember to an ophthalmologist for treatment of glaucoma, cataracts, or other eye diseases. Insome cases, a routine eye examination detects signs of previously undiagnosed medicalconditions, such as hypertension, cancer, diabetes, and nerve disorders. When a member’s eye

examination shows suspicious symptoms, the optometrist refers the member back to the PCP forfurther investigation and followup on the suspected condition.27

Historically, ophthalmologists and optometrists have disagreed on the scope of services that eachdiscipline should provide. While many optometrists believe that they are the appropriate deliverychannel for routine eye care, some ophthalmologists have asserted that, as physicians, they havethe knowledge and skills to provide more comprehensive examinations and other medicalservices as needed. Optometrists often complain that patients they refer to an ophthalmologist foran eye disease or injury are retained in the ophthalmologist’s routine care practice rather thanbeing returned to the optometrist for routine services.

However, it appears that the two eye care disciplines are reconciling differences and collaboratingin some regions. Ophthalmologists have organized many of the MVCOs that include bothophthalmologists and optometrists. The over-arching concern for a health plan contracting withvision care providers or an MVCO is to ensure adequate access to covered services.

Members typically obtain corrective lenses from an optician. The optician orders lensesaccording to the member’s prescription, assists the member with frame selection for eyeglasses,and fits the glasses. The optician may be based in the same location as the ophthalmologist oroptometrist performing the eye examination. Some optometrists also function as opticians.Similarly, the laboratory that grinds lenses for eyeglasses may be part of an optometrist’s orophthalmologist’s practice. A health plan or MVCO assembling a vision care network shouldkeep in mind that a provider who examines eyes and dispenses lenses may be tempted toprescribe corrective lenses unnecessarily in order to generate sales of eyeglasses and contactlenses. Many health plans prefer to separate the examination and dispensing function to reducethe opportunity for this type of self-referral.28 The use of central laboratories for the lenses alsofacilitates quality control for lenses.

Selection of Vision Care Providers

The credentialing and selection processes for ophthalmologists follow NCQA or theCommission/URAC standards for physician selection. Credentialing and recredentialing foroptometrists follow a similar pattern, and include verification of

current licensure appropriate education adequate malpractice and liability insurance

The health plan or MVCO should also check with the NPDB for a provider’s malpractice history,and with Medicare, Medicaid, and the state board of optometry for other sanctions against theprovider. Opticians should provide proof of certification or licensure.

Prior to contracting, many health plans and MVCOs visit the practice site of each candidate forthe provider network to assess the site’s appearance, operations, instrumentation, and patientrecords. The health plan or MVCO also checks the quality of frames and lenses provided byopticians and lens laboratories.

Compensation of Vision Care Providers

In a carve-out arrangement, a health plan typically compensates the contracted MVCO orprovider organization through capitation. In some cases, the capitation payment covers allservices. Other capitation agreements apply only to professional services, with frames and lensesreimbursed on a DFFS basis. Health plans and MVCOs that contract with individual vision carepractitioners use a variety of reimbursement methods, including capitation, DFFS, and feeschedules.

Network Management for Alternative Healthcare

An increasing number of health plans offer coverage of alternative healthcare, that is, healthcareservices not offered by traditional medical providers. Alternative healthcare is also known ascomplementary healthcare. Alternative healthcare includes a wide variety of treatment methods,such as chiropractic, acupuncture, naturopathy, homeopathy, nutritional counseling, massagetherapy, herbal medicine, and biofeedback. Figure 6D-4 describes some of the more commontypes of alternative healthcare.

In addition to considering consumer demand for alternative services, health plans evaluateclinical studies on safety and effectiveness when choosing alternative therapies to include in theirbenefit plans.

An alternative therapy is usually an additional benefit available to members through a PCPreferral to the alternative healthcare provider. However, naturopaths function as PCPs in somehealth plans. A naturopathic physician’s training includes some education about traditionalmedicine as well as training in alternative therapies. Licensed naturopaths are authorized toperform medical screening tests, administer immunizations, order X-rays, and prescribe somemedications that are naturally based.30

Arranging Access to Alternative Therapies

After the health plan determines which alternative healthcare therapies to cover, the plan needs toestablish

reasonable guidelines for the specific services that will be covered appropriate provider recruitment, selection, and contracting processes provider performance management systems to ensure quality and address any

performance problems that arise

Because alternative healthcare services and providers are very different from traditional servicesand providers, many health plans lack personnel with the knowledge and experience tosuccessfully develop and manage alternative healthcare networks. Health plans can turn to stateor national professional associations, such as the American Chiropractic Association or theNational Center for Homeopathy, for guidance on benefits and network management. In addition,health plans may find it helpful to engage the services of a highly regarded local practitioner of aparticular discipline to act as advisor for network development. This advisor works with thehealth plan’s network management department to identify candidates for the network, establishcredentialing standards, and develop appropriate contracts for the discipline.

The licensing and regulation of alternative healthcare providers are inconsistent among the states,with the exception of chiropractic, which is licensed in all 50 states. For example, 36 statesregulate acupuncturists, 26 license massage therapists, and only 11 license naturopaths.31 Theonly well-established credentialing requirements for alternative healthcare are NCQA’scredentialing standards for chiropractors. As a result, credentialing criteria for alternativetherapies vary widely according to the discipline and the state in which the provider practices.

The following criteria often serve as a basis for qualifying and selecting alternative healthcarepractitioners:

Graduation from a fully accredited college Completion of the relevant training program for the discipline Board certification or specialty certification, if applicable License to practice in the state, if applicable Two years of continuous clinical experience Appropriate malpractice insurance Regular participation in relevant continuing education activities32

Any provider who orders prescription medications also needs a DEA or Controlled DangerousSubstance (CDS) certificate. The health plan should check with the appropriate state regulatoryagency, state professional associations, Medicare, Medicaid, and the NPDB for furtherinformation about the provider. When possible, the health plan should visit the practitioner’soffice to perform an assessment similar to that for a physician’s office.

Some traditional providers have training in one or more alternative therapies; however, traditionalmedical education, licensing, and malpractice insurance do not cover the practice of alternativehealthcare by traditional providers. Therefore, any traditional provider who wishes to offeralternative treatment must meet the plan’s credentialing requirements for that therapy.33

Depending on the type of alternative provider needed and the geographic location of the network,a health plan may be able to rent an alternative healthcare network, outsource development to anetwork management company that specializes in alternative healthcare, or contract with analternative health plan. The extent of the authority transferred from the health plan to thealternative care network varies from one contracting situation to another.

Other Considerations for Alternative Healthcare Networks

Many alternative healthcare providers are solo practitioners who have little experience withhealth plans. A health plan should ensure that alternative healthcare providers receive a thoroughorientation and continuing education about the basic concepts of health plans, the particularrequirements of the health plan, and guidelines for referral to traditional providers. The healthplan must also educate its traditional providers about the role of alternative practitioners in thenetwork, situations for which a referral to an alternative practitioner is appropriate, and referralprocesses.

The ultimate goal for the health plan is to integrate any alternative therapies with traditionalmedicine in a way that makes the best use of both approaches according to members’ needs. Forexample, a trauma victim who receives surgical treatment and physical therapy may also benefitfrom acupuncture treatment for pain.34

Network Management for Home Healthcare

Arranging for home healthcare presents a unique challenge for health plans because this specialtyservice is really a collection of services. In addition, home healthcare providers must be skilled inproviding care at the member’s location. While some health plans assemble and manage theirown panels of home healthcare providers, other health plans contract with home healthcareagencies. When evaluating a home healthcare agency, a health plan considers the provider’s

standing with state and federal regulatory bodies and checks for accreditation by JCAHO. If theagency is not accredited, the health plan must establish its own standards for home healthcare andevaluate the agency according to those standards.

***This section on the management of networks for home healthcare is an excerpt from ManagedCare Contracting by Wendy Knight.† The term usual and customary (U&C) is equivalent totraditional fee-for-service (FFS).

***Home health care is administered to members in the home by themselves, a family member,or home care nurses or other trained health professionals. The availability of home health careservices gives members and their physicians an alternative treatment setting to hospitals. Byarranging for home care services for the appropriate diagnoses and conditions, the health plan andphysician can do the following:

Minimize the need for an unnecessary emergency room visit Prevent an unnecessary hospitalization Shorten a hospital length of stay Provide continuous monitored follow-up care Provide care to the member in the safety and comfort of his or her home Facilitate the provision of vital nonmedical services, such as custodial or child care

Range of ServicesIn general, home health care services can be arranged for the treatment of any diagnosis that aphysician determines can be managed effectively in the home with proper training andsupervision. Patients suffering from asthma, diabetes, cancer, acquired immune deficiencysyndrome (AIDS), and some neurological disorders often can be treated safely and effectively inthe home. Postsurgical care, post trauma care, high-risk maternity and prenatal care, postpartumcare, and healthy newborn care are examples of other home care services.

Many health plans are interested in contracting with home care agencies that can provide the fullrange of home care services, including skilled nursing care, physical therapy, durable medicalequipment, infusion care, total parenteral nutrition, pharmaceuticals, and supplies. Home healthcare is provided by multiple health care professionals including registered nurses (RNs), licensedpractical nurses (LPNs), physical therapists, speech therapists, occupational therapists, respiratorytherapists, and medical social workers.

In non-risk contracts, home health care services are generally coordinated and approved throughthe health services department of the health plan. When health plans contract with providerorganizations on a risk basis, they may transfer the responsibility for arranging home care andrelated services to the provider organization.

Contractual ArrangementsThere are a multitude of reimbursement arrangements for providers of home health care services,including discount from usual and customary (U&C) charges, fee schedules, flat rates, andcapitation. Home health care rates may also vary by level of care, such as adult or pediatric.Similar to physicians and other providers, home care providers can be reimbursed based on asingle discount off U&C charges, such as a 20 percent discount for skilled nursing services, ormultiple discounts according to type of care or service, such as a 20 percent discount for skillednursing services and physical therapy and a 10 percent discount for durable medical equipment.

Flat RatesFlat rates for home care services are set payments per visit or per day. These can fluctuatedepending on the level of care or type of service provided. A home care service provided withintwo hours is usually considered a “visit” and paid accordingly. Services consuming more thantwo hours are paid according to a per diem rate schedule. For example, the health plan mayreimburse the home care provider a flat rate for skilled nursing services as follows:

Home Health RN: $50 per visit or $110 per diem Home Health LPN: $45 per visit or $90 per diem Home Infusion: $75 per visit

Capitation

Finally, some HMOs and gatekeeper PPOs are developing capitation rates for a single home carecompany to provide all required home care services to members. These arrangements generallyencompass the full range of home care services and may include participation in the health plan’sdisease management programs and health promotion activities. Home care companies interestedin structuring capitated contracts with health plans should

offer a broad spectrum of services, through alliances with other home care vendors ifnecessary

ensure high quality of care by using licensed providers and employed (versus contracted)personnel, and offering continual staff education and training

acquire information systems that can track and monitor capitation payments tosubcontractors

establish treatment protocols and other policies for continuity of care

Conclusion

In order to ensure adequate member access to specialty services, health plans often adjust theirapproaches to network management according to different types of services, providers, anddelivery systems involved. Health plans may alter their processes for provider selection,contracting, compensation, and management to accommodate the differences, or in manyinstances, they contract with another organization for specialty service network development andmanagement.

Network management practices for specialty services vary greatly from one health plan to anotherand even by type of specialty service within a single health plan. A variety of factors, includingthe level of specialized knowledge associated with a specialty service, the health plan’sexperience with specialty services network management, and the health plan’s time and resourcesavailable for network activities, influence a health plan’s approach to network management for aparticular specialty service.

Endnotes

1. Wendy Knight and Lisa A. Sansone, “Ambulatory and Ancillary Care Contracting,” inHealth Plan Contracting, ed. Wendy Knight (Gaithersburg, MD: Aspen Publishers, Inc.,1997), 219.

2. “Mental Health Benefits in Health Plan,” Health Plan Interface (February 1998): 44.

3. Pat Barone, “Behavioral Health Addresses ‘The Overtreated and Underserved,’”Managed Healthcare (January 1997): 24–25.

4. National Committee for Quality Assurance, “NCQA’s Managed Behavioral HealthAccreditation Program: Frequently Asked Questions,” 22 September 1997, http://www.ncqa.org/pages/policy/accreditation/ mbho/mbhoqa.htm (15 September 1998).

5. Donald F. Anderson et al., “Managed Behavioral Health Care and Chemical DependencyServices,” in Essentials of Managed Health Care, ed. Peter R. Kongstvedt, M.D., 4th ed.(Gaithersburg, MD: Aspen Publishers, Inc., 2001), 339-40.

6. Ibid., 347.7. Ibid.8. Ibid., 348.9. M.J. Werthman, Behavioral Health Plan (New York: Healthcare Financial Management

Association, 1997), 28.10. Anderson et al., 348.11. Ibid.12. Werthman, 34.13. American Dental Association, Managed Care: Making Choices (A Dentist’s Guide to

Health Plan Marketplace Information) (Chicago: American Dental Association, 1995), 4.14. Ibid., 5–6.15. “Managed Dental Care: 30 Percent of the Dental Benefits Market and Growing,” Health

Insurance Underwriter (March 1997): 19.16. Robert J. Ott, “Dental Maintenance Measures Strike the Roots of Managed Care,”

Managed Healthcare (January 1997): 34.17. Peggy M. Vargas and Richard B. Ryan, “Dental Health Plan,” in Health Plan

Contracting, ed. Wendy Knight (Gaithersburg, MD: Aspen Publishers, Inc., 1997), 257.18. Health Plan Facts, Trends and Data, ed. Phoebe Eliopoulos (Washington, D.C.: Atlantic

Information Services, Inc., 1996), 256.19. Vargas and Ryan, 258.20. Health Plan Facts, Trends and Data, 256.21. Vargas and Ryan, 263–64.22. Jesse Rosenthal, “Health Plan Are Beginning to See the Light,” Managed Healthcare

(March 1997): 75.23. Lisa Schiff, “Vision Benefits Are Worth Looking At,” Business & Health (January

1998): 37.24. Rosenthal, 75.25. Schiff, 37.26. Elaine Zablocki, “20/20 Vision Care,” Healthplan (May/June 1998): 27.27. Ibid., 31.28. Jesse Rosenthal and Mort Soroka, “Quality Assurance in Managed Vision Benefits,”

Employee Benefits Journal (June 1998): 7.29. Jim Henderson, “Survey of HMOs Regarding Alternative Therapies,” Health Insurance

Underwriter (March 1998): 24.30. Marian Broida, “Integrating Alternative Providers Into Health Plan: A Case Study,”

Health Plan Interface (September 1997): 67.31. Daniel Stern, “The Building Blocks of a Complementary Medicine Program,” Healthplan

(January/February 1998): 64.32. Deborah Shalowitz Cowans, “HMO Establishes Alternative Care Network,” Business

Insurance (February 3, 1997): 12.33. John Weeks, “Structure for CAM Integration,” in Best Practices in Medical Management,

ed. Peter R. Kongstvedt, M.D., and David W. Plocher, M.D. (Gaithersburg, MD: AspenPublishers, Inc., 1998), 596–97.

34. Alan Dumoff, “Complementary and Alternative Medicine,” in Best Practices in MedicalManagement, ed. Peter R. Kongstvedt, M.D. and David W. Plocher, M.D. (Gaithersburg,MD: Aspen Publishers, Inc., 1998), 579–80.

AHM Network Management: Considerations for the Structure, Composition, andSize of the Network

Objectives

After completing this lesson you should be able to:

Explain how a network-within-a-network approach can benefit a health plan with morethan one product in a market

Explain the difference between primary care HMOs and open access HMOs List several sources of laws, regulations, or guidelines on network access and adequacy Explain how a tiered network helps a health plan address the cost-access trade-off that

health plans typically encounter when setting the size of the provider panel Describe the "build or buy" decision for networks and list some reasons why a health

plan might lease a network or outsource development of a network

Introduction

After determining the market's needs and setting goals for their networks, health plans establishstrategies for achieving those goals. Network strategies vary according to the

type of health plan involved types of products involved populations served legal, regulatory, and accrediting guidelines involved

In this lesson, we discuss how network strategies vary for different types of health plans anddifferent products. We also review regulations, industry standards, and other considerations forthe composition and size of networks. Finally, we discuss the health plan's options for buildingversus renting a network.

Network Strategies for Different Types of Health Plans

Because each type of health plan has certain unique characteristics, network strategies must bechosen to fit these characteristics. In the next several lessons, we will discuss the strategies thatmatch best with different types of health plans.

A health plan that offers more than one type of product may choose to coordinate providernetworks through a network-within-a-network approach, that is, by including the providers fromone product's panel in the network of another panel. The inclusion of one network within anothernetwork is sometimes called nesting, customized networks, or sub-networks. Consider, forexample, a multi-line insurance company with a range of products that includes a managedindemnity product, a PPO, a POS product, and an HMO. Subject to local market demand, thishealth plan may progressively narrow its provider panels from the PPO to the HMO in order toobtain incremental price concessions in exchange for patient volume or stronger utilizationcontrol. At the same time, the health plan can include the HMO network in the other products,that is, include the provider partners from the HMO in the PPO and the POS product networks.The plan can continue to coordinate networks by including all of the POS providers in the PPOnetwork.

In another approach to creating a network within a network, the health plan could have broadpanels with essentially the same providers for every product. Coordinating provider networks ineither of these ways creates similarity among the networks of different products. This similaritycan improve satisfaction for purchasers and consumers as they move from one product to another.The use of the network-within-a-network method facilitates the development of multiplenetworks in a timely manner and helps control the costs of network development because the totalnumber of providers who must be recruited, credentialed, and contracted with is greatly reduced.Obviously, including one network within another is not an option for a single-product health plan.Figure 2B-1 depicts a network-within-a-network approach for a health plan with PPO, POS, andHMO products.

Provider-Sponsored Health Plans

Health plans that are sponsored or owned by providers have a different set of issues that influenceprovider network development. A health plan that was created by a specific group of providerstypically builds its network around this core group of providers. The health plan must thendetermine whether the core group of providers is sufficient to meet regulatory requirements andmarket expectations. If the network is not adequate, the question of which additional providers toadd arises.

Frequently, provider-sponsored health plans are developed in response to a real or perceivedcompetitive threat from another provider or provider organization. Typically, this motivationlimits further provider recruiting to non-aligned or non-competing providers. Provider-sponsoredhealth plans are sometimes developed in response to dissatisfaction with existing health plans. In

this case, the founding providers may not need or want to restrict provider participation in thenetwork based on existing competition

National, Regional, and Local Health Plans

Provider network goals and strategies are also likely to vary with the geographic scope andmarket focus of the health plan. A growing number of health plans are attempting to buildnational provider networks and create national product structures. National PPO networks areincreasingly common, with between 10 and 12 nationally recognized players.1 HMO and POSnetworks have not yet reached true national scope. Even those health plans with HMOs in manystates are not able to coordinate healthcare services across all locations. No national HMOnetwork is yet able to serve a comprehensive list of larger cities. Vast areas of smaller cities andrural areas are not covered by national networks. However, true national networks are indevelopment and may be available in the next few years.

One motivation for health plans to develop national provider networks is to better serve thehealthcare needs of large, national employer groups and associations. Large employers likeGeneral Motors, AT&T, Xerox, and others have nationwide needs for employee health benefitprograms. Such companies would prefer to work with a limited number of health plans that havenational networks rather than having to contract with a large number of local health plans. Whena health plan decides to address the national account market, the needs of these mega-accountsoften shape the provider network strategy of the health plan.

Many large national accounts are headquartered in urban areas. Typically, but not always, theseurban areas have high numbers of providers, overcapacity in hospitals and specialty care (if notprimary care), and a significant level of health plan competition. Large national companies areoften familiar with the strong health plan techniques of closed provider panels, primary caregatekeepers, deep discounts from providers, capitation, and case management. However, ifnational health plans bring a strong health plan approach to all of the employee locations of thelarge customer, including smaller markets where these techniques are not as common,dissatisfaction with healthcare services may result. As we discussed in the lesson on urban andrural markets, local employers in small towns may be reluctant to accept a provider panel thatexcludes some local providers.

Because of their knowledge about healthcare benefits, large national accounts are among the mostactive customers in insisting on the development of outcome measures and the measurement ofpatient satisfaction by health plans. Measuring outcomes and patient satisfaction is less importantin smaller groups. In 1997, only 31% of mid-sized employers (200-999 employees) were familiarwith National Committee for Quality Assurance (NCQA) accreditation compared to 72% of verylarge employers (5,000+ employees).2 NCQA standards require health plans to have closerrelationships with providers in order to improve outcomes and satisfaction. Again, the needs oflarge national accounts often shape the development of national networks. However, thehealthcare requirements of large accounts should be balanced with the needs of other accounts thehealth plan wishes to sell to. Many health plans that serve national purchasers have separateoperational units, including network management, for large national accounts.

A national health plan with a focus on large national accounts may be successful with a fairlystandard provider network strategy across all markets. However, a health plan that wishes to servenational, regional, and local customers with its networks will need to modify its networkcomposition, size, and payment arrangements to meet local market conditions. If the health plan

intends to build a national network with variations based on local market conditions, the healthplan must be willing to commit more time and resources in order to research and implement localnetworks. As we will discuss in the "Build or Buy" section at the end of this lesson, the amount oftime and resources required to develop a network may make outsourcing of network developmentor rental of a network seem attractive in the early stages of market development.

Regional health plans face some of the same challenges as national health plans. For example,some regional purchasers may be headquartered in a strong health plan market, such asMinneapolis or Denver. The decision makers at headquarters may have a bias toward health planproducts that are less common in smaller cities and rural areas. As a result, regional health plansalso have to balance the needs of regional and local customers in developing a provider networkstrategy. However, regional plans typically develop from an initial market base in one or morelocal markets. Therefore, regional plans tend to start with a local orientation and then respond asnecessary to the needs of larger accounts. Local health plans, by definition, are focused on thedemands and structure of their local markets. These health plans are frequently challenged torespond to the needs of national accounts that need local coverage in an area not served by anational health plan. Local health plans frequently have to decide whether accommodating theprovider network needs of national or regional accounts is worth the cost if these needs aredifferent from those of local accounts.

Network Strategies for Different Types of Products

Just as different types of health plans have different provider network needs, the individualproducts within a health plan may require unique network goals and strategies. The followingsections describe network development considerations for managed indemnity products, PPOs,several types of HMOs, and POS options.

Managed Indemnity Products and PPOs

Managed indemnity products have the most basic provider network needs. Therefore thestrategies for these products are relatively simple. Provider networks for managed indemnityproducts are typically very broad with few restrictions on patient access.

Health plans with PPOs or managed indemnity as their only lines of business have historicallyfocused on goals for cost-effectiveness and access when developing provider networks. Thecurrent dominant PPO model is based on very broad provider panels where discounts are obtainedon the basis of the market share of the PPO and providers' concerns about losing patient volume.PPOs use utilization review and case management as their primary tools for managing utilization.Although some PPOs set goals for and measure patient satisfaction, PPOs typically have notinitiated outcome measurement tools or developed collaborative process improvementrelationships with providers.

PPO plans with little or no beginning market share and limited name recognition may need tostart with a relatively narrow provider panel (40% or less of the available providers) and establishexclusive or semi-exclusive arrangements with some providers in order to obtain competitiveprice discounts. However, the narrow panel may be less appealing to consumers and purchasers.As market share grows, the PPO may be able to expand the size of its provider panel whilemaintaining price discounts. Health plans with national or regional reputations for quality caremay be able to enter a new market with broad provider panels and obtain competitive discountsfrom these providers on the strength of their reputations for growth in other markets.

A PPO with established market share can preserve its market appeal while reducing costs bydeveloping provider panels that are divided into two levels based on the type of care that isprovided. For the providers most commonly used, such as primary care, obstetrics-gynecology(OB-GYN), and general surgery, the plan maintains broad panels (more than 60% of the availableproviders). For the highly specialized, typically high-cost areas such as transplants, oncology, andneurosurgery, and for ancillary provider areas such as mental health and chiropractic, the plandevelops narrower panels (25-50% of the available providers).

HMOs

While most PPOs maintain relatively broad provider panels, HMOs are typically more concernedwith balancing consumer demand for large panels with the HMO's goals for cost-effectiveness. Intrying to achieve a satisfactory balance, many HMOs have attempted to compare the relativeefficiency of primary care HMOs and open access HMOs.

Primary Care HMOs

A primary care HMO, also known as a gatekeeper HMO, requires each HMO member to select aPCP (usually a family practitioner, pediatrician, general internist, or sometimes an OB-GYN) tobe the primary manager of the member's care. Primary care HMOs also require the member tobegin each episode of care with the PCP. The PCP may refer the member to a specialty physician,another healthcare professional, or facility for further care. If the patient self-refers to a specialtyphysician, another professional, or facility, the HMO usually will not reimburse the provider orthe member for the care.

A key goal for primary care HMOs is to select PCPs who are likely to succeed as care managers.A physician's willingness to be actively involved in coordinating all care, including care providedby specialists and other healthcare professionals is one indicator of likelihood to succeed. Thecurrent practice patterns of the physician also offer indications of the practitioner's fit with theprimary care HMO. The following are some questions to consider about practice style:

Which services and procedures does the PCP deliver in the office setting? Is this physician conservative in referrals to specialists, the ordering of tests, and writing

prescriptions? Are patients with chronic illnesses such as asthma and diabetes tracked closely and

treated appropriately to avoid hospitalizations?

The health plan may obtain answers to these questions through physician profiling data onquality, utilization, and cost-effectiveness if such data is available, or through an interviewincluded in the physician application process. The use of either profiling or interviewing requiresa fairly intensive local effort by the health plan during the development of the primary carenetwork, and many health plans may be unable to devote the resources necessary for profiling orinterviewing before selection.

The ability of the health plan to obtain local physician profiling data and to maintain a significantlocal presence are key factors in determining the size of the primary care network that can bemanaged effectively. While primary care HMOs usually have strong financial incentives thatapply at the individual doctor level, experience indicates that physicians are often unable to dowell under the incentive program without monitoring and feedback from the health plan. If theHMO has a good information management system to monitor physician practice patterns, and if

the health plan can provide strong local medical leadership and staff support, the HMO canmaintain a broader primary care network. With appropriate data about practice patterns, the HMOmedical director and HMO network management staff can issue regular periodic performancereports to individual providers and work with them to address variances from quality, patientsatisfaction, and utilization goals.

Primary Care HMOs

A late entrant into a market with a high penetration of primary care HMOs and strong financialincentives for PCPs may be able to manage its provider network without a strong local presence,if the PCPs are achieving success under other primary care HMOs. However, this "me too"strategy will not differentiate such an HMO and will not create a competitive base on which tobuild significant market share. On the other hand, copying competitors' strategies may beacceptable for a regional or national HMO that needs to establish a local presence in a particularmarket only because of obligations to national accounts and not because it intends to develop thelocal market.

A primary care HMO that lacks access to physician profiling data on candidates for the networkmay not have adequate resources to establish a strong local staff presence. In this case, the healthplan can modify its application process so that the HMO can identify and select PCPs whoseapplications indicate quality, utilization, and cost patterns that are already consistent with theHMO's goals. Some provider organizations may be willing and able to monitor and manage thepractices of their PCPs in addition to providing reports on performance of the organization as awhole. However, HMOs should not assume that every provider organization has the capacity togive extensive feedback and assistance to its primary care providers.

Open Access HMOs

Open access (OA) HMOs do not require the member to select a PCP. This type of plan allows themember to go to any doctor, healthcare professional, or facility that is on the HMO panel withouta referral from a primary care doctor. Care received outside the HMO network is not reimbursedunless the provider obtains advance approval from the HMO. A variation of the OA HMO is thedirect access HMO. In a direct access HMO, the member must select a PCP, but is allowed to goto any other provider on the HMO panel without a referral from the PCP. Although the commonwisdom in the health plan industry has been that primary care HMOs improve cost-effectiveness,coordination of patient care, and quality of care more than OA HMOs, consumer demand in the1990s has led a growing number of health plans to offer OA HMOs.

Typically, OA HMOs reimburse providers on a discounted fee-for-service (DFFS) basis, plusincentives based on the overall cost-effectiveness of all panel providers in a particular servicearea or market. Some health plans believe that cost differences between open access and primarycare HMOs are modest, while other health plans report substantially increased costs whengatekeepers are removed.3,4 The debate over open access versus primary care HMOs remainsunresolved, but it is clear that HMOs' network strategies will differ depending on the modelchosen.

Primary Care and Open Access Approaches in Staff Model HMOs

Under staff model HMOs, the physicians are either employed by or under exclusive contract to anHMO. Staff model HMOs have declined in popularity in recent years due to purchaser and

consumer preference for broad provider panels and the considerable expense involved inconstructing modern, attractive healthcare facilities. Currently, the most successful staff modelHMOs have been long established and their substantial market share allows them to open a largernumber of office locations across their service area. The key challenge for a staff model HMOentering a new market is to develop a primary care network that is broad enough to have marketappeal without burdening the HMO with too much overhead from physician and staff salaries,facilities, and equipment while the member base is being developed.

A staff model HMO may operate under either a primary care or open access approach.Frequently, a staff model HMO acquires one or more existing PCP practices in a new market sothat its physicians already have a patient and revenue base. To avoid high overhead expenses inthe early stages of market development, staff model HMOs usually contract with specialists andancillary providers rather than employing these providers. As patient volume grows, staff modelHMOs add specialists as the patient load will support them. At this point, specialists may be hiredor practices purchased by the HMO to add this capacity. Early staff model HMOs owned hospitalcapacity as well. However, overcapacity in the hospital market usually allows health plans tonegotiate price discounts deep enough to make renting hospital space more attractive than owningit. In new markets, staff model HMOs generally contract with hospitals rather than owning them,regardless of the ultimate market share of the plan. A staff model HMO typically begins under aprimary care (gatekeeper) approach until the health plan has enough patient volume to justifyhiring full-time specialists and ancillary providers. When volume permits a full staff of employedprofessionals, the plan may convert to an OA staff model HMO.

Point-of-Service Products

Point-of-service (POS) products represent a hybrid of primary care HMO and PPO approaches tohealthcare. A POS product requires members to select a PCP, and members receive the highestbenefit level if they visit this PCP first each time they need care. Patients may self-refer to otherproviders, but the benefit level is lower; that is, the coinsurance or copayment is higher. SomePOS options offer two levels of benefits where the lower benefit level applies to any self-referral.Other POSs have three levels of benefits. In three-level POSs, the highest benefits are paid whencare starts with the PCP. The middle level applies for self-referrals within the POS panel. Thethird (lowest) level of benefits applies to self-referrals outside the POS panel. Figure 2B-2illustrates the two- and three-level approaches to POS benefits.

When contracting with providers, health plans with POS products use many of the same strategiesfor contracting with PCPs as primary care HMOs. For example, PCPs on POS panels frequentlyhave financial incentives similar to those under primary care HMOs. However, strategies fordeveloping specialty, ancillary, and institutional panels often vary depending on whether the POShas a two-level or three-level benefit structure. In a two-level benefit structure, the patient has noincentive to choose an in-network specialist, ancillary provider, or institution over a non-networkprovider. Under a two-level benefit system, both the health plan and PCPs under cost-basedincentive plans stand to benefit if non-primary provider panels are relatively broad. By havingcontractual agreements with a larger number of specialists, institutions, and ancillary providers,the health plan has influence over quality, utilization, and cost of care for a higher proportion ofits members. If the panel is narrow, the plan and the at-risk PCPs lose control over quality,utilization, and cost for a larger number of patient cases because members are likely to seekservices outside the panel. A three-level POS program can use a somewhat narrower panelbecause the benefit system gives members an incentive to stay within the POS network.

Network Strategies for Special Populations

In addition to differences according to the type of product, network strategies also vary by thepopulation served. Products that are designed to serve the Medicare, Medicaid, workers'compensation, or children's segments have specific provider network needs.

Medicare

A Medicare provider network must be able to address the unique needs of the elderly. Medicareproviders should be skilled at maintaining the health of elderly patients and treating a widevariety of illnesses. For example, some Medicare beneficiaries need treatment for chronicillnesses like mild arthritis and high blood pressure in order to continue their activities of dailyliving. Other Medicare recipients suffer from acute illnesses and require hospitalization, while yetother elderly patients are confined to nursing facilities and need periodic care to prevent theirconditions from deteriorating further. The skill mix of professionals and the types of casemanagement services needed for the Medicare population are clearly much different from theneeds of a younger population.

Medicaid

Medicaid managed care plans also face unique network challenges. For example, problemsassociated with pregnancy and early childhood development are major issues for the Medicaidpopulation. Poor diet and inadequate prenatal care frequently result in high-risk pregnancies andlow-birth-weight babies. The Medicaid provider network must be skilled at providing patienteducation, wellness, and prevention services. Medicaid providers must also conduct outreachprograms to bring patients into the healthcare system early to prevent problems and keep minorconditions from becoming critical. Some major health problems, such as cancer and heart disease,are often under-diagnosed in Medicaid populations because these patients generally do not seekprimary care as regularly as other groups do. A health plan should emphasize the importance ofrelationships between PCPs and members, and the need for routine care when developing aMedicaid network. A Medicaid network should, if possible, include the providers with whomMedicaid recipients are most comfortable. In some cities, Medicaid recipients are most familiarand comfortable with the public general hospital. It is usually important to include such a facilityin a network unless cost-effectiveness is compromised or quality deficiencies are severe.

Workers' Compensation

Because the emphasis in workers' compensation health plans is on the prevention, treatment, andrapid rehabilitation of work-related injury and illness, PCPs are not always the best starting pointfor a workers' compensation provider panel. Specialty networks built around the treatment ofcommon work-related conditions, such as low back pain and carpal tunnel syndrome, may be thebest option for achieving high-quality, cost-effective care. For instance, a back pain network builtaround orthopedists, chiropractors, and physical therapists may be better suited for treating backpain than most PCPs. Health plans may wish to provide PCPs with protocols on how to evaluatetypical work-related conditions and when to refer patients to the specialty care networks.Behavioral healthcare is another area of workers' compensation for which specialty networks maybe appropriate.

Children's Health

The number of government-sponsored children's health plans has recently grown as a result ofincreases in federal funding. Children's health plans typically place a strong emphasis on earlytreatment and prevention. In addition to focusing on a strong network of pediatric and familypractice providers, these health plans need programs to identify and bring in children who mightnot otherwise receive healthcare. The network should include links with school nurses andneighborhood health centers to facilitate the referrals. We discuss children's health and theChildren's Health Insurance Program further in Special Considerations for Medicaid Networks.

Laws and Regulations on Access and Adequacy of Provider Networks

Various legal, regulatory, and accrediting bodies have developed guidelines for access to andadequacy of provider networks. Adequacy, also known as availability, is the extent to which anetwork offers the appropriate types and numbers of providers in the appropriate geographicdistribution according to the needs of the plan's members. Most of these access and adequacyguidelines relate to HMO and POS products, rather than to PPOs or managed indemnity products.Some federal and state government entitlement programs require health plans to meet theirguidelines and, perhaps, to meet the standards of relevant accrediting agencies. Read Figure 2B-3for a summary of federal and state regulations and guidelines concerning health plan networkaccess and adequacy. Figure 2B-4 contains examples of guidelines on access and adequacy fromaccrediting agencies.

Other Laws Affecting Network Size and Structure

Several additional areas of healthcare legislation have the potential to influence the structure andsize of provider networks. Among these legislative issues are any willing provider laws,mandated coverage, and corporate practice of medicine laws.

Any Willing Provider Laws

Any willing provider laws require health plans to allow any provider who is willing to meet theterms and conditions of the health plan's contract to participate in the plan. Any willing providerlaws prevent the plan from striking exclusive or semi-exclusive arrangements with a provider or agroup of providers. Any willing provider laws have been enacted in several states and have

experienced both positive and negative results in court challenges Figure 2B-5 explains a recentUS Supreme Court decision regarding the legality of AWP laws.

Figure 2B-5

In Kentucky Association of Health Plans v. Miller, the issue the Supreme Court decided iswhether Kentucky's broad law violates the Employee Retirement Income Security Act (ERISA)or whether the state law is a valid regulation of the business of insurance. In the January 14, 2003hearing before the court, the attorney for the Kentucky Association of Health Plans argued thathealth plans need to use limited provider networks to deliver quality health care at a reasonablecost. The state argued that the Kentucky law is a legitimate consumer protection measure thatgives consumers access to providers of their choice.

On April 2, 2003, the US Supreme Court, in a unanimous decision, affirmed the Sixth Circuitdecision that found that Kentucky's "any willing provider' laws are saved from ERISApreemption by the ERISA saving clause because the laws regulate insurance. In the decision, theSupreme Court held that for a state law to be deemed a law which regulates insurance, and thusbe saved from ERISA preemption, it must satisfy two requirements: 1) it must be specificallydirected toward entities engaged in insurance; and 2) it must be substantially affect the riskpooling arrangement between the insurer and the insured.

Any Willing Provider Laws

Many of the court challenges have dealt with the question of whether or not any willing providerlaws are preempted by the Employment Retiree Insurance Securities Act (ERISA). ERISApreempts state level insurance regulation relating to self-insured employers or groups. Challengesto any willing provider laws have generally been successful if the law has been constructed toinclude provider networks used by self-insured groups. Challenges have been unsuccessful if thelaw did not cover self-insured groups.

In states where any willing provider laws exist, health plans must describe the terms andconditions in provider contracts carefully in order to manage the size of the provider panel. Forexample, the health plan may include economic criteria (average cost per case or member) as aterm and condition of the contract. The plan's ability to add terms and conditions to the contractmust be analyzed in the context of the individual state law.

Mandated Benefits

A large number of states have some level of mandated benefits for healthcare. Mandated benefitlaws may require the health plan to include specific benefits in the health plan benefit design, toinclude particular providers in panels, or to grant direct access to a provider class withoutreferrals from PCPs. Where they exist, these laws always influence benefit design and the cost ofhealth plan benefits. Mandated benefit laws also affect provider panel design when they mandatethe inclusion of a class of providers necessary to perform the mandated service. Among themandated benefits enacted by states that affect network design are the following:

Chiropractic services and direct access to doctors of chiropractic Direct access to dermatologists Hospice and home health benefits

Mental health and chemical dependency services (behavioral healthcare) Post-mastectomy reconstructive surgery (plastic surgeons) Temporo-mandibular joint disorders (dental surgeons) Infertility treatment Transplants Direct access to OB-GYN services Specified length of hospitalization for maternity care

The mandates listed above require not only that the benefits be covered, but in most cases themandates imply the need for a particular type of provider in the network, such as behavioralhealthcare professionals.

Corporate Practice of Medicine Laws

Corporate practice of medicine laws generally restrict business corporations from practicingmedicine through licensed employees or prohibit business corporations from obtaining profitsfrom the provision of physician professional services. Where they exist, these laws restrict theability of staff model HMOs to hire physicians directly, unless physicians own the HMO. Staffmodel HMOs have been able to work around corporate practice of medicine laws by forming anexclusive contract with a group of physicians who agree to dedicate all or most of their practicesto HMO patients in return for a set payment (capitation) or revenue-sharing. In some states,corporate practice laws have been interpreted to include hospitals. The designation of hospitals ascorporations makes the development of integrated provider networks more difficult. To the extentthat health plans find working with integrated provider networks beneficial, such laws mayrestrict health plans in their network development.

Some hospitals have addressed corporate practice laws by establishing nonprofit foundations that"own" the integrated physician clinics. These foundations exert management control over theoperation of the physician practice, but profits may not flow from the foundation to the hospital.The foundation is structured to give the hospital substantial involvement in the managementdecisions of the physician group through board membership, management contracts, and otherprovisions. These arrangements allow effective control of the physician practice by the integratedprovider network, thus meeting some of the health plan's needs. The foundation structure does notallow the integrated provider network to use physician service profits to fund a redesign ofhospital facilities. Yet, facility redesign may be essential to improve efficiency. Health plansindirectly lose some of the benefits of provider integration as a result.

Guidelines for Determining the Composition and Size of the Network

Regardless of the type of health plan product, health plans must develop networks that areadequate in composition, size, and geographical access to serve the needs of the current andprojected members of the plan.

Determining the Composition of the Provider Network

The laws, regulations, and guidelines on access and adequacy provide some assistance to healthplans in determining an appropriate network design. Within this context, health plans mustdetermine the proper mix of hospitals, primary care providers, and specialists to include in thenetwork. The health plan must also determine what, if any, other facilities or professionals shouldbe included. For example, should the network include freestanding ambulatory surgery centers in

addition to hospitals? Should it include non-traditional healthcare providers and nursepractitioners in addition to physicians? Considerations for specific types of providers arediscussed further in Identifying and Recruiting Providers for a Health Plan Network.

Determining the Size of the Provider Network

The actual number of providers included in a provider network may be based on staffing ratios,which relate the number of providers in a plan's network to the number of enrollees in the plan. Ingeneral, a closely managed health plan, such as an HMO, requires fewer providers than a looselymanaged plan. A small health plan typically needs more physicians per 1,000 enrollees than alarge plan (one with more than 80,000 members) because larger plans typically benefit fromeconomies of scale and scheduling efficiencies. The specific ratio the health plan uses depends onthe demographics and needs of the patient population and on regulatory requirements. Forexample, because Medicare and Medicaid populations utilize healthcare services to a greaterextent than the general population, Medicare and Medicaid products require more providers thanan employer-sponsored plan of the same size.5 The availability, clinical skills, and acceptabilityof providers among the patient population are also considerations.

Physician-to-enrollee ratios can be used directly only by staff or captive group model HMOswhere all of the resources of the health plan are dedicated to the service of the health plan'smembers. If a health plan's healthcare practitioners also serve patients covered by other healthplans or government programs, then the health plan must estimate how many patients theproviders see under other payment arrangements and how much excess capacity thesepractitioners have in their practices. With this additional information, an IPA or network modelHMO can determine whether provider capacity is adequate.

However, a methodology that measures available service capacity may be inadequate forestimating the initial needs of new networks or for anticipating how a health plan's growth willaffect network needs. One problem is that this type of methodology does not take intoconsideration that many of the new network's members are already patients of the providers in thepanel under another plan. In theory, a new or growing HMO that does not have exclusivecontracts with its providers can determine the proportion of the health plan's target market (suchas Medicare beneficiaries or employer-group members) who are currently patients of the plan'sproposed provider panel. Only the members who will be new patients to the providers in thepanel add to the need for more capacity.

Estimating market share by target market is not easy and may be misleading. Health plansfrequently experience difficulty in obtaining market share data for providers who are notcurrently in their networks. In addition, it is difficult to predict the geographic distribution of newmembers. Finally, a new network that includes only enough provider capacity to handle the healthplan's initial patient volume will be too small to appeal to many potential purchasers or members.For instance, suppose that an HMO estimates first year enrollment of 10,000 members in a city of500,000. A network that includes no more than 100 PCPs could theoretically serve the needs ofthese members, assuming that each PCP could accept 100 new patients. However, the health planwill likely have difficulty marketing a network of 100 PCPs, given the demands of grouppurchasers and consumers for broader provider panels in recent years. As a general rule, theinitial provider panel for a health plan will be larger than the size actually required to serve themembership of the plan in the first several years. For this reason, physician-to-enrollee ratios andformulas are more useful for refining established panels than for establishing new providerpanels.

If, as we discussed earlier, a health plan conducts a thorough market analysis, it can use theinformation based on that analysis to identify the competitive characteristics of the market. Usingthose characteristics as a guide, the health plan can then choose an initial panel size for PCPs,specialists, facilities, and ancillary providers.

Based on the estimated panel size and the results of the competitive analysis, the health plan canthen evaluate its expected economic position, including the prices it can expect to pay providers.Market share and reputation are two key factors in determining the prices that health plans mustpay to attract providers. A plan that already has significant local market share with anotherproduct is more likely to obtain favorable payment arrangements with providers than a plan withno local market share. Sometimes a reputation for success in other markets will allow a plan toobtain more favorable payments than a plan that is not well known.

Once a target panel size is chosen, geographic mapping techniques can be used to determine theneeded distribution of providers. Software packages that can map provider networks againstexisting or prospective member bases may be useful in meeting access regulations. Thesepackages allow health plans to test networks against the "30-miles or 30-minutes" standard.

In most markets, the primary care panel is the most important factor in consumer acceptance ofthe overall provider panel. In general, larger PCP panel sizes attract higher market share unless aprice reduction associated with a smaller panel outweighs consumer preferences for large panels.

Experience has shown that the size of specialist panels is of less importance to consumers thanthe size of primary care panels. Therefore health plans can intentionally limit specialist panels toinclude only specialists who provide the highest-quality, most cost-effective care in the area.Health plans typically consider the following issues when determining the size of the specialistpanel:

Can the health plan evaluate the cost-effectiveness and quality of specialists?If an adequate database is available (from previous products or from other sources) toevaluate cost-effectiveness and quality, specialists and other professionals can be selectedon the basis of these indicators. Those providers with very poor results can be eliminatedfrom the panel, and the health plan can improve the overall cost-effectiveness and qualityof the network without major reductions in panel size. If the health plan can providePCPs with information on the cost-effectiveness and quality of individual specialists, thePCPs will be able to direct their referrals to the specialists with cost-effective, high-quality practice patterns. Feedback to PCPs about specialists is important for PPO, POS,and open access HMO products as well as for primary care HMO products, since patientsfrequently visit their PCPs first, even in products that do not require it.

Can the health plan obtain reduced prices or increased risk-sharing with specialists ifpatient volume is directed to a narrower panel?The value of obtaining better payment arrangements through channeling of patientvolume depends on the market's acceptance of smaller panels, particularly in rural areasand small cities.

Is the prestige of a particular specialist worth the cost of including him or her on thepanel?Generally, the cost of prestige is an issue when the market requires certain highlyregarded specialty groups in any product panel.

How strong are the clinical practice guidelines and care protocols implemented by thehealth plan?

In general, if strong care protocols are implemented either through collaborativeagreements with providers or through authorization and case management systems, thehealth plan can manage larger provider panels without causing higher costs or lowerquality. Care protocols are particularly relevant for behavioral healthcare settings wherediagnosis and treatment may be subjective.

The Tiered Network Structure

When developing its provider network, a health plan must determine how to balance its goals forcost savings with its goals for access. In general, a product with a narrower provider panel andmore restrictions on how patients can access providers will achieve higher cost savings than aproduct with a broader panel and fewer restrictions on access. One way to address the trade-offbetween cost goals and access goals while assuring high-quality care is through the use of a tierednetwork. A tiered network is a provider panel that the health plan has subdivided into two ormore layers (tiers) based on provider profiles for quality, utilization, and cost-effectiveness. Theproviders deemed by the health plan to be the highest quality and most cost-effective form thepreferred (first) tier of the network. The second tier is formed by (1) providers who offer high-quality care but only adequate cost-effectiveness, (2) providers who are highly cost-effective butwho offer only adequate quality, and (3) providers of adequate quality and adequate cost-effectiveness. The third tier is composed of (1) providers whose quality and cost-effectivenesshave been marginal or (2) providers whose performance data is not available. The providers inthis third tier may be included in the network on the basis of purchaser or consumer demand.Recently-licensed practitioners may also be classified as third tier until they have established arecord of adequate performance. The health plan periodically reviews provider performance onquality, utilization, and cost-effectiveness, and then reclassifies providers among the tiers asnecessary. Figure 2B-6 depicts the structure of a tiered network.

Plan members determine the breadth of their own provider panels by selecting a network thatincludes

only Tier 1 providers Tier 1 and Tier 2 providers Tier 1, Tier 2, and Tier 3 providers

The Tiered Network Structure

To encourage members to use the highest-quality and most cost-effective providers, health plansoffer financial incentives such as lower copayments and lower plan premiums to members whochoose the Tier 1 network. Figure 2B-7 shows examples of copayments and premiums for a tierednetwork option.

To reward excellent results on quality, utilization, and cost-effectiveness, the health plan typicallyreimburses Tier 1 providers at a higher rate of reimbursement than is received by the providers inthe other tiers.

Health plans must keep in mind that the additional choices under a tiered network may be moreconfusing to some members. Health plans should monitor the ease of use for the tiered networkthrough its member satisfaction surveys.

The "Build or Buy" Decision

After the health plan has determined the appropriate structure, composition, and size for itsnetwork, the health plan must decide whether its goals can be met by assembling a new network(building) or renting an existing network (buying). If the health plan opts to build a new providernetwork, the health plan must also decide whether to build and manage the network directly or tooutsource the building and management by contracting with a network management firm.

There are a number of organizations that have developed provider networks for resale to healthplans, third party administrators, and self-insured employers. These companies "rent" theirnetworks to customers for a per-member, per-month (PMPM) fee or a percentage of the savingsproduced by provider discounts. However, most of the rental network companies offer only PPOnetworks. A few offer POS networks, but rental HMO networks are rare. Other companiescustom-build provider networks for health plans. These network outsourcing companies developPPO, POS, and HMO networks according to a health plan's specifications and will manage thenetworks if the health plan requires it. Generally, an outsourcing company does not rent a customnetwork to any other health plan.

The health plan should consider a number of factors in deciding whether to build directly, buildthrough outsourcing, or rent a network. These factors include

the previous experience of the health plan in developing provider networks the personnel, information systems, and information sources the health plan has available

for network development whether the health plan wants broad geographic coverage in many markets or a

significant market share in individual markets whether the network is to be developed in a new market or a market with existing

networks for other products of the same plan the health plan's local market share (where the health plan has an existing presence) the time schedule required for network development the amount of control the health plan wants over provider network administration the cost of building and managing the network versus renting or outsourcing

The cost-effectiveness of building a provider network depends on the experience and resources ofthe health plan's network management function, the market share goals for the product, and thehealth plan's existing reputation in the target market. If a health plan is experienced in network

development and is committed to establishing a major presence in a local market, then building anetwork is likely to be cost-effective. Renting may be a logical choice if the health plan isexpecting to achieve only small market shares in several markets over several years. Buildingbecomes a more attractive option if the plan has an existing customer base in the target market orhas a reputation for success elsewhere.

For example, say the national average cost per covered employee for PPO rental networks is$2.52 PMPM. This cost translates into roughly 1% of the health plan premium cost, assuming apremium of $250 per employee per month. By multiplying the network rental cost per member bythe estimated number of plan members, the health plan can determine the overall cost of rentingthe network. Figure 2B-8 illustrates how the network rental cost is calculated.

The health plan then compares the total rental costs for a specified time to the expected costs ofbuilding and managing the network (by using its own resources or by outsourcing) for the sametime period. In this way, the health plan determines the most cost-effective approach. The costanalysis is usually based on a period of at least several years.

Other factors may influence the health plan's decision to build or buy. For instance, the direct costof network development is paid up front before a customer base is developed for the product, buta rental network is paid for as customers are added. Thus, renting helps the health plan avoid highup-front costs. On the other hand, after absorbing the up-front costs of building a network, thehealth plan can expect the later costs of network maintenance to decline, while the fees for arented network will remain the same. However, in many cases, a health plan that rents a networkincurs additional costs associated with the rental. The firm renting the network may require thehealth plan to sign a non-competitive agreement stating that the health plan will not develop itsown network in the same geographic area during the term of the rental and, often, for six monthsto one year afterward. If the health plan wants to eliminate the non-competitive agreement, thenetwork rental company usually requires the health plan to pay a premium for this privilege.

The time-frame requirements for network development are also important. Network developmenttakes many months to complete. If a health plan wants to have a PPO network available in anumber of markets in a short period of time, renting makes sense. In addition, renting may be aninterim option until market shares are large enough to justify direct redevelopment of thenetwork.

Outsourcing a custom-built network can be a viable option if the health plan has little experiencein building provider networks. By outsourcing the development process, the health plan can avoidthe costs of hiring and training its own development staff. In addition, the outsourcing agency can

be contracted to teach health plan staff how to maintain networks and build new networks, thusreducing future learning curves. Outsourcing can also be useful for an experienced networkmanagement department that wants to build networks in more locations than internal staff candevelop in the available timeframe.

Another factor that affects the decision to build or buy is control. If networks are outsourced orrented, the health plan has reduced contact and influence with the providers. In rental situations,the health plan shares a network with other health plans and thus loses the opportunity forcreating competitive advantage or product differentiation in the market. Providers may view therental or outsourcing company as the source of contact, a situation that can create confusion forboth providers and members. Providers may be more loyal to the network development companythan to the health plan. In addition, a poor relationship between the network developmentcompany and a provider may sour the provider's impressions of the health plan that sponsors thenetwork. Outsourcing or renting network management causes the health plan to rely on others todevelop new, innovative relationships with the providers. Direct contracting allows health plansto develop collaborative relationships directly with providers, according to the evolving needs ofthe plan.

Endnotes

1. HMO-PPO/Medicare-Medicaid Digest, Health Plan Digest Series (Kansas City, MO:Hoescht Marion Roussel, 1997), 72.

2. Jon R. Gabel, Kelly A. Hunt, and Kimberly Hurst, "When Employers Choose HealthPlans, Do NCQA Accreditation and HEDIS Data Count?" KPMG Peat MarwickLLP, Sept. 1998, online, Available:http://www.cmwf.org/Health_Care/gabel_ncqa_hedis_293.html, 6 Nov. 1998.

3. Lauren Walker, "Is the Gatekeeper a Dying Breed," Business and Health (January1998): 30-35.

4. Michele Bitoun Blecher, "Choice Words on Open Access," Hospitals and HealthNetworks (March 20, 1998): 54, 58-59.

5. Peter R. Kongstvedt, M.D., ed., The Managed Health Care Handbook, 3rd ed.(Gaithersburg, MD: Aspen Publishers, Inc., 1996), 88-89.

6. HMO-PPO/Medicare-Medicaid Digest, 74.

Network Management in Health Plans: Continuing Management of NetworkAdequacy and Provider Satisfaction

Objectives

After completing this lesson you should be able to:

Describe some situations that may indicate a need to review network adequacy List several factors that health plans examine when reassessing access and availability Explain the importance of provider retention Describe several methods that health plans use to provide continuing education to

network providers and their staffs Explain how direct referral and self-referral programs assist providers with utilization

management List some of the issues that a health plan typically addresses through surveys of providers

and their staffs Explain why health plans often seek to involve network providers in network

management and medical management operations

Introduction

To ensure that its provider networks continue to offer plan members appropriate access tomedical services, a health plan monitors its networks, its member populations, and the healthplan’s environment on an ongoing basis. Because of the dynamic nature of member populationsand the entire healthcare industry, health plans often need to adjust the size and composition ofnetworks. One factor that is critical to managing the availability of healthcare services is theretention of high-quality providers in the network. In many cases, a provider’s decision to staywith a network or leave it depends on the provider’s level of satisfaction with the health plan, soenhancing provider satisfaction is usually a high priority for the network management function.

In this lesson, we first discuss how a health plan modifies a network in order to respond tochanges in members’ needs and changes in the health plan’s environment. In the second part ofthe lesson, we explore ways for an health plan to increase provider satisfaction through education,administrative support and service, and provider involvement in plan management.

Modifying the Provider Network

Health plans reassess the adequacy of their networks according to a periodic schedule, on an as-needed basis, or both. The following situations often prompt a review of the network:

During the process to authorize a referral to a specialist, the UM department learns thatthe recommended specialty care services are not readily available. For example, whenassessing a proposed referral to a rheumatologist, the UM department discovers that thenetwork has too few rheumatologists to serve member needs in a timely manner or therheumatologists’ practice sites are located too far from members’ homes and workplaces.

Member satisfaction surveys or member complaints about appointment lead times oroffice hours indicate that specialty care (or even primary care) is not readily accessible ina specific area.

Contracted PCPs provide feedback to the health plan that more specialists or differenttypes of specialists are needed in the network.

A review of utilization and claims reports identifies a high level of use of noncontractedproviders by plan members. The use of nonparticipating specialists is often an indicationof too few providers in the network, inconvenient provider locations, a lack of thenecessary types of providers, or the absence of members’ preferred providers in thenetwork.

The health plan changes or adds benefits to its coverage. For example, the addition orexpansion of chiropractic benefits should result in a review of the network to ensure anadequate number of contracted chiropractors.

The health plan gains or loses a large employer as a purchaser, which directly impacts theoverall volume of services required.

Network adequacy requirements of regulatory or accrediting agencies change. Forexample, a state that previously required health plans to make providers available within30 miles of members or 30 minutes of driving time changes its requirements to 20 milesor 20 minutes.

The geographic area experiences a significant influx of non-Englishspeaking immigrants.In this situation, the health plan will likely evaluate the need to add more providers whospeak the applicable foreign languages.

A provider organization terminates its contract with the health plan. Depending on thenumber of members receiving healthcare from this provider organization and the amountof excess capacity in the rest of the network, the health plan may need to add providers toensure that the number of providers remains adequate to meet member needs.

Health plans also use capacity reports generated by their information systems to indentify PCPpractices that have reached health plan developed thresholds of practice capacity. These reportsidentify which PCPs have closed their practices to new members and the length of time thepractices have remained closed, as well as PCPs who have recently reopened their practices. Thisdata is used to determine if additional PCPs must be recruited to fill any gaps in the network.

The health plan’s network management department may also receive suggestions andrecommendations regarding network modification from ***these sources.

The network management department should develop a system to obtain network information ona regular basis from the sources described above. Network management should also request to benotified immediately of any major access problems that are reported.

*** The medical director, physician advisors, pharmacy director, or UM and QM

committees. These health plan personnel and committees are likely to be aware of accessor availability problems that have had a negative impact on the quality of care.

The plan’s customer service department. The customer service department can providethe network management staff with regular updates on member complaints about thenetwork and on unmet needs, such as requests for different types of providers.

The marketing research, business development, sales, or marketing departments. Thesedepartments have regular contact with purchasers and, perhaps, with members. They areoften a good source of information about providers that members would like to add to thenetwork and problems that members have experienced with current providers.

Contracted provider organizations. Provider organizations may have suggestions aboutchanging the number or types of providers in the network, based on the services that theirpatients need.

Satisfaction surveys from members and providers. Member satisfaction surveys shouldindicate how well the network is meeting the needs of the members, and provider surveystell how well the health plan and its network management department are meetingprovider needs. Both types of surveys are useful for identifying areas that needimprovement.

Indicators of Network Adequacy

Network management staff examine a variety of factors when reassessing the adequacy of thehealth plan’s network relative to the healthcare needs of its members. Figure 8A-1 lists indicatorsthat are often used to evaluate network access and availability.

By evaluating these factors the health plan can determine what changes, if any, it should make tothe size and composition of the network in order to best meet member needs. For each of thefactors listed, the health plan collects and analyzes data in order to measure its performanceagainst the network adequacy standards set forth by federal and state laws, regulatory agencies,and accrediting agencies. Maintaining access to primary care is especially important for healthplans that require members to initiate all non-emergency episodes of healthcare through theirPCPs.

When a health plan’s provider network does not meet the applicable standards for access andavailability of services, the health plan must develop and implement action plans to correct thedeficiency. The corrective action may address physician-specific access problems, such as limitedoffice hours, or a network-wide problem, such as too few PCPs in a geographic area. In the lattercase, the network management department initiates the selection, negotiation, and contractingprocesses to add PCPs to the network. The health plan must continue to reevaluate networkadequacy to determine whether the implemented action plans have improved member access toservices.

Indicators of Network Adequacy

The reassessment of the provider network may reveal that the health plan’s network has moreproviders than necessary to meet member needs. If providers are salaried, the health plan usuallyhas no alternative but to lay off some providers. In situations in which the health plan contractswith providers, health plans often prefer to maintain a broad panel to enhance the appeal of thehealth plan to purchasers and potential members. Maintaining large networks also reduces thechance of disrupting existing provider patient relationships. However, a plan’s administrativecosts typically increase with each additional contracted provider in the network, so a health plansometimes chooses to decrease the size of the network by not renewing some provider contractsor even terminating some contracts.

One technique that a health plan can use to maintain network adequacy is the systematicmonitoring of provider contract status. By monitoring the status of provider contracts and contractnegotiations, the health plan can avoid delays in renegotiations that may result in a network thatcannot meet member needs. To monitor and manage contract status, a health plan develops orpurchases a database system that identifies

providers due for recredentialing provider contracts due for renewal or renegotiation contract negotiations in progress and stalled negotiations new providers and the dates that their contracts become effective changes in geographic location or services offered by a practice PCPs who have closed their practices to all new members or to certain population

segments, such as children or Medicare beneficiaries recently terminated providers

Provider Retention

Provider retention is critical to maintaining a network that meets legal, regulatory, andaccreditation standards for adequacy. Health plans typically try to retain a stable base of providersfrom one contracting period to another, especially if their contracted providers have demonstratedthe ability to deliver high-quality care in a cost-effective manner. The process of credentialingand contracting with new providers takes time and money, plus plan members are typicallydissatisfied if their chosen providers are no longer in the network. Even a health plan that wantsto reduce the size of its provider network needs to renew contracts with some of its providers. Toimprove retention rates, health plans use a variety of approaches to enhance provider satisfactionand encourage providers to remain with the health plan. These approaches include training forproviders and their staffs, provider satisfaction surveys, provider involvement in medicalmanagement committees, and various types of administrative service and support. Throughout theimplementation of their educational and support activities, health plans also try to establish goodworking relationships with their providers to further enhance provider satisfaction and loyalty tothe health plan.

Strategies for Building Relationships with Network Providers

Through their provider relations staffs, health plans actively work to foster the development oftrue partnerships between the health plan and contracted providers. Provider relations personnelare responsible for communicating with providers regarding questions about health planprocedures, changes in health plan processes, and areas of dissatisfaction with the health plan.

Approaches to provider relations vary greatly among health plans. A health plan that wantsdifferentiate itself in the eyes of its contracted providers will develop a positive, open relationshipwith its providers. To create this type of relationship, a health plan must dedicate the services andpersonnel required to ensure that contracted providers

have easy access to information and appropriate plan personnel are familiar with the health plan’s services are able to resolve problems quickly are reimbursed for services in a timely manner receive consistent communications regarding health plan operations, quality management

activities, and provider performance are encouraged to participate in the development of health plan policies, clinical

procedures, and other activities related to medical management

Strategies for Building Relationships with Network Providers

Health plans and contracted provider organizations may also create joint operating committeesthat include key personnel from each entity. The members of these committees collaborate toidentify and resolve problems, develop quality management activities, discuss improvements toadministrative functions, and maintain two-way communications.

Communication is a key element for developing a strong, mutually supportive relationshipbetween the health plan and its providers. Figure 8A-2 lists communication methods that areoften used by health plans to educate network providers and collect information regardingprovider needs.

Communication programs initiated by the health plan need active participation from providersand their staffs in order for the communication efforts to be effective. Providers and their staffsshould respond to these opportunities by providing feedback to the health plan, attendingmeetings, and participating in health plan programs. Apathy from either party can result in poorprovider relations, disgruntled providers, and, eventually, in health plan members who aredissatisfied with their health plan.

Provider and Staff Education About the Plan

Before a provider signs a contract with a health plan, the provider should already be familiar withthe key elements of a health plan’s administrative, operational, and medical managementprocesses. However, once under contract, the provider must take the additional steps necessary tobecome familiar with all obligations and procedures included in the contract. If the provider’ssystems and office staff do not render adequate healthcare services, member dissatisfaction mayaffect the health plan’s ability to satisfy, retain, and expand its membership. Eventually,inadequate care will lead to the dissolution of the contractual relationship between the health planand the provider.

Because providers typically contract with more than one health plan, providers and their staffsmust make a conscious effort to understand the requirements and follow the routine processesestablished by each health plan. Health plan provider manuals and regular training sessionsconducted by the health plan with the provider’s staff can help the provider reduce or avoidconfusion about the administrative functions related to patient care. In some instances, providersmay need to enhance the automation of their office systems in order to comply with health planprogram requirements. For example, a provider may need to upgrade its computers or obtain newsoftware to produce the UM and QM reports required by the health plan.

While the provider relations staff is primarily responsible for provider education, all health plandepartments may directly or indirectly support the provider network by providing specificinformation or services, such as the authorization of a service or a referral to a specialist,verification of eligibility, or updates on claims. Health plans must educate all their personnel totreat providers as both business partners and customers. The provider is a business partnerbecause, without the provider, the healthcare services guaranteed by the health plan cannot bedelivered. The provider is a customer because one of the health plan’s primary responsibilities isto support the provider’s delivery of healthcare services to members.

When a provider organization contracts with multiple health plans, the provider organizationmust coordinate the requirements of the various health plans and present them to networkproviders as an understandable and consistent administrative program. In addition, the providerorganization must develop the same sort of provider education programs that a health plandevelops. However, the provider organization’s educational programs must represent theperspective of all contracted health plans.

Provider Orientation

Once the contract is signed, the health plan’s provider relations staff conducts a providerorientation program to communicate all operational aspects of the health plan contract to newproviders. Provider relations personnel may hold the orientation program on an individual basis atthe provider’s location or on a group basis for all newly contracted providers. The timing of thisorientation is important. Unless the health plan has furnished the provider with an administrativemanual and other resources at the time of contracting, the orientation should take place before theprovider begins to deliver services to health plan members. While programs vary from one healthplan to another, a typical new provider orientation covers the following topics:

Health plan administrative requirements, including forms and paperwork Member identification and eligibility verification processes Review of benefit plans and member copayment responsibilities

Referral authorization and other UM processes Claims and reimbursement processes Overview of QM programs and committee structure Member rights and responsibilities, including the complaint and grievance process Provider rights and responsibilities, including credentialing requirements, scope of

services, appeal processes, and peer review

The orientation process usually does not address specific UM and QM guidelines or detailed stepsfor completing and submitting claims or encounter forms.

Some providers are employed directly by the health plan (as with staff model HMOs) or providerorganization (as with some medical groups). For providers employed by a health plan or providerorganization, the orientation is more a new employee orientation than an introduction to managedcare since the health plan’s processes are already in place at the practice site.

Provider Manuals

During the orientation, if not before, the provider receives a copy of the health plan’s providermanual. This manual is a valuable reference that includes information to help providers meet therequirements of the managed care contract. The provider manual reinforces contractualprovisions, especially if the contract references the manual as an attachment that documentsrequired health plan processes. Figure 8A-3 lists some of the components commonly included inprovider manuals.

In many cases, the directory of contracted providers is not included in the provider manualbecause this information is updated several times a year. The health plan should also updateprovider manuals periodically as policies and procedures change. Although the manuals areusually called provider manuals, the most frequent users will be the provider’s staff who areresponsible for the administrative tasks associated with providing healthcare.

The provider manual is also a useful tool to demonstrate the health plan’s compliance withaccrediting agency standards concerning provider performance and communication between thehealth plan and provider. Some accreditation standards that can be addressed in the providermanual include requirements for network access, the communication of QM activities, anddocumentation of contractual requirements.

Individual practitioners or provider organizations that contract with multiple health plans receivea provider manual from each plan. If the health plan delegates utilization and quality functions toa contracted provider organization, the provider organization is then responsible for disseminatingthe appropriate information to the individuals in the organization. Because most health plansfollow similar guidelines and procedures, a provider organization typically writes its ownprovider manual, noting any procedural differences between the various health plans. Forexample, requirements and procedures for authorization of referrals and services vary greatlyamong health plans. The provider organization’s manual also documents the providerorganization’s own policies and procedures for functions that are delegated to the providerorganization by a health plan. If a provider organization writes and distributes a provider manual,the health plan generally does not distribute its manual to individual practitioners affiliated withthe provider organization.

Ongoing Education for Providers and Staff

The health plan’s provider relations personnel have the primary responsibility for maintainingongoing communications with providers and their office staffs in order to keep them informedabout relevant health plan activities. Updates to providers and their staffs often concern thefollowing issues:

Changes or updates to existing health plan programs, such as referral or serviceauthorizations, disease management, or health education

New programs available to members or providers Communications to members Operational and administrative changes Regulatory and accreditation changes which may affect the provider, the health plan, or

both The status and results of health plan quality management activities Special instructional courses available to the provider and staff

Health plans often send providers and their staffs revisions and additions for the provider manual.Other primary methods of educating providers and their staffs are provider newsletters, calls andvisits by provider relations staff, periodic meetings with providers and their staffs, and onlineinformation.

Provider Newsletters

Many health plans find newsletters to be an effective tool to keep their providers up-to-date. Mosthealth plans use a monthly or quarterly publication to communicate new programs, updateexisting programs, and address specific issues of concern. For example, newsletters often provideclinical information, such as updates on outcomes research, and explain how this informationaffects the delivery of care by plan providers. Newsletters also include information on practice

management and ideas for improving the delivery of services to patients, such as a program toremind patients to get annual immunizations against influenza. To ensure that all providers haveaccess to the newsletter, some health plans mail their newsletter to all network practitioners evenwhen there is an intermediary provider organization.

Newsletters are also good avenues for reinforcing health plan, regulatory, and accreditationrequirements. For example, the newsletter can be used to remind providers of a health plan’smember rights and responsibilities statement, keep them informed about QM activities, or advisethem of new regulatory or accreditation requirements which may affect health plan administrativeprocedures.

To ensure that providers are familiar with the information that plan members receive, the healthplan may also include a copy of its member newsletter along with the provider newsletter.Member newsletters usually discuss general healthcare issues and tips, as well as specific planinformation, such as how to access health plan services. Provider newsletters often address thesesame issues but from a healthcare professional’s perspective. Many health plans write differentmember newsletters for the various populations they serve. Each newsletter targeting a specificpopulation addresses different health issues and concerns based on the population’s interests,potential health risks, economic status, and their stage of life. For example, a newsletter forMedicare members typically includes information about diseases and injuries associated withaging and suggestions for remaining physically active and healthy during retirement. For apopulation that includes families with young children, newsletter topics might cover childhoodillnesses and parenting skills.

Visits and Phone Calls by Provider Relations Staff

While the initial orientation of health plan providers is in person and often at the providers’locations, most of the subsequent interaction between provider relations personnel and providersor their staff is by telephone. Many health plans also establish visitation programs and requiretheir provider relations representatives to visit each provider practice site periodically, usuallyonce or twice per year. Provider relations staff schedule additional visits to providers who areexperiencing problems that can be addressed through further education. For instance, providerrelations representative may work with a provider’s staff to show them how to prepare routineUM and QM reports.

A health plan may enhance the relationship-building aspect of calls and visits by assistingproviders and their staffs with issues that are not necessarily health plan-related. For example, theprovider relations representative may suggest alternative methods for appointment scheduling,patient registration, or medical records management to improve the operations of the practice.Provider relations staff can also offer other value-added services such as materials on improvingprovider-patient communications or on managing the care of special populations, such asMedicaid recipients.

Although the health plan sets goals for the frequency of provider visitations, the actual number ofvisits per provider that a provider relations representative is able to make depends on the size ofthe network and the geographic location of the network providers, as well as on the size of thehealth plan’s provider relations staff.

Periodic Provider Meetings

One of the most effective means of maintaining an informed provider network is to hold regularmeetings for providers and their office staffs to interact with key personnel from the health plan.Provider meetings often include clinical personnel from the health plan and generally coverclinical issues, provider performance measurement results, and contractual issues. Meetings forprovider staff address operational issues, such as claims and encounter report filing or referralrequirements. Health plans may also present general information about health plans to helpeducate providers and staff who may not be familiar with managed healthcare. Provider and staffmeetings are also a good forum to solicit ideas for operational changes or feedback on newprograms the health plan may be considering.

Online Information

As the Internet becomes a more popular vehicle for disseminating information, many health planshave established websites specifically for their members and providers. Websites can be used tocreate positive publicity for the health plan with their members by communicating informationabout health plan products, services, and network providers. Websites for providers typicallyinclude healthcare-related information, such as recent articles from medical journals orinformation about disease management.

Increasingly, health plans are creating account-based, password-secured websites so thatproviders can access health plan information regarding service authorization, claim status, and insome cases, member eligibility. Some health plans also allow providers to use electronic mail (e-mail) to transmit authorization requests, encounter data, or claims information. If the health planreceives questions from providers by e-mail, the plan must ensure that a designated employeereviews and responds to the e-mail communication in compliance with procedures established forother forms of communication, such as telephone or mail. For example, responses to e-mailquestions should adhere to the plan’s standards for timeliness and accuracy of information.

Since not all providers have access to the Internet, information communicated via a websiteshould not replace more traditional communication such as manuals and newsletters. Onlinecommunication should be used as a communication option to reinforce other communicationtools.

Service and Support to Providers and Staff

Perhaps the most significant way a health plan can ensure provider satisfaction with the plan is tomake the commitment of time, resources, and energy to ensure operational excellence in theservice and support given to providers. The health plan’s delivery of service and support directlyshapes providers’ perception of the health plan and strongly influences their desire to maintain arelationship with the health plan. Simply stated, if the health plan’s personnel are responsive tothe needs and questions of providers, and if operational functions such as claims payment, referralprocessing, and eligibility verification are completed in a timely and provider-friendly manner,providers are more likely to be satisfied with their health plan relationships and to communicatethat satisfaction to health plan members.

Although the provider relations department is the centralized resource for provider information, aprovider’s routine interaction with the health plan can be more efficient if the provider has directaccess to specific health plan departments. For example, a provider checking on claims status can

accomplish this task more quickly by calling the claims processing department directly ratherthan sending the request through a provider relations representative. Direct access to utilizationreview expedites the processing of requests for procedure authorization.

Assistance with Utilization Management Issues

Typical UM programs require that providers request authorization prior to rendering variousservices or referring a member for specialty care. Health plans attempt to implement authorizationprocesses that are as simple and unobtrusive as possible and to make provider relations and UMstaff available to answer provider questions. Two ways in which health plans may facilitate thereferral process for PCPs are electronic referrals and variations of standard referral authorizationsystems, such as direct referral and self-referral programs.

Electronic Referrals

Just as health plans are adopting electronic processes for claims submission, some health plansare also creating more automated referral submission processes. An electronic referral systemallows providers to either fax the referral request or submit it via e-mail. The UM decision isreturned to the provider in the same manner. More sophisticated electronic referral systemsintegrate the authorization process with claims processing.

In these systems, after the service has been rendered and the claim submitted, the systemautomatically links the authorization to the claim, further streamlining the health plan’soperations and reducing the chance for error in provider reimbursement.

Alternative Referral Programs

Some health plans have responded to demands from both providers and members for greaterfreedom to make healthcare referrals by adopting direct referral or self-referral programs. Underdirect referral programs, PCPs can make most referrals to specialists without obtaining priorauthorization. Self-referral programs allow members to bypass the PCP and see a specialistwithout a referral under certain circumstances. For example, a self-referral program may permitmembers in an area with a high incidence of skin cancer to see a dermatologist without a PCPreferral. Some self-referral programs allow members with chronic conditions, such as diabetes, toreceive specialist services as needed without a PCP referral once the PCP has identified thechronic condition and made the initial referral to the specialist.

Assistance with Member Eligibility and Benefit Issues

Since provider reimbursement for covered healthcare services is dependent upon a member’seligibility for coverage, the health plan must provide eligibility verification mechanisms that areaccurate, easily accessible, and available to all providers. While the health plan may not alwaysreceive timely eligibility information from purchasers, the health plan’s established eligibilityverification systems should not create further inaccuracies and delays.

The health plan is responsible for issuing health plan ID cards to all members. Additionally, thehealth plan compiles and distributes monthly eligibility lists to PCPs. However, the most accurateway for a provider to verify a member’s eligibility on the date of service is to call the health plandepartment responsible for verifying eligibility, usually the member services or eligibility

department. The telephone method of verification is the most common, but, in some instances,may require the provider’s staff to wait on hold before they are able to verify a member’seligibility.

Some health plans have reduced the problem of lengthy hold times by installing automatedtelephone verification systems that allow a provider’s staff to verify a member’s eligibility byaccessing a daily updated member database. By following the directions given by the automatedphone answering system and entering a member’s ID number, the provider staff can check on themember’s current eligibility as listed in the database. Some health plans use ID cards withmagnetic coding information that is read by a card-reader device at the provider site. Through anelectronic connection with the health plan’s eligibility system, the card reader immediatelydetermines the member’s current eligibility.

Assistance with Claims

With the exception of providers who are reimbursed under a capitated or salary arrangement,providers are paid on some type of a fee-for-service (FFS) basis for covered services. Since FFSreimbursement arrangements can amount to a significant portion of a provider’s income, it isimportant for a health plan to reimburse the provider in a timely and accurate manner within theguidelines of the contracted payment arrangement, benefit plans, and scope of services.

However, fast, accurate claims payment is not entirely the responsibility of the health plan. Ifproviders submit incomplete or inaccurate claims, the result will be delays in processing andpayment. Figure 8A-4 lists examples of claims submission and processing mistakes that can havea negative impact on the timeliness and accuracy of claims payment.

If the health plan’s claims department becomes aware of a pattern of incorrect claims submissionby a provider, the department notifies the appropriate provider relations representative. Therepresentative can show the provider specific examples of the claims problem to clarify anymisunderstanding and then provide additional training as needed.

Claims errors sometimes occur when the health plan delegates claims processing to a providerorganization. If a provider organization that contracts with a health plan is responsible forprocessing claims, the provider organization must clearly communicate to its individualpractitioners how to submit claims. Otherwise, providers may submit claims to the health planrather than to the provider organization, resulting in confusion and delayed processing. When thehealth plan receives a claim that should have been sent to the provider organization’s claimsdepartment, the health plan usually contacts the individual provider directly about the error.health plans often indicate this type of error by a message on the Explanation of Payment orExplanation of Benefits form sent to providers. If the individual provider persists in sendingclaims to the health plan, the plan contacts the provider organization’s provider relations staff,which, in turn, contacts the individual provider to offer additional training.

Use of Electronic Claims Submission

Electronic claims submission allows a provider to submit claims to a health plan throughelectronic data interchange (EDI). The Centers for Medicare and Medicaid Services (CMS)championed the electronic submission of claims as a means of managing healthcare financialdata. The private sector has adopted electronic claims submission to some extent, in part tocomply with CMS requirements, but also because the use of EDI results in more accurate claimsadjudication, more cost-effective claims processing, and earlier notification to the provider ifthere is a problem with the claim.

When a health plan accepts electronic claims, the health plan’s information systems (IS), claims,and provider relations staffs work with the provider to set up the electronic process and determinesoftware and hardware requirements. The health plan also provides the necessary training for theprovider and office staff to submit claims electronically and, in some instances, even offerssoftware and hardware at a reduced cost or no cost to the provider.

Encounter Reports

When a provider contracts with a health plan under a capitated arrangement, the providertypically does not file claims for services provided within the scope of capitation. However, theprovider documents the services delivered as encounter reports, and health plans often requireproviders to submit these encounter reports to the plan. Health plans need encounter datadescribing diagnoses, tests, treatments, and progress for

the plan’s reports to regulatory agencies the plan’s reports to purchasers ongoing evaluation and adjustment of capitation rates UM reporting QM activities, such as clinical studies or provider performance profiling HEDIS data collection

Frequently, capitated providers do not understand the purpose of sending encounter data to thehealth plan. Some providers feel that not submitting information is one of the benefits of beingpaid through capitation. Unless providers understand why the health plan needs the informationand receive reminders to send the data, they may fail to submit encounter data.

Some health plans have mechanisms to monitor the submission of encounter data. For example, ahealth plan may estimate the expected number of encounters based on the assigned populationand then compare the projected number of encounters to the number of encounter forms received.The health plan’s provider relations staff often has the responsibility for contacting noncompliantproviders to remind them that submitting encounter data is a contractual requirement.

Assistance with Other Problems and Questions

As noted earlier in this lesson, the health plan’s provider relations representatives are the maincontact point for providers and their office staffs for problem resolution. While a provider’s officemay work directly with the health plan’s claims, eligibility, or UM departments, a provider’soffice directs most other problems to the provider relations representative.

The provider relations department typically addresses the following questions and problems:

Requests for health plan materials, such as wellness brochures or benefit information, todistribute to health plan members

Requests to transfer members who refuse to comply with treatment plans to anotherprovider

Difficulty verifying eligibility information or receiving incorrect eligibility information Contractual issues, such as questions about reimbursement A PCP’s difficulty in obtaining follow-up reports from a specialist about the diagnosis

and treatment of the PCP’s patients who have been referred to that specialist General complaints a provider has regarding the health plan

Surveys of Providers and Their Staffs

Just as health plans survey their members to determine satisfaction with the health plan andnetwork providers, health plans also survey contracted providers and their staffs to assess their

satisfaction with the health plan from an administrative and operational perspective. Surveyresults help the health plan determine answers to the following questions:

Do providers feel that they are able to provide quality healthcare within the guidelines ofthe health plan’s UM and QM programs?

Do any of the health plan’s departments provide poor service or are they unresponsive toprovider needs?

Are the health plan’s procedures easy to follow and use? Are providers satisfied with feedback received regarding their performance, as measured

by health plan standards? How satisfied are providers with the health plan’s provider relations programs, staff, and

communications? What comments and suggestions for improvement do providers have for health plan

programs or processes?

Both positive and negative feedback assist the health plan in modifying its programs to bettermeet provider needs and improve provider satisfaction with the plan.

Involvement of Providers in Health Plan Management

Provider involvement in the day-to-day operations of the health plan is crucial to developing andmaintaining a health plan that is responsive to the needs of network providers and health planmembers. Providers under contract are a valuable resource to the health plan in many ways.When initiating efforts to expand or fill gaps in the network, provider relations representatives orthe medical director often seek input from network providers. These providers usually haveprofessional relationships with non-network providers in the community and may be able toidentify and help evaluate likely candidates for the network. For example, PCPs can offerinformation about local specialists and ancillary providers.

Health Plan Committees

Another way in which health plans involve providers in health plan operations is throughcommittee membership. The health plan’s medical director is typically very involved with theclinical aspects of the plan’s UM and QM programs. However, achieving significantimprovement in medical management often requires clinical expertise beyond the contributions ofthe medical director and other physicians who are employed by the health plan. Accordingly,health plans frequently solicit network providers to participate in the medical management of theorganization. Quality management standards from accrediting agencies require a health plan toestablish and maintain specific medical management committees and to have active providerparticipation on these committees.

Because network providers are directly involved in the provision of healthcare on a daily basis,they bring a significant real world perspective to QM and UM programs. In addition to lendingtheir clinical expertise, providers who participate on QM and UM committees also serve as acommunications conduit to and from the provider community. Providers who are committeemembers can help the health plan educate its network about the principles of QM and UM and thespecific activities and requirements of the health plan’s own QM and UM programs.

Each health plan has a variety of organizational committees related to quality and utilizationmanagement. These committees have assigned functions and goals that help the health plan meet

its overall objectives for access, quality, and cost-effectiveness. Health plans frequently includenetwork providers as members on these committees as a means to

obtain additional clinical knowledge gain the perspective of practicing providers for decision making lend greater credibility to health plan decisions in the eyes of the provider community

The number and types of medical management committees vary from one health plan to another.Health plans generally have committees for UM and QM, and may have committees specificallyfor peer review, credentialing, and evaluation of medical treatments.

The quality management committee generally has the responsibility for overseeing the healthplan’s quality improvement activities in both clinical and service areas. This committee

identifies appropriate issues for monitoring evaluates the results of quality studies to determine the need and opportunity for

improvement develops action plans for improvement provides oversight of action plan implementation monitors the effectiveness of the action

The QM committee also reviews and updates the health plan’s QM program for approval by thehealth plan’s board of directors and recommends policy decisions to the board. Associatedcommittees and subcommittees may also participate in quality activities. health plans mayseparate the QM committee into two components: a clinical QM committee, composed primarilyof providers, and a corporate QM committee that does not include contracted providers. When theQM committee is divided in this way, the clinical component often serves as an advisory board tothe corporate committee. For example, when the clinical QM committee develops action plansthat involve increased costs or policy changes, these action plans are submitted asrecommendations to the corporate committee for its approval or rejection of the plans.

The utilization management committee reviews and updates the health plan’s UM programdescription and develops utilization review protocols. The UM committee also

reviews and evaluates referral and utilization patterns reviews medical appropriateness for utilization decisions that are under appeal provides oversight of inpatient concurrent review

The peer review committee reviews cases identified through utilization review processes,complaints and grievances, or clinical monitoring activities. This committee formulates,approves, and monitors corrective action plans for providers as needed. Generally, the onlymembers of this committee who have voting rights are the providers.

The medical advisory committee formulates clinical monitoring activities and develops clinicaland preventive health practice guidelines and medical care standards. This committee may havesubcommittees that assess new medical technologies or develop the health plan’s formulary. Insome health plans, the QM committee also performs the medical advisory function.

The credentialing committee establishes and updates credentialing processes and criteria, subjectto approval from the board of directors, and reviews the credentials of new applicants and

contracted providers during the credentialing and recredentialing processes. Depending on theauthority granted the committee by the board, the credentialing committee may either makerecommendations to the board or make the final decision regarding a provider’s participation inthe network. Some health plans include peer review activities in the duties of the credentialingcommittee.

The number of providers on a committee varies depending on the nature of the committee, thesize of the network and the health plan, and the availability and interest of the network providers.The composition of the committee should reflect the composition of the entire network. Mosthealth plans require that physicians participating on committees be board-certified. Other types ofproviders should have appropriate professional licensure or certification. The UM and peerreview committees also draw from network providers for ad hoc committees when the expertiseof a certain specialty is needed to review a utilization or provider performance question.

One of the main benefits for a provider who participates on a health plan committee is theopportunity to become more familiar with health plan operations. In addition, such a provider hasan opportunity to help shape the programs and activities of the health plan. To encourage providerparticipation on committees, health plans may reimburse providers for the time they serve oncommittees. To maintain continuity of provider participation on committees, some health plansattempt to carry over at least 50% of a committee’s provider members from one year to another.

Conclusion

So far in this assignment, we have discussed the importance of monitoring overall networkperformance to ensure that health plans remain responsive to the demands of the healthcareenvironment and the needs of plan members. We have also described some of the methods healthplans use to enhance provider relations and increase provider satisfaction. In the following lesson,we look at network management from the perspective of individual providers and describe waysin which health plans measure, evaluate, and modify provider performance.

AHM Network Management: Delegation of Network Management Activities

Objectives:

After completing this lesson you should be able to:

Define delegation and sub-delegation Explain the difference between "authority" and "accountability" with regard to delegation List some reasons why health plans sometimes delegate activities Identify and describe the steps in the delegation process Describe the primary requirements of the National Committee for Quality Assurance

(NCQA), the American Accreditation HealthCare Commission (the Commission/URAC),and the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) fordemonstrating appropriate oversight of credentialing delegation

Introduction

In Analysis of Market and Health Plan Needs and Considerations for the Structure, Compositionand Size of the Network, we described how health plans analyze potential markets, set goals fortheir provider networks and then establish strategies for developing those networks. In this lesson,we will discuss the ability of health plans to delegate certain activities related to their networks toproviders or other organizations.

We begin this lesson by exploring the accrediting standards and laws that a health plan considerswhen delegating any function. We then discuss the types of activities that health plans delegateand possible reasons for delegation. Next, we describe the typical delegation process and thehealth plan's role in overseeing the delegated activities. Finally, we look at specific requirementsfor delegating network management activities.

In order to establish and maintain high standards of quality for their provider networks, healthplans have instituted a variety of network management programs, such as credentialing,recredentialing, and provider performance management. Health plans do not always perform allaspects of these functions within the plan, however. Health plans sometimes contract with theirproviders or other outside organizations for the delegation of selected activities. Delegation is aformal process through which a health plan transfers to another entity the authority to conductcertain functions on behalf of the health plan. The entity that contracts with the health plan toperform the specified function is the delegate, and the health plan that transfers the authority isthe delegator.

Delegation is not restricted to network management activities. Functions such as utilizationmanagement (UM), member services, medical records review, quality management (QM), andclaims administration are examples of other activities that the health plan may delegate. The listof potential delegates includes hospitals and other facilities, provider organizations, credentialsverification organizations (CVOs), case management companies, claims administrators,management service organizations (MSOs), and utilization review organizations (UROs). With somany delegation options available, health plans face an ongoing challenge to select qualifieddelegates and monitor their activities.

Regulation of Delegated Activities

The use of delegation by health plans is governed by various accrediting and regulatory agencies,and by state laws. These accrediting standards, regulations, and laws help determine whichactivities, if any, a health plan decides to delegate. Accrediting agencies hold the health planaccountable for the delegated activities, regardless of the agreement for delegation. Therefore, ahigh level of review and monitoring is required for delegation.

Authority and Accountability

The National Committee for Quality Assurance (NCQA), the American Accreditation HealthCareCommission/Utilization Review Accreditation Commission (the Commission/URAC), and theJoint Commission on Accreditation of Healthcare Organizations (JCAHO) all consider a healthplan's management of delegated activities when evaluating a health plan for accreditation. Thesethree agencies have established specific standards for the oversight of delegated activities. Healthplans typically design programs to comply with the delegation guidelines of one of theseaccrediting organizations because delegation moves key functions away from the health plan. Asa result, the health plan has less direct control over the delegated activities.

Whether the applicable accrediting agency is the Commission/URAC, NCQA, or JCAHO, theissue of accountability is a primary focus for a health plan's delegation oversight program.Accountability is the process by which one party is required to justify its actions and policies toanother party. When a health plan delegates authority for a function, it transfers the power toconduct the function on a day-to-day basis, but not the ultimate accountability for the function.Although the delegate assumes the right to plan and carry out the function within specifiedparameters, the health plan retains the responsibility for making sure that the delegate performsthe function in accordance with the health plan's standards and those of JCAHO, NCQA, or theCommission/URAC. If the delegate's performance fails to meet these standards, the health plan isresponsible for developing a plan of corrective action to remedy the deficiencies. The health planis also accountable for ensuring coordination and continuity between the delegated functions andthe functions that are conducted by the health plan.

Both the Commission/URAC and NCQA have standards for the written agreement between thehealth plan and the delegated entity. All three accrediting agencies require documentation provingthat the health plan is conducting appropriate oversight of the delegated function. Such oversighttypically includes regular reports from the delegate to the health plan, and formal site visits andaudits by the health plan on an annual basis or more frequently. If the delegate is an NCQA-accredited health plan, CVO, or managed behavioral healthcare organization (MBHO) and thedelegator health plan adheres to NCQA standards, the requirements for oversight of delegatedfunctions are significantly less stringent. Although NCQA still requires an appropriate writtenagreement between the health plan and the delegate, the health plan is not obliged to make aformal, annual oversight review of any elements already certified for that delegate by NCQA.1

Similarly, if a health plan accredited by the Commission/URAC delegates activities to aCommission/URAC-certified CVO or utilization management organization, theCommission/URAC does not require the health plan to perform annual oversight reviews ofelements already certified for that delegate.

The primary resource for NCQA guidelines on delegation is the most current version of SurveyorGuidelines for Accreditation of Managed Care Organizations. The Commission/URAC'sstandards on delegated functions and information about complying with these standards are

explained in the Commission/URAC's Interpretive Guides of Standards for health UM, healthnetworks, and network practitioner credentialing. JCAHO addresses delegation in its manual ofstandards for healthcare networks. We address these agencies' standards for delegated networkmanagement functions later in this lesson. Standards for the delegation of QM and UM activitieswill be discussed in the Academy for Healthcare Management's course on medical management.

State laws may play a role in a health plan's approach to delegating functions. The NationalAssociation of Insurance Commissioners (NAIC) HMO Model Act stipulates that an HMO'swritten quality assurance program must describe its contractual arrangements for delegation.More than half of the 50 states have adopted all or parts of this model act or similar legislation.Some states have more specific requirements for the delegation of functions by health plans. Forexample, in Alabama credentialing activities may be delegated only to entities that have beenapproved by the state for this purpose. Because state laws on delegation vary, a health planmonitors the requirements of each state in which the health plan operates and adjusts itsdelegation programs accordingly.

Oversight of delegation is also important to the health plan from a liability point of view. Becausethe health plan retains the ultimate accountability for the performance of any delegated function,the health plan may be held liable if delegated functions are not conducted properly. For instance,if provider malpractice occurs, the delegate that performed provider credentialing activities andthe health plan may both be liable if the credentialing process for the provider was not conductedaccording to legal and regulatory standards.2

The delegation of functions may also be subject to regulation from other organizations. Healthplans that serve a Medicare population are subject to delegation guidelines established by theCenters for Medicare and Medicaid Services (CMS). The CMS requirements for delegationoversight are similar to those of NCQA and the Commission/URAC. In essence, delegatedfunctions are held to the same CMS standards as the functions actually performed by the healthplan, and the health plan will be held accountable for any deficiencies in the performance of thedelegate. The details of CMS's specifications for delegation are included in the regulations forMedicare health plans.

Health plan can delegate almost any function that it chooses, assuming that it can find anappropriate vendor to perform the function. The Commission/URAC and JCAHO place norestrictions on the types of functions that can be delegated, and NCQA allows health plans todelegate authority for almost all functions. One important NCQA limitation on delegation is thatthe health plan itself must conduct all delegation oversight functions rather than delegating theresponsibility for oversight to another entity.3 Figure 2C-1 lists all the standards for which NCQAdoes not allow the delegation of functions.

Credentialing and UM activities are the most frequently delegated functions. Member servicesand medical records review functions are also commonly delegated. Depending on the particularhealth plan and the situation, the delegation agreement may or may not include all activities for aparticular function. For example, one health plan may delegate all of the activities necessary togather and verify credentialing information to a CVO, while another health plan contracts withthe CVO only for primary source verification and conducts the rest of the credentialing activitieswithin the plan. Other individual activities that are sometimes delegated include credentialing sitevisits, demand management, disease management, case management, and utilization review.(Refer to Healthcare Management:An Introduction for a review of UM techniques.)

In many cases, the delegation arrangements for UM, credentialing, member services, and medicalrecords review activities are made between the health plan and provider organizations such asphysician groups, independent practice associations (IPAs), hospitals, or MBHOs. When thedelegate is a provider organization, the delegation arrangement often includes two or more majorfunctions. For instance, a health plan might delegate to a network hospital the credentialing ofhospital practitioners, as well as the UM and medical records review functions for servicesprovided by the hospital. Many health plans also contract with CVOs for one or more aspects oftheir credentialing function or with UROs for utilization activities. While the delegationagreement between a health plan and a provider applies only to the healthcare services of thatparticular provider, CVOs and UROs can assume responsibility for a function across many or allproviders in the network. Delegation is less common for quality management (QM) andpreventive health services, possibly due to the more complex processes required for theseactivities.5 Quality management activities must be performed across a broad population. Ifnetwork providers are widely dispersed or not affiliated with a provider organization, the healthplan may be unable to coordinate QM activities across providers.

Why Delegate?

Decisions on whether to delegate a function at all, and which aspects of a function to delegate,depend on the health plan's resources, the proposed delegate's ability to perform the functionaccording to the health plan's standards, and the health plan's philosophy about delegation. Thehealth plan might choose to delegate because it does not wish to dedicate internal resources toperform the activity within the health plan or because the plan's staff seeks external expertise for

the activity. Also, the health plan may realize that its current information system cannot handlethe demands of a particular function.

If another organization already has the necessary systems and personnel in place to perform anactivity, the health plan may find it more efficient in terms of time and money to delegate to thatentity. For example, when a health plan is in the process of establishing its systems for a newbenefit plan, contracting with provider organizations for medical records review services may bemuch faster than building the capability for the medical records review function within the healthplan.

Some health plans find delegation to be a particularly useful option for services that are utilizedby a relatively small number of members or specialty services that require a different knowledgebase, such as behavioral healthcare or chiropractic care. For example, many health plans thatcontract with an MBHO for behavioral healthcare services also choose to delegate quality-relatedactivities for behavioral healthcare to the MBHO. These health plans believe that the MBHO'sexpertise in behavioral healthcare will result in better performance of UM, QM, credentialing,member services, and medical records review activities than the health plan could achieve.

Delegation often occurs because the network's providers request the responsibility for certainactivities. Hospitals and provider organizations that accept financial risk for the delivery ofhealthcare services may even require the delegation of functions such as credentialing or UM as acondition for contracting with the health plan. However, the delegation of functions to providerscan also occur without the transfer of financial risk, and the transfer of financial risk does not inand of itself equal delegation. If the provider already has satisfactory systems for an activity inplace and the health plan does not, the health plan may simply find it more practical for theprovider organization to assume responsibility for the function, at least on a temporary basis.Over time, the health plan may choose to develop its own mechanisms to conduct functions thathave been previously delegated.

The oversight of delegated functions is typically a complex, time-consuming process for a healthplan, especially if the health plan delegates several different functions or delegates a function tomore than one entity. In some cases, health plans find it easier to perform the function within thehealth plan than to conduct the oversight process. These organizations typically delegate fewfunctions or delegate no functions at all.6 In addition, when a health plan delegates a function, itrelinquishes some control over the delegated function. A health plan that is uncomfortable withdiminished control is unlikely to delegate.

The Delegation Oversight Program

In order to comply with accrediting, regulatory, and legal requirements, and to decrease the healthplan's legal risk associated with delegation, health plans usually establish a formal program foroversight of delegated functions. This program outlines the health plan's processes for evaluatingproposed delegation arrangements, reviewing the performance of delegates, and providingdelegates with corrective action plans as needed. By instituting a formal program for delegationoversight, the health plan can avoid several problems, such as

confusion about which functions have been delegated inadequate criteria and processes for selecting delegates inadequate continuing oversight of delegates failure to formalize the delegation arrangement

The ultimate goal of the delegation oversight program is to ensure that delegated functions areperformed at or above the standards of the health plan and the applicable accrediting andregulatory agencies. Another objective for the delegation oversight program is to ensure equaland consistent treatment of plan members across the health plan's entire network.

Organizational Structure for Delegation Oversight

The organization of the delegation program varies from one health plan to another. In some healthplans, the existing committee responsible for a specific function directs the delegation oversightprogram. For instance, delegation oversight of primary source verification is assigned to thecredentialing committee or to the QM committee, if there is no dedicated committee forcredentialing. The UM Committee is likely to oversee the delegation of demand management orcase management.

Other health plans have a standing multidisciplinary committee that is dedicated to supervising alldelegation processes. This delegation oversight committee typically reports to the health plan'sQM committee. The composition of a multidisciplinary delegation oversight committee variesaccording to the type of activities that the health plan delegates. Delegation oversight committeemembership often includes the health plan's medical director or another medical managementofficer, as well as department directors from UM, QM, network management, credentialing,compliance and accreditation, marketing, member services, and claims. The delegation oversightcommittee may also include a representative from the delegated entity, although suchrepresentation is not standard practice. The inclusion of the delegate's representative enhancescommunication and the feeling of the partnership between the health plan and the delegate.7

The committee that oversees the delegation process is generally responsible for establishing thecriteria for selecting delegates. Selection criteria vary among plans, but the typical minimumrequirements for delegates are the following:

One year of experience performing the delegated activity Demonstrated compliance with regulatory requirements Systems and processes capable of meeting the health plan's standards and applicable

accreditation standards A corporate structure that can support performance of the delegated activity No current Medicare or Medicaid sanctions against the entity or any of its officers Agreement with the health plan's requirements for periodic reporting Policies and procedures for the delegated function that are acceptable to the department

in the health plan that would otherwise perform the function A designated coordinator for the function to be delegated Adequate liability insurance for the delegated activity

The committee in charge of delegation oversight is responsible for approving or denyingproposed delegations, based on evaluations of the candidates' capabilities. This committee alsoreviews and approves the processes for measuring delegates' performance.

Depending on the extent to which the health plan delegates functions, a health plan may have oneor more staff members whose sole job is to administer delegated activities. In health plans wheredelegation plays only a small role, personnel from the department that would otherwise performthe delegated function typically carry out the routine tasks of the delegation process. For example,UM department personnel compile information about the qualifications of potential demand

management delegates. Health plans that do a great deal of delegation often have several staffmembers plus a manager who coordinates the oversight of delegated functions. The staffmembers review evaluation results, write reports, and make recommendations about potentialdelegates to the committee overseeing the delegation.

Health plans that delegate functions typically use a structured oversight process to ensure alogical, consistent approach to the selection and monitoring of delegates. The delegationoversight process generally includes the following steps:

1. Proposal for delegation2. Evaluation of the candidate for delegation3. Decision by the committee responsible for delegation oversight4. A written document describing the delegation arrangement5. Continuing oversight of the delegated activity, with corrective actions and follow-up

evaluations when indicated

Figure 2C-2 illustrates the steps involved in a health plan's delegation oversight process.

In addition to having a written delegation agreement, the health plan usually creates printed formsto document the other steps in the delegation process. For example, the health plan maystandardize the application for delegation, the form to record the assessment of candidates fordelegation, and reporting forms for delegated activities. Besides making the documentationprocess easier, the use of standard forms also promotes consistency and objectivity in theevaluation and monitoring of delegates. Some health plans use documentation forms adaptedfrom sources such as the NCQA Surveyor Guidelines and NCQA Data Collection Tool. Healthplans may also create and distribute to its delegates a policy and procedure manual for thedelegated function.

The Delegation Oversight Process

In some cases, the health plan initiates the delegation process by inviting potential delegates tosubmit written proposals describing their services and how those services can meet the needs ofthe health plan. The health plan then evaluates the proposals and selects the candidate mostqualified to perform the function.

More often, however, the candidate for delegation approaches the health plan to express interestin contracting for delegated activities. Credentials verification organizations, utilization revieworganizations, and companies that specialize in demand management, disease management, andcase management typically have marketing programs that emphasize their capabilities. Providergroups desiring delegation frequently introduce the subject of delegated activities during contractnegotiations with the health plan.

After both parties have indicated their interest in delegation, the health plan then forwards awritten proposal for delegation to the candidate. The written proposal generally consists of aletter of intent, an application, and, perhaps, a draft of the delegation agreement. Ideally, all ofthese preliminary documents contain precise language describing the activities to be delegatedand the time period for which the delegation agreement will be effective. The use of broad termssuch as "key activities for utilization management" or the omission of specific dates can createconfusion about the true nature of the delegation. For example, the health plan and the potentialdelegate may interpret differently which activities are included in "credentialing," "memberservices," or "quality management." In addition, the activities viewed as most important by thehealth plan may seem only incidental to the delegation candidate. Terminology must be clearlyexplained so that both organizations understand the exact nature of the proposed delegationarrangement. Clarity is especially critical when delegating functions to network providers whomay be less aware of the health plan's expectations than a CVO, URO, or other organizationspecifically dedicated to performing delegated functions.

Proposal for Delegation

The letter of intent outlines the delegation oversight process. It also establishes a mutualagreement about the confidentiality of patient information and the policies and procedures of thehealth plan and the potential delegate. However, a letter of intent is not a contract and does notcreate a legally binding relationship. Figure 2C-3 lists the typical components of a letter of intent.

The documents reviewed by the health plan prior to the site visit include

the candidate's policies, procedures, and program descriptions for the delegated activity evidence of any certification or accreditation by external agencies the candidate's QM plan historical information about the entity (such as the date of formation, the names and titles

of officers, and an organization chart) evidence of experience with the delegated activity, such as references, sample activity

reports, previous audit results, and any corrective action plans information on any subdelegation arrangements

The length and complexity of the application for delegation vary from one health plan to another.Some health plans use this form to record only very basic information about the delegate, such asthe name, address, telephone number, and contact person for the organization, and the activities

that are being requested. Other applications are more extensive and require information about thecandidate's policies, procedures, and qualifications. If the potential delegate is a providerorganization, the application may request information about the types and numbers of providersincluded in the organization. When the health plan receives the completed application and therequested supporting documentation, the health plan can begin to evaluate the candidate

Evaluation of the Candidate

The main purpose of the evaluation is to determine if the candidate can perform the delegatedfunction as well as or better than the health plan at an acceptable cost. To determine this ability,the health plan compares the application and supporting documents to the health plan's ownpolicies and procedures and to the standards of the applicable regulatory and accrediting agencies.Thus the health plan becomes familiar with the candidate's basic systems and processes for thedelegated function and identifies areas of special concern for the site visit.

During the site visit, the health plan seeks to validate the documentation previously submitted andto gain additional information about the quality of the candidate's performance. The delegationevaluator from the health plan generally examines the potential delegate's structure, resources,procedures, and outcomes for the function under consideration

The candidate's organizational chart and bylaws are sources of information about the candidate'sreporting structure for the delegated function. The delegation evaluator examines thesedocuments for indications that the potential delegate's highest level of authority is appropriatelyinvolved in the governance of the delegated function. For example, does the candidate's UMcommittee review the policies, programs, and performance for UM at least annually? Does thiscommittee regularly receive reports about UM operations?8 In addition, the candidate should havea QM committee and other committees to oversee the delegated function. If the health plan plansto delegate UM or QM, the candidate's organizational structure should include committees forongoing peer review and individual case review.

The candidate's human, technological, and financial resources are other indicators of its ability tomeet the health plan's requirements. By observing the delegated function on site, the evaluatorcan determine if the personnel responsible for the function are competent and well-trained and ifthe support systems for the function are adequate. In particular, can the candidate's informationsystem monitor the function effectively and produce the reports required by the health plan?

Further, information about the candidate's financial status provide the evaluator with insights intothe candidate's financial stability, management competence, and likelihood of future success.

The evaluator also audits reports and records to make sure that the candidate's current processesallow it to perform the delegated function effectively and in accordance with applicable laws andregulations. The outcomes described in these reports and records are generally a reflection of thecandidate's level of expertise with the delegated function. In addition, the evaluator determines ifthe candidate plans to subdelegate any of the delegated activities and if so, how the candidateplans to manage the subdelegation. We will discuss subdelegation in more detail later in thislesson.

Decision by the Delegation Oversight Committee

The manager of delegated services or other personnel in charge of candidate evaluation presents awritten summary of the evaluation results and recommendations for action to the health plancommittee overseeing the delegation. The committee reviews this information and eitherapproves, denies, or pends the delegation.

If the candidate meets the health plan's standards for the delegated function, the health plan sendsits findings and a written document that describes the delegation arrangement to the candidate forapproval. If the candidate's capabilities are inadequate to perform the specified function, thehealth plan sends a denial of the delegation along with an explanation of the candidate'sdeficiencies. The rejected candidate may reapply for delegated activities after a specified periodof time, usually six months. At this time, the candidate provides documentation that pastdeficiencies have been remedied.

In cases where the candidate does not fully meet the health plan's standards but does not havesignificant deficiencies, the health plan may send the candidate a letter outlining recommendedchanges, expected completion dates for the changes, and a date for a repeat site visit. Thecandidate's request for delegation will be approved or denied based on the second evaluation.Some health plans may agree to a shared delegation arrangement with a delegate who meetssome, but not all, of the health plan's requirements for a particular function. In a shared delegationsituation, the health plan contracts with the delegate for selected activities and retainsresponsibility for the activities that the delegate cannot perform.

The Delegation Agreement

A delegation agreement is the contractual document that describes the delegated functions andthe responsibilities of the health plan and the delegate. The delegation agreement may be in theform of a contract (the form generally preferred by health plans), a letter, or some other writteninstrument. For a delegation arrangement with a provider organization, the delegation agreementmay be included in the contract for the delivery of healthcare services or it may be a separatedocument. Some health plans prefer to keep the delegation agreement separate to allow fortermination or modification of the delegation arrangement without affecting the contract forhealthcare services.

Like the letter of intent and the application for delegation, the delegation agreement should be asspecific as possible. An agreement that lists the individual services to be delegated and thendefines the components of these services reduces the chance for misinterpretation. When a healthplan contracts with more than one delegate for a particular function, a clear and detailed

agreement can help assure that all delegates perform the function in the same consistent manner.The health plan can further lessen the chance for confusion by describing in detail theresponsibilities retained by the health plan and the responsibilities transferred to the delegate. Inaddition, listing the responsibilities of both parties in the agreement establishes a tone ofcollaboration

Although the delegate is responsible for performing the function according to establishedstandards, the health plan is ultimately accountable for any deficiencies. The health plan,therefore, must oversee the quality of the delegate's work and propose corrective action if theneed arises. In order for the delegate to meet the health plan's requirements, the standards forconducting the activity and the methods of measuring performance should be clearly stated in thedelegation agreement. Other specific elements typically included in the delegation agreement arethe required format for reports from the delegate, the schedule for submitting reports, and thedates on which the delegation begins and ends. The agreement may also name the individualsfrom both organizations who serve as the primary contact persons for the delegationarrangement.9 In some cases, the agreement includes a provision requiring the delegate tocooperate with market conduct studies performed by regulatory agencies and key purchasers.

Delegation agreements usually specify contingencies for potential problems associated with thedelegated function. One type of contingency clause allows the health plan or the delegate toterminate the agreement under certain circumstances, that is, with cause. For example, if adelegate with poor performance fails to implement corrective action as directed by the healthplan, the health plan may end the arrangement with appropriate written notice. In otheragreements, either party may end the delegation arrangement without cause after giving adequatewritten notice to the other party.

Diligent oversight of a delegation arrangement is just as important to ensuring quality care as theinitial selection process. Unless the delegate is accredited or certified by the same accreditingagency as the delegating health plan, the health plan must regularly audit the delegate to ensurethat the delegate is following the health plan's guidelines for the function. Some health plansperform periodic audits even if the delegate is accredited or certified by the health plan'saccrediting agency in order to ensure satisfactory performance of the delegated function. Duringan audit, a representative from the health plan revisits the delegate at least annually to observeoperations, check documentation, and attend committee meetings related to the delegatedfunction. The purpose of the audit is to assess the delegate's continued capability to perform thedelegated function in a way that meets the standards of the health plan and the applicableaccrediting and regulatory bodies.

The health plan' s delegation oversight committee reviews the findings from the repeat visitsalong with the delegate's formal reports on operations. After the oversight committee comparesthe delegate's results and processes to the goals and standards established in the delegationagreement, the health plan sends its comments and any indicated corrective action plans back tothe delegate. If the health plan has a delegation oversight manager, this person often acts as aliaison between the oversight committee and the delegate during the oversight process to facilitatecommunication and help correct any performance deficiencies.

If the delegated function is QM or member services, one important report that the delegateregularly submits to the health plan is an account of adverse events and consumer complaintsregarding the delegated function. This document identifies the number of complaints (often

reported as the number of problems per 1,000 members), the type of complaints, and an overallassessment of quality.10

The frequency of a delegate's reports to the health plan typically coincide with the health plan'sown reporting schedule. For example, assume that a health plan has delegated its utilizationmanagement function. If the health plan's UM committee meets monthly, the delegate handlingUM will schedule monthly UM reviews and prepare reports in time for the UM committeemeeting. As a general rule, the broader the scope of activities delegated, the more frequently thedelegate is required to submit reports. Similarly, the reporting requirement tends to be greater if alarger number of members are affected by the delegated activities. The health plan may alsoincrease the reporting requirements if the delegate's performance has been deficient in some way.

Besides maintaining a file of the scheduled reports from the delegate, health plans also keeprecords of site visit results and other information relating to the delegation. Some health planshave a policy of documenting all verbal and written contact between the health plan and thedelegate.11

Subdelegation

As part of the delegation process, the health plan also monitors any use of subdelegation.Subdelegation is the process that occurs when the health plan's delegate contracts with a thirdentity to perform activities that were originally delegated by the health plan. For example, ahealth plan may delegate utilization management to an IPA that, in turn, transfers the authorityfor case management to an organization that specializes in that activity. The case managementcompany becomes the subdelegate, and its performance is subject to the same standards as theoriginal delegate. Either the health plan or the delegate may conduct the oversight of thesubdelegate. Once again, however, the health plan is ultimately accountable for the performanceof the subdelegate.12 The delegation agreement between the health plan and the delegate shouldclearly define any limitations that the health plan places on subdelegation. For example, theagreement may forbid the delegate to subdelegate activities without informing the health plan andobtaining the health plan's express written approval prior to subdelegation, or it may specifycertain activities that may not be subdelegated.

The process for subdelegation follows the same steps as the original delegation: an evaluation ofthe subdelegate's structures, processes, and outcomes to ensure that they meet health planstandards; a delegation agreement that describes the arrangement in detail; and an ongoingprogram of regular reports on activities, results, and problems. Many health plans inquire aboutthe delegate's plans for subdelegation on the original application. Figure 2C-4 lists typicalquestions that health plans might ask a potential delegate about subdelegation.

Since subdelegation removes the delegated activity even further from the health plan's control,health plans are generally cautious about subdelegation. As a result, the health plan may prefer toconduct its own initial and continuing oversight of the subdelegation rather than leaving thisresponsibility solely to the delegate.13

The Delegation of Network Management Activities

As previously noted, the delegation of provider credentialing and recredentialing activities is acommon practice for health plans. Some health plans also delegate all or part of the performancemanagement function to providers or to organizations that focus on quality measurement andimprovement. The delegation of credentialing or performance management activities follows thebasic delegation oversight processes described above. The next sections provide further detailsabout the delegation of these two network management activities.

Delegation of Credentialing and Recredentialing

Health plans use credentialing and recredentialing to help them build and maintain networks ofexperienced, licensed, and well-trained providers who can deliver the required healthcareservices. Efficient credentialing helps a health plan establish a network, offer a new product, orenter a new market as quickly as possible. Many health plans have found that credentialing can bedone faster and less expensively by delegating some or all of the information-gathering andverification activities. A local CVO or provider organization may know the local provider marketbetter or have a more efficient system for gathering information than does the health plan.

Some health plans delegate the entire credentialing process, that is, information collection, dataverification, and selection decisions, to their providers.14 Most health plans, however, especiallythose using CVOs, delegate certain information-gathering aspects of credentialing but retain theauthority to accept or reject individual providers. Applications, primary source verification, andsite visits are some of the components that a health plan may delegate while reserving the right tomake the final selection. The delegation of primary source verification and site visits may reduceor even eliminate duplication of effort in regions where most providers contract with multiplehealth plans. In fact, medical associations in some geographic areas encourage health plans to usea central source for primary source verification. In addition to reducing the administrative burdenon providers, the centralization of primary source verification may reduce the time required for ahealth plan to complete its credentialing process.

When a health plan delegates credentialing or recredentialing activities to a CVO, IPA, MSO,hospital, physician-hospital organization, or other provider organization, the health plan is stillresponsible for ensuring that its quality standards for providers are consistently maintained. If the

health plan delegates recredentialing, the health plan must assure that the recredentialing processincludes appropriate information about the quality of practitioner performance.15

Although JCAHO does not specifically address the delegation of credentialing, both NCQA andthe Commission/URAC have guidelines for credentialing delegation. In many respects, thecredentialing delegation standards of the Commission/URAC and NCQA are similar. Both sets ofstandards require the delegator to demonstrate appropriate oversight of the delegated activitythrough a thorough evaluation of the candidate for delegation, a written delegation agreement thatspecifically describes the responsibilities of the delegator and the delegate, and an ongoingprogram for performance monitoring and correction of any deficiencies.

In addition, both agencies specify that the health plan retains the right to make the final decisionto accept or reject a proposed provider. When establishing a program to oversee delegatedcredentialing activities, health plans generally follow NCQA or the Commission/URACguidelines.

Because the health plan may be liable for any adverse events that result from credentialing errorscommitted by the delegate, many health plans include one or more provisions in the delegationagreement to protect the health plan against losses related to credentialing mistakes. Under onetype of provision, the delegate must reimburse the health plan for any losses that the health planincurs as a result of negligence in the credentialing process. Another type of liability protectionprovision stipulates that delegates carry adequate liability insurance for credentialing activities.The liability insurance provision may require the policy to include the health plan as an additionalinsured party.16 We will discuss specific standards for delegated credentialing in Collecting andVerifying Data for Credentialing Purposes.

Delegation of Provider Performance Management

While health plans sometimes delegate provider performance management to providerorganizations, health plans rarely delegate this function to other parties. None of the accreditingagencies specifically address the delegation of provider performance management activities intheir standards. Health plans that are accredited by JCAHO can apply that agency's generalstandards for delegation to provider performance management. The JCAHO standards requirehealth plans to (1) evaluate the delegation candidate according to clear criteria prior to delegation,(2) conduct ongoing monitoring of the delegated function according to established expectations,(3) periodically collaborate with the delegate to coordinate activities, (4) retain the right to makekey decisions, and (5) ensure that the delegate complies with applicable JCAHO standards for thefunction.17

The delegation of provider performance management falls under the Commission/URAC'sstandards that deal with the delegation of medical management. These standards require thehealth plan to assume accountability for delegated activities through proper oversight of thedelegate's performance and compliance with the Commission/URAC standards for the activity.The delegator plan is also responsible for ensuring that the delegate adheres to theCommission/URAC's standards for confidentiality of member health information.18

Health plans that seek NCQA accreditation typically follow that agency's standards for thedelegation of quality improvement (QI) activities when delegating provider performancemanagement. The main requirements for appropriate oversight of QI delegation are similar tothose for credentialing delegation: evaluation of the candidate prior to the delegation, a written

delegation agreement describing the exact nature of the delegation, and continued monitoring ofthe delegate's performance.19

Endnotes

1. Frequently Asked Questions: Delegation and NCQA Accreditation, 15 April 1997, par.19-20, online, National Committee for Quality Assurance, Availablehttp://www.ncqa.org/accred/delgqa.htm, 24 Feb. 1998.

2. Emily Rhinehart, "You Can Pass the Buck, but Not The Responsibility," ManagedHealthcare (January 1998): 14.

3. Frequently Asked Questions: Delegation and NCQA Accreditation, par 7.4. National Committee for Quality Assurance (NCQA), 1998 Surveyor Guidelines for the

Accreditation of Health Plans (Washington, DC: National Committee for QualityAssurance, 1998), 356.

5. Ibid.6. Rhinehart, 14.7. Angela Lenox, RN, "Quality Assurance for Delegated Services," Healthplan

(September/October 1996): 31.8. Ibid., 28.9. Ibid.10. Ibid., 30-31.11. Ibid.12. Frequently Asked Questions: Delegation and NCQA Accreditation, par 14.13. Lenox, 36.14. Sheryl Tatar Dacso and Clifford C. Dacso, M.D. Health Plan Answer Book, 2nd Edition

(New York: Panel Publishers, 1997), E-1.15. Frequently Asked Questions: Delegation and NCQA Accreditation, par 28.16. Jane Garwood et al., "Credentialing," Supplement #7, ©1998, in Health Plan Law

Manual, vol. II (Gaithersburg, MD: Aspen Publishers, Inc., 1998), 68.17. Joint Commission on Accreditation of Healthcare Organizations (JCAHO), 1998-2000

Standards for Healthcare Networks (Oakbrook Terrace, IL: Joint Commission onAccreditation of Healthcare Organizations, 1998), 110.

18. American Accreditation HealthCare Commission/URAC (the Commission/URAC),Interpretive Guide: Health Network Standards (v. 1.0), Interpretive Guide (Washington,DC: American Accreditation HealthCare Commission/URAC, 1997), 39, 87.

19. NCQA 1998 Surveyor Guidelines for Accreditation of Health Plans, 104.

AHM Network Management: Environmental Consideration for NetworkManagement

Objectives

After completing this lesson you should be able to:

Understand the numerous legislative and regulatory requirements that affect networkmanagement

Identify the expectations of purchasers and consumers with respect to networkmanagement

Describe how health plans balance complex and sometimes competing interests andrequirements in managing provider

Introduction

In the past, employers frequently offered health plans in addition to their traditional indemnityhealth insurance plans. Now in many regions of the United States, the trend today is toward totalreplacement coverage, in which a purchaser awards its health coverage contract through acompetitive bidding process to a single health plan. The purchaser then discontinues any non-health plan products and presents the new health plan program to its employers as their onlychoice. As a result of this more restrictive practice, health plans are subject to a variety ofrequirements and expectations. Both federal and state governments are now scrutinizing theindustry more closely than ever before, primarily because a significantly large percentage of theAmerican public is now enrolled in some form of health plan. Purchasers want to purchaseadequate health benefits for their employees at a cost that is stable, predictable, and as low aspossible. Plan members want a wide range of covered services and freedom to choose from avariety of providers. In order to be successful, health plans must find a way to address all of theseconcerns.

In this lesson, we will discuss the legislative requirements and the purchaser, consumer, andprovider expectations that create the environment in which health plans must operate.

Legislative Requirements

Although the healthcare industry has always been regulated, the past few years have seen anincrease in the amount of legislative activity designed to establish standards for the industry andto address real or perceived concerns. While some legislation has been enacted specifically forhealth plans, courts have also held health plans accountable to existing statutes that govern otherindustries. The following sections describe the major types of federal and state legislation thataffect the network management function.

Federal Legislation

Regulation of insurance is typically left to the states. However, there has been some disagreementabout whether health plans qualify as insurance for regulatory purposes. Insurance functionsprimarily as a vehicle for funding healthcare services; managed healthcare plans, on the otherhand, provide for both the funding and the delivery of medical services. As a result, stateinsurance laws are not always appropriate for regulating health plans. To address the more

complex role of health plans, the federal government has passed new legislation and interpretedexisting legislation in light of health plans' particular circumstances. In this section, we willdiscuss some of this legislation.

HMO Act of 1973

The Health Maintenance Organization Act of 1973 (HMO Act) is a federal law designed to helpcontain spiraling healthcare costs by encouraging the development of HMOs. The originallegislation established requirements that health plans must meet to obtain federal qualificationand, for a period of time, provided federal funds for the establishment of HMOs. The HMO Actand subsequent amendments establish voluntary standards for health plans seeking federalqualification and serve as a model for state health plan statutes. There are several provisions inthe HMO Act that relate to the network management function. These provisions address thefollowing issues:

Defining the structure of network relationships through which basic health services (otherthan emergency services or infrequently used services) must be provided

Requiring geographic accessibility and 24-hour-a-day/7-day-a-week availabilitystandards for participating providers

Imposing requirements for continuing education and medical record-sharing by networkproviders

Establishing a quality assurance program that stresses health outcomes, provides for peerreview, uses systematic data collection of performance and patient results, and includeswritten procedures for remedial action

Establishing a mandated grievance resolution mechanism, including a method formembers to address grievances with network providers

Setting minimum standards for provider agreements with the health plan Requiring that each member have a health professional primarily responsible for

coordinating the member's overall healthcare

Health plans incorporate these standards into health plan policies and procedures with respect toprovider recruitment, contracting, credentialing, accessibility and availability, and quality andutilization management protocols.

Employee Retirement Income Security Act (ERISA) of 1974

The Employee Retirement Income Security Act (ERISA) of 1974 is a federal statute designed toensure the proper funding and administrative management of pension and employee welfareplans. As part of its numerous provisions, ERISA regulates employer-sponsored employeewelfare benefit plans-including health benefit plans-by establishing requirements for

guaranteeing employee rights and protections, reporting by plan fiduciaries, and providing written summary documents to plan participants.

While ERISA does not apply to issuers of health insurance products (such as HMOs), mostnongovernmental employer plans that include healthcare benefits for employees (including thoseprovided through health plans) fall under ERISA and are therefore subject to its provisions.

From a health plan and network management perspective, the most significant aspect of ERISA isits preemption provision, which means that the terms of ERISA generally take precedence overany state laws that regulate employee welfare benefit plans. State laws continue to regulate thebusiness of insurance, and apply to employee welfare plans if the plans are insured. Self-fundedplans are generally exempt from state mandates otherwise affecting health insurance companiesand health plans. In addition, as described later in this lesson, some courts have interpreted theERISA preemption in a way that prevents health plans from being held liable for malpractice bynetwork providers, including the associated compensatory and punitive damages associated withsuch liability.

Health Insurance Portability and Accountability Act (HIPAA) of 1996

In 1996, Congress passed the Health Insurance Portability and Accountability Act (HIPAA),which increased the continuity and portability of health coverage in the group and individualhealth insurance markets. HIPAA, which became effective on June 1, 1997, specifies that a grouphealth plan may not deny coverage or discriminate against individuals based on their healthstatus. Key provisions of HIPAA:

define the term "pre-existing condition" as any physical or mental condition for whichmedical advice, diagnosis, care, or treatment was recommended or received within thesix-month period prior to an individual's enrollment in a health plan

limit the exclusion period for pre-existing conditions to a maximum of 12 months afterenrollment (18 months for late enrollees)

reduce the length of a health plan's pre-existing condition exclusion period for apreviously covered individual by applying the individual's creditable coverage, whichincludes previous coverage under a group health plan, health insurance policy, or benefitprogram provided by the federal or state government

provide guaranteed access to healthcare coverage for small businesses and previouslycovered individuals who meet specified eligibility requirements

guarantee the renewability of group and individual health coverage, regardless of thehealth status of covered group members or individual insureds

Less than three months after HIPAA was enacted, Congress amended the law to include federalrequirements relating to mental health benefits and the minimum length of stay for maternitycases. The Mental Health Parity Act (MHPA) of 1996 prohibits health plans that offer mentalhealth benefits from applying more restrictive limits on coverage for mental illness than theyapply on coverage for physical illness. The Newborns' and Mothers' Health Protection Act(NMHPA) of 1996 mandates that coverage for hospital stays for childbirth cannot generally beless than 48 hours for normal deliveries or 96 hours for cesarean births. These provisions do notmandate coverage of mental health or maternity services; instead, they specify certain rules that ahealth plan must follow if it offers such coverage. Although states are given the opportunity toenforce the requirements of HIPAA, the federal government will step in to regulate health plansin this area if the state fails to do so.

Both Medicare and Medicaid, as well as other governmental programs, are bound by the HIPAArequirements. HIPAA requires the Centers for Medicare and Medicaid Services (CMS) to set up afraud-reporting hotline, much like the "whistle-blower" system used by the Internal RevenueService. The Act also provides funding to enforce regulations against fraud and other abuses inMedicare and Medicaid. Any fines or penalties collected are returned to the fund to be used forfuture enforcement activities.

Antitrust Laws

Antitrust laws exist to ensure free competition. Three of these laws-the Sherman Act, the ClaytonAct, and the Federal Trade Commission (FTC) Act-are especially relevant to health plans. Figure1B-1 gives a brief description of each of these antitrust laws. Most states have similar antitruststatutes patterned after these federal laws.

Antitrust laws divide anti-competitive business practices into two categories. One categoryconsists of specified business practices that are deemed illegal regardless of the justification orbenefit. Included in this category are such practices as:

Price fixing, in which supposed competitors agree to charge the same fees in order tokeep prices artificially high. It is illegal for a group of independent physicians, hospitals,or other providers to jointly agree to fix the prices they individually charge patients forspecified services.

Horizontal division of territories, in which competitors agree to divide territories orcustomers. For example, two HMOs would be in violation of antitrust laws if they split alarge employer group by agreeing to let one HMO market to some company employeesand to let the second HMO market to different company employees.

Group boycotts, in which competitors with significant market share agree to excludeother existing or potential competitors. A PHO that denies membership to a physiciansolely because that physician has admitting privileges at a competing hospital would beguilty of a group boycott.

Tying arrangement, in which the purchase of one product or service is tied to purchaseof another product or service. For example, it is unlawful for a provider-owned integrateddelivery system (IDS) to agree to provide specialty services to a health plan only oncondition that the MCO agree to contract with the IDS for other services.

The critical elements that make these activities antitrust violations are the relationship betweenthe competitors and the effect of their activities on competition. Competitors who are functioningas part of a single economic entity typically are not considered to be in violation of antitrust laws,because a single entity cannot conspire against itself to restrain trade. Activities of competitorsthat operate as separate legal and economic entities are considered violations. For example, underthe definition of price fixing, competing physicians can form an IPA and, through the IPA, canlegally agree to charge a single fee rate to IPA customers. Two IPAs competing in the samemarket as separate entities cannot jointly agree to set a single fee rate.

A second category of antitrust violations consists of business practices that are subject to "rule ofreason" standards which weigh a violation's anti-competitive effect in terms of market shareagainst any potential economic advantage that an entity would gain. Activities in this categoryinclude:

Refusal to admit providers or termination of providers. An HMO offering a closedprovider network is acting within the law when it limits participation in its network.Similar action by a provider-controlled health plan is potentially an anti-trust violation.

Exclusive arrangements which prohibit providers from participating in more than onenetwork. These arrangements, which are common among HMOs, are generally permitted.However, they may represent a restraint of trade if the health plan has substantial marketshare.

Individuals and corporations determined to be in violation of antitrust laws are subject to severesanctions and penalties, such as trebled civil monetary damages, criminal liability, consentdecrees, and (for individuals) imprisonment.

Self-referral Laws

Commonly referred to as the Stark laws, named after their sponsor, Congressman Fortney "Pete"Stark of the U.S. House of Representatives, the federal Ethics in Patient Referrals Act andsubsequent amendments prohibit physicians from referring Medicare or Medicaid patients toentities in which they have a financial or ownership interest. These entities include (1)laboratories; (2) providers of radiology, radiation therapy, and diagnostic services; (3) physicaland occupational therapy providers; (4) vendors of parenteral and enteral nutrients, equipment,and supplies; (5) home health agencies; (6) pharmacies; (7) durable medical equipment suppliers;and (8) hospitals (for either inpatient or outpatient services)1. Such referrals violate federal anti-kickback laws, which prohibit any financial inducement for referrals of Medicare or Medicaidpatient. Figure 1B-2 describes some of the permitted exceptions to these referral statutes.

The Stark laws have resulted in significant changes in physicians' ownership of ancillary servicesand their referrals to such services. From a health plan perspective, this change has removed someincentives for potential overutilization of the services. In addition, by removing pressure forhealth plans to contract with numerous vendors that individual physicians prefer, the self-referral

statutes have encouraged health plans to manage their contracts with ancillary services moreeffectively.

Fraud and Abuse Laws

Health plans are also affected by regulations that specifically relate to fraud and abuse byMedicare and Medicaid providers. These laws prohibit kickbacks to practitioners intended toinduce referrals of patients, the filing of false claims, and other fraudulent billing practices. Inaddition, states are increasingly taking the initiative to establish standards for special investigativeunits (SIUs) in the health plan industry. These standards include mandatory reporting ofsuspected or proven cases of fraud or abuse. Because of both statutory requirements and privatepurchaser expectations, many health plans have developed formal processes and procedures foridentification and prosecution of provider fraud. Health plans are working closely with state andfederal law enforcement agencies to achieve these goals.

Quality Improvement Laws

There are numerous federal and state laws governing quality assurance in health plans. In thissection, we will address legislative efforts in the area of quality improvement of health plans.

One important piece of federal legislation affecting network management is the Health CareQuality Improvement Act (HCQIA) of 1986. HCQIA established the National Practitioner DataBank and provides limited antitrust immunity to healthcare entities-including HMOs-for theircredentialing and peer review quality assurance activities. Before allowing a provider toparticipate in a network, a health plan must verify the provider's credentials. If those credentialsare inadequate, the provider is not offered a contract. An established network provider'sperformance is regularly evaluated by his or her peers. A negative peer review can result intermination of the provider contract. Without immunity, adverse consequences of credentialingand peer review activities might be considered to be a refusal to deal with the provider on the part

of the health plan. In order to enjoy protection against normal business activities being ruled inviolation of antitrust laws, health plans must follow HCQIA standards for due process. Thesestandards ensure that physicians receive fair hearings in situations involving alleged qualityassurance issues by requiring that health plans notify providers of the reasons for any adverseaction and give providers an opportunity to respond in a formal hearing. Such a hearing can beheld before a neutral arbitrator, a hearing officer, appointed by the health plan, who is not indirect competition with the provider, or before a panel of non-competing individuals appointed bythe health plan.

Consumer Protection Laws

Federal lawmakers have proposed a number of so-called patient bill of rights initiatives. Theintent of these initiatives is to address concerns about the health plan industry. Such proposalshave typically included a number of provisions that relate to or affect network management.

Federal lawmakers have proposed a number of so-called patient bill of rights initiatives. Theintent of these initiatives is to address concerns about the health plan industry. Such proposalshave typically included a number of provisions that relate to or affect network management.

Patient rights proposals from other sponsors have included recommendations for

extending coverage to treatment by providers of alternative therapies mandatory review times for provider applicants prohibitions against reimbursing providers differently based on licensure extending statutory labor rights to physicians preemption of ERISA provisions protecting health plans from malpractice suits

As of this writing, no federal regulation exists for consumer rights and responsibilities underhealthcare plans. However, many states have taken the initiative to adopt their own versions ofhealthcare reform bills that incorporate several of the federal recommendations. State legislatorshave been far more receptive than Congress to enacting health plan bills. We will discuss some ofthese state initiatives in a later section of this lesson.

State Regulation of Health Plans

As we noted earlier, self-funded employer plans and other payor plans subject to ERISA aregenerally exempt from state laws governing regulation of health insurance, including statutespertaining to health plans. Nevertheless, health plans must be licensed through the insurancedepartment and/or health department in each state in which they operate. In addition, many healthplan members are enrolled under fully insured arrangements. As a result, state regulations directlyor indirectly affect most health plans' network management functions.

National Association of Insurance Commissioners (NAIC) Model Standards

Because all health plans are licensed by the states in which they operate, having consistency instatutory requirements considerably facilitates compliance and administrative practices. TheNational Association of Insurance Commissioners (NAIC) is an organization of state insuranceregulators that develops model standards to encourage uniformity in insurance regulation.Although states are not required to adopt NAIC model standards, more than 30 states have

enacted the original NAIC 1972 HMO Model Act or developed their own statutes based on theModel Act. The NAIC has also adopted the Preferred Provider Arrangement (PPA) Model Act,which requires preferred provider arrangements to ensure reasonable access to covered networkservices, include cost-management mechanisms, and establish the amount and manner ofpayment to preferred providers. All states have enacted statutes regulating PPAs.

The NAIC has recently developed similar health plan accountability standards and has offeredthem to the states in the form of Model Acts. These Model Acts cover quality assessment andimprovement, professional credentialing verification, network adequacy, utilization review, andgrievance procedures. Two of these Model Acts—the Health Care Professional CredentialingVerification Model Act and the Managed Care Network Adequacy Model Act —have a directimpact on network management

The NAIC’s Health Care Professional Credentialing Verification Model Act specifies thecredentialing requirements health plans must satisfy in order to ensure that network providersmeet minimum standards of professional qualification. These requirements include

verification of the credentials of all contracted healthcare professionals in accordancewith written procedures,

collection of a minimum set of credentialing information by either primary or secondaryverification and mandatory recredentialing every three years, and

establishment of a process for providers to use to review and correct credentialinginformation

The Managed Care Plan Network Adequacy Model Act defines specific adequacy andaccessibility standards that health plans must meet. In addition, the Model Act requires healthplans to

hold covered persons harmless against provider collections for unreimbursed charges orunpaid claims and guarantee continued coverage for uncompleted treatment in the eventof plan insolvency,

develop standards to be used in selecting providers, adhere to specified disclosure requirements related to provider contract termination, and file written access plans and sample contracts with the state Commissioner of Insurance.

Health plans would have 18 months from the effective date of the Act to implement theseprovisions.

As of this writing, the NAIC is also developing the Health Information Privacy Model Act, whichaddresses the confidentiality of health information, and a model licensure act, which is part of theNAIC’s Consolidated Licensure for Entities Assuming Risk (CLEAR) initiative. The modellicensure act could replace a number of existing acts, including the HMO and PPA model acts,and incorporate other NAIC model acts by reference.

Benefit/Provider Mandates

One of the distinguishing characteristics of managed healthcare is its use of networks to deliverhealthcare benefits to plan members. Although health plans typically cover a broad range ofservices with limited member cost-sharing, they do not cover every medical service. Andalthough health plan networks typically include a variety of practitioners, facilities, and ancillaryservice vendors, they do not include all types of medical practitioners.

Consumers have lobbied their state legislatures to require coverage for some traditionallynoncovered services, such as infertility treatment, or expanded mental health benefits, and/orinclusion of specific types of nonphysician providers, such as chiropractors or acupuncturists.State legislatures have responded by enacting a number of benefit and provider mandates.

Such mandates have addressed consumer concerns, but they have created potential problems forpurchasers, who generally take the position that such mandates ultimately increase the cost ofproviding health coverage. This cost factor discourages some employers from offering healthcarecoverage altogether or prompts them to consider self-funding to avoid state requirements.

Health plan network management and medical management staff have attempted to reconcile thesometimes conflicting needs of consumers and purchasers by developing criteria for recruitingand selecting nontraditional providers into their networks and establishing guidelines regardinghow and under what circumstances the services of these providers will be covered.

Any Willing Provider Laws

Once a health plan's network includes a sufficient number of providers who meet the health plan'sstandards with respect to credentialing, quality, access, and cost-effectiveness, the health planmay choose to close its panels except to providers who join existing practices or who fulfill anunmet need in the area of geographical access or services. In states that have any willing provider(AWP) laws, such action on the part of the health plan is prohibited. Any willing providerstatutes require that health plans contract with any provider who is willing to abide by the healthplan's policies and procedures and who meets its credentialing requirements. Figure 1B-3describes a recent US Supreme Court ruling regarding the legality of any willing providerstatutes.

Both the health plan industry and the business community have vigorously opposed passage ofany willing provider bills. Including an unlimited number of providers results in fewer membersper provider. From a provider perspective, such action negates one of the reasons that providersjoin a network-increased patient volume. From a health plan perspective, enactment of anywilling provider laws often jeopardizes the financial and contractual arrangements that areinherent in health plans and that are essential to effective network management. In addition, ahealth plan with a relatively large number of network providers may not be able to properlyeducate its providers about utilization management, to monitor utilization patterns of networkproviders, or to correct overutilization. Overutilization can contribute to increased plan premiumsand to financial losses for providers who are compensated on a risk-sharing basis.

** Figure 1B-3In Kentucky Association of Health Plans v. Miller, the issue the Supreme Court decided iswhether Kentucky's broad law violates the Employee Retirement Income Security Act (ERISA)or whether the state law is a valid regulation of the business of insurance. In the January 14, 2003hearing before the court, the attorney for the Kentucky Association of Health Plans argued thathealth plans need to use limited provider networks to deliver quality health care at a reasonablecost. The state argued that the Kentucky law is a legitimate consumer protection measure thatgives consumers access to providers of their choice.

On April 2, 2003, the US Supreme Court, in a unanimous decision, affirmed the Sixth Circuitdecision that found that Kentucky's "any willing provider' laws are saved from ERISApreemption by the ERISA saving clause because the laws regulate insurance. In the decision, the

Supreme Court held that for a state law to be deemed a law which regulates insurance, and thusbe saved from ERISA preemption, it must satisfy two requirements: 1) it must be specificallydirected toward entities engaged in insurance; and 2) it must be substantially affect the riskpooling arrangement between the insurer and the insured.

Health Plan Reform Bills

State legislatures have also enacted health plan reform bills which address specific administrativepractices of managed healthcare plans. These reform bills, like consumer protection lawsproposed at the federal level, affect network management. Figure 1B-4 describes some of theproposed reforms.

Most well-run health plans already follow many of these practices. State reform bills are designedto modify the activities of those organizations that fail to meet appropriate standards in the waythey do business.

Vicarious Liability

Under the theory of apparent or ostensible agency, a health plan may be considered responsiblefor malpractice by its network providers if "the patient reasonably relied upon actions orrepresentations of the health plan, which 'held out' the negligent provider as its employee oragent."4 In other words, if the member reasonably believed that the physician (or other provider)was acting as the health plan's employee or agent while providing negligent care, the membermay have cause to bring action against the health plan organization. This legal concept is knownas vicarious liability. Courts have been divided over whether ERISA preempts claims of vicariousliability against health plans and there have been a number of proposals to amend ERISA to allowcompensation from health plans for lost wages, death or disability, pain and suffering, emotionaldistress, and/or other damages that members may suffer in a malpractice situation. Texas was the

first state to enact legislation holding health plans liable if the plan fails to exercise ordinary carein making treatment decisions. Several other states have also considered such bills.

Until there is a definitive ruling on the subject, health plans can take a number of steps to reducetheir exposure to vicarious liability claims. These steps include maintaining adequate malpracticeinsurance, implementing risk management and quality assurance programs for their networks, andestablishing procedures to assess the qualifications and clinical competence of participatingproviders.6 In addition, health plan provider agreements should explicitly state that thepractitioner or provider is an independent contractor (a fact that should be reemphasized inmarketing and membership literature). Agreements should also avoid restrictions on provider-member communication involving treatment decisions and allow for arbitration or otheralternative dispute resolution procedures.7

Accreditation Standards

Accreditation is another way of ensuring that purchasers and consumers receive qualityhealthcare services. A new, private industry has emerged to assess the quality of care and servicethey provide. Although assessment programs generally fall into two categories-accreditation anddata reporting-these categories are increasingly being integrated into combined quality-evaluation systems.

At the same time-much to the relief of health plans concerned about multiple requirements-several of the organizations that produce health plan report cards are pooling their efforts in themeasurement development process and cooperating to make use of each others' measures.

While the National Committee for Quality Assurance (NCQA) is probably the best known of thequality measurement organizations, both the Joint Commission on Accreditation of HealthcareOrganizations (JCAHO) and the American Accreditation HealthCare Commission/URAC (theCommission/URAC) have developed accreditation programs for health plans. In an effort tostandardize regulation among the states, the National Association of Insurance Commissioners(NAIC), an organization made up of the state insurance commissioners, has developed a set ofmodel guidelines in a variety of operational and contractual areas. The following pages provide abrief description of the major accrediting and quality assessment organizations.

National Committee for Quality Assurance (NCQA)

The National Committee for Quality Assurance (NCQA) serves as the primary accreditingagency for most HMOs and similar health plans, managed behavioral health organizations(MBHOs), and credentials verification organizations (CVOs). A credentials verificationorganization (CVO) is an organization that gathers and verifies information about thequalifications and credentials of healthcare practitioners. Health plans sometimes use informationfrom CVOs to determine which practitioners to select and retain in the network. NCQA is wellknown for both its health plan accreditation process, which began in 1990, and the HealthEmployer Data and Information Set (HEDIS) report card. Although NCQA's accreditationprocess and HEDIS have been largely distinct in the past, NCQA took steps to integrateaccreditation with select HEDIS measures into their Accreditation '99 program.

Accreditation '99 emphasized demonstrated results (or performance) and evaluated the processeshealth plans use to achieve those results. Under Accreditation '99, accredited health plans wererated as Excellent, Commendable, Accredited, or Provisional. In all, Accreditation '99 included

54 accreditation standards, 11 HEDIS effectiveness of care measures, and 10 consumer surveymeasures.

Although the specific details of NCQA accreditation and HEDIS requirements are beyond thescope of this lesson, with Accreditation '99 NCQA announced the following reporting categoriesfor accreditation of health plans:

Access and Service Qualified Providers Staying Healthy Getting Better Living with Illness

These categories describe performance in areas such as quality management and improvement,utilization management, network management, coordination of care, medical record review,preventive health services, patient rights and responsibilities, and provider credentialing.

HEDIS includes a broad range of measures that use data collected through a combination ofmedical chart review, information system transactions (based on claims, eligibility, and financialdata), and patient surveys. HEDIS includes measures from the following domains:

Effectiveness of care Access and availability of care Satisfaction with the experience of care Health plan stability Use of services Cost of care Health plan descriptive information

Participating health plans voluntarily report HEDIS results to NCQA. These results are availablethrough a computerized NCQA database called Quality Compass and can be accessed bypurchasers and consumers for use in evaluating and selecting health plans. NCQA has alsocreated additional programs, including the development of standards for auditing HEDIS data toensure that health plans calculate measures correctly, an auditor certification program,accreditation programs for new health plans and managed behavioral health organizations(MBHOs), and certification programs for physician organizations and CVOs. Private employergroups, as well as state and federal regulations, have increasingly begun to require both NCQAaccreditation and HEDIS reporting for evaluation and selection of health plans.

Joint Commission on Accreditation of Healthcare Organizations (JCAHO)

Best known for its accreditation of hospitals, the Joint Commission on Accreditation ofHealthcare Organizations (JCAHO) has also developed standards for accrediting health planprovider networks and health plans, psychiatric and long-term care facilities, substance abuseprograms, and home care organizations. JCAHO defines healthcare networks as "entities thatprovide or provide for integrated healthcare services to a defined population of individuals." Thedefinition includes HMOs, PPOs, IPAs, vertically integrated (full-service) networks, andhorizontally integrated (specialty) networks. JCAHO offers separate network accreditation tracksfor HMOs, PPOs, integrated delivery systems (IDSs), and other networks.JCAHO's review program evaluates health plan performance in the areas of

patient rights, provider responsibilities and ethics, continuum of care, education and communication, health promotion and disease prevention, leadership, management of human resources, management of information, and improving network performance.

JCAHO evaluates a health plan's compliance with these standards in terms of outcomes,processes, and excellence of care and scores the health plan's performance numerically. Healthplans that complete JCAHO review receive one of the following designations: Accreditation withCommendation, Accreditation with or without Recommendation, Provisional Accreditation,Conditional Accreditation, or Non-accreditation.

In addition to the accreditation standards, JCAHO has developed a report card system known asORYX, which incorporates over 200 measures developed by JCAHO, NCQA/HEDIS, theFoundation for Accountability (FACCT), the University of Colorado Health Science Center, andthe University of Wisconsin. The ORYX initiative was introduced in February 1997, with thegoal of integrating outcomes and other performance measurement data into JCAHO'saccreditation process for hospitals and long-term care facilities. Each hospital and long-term carefacility must select a performance measurement system that best meets its needs, as well as atleast two, but not more than five, clinical performance indicators that are relevant to the facility'sinternal performance improvement activities. The ORYX Plus program is available fororganizations that wish to measure their outcomes on a more advanced level. ORYX Plusrequires facilities to choose a minimum of 10 performance measures from a set of 32 standardmeasures.

American Accreditation HealthCare Commission/URAC (the Commission/URAC)

The Utilization Review Accreditation Commission (URAC) was founded in 1990 to promoteconsistent standards in the application of utilization procedures. In 1996, URAC broadened itsscope to include national network accreditation standards and became the AmericanAccreditation HealthCare Commission/URAC (the Commission/URAC). TheCommission/URAC currently offers accreditation programs in the following categories:

Health utilization management Health networks (HMOs, PPOs, PHOs, and other types of networks) Network practitioner credentialing Workers' compensation utilization management Workers' compensation networks Credentials verification organizations (CVOs)

The Commission/URAC evaluates health networks on the basis of National NetworkAccreditation Standards, which are a combination of health network accreditation and utilizationmanagement accreditation standards. This evaluation addresses the following general areas:

Network management Utilization management Quality management Credentialing Member participation and protection

Currently, 20 states and the District of Columbia have incorporated the Commission/URAC'saccreditation into their regulation of health plans.

Effect of Accreditation Standards on Network Management

Because of the breadth and specificity of accreditation standards, health plans must not onlyestablish and document policies and procedures, they must also communicate those policies andprocedures to network providers. Incorporating such information into the health plan's materials,provider orientations, and ongoing provider service is an important factor in effective networkmanagement. Many of the established evaluation measures involve assessments of providerclinical expertise and performance, including utilization management and quality assuranceissues. It is essential, therefore, that network providers understand these expectations andprocesses and that health plans recruit providers who meet the necessary standards. Althoughnetwork management staff are not usually directly involved with the coordination of accreditationand report card preparation, the active involvement of provider relations staff is an importantfactor in ensuring that network providers satisfy both regulatory requirements and purchaser andcustomer expectations.

Purchaser Expectations

The vast majority of consumers obtain health coverage through a purchaser arrangement in whichsomeone other than the consumer arranges for the coverage. Some of these purchasers are privateemployers or business groups that purchase healthcare coverage for their employees or groupmembers. Other purchasers are government agencies offering healthcare coverage through publicprograms such as the Federal Employees Health Benefits Program (FEHBP), Medicare,Medicaid, and workers' compensation. Because purchasers pay the bill for the majority ofhealthcare expenditures in the United States, they play an active role in establishing requirementsand standards for health plans.

Private Purchasers

The business community has had an enormous influence on the growth of health plans, and theexpectations of employers, unions, and business coalitions have had a direct effect on the waythat health plans operate. Employers, concerned about the rising costs of healthcare coverage,have turned to health plans to provide more cost-effective care than is available in fee-for-serviceplans. Today, approximately 61% of individuals covered by employer health plans are enrolled insome form of health plan.8 Employers are also concerned with ensuring that their employeesreceive quality healthcare. During the past several years, businesses have become moresophisticated in their search for value-a combination of reasonable price and quality of care andservice. Employers look for this value in the form of limited premium increases, formal qualityand disease management programs, customer service standards, and quality measurementreporting.

In order to avoid the administrative expenses of offering multiple carriers, many companies use acompetitive bidding process to select a single health plan to serve all their employees (regardlessof location) and to address all of the employer's coverage needs.

Health plans typically bid for a purchaser's account by responding to the purchaser's request forproposal (RFP). Under the RFP process, multiple plans bid for an account by completingextensive questionnaires and undergoing in-depth site visits. Health plans must demonstrate thatthey have sufficient network capacity, i.e., that the plan has enough providers to serve all of thepurchaser's employees adequately. The purchaser also looks for the availability of preferredphysicians, hospitals, and other providers with regional, national, or world-wide reputations forspecialized care and treatment. If the purchaser is sufficiently important to the health plan, it maybe necessary for the network management staff to guarantee recruitment of specified providerswho are not already under contract. These additional providers must meet the health plan'scredentialing standards in order to be included in the network. Recruitment of specified providersmay be particularly important in a union situation, in which the purchaser's contract with theunion requires the continued availability of specified providers or benefits. Further, morepurchasers are selecting health plan products that allow their employees to receive coverage forelective, out-of-network care. Once the bidding and selection process is completed, purchasersfrequently formalize their requirements through carrier guarantees, whereby the selected healthplan agrees to pay specified financial penalties if it fails to deliver on certain parameters.

Because of their powerful effect on state and national economies, private purchasers have beenable to influence a number of legislative initiatives, thus benefiting both themselves and thehealth plan industry. Such efforts have helped defeat any willing provider bills, benefit mandates,and mandatory provider selection provisions that can drive up the cost of healthcare.

Government Purchasers

The federal government has long offered health plans as an option to government employees, andnow offers health plan options to Medicare beneficiaries. In addition, virtually all states now offeror even require health plans as part of their Medicaid programs.10 Some states have enactedlegislation that allows health plans in workers' compensation programs-long considered the lastbastion of unregulated, fee-for-service medicine. Even the Department of Defense, through theMilitary Health Services System's TRICARE program, has established demonstration projectsinvolving health plans. In the following sections we provide a brief overview of thesegovernment-sponsored programs. The structure and benefits available under the plans arepresented in Healthcare Management: An Introduction and the laws regulating their operationsare discussed in Health Plans: Governance and Regulation. A more detailed discussion ofnetwork management in government programs is included in later lessons of this text.

Federal Employees Health Benefits Program (FEHBP)

Approximately 10 million enrollees obtain health coverage through the Federal EmployeesHealth Benefits Program (FEHBP), which offers a government-wide indemnity plan, employeeassociation or union plans, and approximately 400 prepaid plans (mostly HMOs) to federalemployees, retirees, and their dependents. One of the factors in selecting health plans forinclusion in the FEHBP program is an evaluation of network access and availability. Health plansare required to demonstrate initial and ongoing capability in the appropriate service areas.Although FEHBP does not require a standard benefit package, participating plans must includecertain core benefits, such as hospital benefits, surgical benefits, ambulatory patient benefits,

supplemental benefits, and obstetrical benefits. FEHBP also requires plans to include coverage ofsubstance abuse and mental health services.

Medicare

Medicare is the federal healthcare program for individuals age 65 and older, as well as individualsof any age who are disabled or who have end-stage renal disease. The Centers for Medicare andMedicaid Services (CMS) regulates Medicare. CMS also establishes standards for health plansseeking to contract with the program. Historically, health plans have participated in Medicarethrough either a risk contract or a cost contract with CMS. The Balanced Budget Act of 1997revised the contracting process and under the new Medicare+Choice program all planscontracting with Medicare are required to accept risk. The Medicare Modernation Act of 2003continued to reform Medicare, providing needed payment reforms and benefit enhancements andchanging the name of the program to Medicare Advantage. Significantly for health plans,provider-sponsored organizations (PSOs) can now contract directly with CMS and compete withestablished health plans.

Health plan network management departments must be aware of Medicare regulations withrespect to network access and availability, as well as regulatory standards for quality assurance,utilization management, fraud and abuse, and reporting. These regulatory requirements arediscussed in more detail in Special Consideration for Medicare Networks.

Medicaid

The Medicaid program provides health coverage to low-income, medically needy, and disabledindividuals. Although it is a joint federal and state program, Medicaid is primarily regulated onthe state level. Most states' Medicaid programs are designed to encourage or even requirerecipients to enroll in approved health plans. States have looked to health plans as a way ofexpanding network availability, ensuring continuity of care, implementing quality managementprograms, and controlling healthcare expenditures. Health plans with Medicaid programs mustdeal with a number of network-related issues, including ensuring acceptable reimbursement toproviders, addressing provider concerns about serving the Medicaid population, contracting withtraditional Medicaid providers, working with appropriate social service agencies to meetrecipients' nonmedical needs, and overcoming the skepticism toward health plans of manyMedicaid consumer and provider advocacy groups. Network requirements under Medicaid arediscussed in more detail in Special Considerations for Medicaid Networks.

Workers' Compensation

Workers' compensation programs are designed to cover both the medical expenses associatedwith workplace injuries and the associated lost wages. Because of escalating costs, many statesare passing legislation enabling the development of managed workers' compensation programs. Insome cases, health plans have developed so-called "24-hour" programs that integrate workers'compensation, industrial health, and group health coverage into one comprehensive package.There are several important network issues in the development of a successful managed workers'compensation program. These issues include the following:

Recruiting a sufficient number of physicians and other providers in the appropriatespecialties, especially those who have experience in occupational medicine

Developing appropriate reimbursement methods

Educating providers to evaluate a patient's ability to return to work Developing medical/disability protocols appropriate to work-related injuries11

Additional information on workers' compensation programs is included in Provider Networks forWorkers' Compensation.

Military Health Services System (MHSS)

The Department of Defense has attempted to accommodate the mobile armed forces population'sneed for managed healthcare services through its TRICARE program. TRICARE, whichincorporates health plans into the military's original Civilian Health and Medical Program of theUniformed Services (CHAMPUS), offers coverage in Figure 1B-5.

TRICARE contracts with private health plans that provide administrative services and additionaltreatment facilities. Active-duty military personnel are automatically enrolled in the HMO optionwith no deductibles and reduced copayments (TRICARE Prime). Eligible family members anddependents can enroll in eiither the HMO option (TRICARE Prime), the PPO plan (TRICAREExtra) or an indemnity plan (TRICARE Standard).

Issues for Network Management

Network adequacy and accessibility and provider contracting are critical issues that affectnetwork management in governmental healthcare programs. Another area of concern is thequestion of reimbursement. Typically, governmental entities have a formula through which theyestablish payments-usually capitated-to health plans. Unlike fee-for-service arrangements, suchpayments do not directly reimburse health plans for the cost of rendering medical care andmeeting administrative expenses. In many cases, especially in Medicaid and workers'compensation, the provisions of governmental programs are sufficiently different fromcommercial contracts that health plans incur extra expenses in fulfilling the additionalrequirements. As a result, health plans may find it necessary to limit provider reimbursement andnetwork capitation. These reimbursement limitations may cause providers to withdraw from thenetwork, creating disruption in service to plan members. In some instances, health plansthemselves have withdrawn from participation in governmental programs, including Medicareand Medicaid, because the reimbursement limitations were too restrictive.

Member Expectations and the Role of Consumerism

Because of the growing need to manage healthcare expenditures, enrollment in health plans hasincreased significantly. Purchasers and members alike are attracted to and have benefited fromthe many advantages that health plans provide, including broad coverage, lower premiums,limited copayments, management of unnecessary medical expenditures, and formal qualityimprovement initiatives. Even indemnity health insurance plans have adopted some health plantechniques, and some employers now offer their employees only one option for healthcarecoverage-a health plan.

The growing sophistication of the public toward medical care in general has led consumers tobecome more interested and involved in healthcare coverage issues, including access to datarelated to quality and satisfaction, better service and convenience, and a greater say in healthcaretreatment decisions. As described earlier in this lesson, the consumerism movement has helped to

increase the public's support of state and federal statutes that govern how health plans operate.We have already reviewed how public pressure has led to health plan coverage for maternity care,mastectomy treatment, and emergency room visits, as well as contract provisions that enhancepatient-provider communication and require external appeal mechanisms for denied services andmandatory turnaround times for medical review decisions. Consumers increasingly expect theirhealth plans to cover new technologies or last-resort treatments, even if the services areconsidered experimental, marginally effective, or not medically necessary. Regulators, of course,must consider the ramifications of such coverage.

Selection of Providers

Health plans consider many factors as they assemble provider networks, including providers'

ability to provide covered services clinical reputation geographic accessibility willingness to provide care in a high-quality, cost-effective manner consistent with a

health plan approach willingness to accept financial reimbursement and/or risk-sharing methodologies

It is also important that network providers be viewed as desirable by existing and future members.Consumers often judge a plan by whether or not it includes providers-especially physicians andhospitals--that they know and trust. For major employer accounts, health plans may ask memberswhich providers they would like to have in the network or analyze data to determine whatprovider usage patterns already exist. With that information, the plan can then attempt to targettheir network recruiting efforts toward those providers.

In the case of other types of accounts (particularly in Medicare, Medicaid, and othergovernmental programs), health plans try to recruit providers who offer services that are bestsuited to meet the healthcare needs of those populations. For example, if a state's Medicaidenrollees currently receive care from providers who are not already part of a health plan network,health plans may recruit those traditional Medicaid providers as a part of their marketing strategy.Similarly, because of the special features or demographic attributes of some purchaser programs,health plans may need to add new types of providers to their networks or expand the existingnumber to accommodate members' needs.

The health plan must verify the credentials of all network applicants before admitting them to thepanel. Only under special circumstances can a health plan accept a provider that does meet itscredentialing standards. This issue is more fully discussed in Collecting and Verifying Data forCredentialaling Purposes.

Open Access

A combination of member initiatives, state legislation, and reevaluation by health plans of theeffectiveness of current referral programs has caused a growing number of health plans to removemany of the referral requirements. More health plans allow members to go to nonparticipating aswell as participating specialists, permit female members to access obstetrician/gynecologistsdirectly without a PCP referral, and authorize some types of specialists to serve as PCPs formembers with serious or chronic conditions.

These changes have a number of implications for network management. While allowing membersmore open access to providers lessens the administrative requirements on participating providers,health plans face an additional challenge in ensuring that the primary care physician has acomplete record of the care his or her patients receive. Open access also makes it more difficultfor a risk-bearing network to manage utilization and to operate successfully under a capitationarrangement. In such open-access products, it becomes even more important that the health plan'sinformation system supports timely and accurate reporting, including provider profiling and thecapability to identify specific areas or providers requiring review.

In the case of other types of accounts (particularly in Medicare, Medicaid, and othergovernmental programs), health plans try to recruit providers who offer services that are bestsuited to meet the healthcare needs of those populations. For example, if a state's Medicaidenrollees currently receive care from providers who are not already part of a managed carenetwork, health plans may recruit those traditional Medicaid providers as a part of their marketingstrategy. Similarly, because of the special features or demographic attributes of some purchaserprograms, health plans may need to add new types of providers to their networks or expand theexisting number to accommodate members' needs.

The health plan must verify the credentials of all network applicants before admitting them to thepanel. Only under special circumstances can a health plan accept a provider that does not meet itscredentialing standards. This issue will be more fully discussed in Collecting and Verifying Datafor Credentialing Purposes.

Alternative Healthcare

To adapt to consumers' increased use of non-traditional therapies, health plans have begun toinclude alternative healthcare approaches, such as chiropractic, naturopathy, homeopathy, andacupuncture, in their benefit plans. In some cases, statutory requirements on the state level havemandated that health plans include providers of alternative therapies as part of their networks. Inother instances, health plans have recognized the growing popularity of these services and havechosen to provide coverage of alternative healthcare-usually as a rider-as a way of differentiatingthemselves from competitors in the marketplace.

While health plans have the experience and literature to establish credentialing standards, medicalnecessity criteria, and performance parameters for conventional healthcare, they often lack theexpertise to do the same for alternative healthcare. In order to arrange access to alternativehealthcare services, health plans frequently seek advice from professional associations andalternative medicine practitioners.

Environmental Changes in Store for Health Plan

The ongoing debate in the federal and state legislatures virtually ensures further changes in theexternal environment for health plans. Health plans must be prepared to meet increasing levels ofreview and regulation and to manage their networks accordingly.

Endnotes

1. 42 U.S.C. § 1395nn(h)(6).

2. The Advisory Commission on Consumer Protection and Quality in the HealthcareIndustry, Executive Summary, Consumer Bill of Rights and Responsibilities, preliminarydraft, January 16, 1998.

3. Jerry Geisel, “GOP Backs Proposal on Patient Protection,” Business Insurance (June 29,1998): 4.

4. Jacqueline M. Saue and Gregg H. Dooge, “ERISA and Health Plan,” in The ManagedHealth Care Handbook, Peter R. Kongstvedt, M.D., ed., 3rd ed. (Gaithersburg, MD:Aspen Publishers, Inc., 1996), 956.

5. American Association of Health Plans, Guide to Accreditation (Washington, D.C.:American Association of Health Plans, June 1996), 83.

6. Sheryl Tatar Dacso and Clifford C. Dacso, M.D., Health Plan Answer Book, 2nd ed.(New York: Panel Publishers, 1997), 5-51.

7. Brian Christaldi, “A Risk Analysis of Managed Care Liability,” Managing EmployeeHealth Benefits (spring 1997), 6–7.

8. Employee Benefit Research Institute, “Typical Employee Benefit Package in Mediumand Large Private Establishments with 100 or More Full-Time Employees,”http://www.ebri.org/facts/0298afact.htm (23 July 1998).

9. Jon R. Gabel, Kelly A. Hunt, and Kimberly Hurst, “When Employers Choose HealthPlans: Do NCQA Accreditation and HEDIS Data Count?” KPMG Peat Marwick, LLP,September 1998, http:// www.cmwf.org/programs/health_care/gabel_ncqa_hedis_293.asp (6 November 1998).

10. “Health Plan in Medicare and Medicaid,” Fact Sheet (CMS Press Office, January 28,1997).

11. Dacso and Dacso, 11-34–11-35.

AHM Network Management: Identifying and Recruiting Providers for a HealthPlan Network

Objectives:

After completing this lesson you should be able to:

List and describe the types of providers included in most health plan networks Discuss the factors that a health plan considers when identifying potential network

hospitals and practitioners Explain the advantages and disadvantages of a health plan's contracting with (1)

individual practitioners and (2) provider organizations Discuss the methods that health plans may use to recruit candidates for their provider

networks

Introduction

In previous lessons, we introduced you to the strategies a health plan can use to determine thestructure, size, and composition of its provider network and to the ways it can delegate networkmanagement activities. Once a health plan has established a strategy, it must assemble theproviders who will make up the network. We begin this lesson with a discussion of how a healthplan defines the types and number of providers it needs in its network. We then present some ofthe methods a health plan can use to identify and recruit the most appropriate providers for itsnetwork.

What Kinds of Providers to Include in the Network

The types of providers included in the panel must reflect the full range of services that the healthplan will offer. In most cases, the network includes primary care providers, specialists, healthcarefacilities such as hospitals and pharmacies, and ancillary care providers as shown in Figure 3A-1.

Primary Care Providers

Traditionally, primary care providers have been chosen from the following categories:

General practice Family practice Pediatrics Internal medicine Obstetrics-Gynecology

Many health plans have begun to include nurse practitioners (NPs) and physician assistants (PAs)in their primary care panels. NPs and PAs perform most of the same primary care and preventivefunctions as physicians. In most situations, NPs and PAs work under the supervision of a doctor,although the doctor may not always be physically present when care is delivered. State laws varyon the types of services that NPs and PAs can provide independently, that is, without consulting aphysician about a particular case. For instance, the state of New York gives NPs unrestrictedprivileges to diagnose and treat patients, write prescriptions, and admit patients to a hospital.1 Byusing NPs and PAs as a supplementary source of primary care, health plans may be able toprovide many healthcare services more cost-effectively.

The coordination of care for inpatients has been a concern of both hospitals and health plans forsome time, especially for complex cases involving several different medical specialties. In manycases, PCPs lack the time to visit hospitalized patients regularly to oversee care. In addition,many PCPs do not have the range of knowledge to assume the team leader role for patients whohave complex or multiple problems. As a result, inpatient care is not always optimal, andinpatient stays may be longer and more costly than necessary.2

In their efforts to improve the quality and cost-effectiveness of care for inpatients, some healthplans have begun to include hospitalists in their provider networks. Hospitalists, also known asinpatient specialists, are physicians who spend at least one quarter of their time in a hospitalsetting where they serve as the physicians-of-record for patients that have been "handed off" tothem by PCPs.4 The hospitalist's main function is to coordinate diagnostic and treatment activitiesto ensure that the patient receives appropriate care while in the hospital. The patient returns to theoriginal PCP after discharge. A hospitalist system can improve the quality and efficiency ofinpatient care because a hospitalist focuses on inpatients and sees them at least once a day.

Hospitalists are often internists, but may be from other specialties as well. Hospitalists typicallyhave a great deal of experience in the inpatient setting and are familiar with the most commondiseases and injuries that lead to hospitalization. Some hospitalists practice exclusively in hospitalsettings on behalf of health plans, the hospital, or provider organizations, and do not maintainoutpatient practices.

The positive aspects of the hospitalist role seem clear. Health plans should carefully examine thisconcept, however, before endorsing it. By focusing on inpatient care alone, the hospitalist rolegoes against the concept of disease management. Disease management calls for coordinatedintervention at the earliest appropriate stage of the patient's disease or diseases. The hospitalistprovides coordinated intervention, but only after hospitalization. Health plans may achieve betterresults by arranging the transfer of care for complex, multi-diagnosis cases from PCPs tospecialists or to internal medicine physicians with relevant subspecialties. For example, a diabetic

patient experiencing complications could be transferred to an endocrinologist or internist with asubspecialty in endocrinology for both primary and secondary care. Such a specialist can thencoordinate care both inside and outside the hospital. There may still be a benefit to havinghospitalists on staff at hospitals to coordinate care when the attending specialist or internistcannot be available, but, in general, complex cases require a team leader both inside and outsidethe hospital.

Specialists

A specialist is a healthcare professional who voluntarily limits practice to a certain branch ofmedicine related to specific services or procedures, certain age categories of patients, specificbody systems, and certain types of diseases. A specialist is usually a physician, but the term alsoapplies to other healthcare providers who have had special education and training in a specificfield.5

Ideally, the health plan will have every specialist category represented in its provider panel withappropriate geographic distribution. Even if the health plan cannot obtain its preferred financialarrangements with a particular specialty, a contract that at least assures the provider'sparticipation in utilization management and includes a no-balance-billing provision is superior tono contract at all. Health plans in rural markets may be unable to contract with certain types ofspecialists because the specialty is absent from the service area. In geographic areas where thehealth plan encounters a shortage of PCPs, the health plan may consider contracting with somespecialists for primary care services provided to patients with chronic conditions. For example, acardiologist may be willing to assume primary care responsibilities for patients whose maincomplaint is congestive heart failure.

Healthcare Facilities

With the exception of small cities and rural markets, most markets have an oversupply offacilities of all types (hospital, subacute, skilled nursing, ambulatory surgery and otherambulatory diagnostic and treatment centers). Due to this general overcapacity, health plans canusually assemble a large facility network that matches the physician network in terms ofgeographic distribution and physician admitting privileges. Large facility panels are possiblebecause hospitals and other facilities in an overcapacity market will grant favorable pricearrangements in order to avoid losing patients. When one hospital grants a larger price concessionin exchange for additional patient volume directed to it, competitor hospitals are likely to cutprices further to preserve their own patient volume. For this reason, narrow institutional panelsare not generally necessary. In addition, since hospitals are more visible in a community thanindividual physician groups, it is more likely for the market to demand the inclusion of aparticular prestige hospital.

Ancillary Service Providers

In addition to contracting with PCPs, specialists, and healthcare facilities, health plans alsoinclude ancillary service providers in the network. Ancillary services is an umbrella term for avariety of healthcare services that are an adjunct to primary, specialty, and inpatient facility care.Ancillary services are typically provided by non-physicians and include both diagnostic andtherapeutic services such as laboratory tests, radiology, physical therapy, and home healthcare.For each type of ancillary service, the health plan must estimate the needs of its members andinclude a sufficient number of providers in the network. Pharmacy services are an especially

important type of ancillary service because most health plan members have contact with apharmacist at some point in time.

Pharmacies

The number of pharmacies needed in a health plan network depends on how the health planintends to use pharmacists. For the routine filling of prescriptions, the health plan should contractwith all pharmacies that are willing to contract for competitive rates for ingredient cost anddispensing fees. However, the pharmacist can play a broader role than merely dispensing drugs.Some estimates indicate that the cost of inappropriate use of prescription drugs is over $76 billionper year, due to poor patient compliance, drug reactions and interactions, and inappropriateprescribing.6 Health plans can decrease the incidence of inappropriate drug use by encouraging apartnership between physicians and pharmacists for planning and implementing drug therapies. Ifthe health plan wishes to expand the role of pharmacists in this way, the health plan may have todepend on a smaller network of pharmacies because of the limited number of pharmacists whoare trained to collaborate with physicians on prescribing.

Which Providers to Include in the Network

The facilities and practitioners that a health plan recruits for its provider network must be able todeliver the medical services covered under the health plan's benefit package to plan memberswhile meeting the health plan's standards for access, quality, utilization, and cost-effectiveness.Determining the suitability of healthcare facilities and professionals for the network requires anevaluation of member and purchaser needs and provider characteristics. The following sectionsdiscuss considerations for identifying and recruiting two critical components of a network:hospitals and individual practitioners.

Hospitals

The number of hospitals included in a health plan network depends, in large part, on the size ofthe plan's service area. A plan covering a localized population or operating in a small, rural areamay need to contract with only one hospital. On the other hand, a plan whose members aregeographically dispersed across a large metropolitan area will need to contract with multiplehospitals.

When evaluating which hospitals to recruit for its network, a health plan considers the followingattributes of potential candidates:

Accessibility to plan members. A health plan must consider a hospital's location relativeto the defined service area and to competing hospitals. In some cases, the plan must alsoconsider such factors as the availability of public transportation between members' homesor workplaces and area hospitals.

Costs. The hospital's costs and use of resources should be compatible with the healthplan's standards and competitive with other hospitals in the service area.

Types and quality of services offered. The hospital's facilities and services must be bothadequate and appropriate for the plan's membership. A plan that covers large numbers ofyoung families will benefit from having network hospitals that offer obstetrical andpediatric services. A network hospital that serves Medicare beneficiaries should offeradequate geriatric services.

Reputation. Because consumers and purchasers often equate reputation with quality, it isimportant for health plans to recruit hospitals that are well known and well respectedwithin the service area.

Level of participation in health plans. A hospital that is part of an integrated deliverysystem (IDS) is likely to be a valuable resource for a new plan because of its ability todeliver comprehensive services and accept financial risk. Hospitals that have contractualagreements with health plans through ownership or joint venture arrangements or thatactively support health plan initiatives are also prime candidates for networkparticipation.

Accreditation status. A health plan can obtain a formal assessment of a hospital'squalifications by reviewing its accreditation status and information about performanceand services. For example, the ORYX report card system developed by JCAHO providesintegrated data about hospital outcomes and performance. The American HospitalAssociation (AHA) can provide information about a hospital's range of services.

Healthcare Practitioners

Most health plan networks include three general types of individual practitioners: (1) primarycare providers (PCPs), (2) specialists, and (3) ancillary services providers. The number ofpractitioners the health plan will need in its network from each of these groups depends onwhether the plan is a closed panel health plan, such as a group or staff model HMO, or an openpanel health plan, and on specific staffing requirements. Most plans also adjust the number ofproviders according to the needs of the particular market, the scope of services offered by PCPsand specialists, and the health plan's network management philosophy.

Both open panel and closed panel plans have the same goal: finding the most suitablepractitioners for their networks. Obviously, health plans seek providers with appropriate clinicalcompetence. Health plans also want to identify and recruit providers with proven ability to deliverhigh-quality, cost-effective care. In addition, some health plans prefer to recruit providers whoalready understand health plan concepts such as authorization systems, utilization review, andquality management. However, providers with health plan experience are not always available,particularly in areas with low health plan penetration.

Recruiting and Selecting Providers

Occasionally, providers take the initiative and apply directly to the health plan for inclusion in thenetwork. More often, the health plan receives recommendations from purchasers, plan members,or even other providers. Health plans take recommendations from purchasers very seriously,especially when negotiating with large groups. A plan's ability to offer recommended providers inits network can give the plan a competitive advantage in bidding for a group contract. Becausethe plan must also sell itself to potential plan members, recommendations from consumers arealso considered, and even encouraged. In fact, most plans have a mechanism for allowing newenrollees to nominate providers for inclusion in the network. Once core providers are recruited,they also become a source of recommendations for additional providers. Recommendations thushelp health plans ensure that network providers are acceptable to the purchasers, plan members,and other participants in the provider network.

Approaches to Recruiting

In many instances, health plans actively recruit candidates for their networks. Recruiting methodsvary according to the type of health plan (open panel or closed panel), the nature of the providercommunity, and the preferences of the health plan. However, the following basic recruitingtechniques may be applicable in various recruiting situations:7

Word of mouth. Health plan personnel and current network providers often interactprofessionally and socially with non-participating community providers. Positive word ofmouth from other clinicians about the benefits and opportunities associated with networkparticipation is often very effective in influencing community providers to considercontracting with a health plan

Direct mail. Some health plans have found that mailing letters or brochures directly toprospective candidates can be a very effective method of recruiting providers. Suchmailings often include descriptions of the health plan, the market served, the number ofmembers, the services covered, and the providers already in the network. Health plansobtain lists for direct mailings from sources such as local, state, regional, or nationalmedical societies; competitors' provider directories; state departments that overseeprovider licensing; databases from other health plan products or employers who contractwith the health plan; and even telephone yellow pages.

Contact with practitioners in training programs. Health plans may recruit practitionerswho are still in training by sending recruiting information to practitioner trainingprograms, such as physician residency programs. However, many training programs donot allow on-site recruiting.

Advertisements. Advertisements in national and state professional journals reach a wideaudience and are another common approach to recruiting practitioners. Some newspapersalso carry recruiting advertisements for health plans. Overall, newspaper advertisementshave been less productive than other recruiting methods.

Professional recruiting agencies. Recruiting agencies perform labor-intensive tasks suchas making the initial contact with providers and screening out undesirable candidates.However, such agencies typically charge substantial fees. A health plan considering theuse of a recruiting agency should examine the agency's track record for the averagelength of time required to recruit candidates, the percentage of successful placements ofrecruited candidates, and the average length of time that selected providers remain withthe network.

Selecting Providers

Whether a health plan develops an open panel network or a closed panel network, whether theorganization decides to buy or to build its network, and whether a potential provider is identifiedby the plan or requests to join the plan, the health plan must examine each provider'squalifications. An evaluation of a prospective provider's reputation in the medical community,clinical competence to serve the area's population, and ability to meet access, quality, and costmanagement standards helps ensure that the provider can meet the needs of both the plan and itsmembers.

Selection of individual practitioners is based on an evaluation of personal and professionalinformation collected during the application process. Although application forms vary accordingto the plan and the type of provider being recruited, most applications include detailed questionsabout the applicant's practice, education and training, hospital and/or practice affiliations, practice

specialty, work history, professional licenses and certifications, insurance coverage, liabilityclaim history, sanctions by government entities or licensing boards, and references.

The information on the application is then verified, reviewed, and evaluated as part of the healthplan's credentialing process. This process is described in more detail in Collecting and VerifyingData for Credentialing Purposes. Practitioners and other providers who satisfy the health plan'scredentialing requirements are then granted specific privileges outlined in the provider contract.Details of the contracting process are presented in later lessons.

Contracting Options

Open panel health plans can contract with individual providers or with various provider groupswhen developing their networks. Both approaches to assembling a network (contracting withindividual practitioners or contracting with provider groups) have potential benefits anddrawbacks.

Contracting with Individuals

Because most physicians practice independently or in small groups, contracting with individualpractitioners is the most common contracting situation for open panel plans.8

One advantage of contracting with individual practitioners is that a health plan can evaluate eachpotential network participant based on that individual's merits and abilities to meet the needs ofthe health plan and its members. When a health plan has a one-on-one relationship with anindividual practitioner, negotiating, contracting, and ongoing interaction with the provider aretypically uncomplicated. Further, if an individual practitioner leaves the network, the disruptionto care delivery for the plan as a whole is minimal.

On the negative side, assembling a network one provider at a time is a lengthy process. Inaddition, maintaining relationships with individual practitioners requires a heavy investment oftime and labor on the part of the health plan.

Contracting with Provider Organizations

Recall from Analysis of Market and Health Plan Needs that many health plans build theirnetworks around existing provider groups and organizations, such as physician-hospitalorganizations (PHOs), multispecialty groups, individual (independent) practice associations(IPAs), or integrated delivery systems (IDSs). In some markets, health plans also contract withfaculty practice plans.

Contracting with provider organizations is typically a more efficient, cost-effective way todevelop and maintain a network than is contracting with individual practitioners. Each contractwith an organization adds a number of practitioners to the network. Organization such as IPAsand IDSs often bring a large number of providers to a health plan. When a health plan contractswith a multispecialty group, both PCPs and specialists are added to the network. Includingmultispecialty groups in a network also facilitates the continuation of existing referral patternsfrom PCPs to specialists, which may improve the continuity of care for plan members.9

Because the health plan generally interacts with the organization rather than having to contacteach individual about issues related to the delivery of care to plan members, ongoing networkmanagement activities are more streamlined under group contracts than under contracts withindividuals. The health plan may also benefit if the provider organization already has medicalmanagement programs and processes in place. For example, large organizations may already haveprograms for and be familiar with utilization management and financial risk-sharing.

Contracting with a provider organization also has some potential disadvantages. A health plantypically must accept all of the providers in an organization for the network. This is true even ifthe organization includes more specialists than the health plan needs to meet the needs of itsmember population or if a practitioner's utilization of medical resources is higher than desired.Generally, a health plan has less ability to select and deselect individual physicians whencontracting with an IPA, IDS, faculty practice plan, or other organization than when contractingwith individual providers.10

Another disadvantage is that the complexity of the contracting process typically increases withthe size of the provider organization and the scope of services that the organization provides.Large, cohesive groups sometimes wield a great deal of leverage on compensation and othercontract terms. Because multiple providers are covered under a single contract, termination of thecontract, by either the health plan or the provider organization, can create a significant gap in theprovider network.

In addition to the general advantages and disadvantages described above for contracting withprovider organizations, some types of provider organizations present additional issues that ahealth plan should consider.

Individual Practice Associations

An individual practice association (IPA), also known as an independent practice association, is alegal entity that contracts with individual providers (typically physicians) and with health planson behalf of the providers. If the IPA's goals related to care delivery, such as high-quality servicesand cost-effectiveness, are similar to those of the health plan, then the IPA's physicians are likelyto be suitable for the health plan's network. If the goals of the IPA and the health plan are notaligned, the performance of some of the physicians in the IPA may be less than optimal accordingto the standards of the health plan.

The proportion of local physicians who belong to a particular IPA is another importantconsideration for a health plan. Because an IPA typically contracts on behalf of a large number ofphysicians, one IPA might control a significant part of the healthcare delivery system in a servicearea and thus have a very strong position for negotiating health plan contract terms. Further, if ahealth plan attempts to establish an exclusive contract with an IPA that represents a significantproportion of the physicians in a market, the health plan might be at risk of violating antitrustregulations.

Integrated Delivery Systems

Integrated delivery systems carry many of the same potential benefits as IPAs. One importantadvantage of contracting with an IDS is the large number of providers and wide scope of servicesadded to a health plan's network. Contracting with an IDS allows a health plan to assemble anetwork (or at least a significant portion of a network) and have it operational very quickly. Rapid

development of networks is often critical when a health plan is entering a new market or a marketthat is already very competitive.12

Contracting with an IDS also raises concerns similar to those for contracting with an IPA,including concerns about goal alignment and antitrust risks.

Faculty Practice Plans

A faculty practice plan (FPP), also known as an academic health center, is a medical group thatis organized around a physician teaching/training program, typically at a university hospital.Health plans generally contract with the legal group representing the FPP, rather than withindividual physicians.13

FPPs provide a broad range of both routine and highly specialized healthcare services. In manymarkets, FPPs are the only source of tertiary care, such as organ and blood product transplantservices. A health plan that contracts with an FPP can often obtain discounted compensationagreements to reduce the health plan's financial liability for the services that plan membersreceive from the FPP. In addition, a contract with an FPP may bring prestige to the health planbecause services provided at academic health centers are typically perceived as high quality.1

However, FPPs typically present several potential drawbacks for a health plan's network. BecauseFPPs teach medical students and perform clinical research as well as deliver patient care, theytend to focus on specialists' services and frequently do not achieve optimal cost-effectiveness ofcare. Health plan control over utilization of medical resources by FPPs is limited, and actualutilization by these organizations is often higher than average because much of the routine carefor patients is delivered by medical students, interns, and residents. These physicians-in-traininghave limited experience to help them determine which medical interventions will yield thedesired outcomes in the most cost-effective manner. As a result, they tend to use more resourcesand more costly resources than do physicians who have been in practice for many years.15

FPPs generally focus on care by specialists and organize this care into a series of single specialtyclinics. In many instances, no individual physician is accountable for coordination of care amongthe specialties. This type of delivery system does not facilitate and may even impede casemanagement for complicated cases.16 Such fragmentation of services has the potential to result inthe duplication, delay, or omission of services, and possibly, to reduce the overall quality andincrease the costs of care.

Endnotes

1. Robin Warshaw, “Too Much Independence for NPs?” ACP-ASIM Observer, AmericanCollege of Physicians—American Society of Internal Medicine; January 1998, http://www.acponline.org/journals/news/jan98/ toomuch.htm (6 February 1998).

2. Herbert S. Diamond, Elliot Goldberg, and Janine E. Janosky, “The Effect of Full-TimeFaculty Hospitalists on the Efficiency of Care at a Community Teaching Hospital,”Annals of Internal Medicine 129 (1998): 197.

3. “More MD Assistants,” Hospitals & Health Networks (April 5, 1998): 20.4. Robert M. Wachter, “Hospitalists Fan Winds of Change, and Inpatient Care Won’t Be the

Same,” Managed Healthcare (January 1998): 37.5. Marianne F. Fazen, St. Anthony’s Managed Care Desk Reference, 1996–1997 ed.

(Reston, VA: St. Anthony Publishing, Inc., 1996), 272.

6. JA Johnson and JL Bootman, “Drug-Related Morbidity and Mortality, a Cost of IllnessModel,” Archives of Internal Medicine 155 (October 9, 1995): 1953.

7. Peter R. Kongstvedt, M.D., “Primary Care in Closed Panel Plans,” in Essentials ofManaged Health Care, ed. Peter R. Kongstvedt, M.D., 2nd ed. (Gaithersburg, MD:Aspen Publishers, Inc., 1997), 84–85.

8. James C. Robinson, “Blended Payment Methods in Physician Organizations UnderHealth Plan,” Journal of the American Medical Association (6 October 1999): 1258.

9. Peter R. Kongstvedt, M.D., “Primary Care in Managed Health Care Plans,” in Essentialsof Managed Health Care, ed. Peter R. Kongstvedt, M.D., 4th ed. (Gaithersburg, MD:Aspen Publishers, Inc., 2001), 89.

10. Ibid., 90.11. Fazen, 288.12. Kongstvedt, 4th ed., 90.13. Ibid., 91.14. Ibid.15. J. R. Woodside, R. Bodne et al., “Intensive, Focused Utilization Management in a

Teaching Hospital: An Exploratory Study,” Quality Assurance Utilization Review 6(1991): 47–50, as cited in Peter R. Kongstvedt, M.D., “Primary Care in Managed HealthCare Plans,” in Essentials of Managed Health Care, ed. Peter R. Kongstvedt, M.D., 4thed. (Gaithersburg, MD: Aspen Publishers, Inc., 2001), 90–91.

16. Kongstvedt, 4th ed., 91.

Network Management in Health Plans: Managing Provider Performance

Objectives

After completing this lesson you should be able to:

Explain why health plans measure the performance of network providers Describe how provider profiling is important in performance measurement and

performance management Describe the following types of performance measures: Structure Process Outcomes Patient satisfaction Explain how outcomes research and outcomes measurement can be used to benchmark

provider performance Describe some of the methods health plans can use to change provider behavior

Introduction

A health plan’s goal is to provide quality healthcare at a reasonable cost to its members. In fact,many purchasers have begun to demand proof that health plans can deliver the quality of care thatthey claim to provide. Therefore, it is necessary for health plans to establish methods to measureand manage provider performance. The previous lesson presented a number of ways that healthplans build positive relationships with their providers. In this lesson, we discuss how thesemethods combine with performance measurement and other techniques to manage providerperformance.

First, we provide some background information on medical management and the relationshipbetween medical management and provider performance. We then address some of the ways thathealth plans measure and influence provider performance and quality. Last, we discuss howhealth plans deal with providers who may be impaired by substance abuse or other problems.

Medical Management and Provider Performance

Medical management is an umbrella term used to describe a variety of utilization management(UM), quality management (QM), and clinical practice management activities designed to

assess a plan’s costs and consumption of resources evaluate the care and services provided and not provided to plan members balance costs and quality to ensure that the plan provides healthcare that meets or exceeds

customer expectations and plan standards implement a program of continuous quality improvement based on outcomes and

utilization patterns

Health plans must evaluate and manage providers’ utilization of services to ensure that providersare rendering the appropriate types of treatment in the appropriate settings for their patients.Overutilization results in excess costs and subjects plan members to unnecessary treatments.

Underutilization deprives members of medically indicated care. The health plan’s goal is to avoidboth of these situations by encouraging providers to utilize services appropriately.

At the same time, health plans must evaluate and manage the performance of individual providersand implement programs to support continuous quality improvement. Continuous qualityimprovement (CQI) in healthcare consists of a “structural organizational process for involvingpersonnel in planning and executing a continuous stream of improvements in systems in order toprovide quality healthcare that meets or exceeds customer expectations.”1 Quality improvementefforts typically focus on (1) assessing plan performance to identify the best and worst outcomesand utilization patterns and (2) developing and implementing strategies such as treatmentprotocols and practice guidelines to improve performance. The key to implementing CQI is thequality of the health plan’s network of providers.

With increasing competition among health plans, health plans have begun to recognize theadvantage of being able to present evidence to purchasers and consumers that the health planoffers a quality product. Purchasers of healthcare are increasingly demanding accountability fromhealth plans. In turn, health plans have sought accountability from their network providers.Through quality management processes, a health plan is able to ensure—and assure purchasers—that its network is composed of qualified providers who continue to meet the criteria for networkparticipation and that these providers contribute to the overall quality of care and services offeredby the health plan.

Measuring and Evaluating Provider Performance

In Collecting and Verifying Data for Credentialing Purposes, we described how health plans usethe credentialing process to evaluate a potential provider’s educational and professionalqualifications prior to contracting. Although some health plans also assess a provider’s practicepatterns prior to formalizing an initial contract, credentialing typically does not providequantifiable information about provider performance. The recredentialing process, which plansconduct at regular intervals after signing the initial contract, offers an opportunity for the healthplan to evaluate the provider’s current performance. In this section, we describe how health plansmeasure and evaluate the quality of their providers’ performance.

Performance measurement provides a health plan with quantifiable information about the careand service that a provider delivers to the health plan’s members. Performance evaluation allowsthe health plan to generate a meaningful, valid, and accurate picture of the quality of itsproviders’ performance by comparing measured results against established performancestandards. Performance standards define the level of performance that the provider must reach inorder to meet plan objectives. This level may be either a minimum level of service and care, anaverage level of performance, or a best practice.

Standards can be developed internally or externally. Internal standards are developed inside thehealth plan and are based on the health plan’s own historic performance levels. For example, autilization standard based on the average utilization of all providers in the network would beclassified as an internal standard. External standards are based on outside information such aspublished industry-wide averages or the best practices of recognized industry leaders.

Performance Measures

Performance measures can be either quantitative or behavioral. Quantitative measures evaluatehow quickly, how often, and how accurately services are delivered. Behavioral measures, orqualitative measures, evaluate a provider’s interactions with plan members. Behavioral measuresare not associated with numbers or statistics, but with the provider’s ability to communicateeffectively and make patients feel that they are receiving the service and care they deserve.Figure 8B-1 provides some examples of measures health plans use to evaluate providerperformance.

Performance measures typically focus on four areas: structure, process, outcomes, and patientsatisfaction.

Structure Measures

Structure measures evaluate a provider’s staff, equipment, and facilities. Aspects of a provider’spractice that are appropriate for structural measurements include the provider’s

compliance with specific regulatory or accreditation requirements in such areas aslicensing and medical record keeping practices

conformity to standards for prescribing controlled substances procedures for controlling infection procedures for ensuring patient access to care

Structure measures are relatively easy to use because of their objectivity and the fact that they canbe standardized for comparisons between individual providers.

Process Measures

Process measures evaluate the healthcare services offered by a provider to the health plan and itsmembers. Process measures apply to such areas as the availability and use of preventive healthscreenings or childhood immunizations. Health plans often compile summary statistics fromclaims and encounter data about the types of services a provider offers or how often the providerperforms a particular procedure. These data can then be compared to the number of members whoare patients of this provider to determine if the services are appropriate to the membership. Forexample, do plan members receive regular preventive health screenings, or do young patientsreceive appropriate immunizations at the right age? Health plans may require that providerssubmit regular encounter reports on certain types of services to verify that they are being renderedappropriately.

Encounter data, however, are not always accurate or complete. For example, a patient whoobtains services at a location other than the physician’s office—such as flu shots orimmunizations received at a health clinic— may be receiving appropriate care, even thoughinformation about that care is not included in the physician’s medical records. Incorrectdiagnostic or treatment codes can also affect the value of encounter data.

Outcomes Measures

Outcomes measures focus on the direct results of a process. In other words, outcomes measuresevaluate a patient’s condition after a clinical treatment. One example of an outcomes measure isthe five-year patient survival rate following a specific treatment plan for a particular illness or aparticular patient population. Health plans can obtain initial information about a procedure ortreatment plan by examining claims and encounter data. A review of patient medical recordsprovides additional information about specific types of conditions and about the patient’sprogress throughout the treatment. The health plan can then compare a provider’s performance onthe measure to established standards.

In many cases, outcomes standards are expressed as functional scales comparing the patient’scondition before and after treatment. For example: Did the patient get better or worse? Didfunctional levels increase or decrease? Did the treatment resolve an acute illness? Was thetreatment successful in managing the associated complications of a chronic illness?

Additional standards are established through outcomes research, which documents theeffectiveness of various treatment plans and identifies which treatment plans produce the mostdesirable outcomes. Once effective treatment practices are identified, they can replace other, lesseffective treatment practices through the development of clinical pathways, clinical practiceguidelines, and disease management strategies. These preferred practices are used forbenchmarking in outcomes measurement.

Because most health plans lack the resources to conduct extensive outcomes research, most plansuse information from external sources. One such source is the Agency for Healthcare Researchand Quality (AHRQ), a U.S. Public Health Services agency that supplies research resultsdesigned to improve the quality of healthcare while reducing costs. In 1996, AHRQ began thedevelopment of the Quality Management Network, which is intended to help health plansidentify, choose, and use clinical performance measures.2 AHRQ, through its Center forOutcomes and Effectiveness Research, funds research activities to identify clinical interventionsthat result in successful outcomes in typical practice settings. AHRQ has focused its research

activities on treatment for costly and prevalent health conditions, such as asthma in children. Thegroup’s research findings, available in print or on the agency’s website (http://www.ahrq.gov),serve as the basis for quality improvement, cost-effectiveness, and technology assessmentinitiatives within healthcare institutions.3

A number of other public and private companies also supply outcomes research informationapplicable to healthcare. Some health plans even use Internet-based benchmarking software thatallows them to retrieve outcomes data from other organizations.

Health plans are in a unique position to implement outcomes measures because they have accessto data that encompass entire episodes of care. For example, consider a situation in which a PCPrefers a patient to a specialist who, after examining the patient, recommends surgery at a localhospital. Following surgery, the patient undergoes two months of physical therapy. Each of theindividual providers involved in the patient’s care—the PCP, the specialist, the hospital, and thephysical therapist—has data about only one segment of that care. The health plan has data aboutthe entire treatment program. This ability to capture data about patient care from beginning to endgives health plans a significant advantage over other healthcare providers when it comes tomeasuring and managing quality.

Case Mix/Severity Adjustment

When evaluating a provider's success or failure in meeting standards, the health plan must makecase mix/severity adjustments for any unusual factors that may exist in the provider's ptientpopulation or in a particular patient. Case mix/severity adjustments allow for a more equitablecomparison of data between providers for both inpatient and outpatient care. Knowing thatProvider A's patients die sooner than Provider B's patients is of little value unless it is also knownthat Provider A's patients are sicker to begin with. Performance results for a PCP whose patientssuffer from a greater number of chronic conditions, such as diabetes or asthma, cannot becompared equitably to results for a PCP who has a typically healthy patient base unless casemix/severity adjustments are made.

Case mix/severity adjustments are particularly important in measuring a specialist's performance.Because specialists treat patients with existing medical conditions referred by PCPs, a specialistspatient base is fundamentally different from the general patient population. Within specialties,some specialists may have specific qualifications to treat very high-risk patients or to performparticularly complicated surgical procedures. For example, a perinatologist is more likely toprovide care for high-risk pregnancies than a general obstetrician.

Case mix/severity adjustments help maintain the statistical integrity of outcomes measurement byproviding a means of comparing providers to similar providers delivering similar services tosimilar patients. They also help reduce the number of providers who might otherwise beconsidered outliers. An outlier is a provider who is using medical resources at a much higher orlower rate or in a manner noticeably different from his or her peers. Figure 8B-2 illustrates theeffect of case mix/ severity adjustments.

Case mix/severity adjustment can explain some or all of the variation in a provider’s practicepatterns. In the example described in Figure 8B-2, it would allow the health plan to place Dr.Chou’s seemingly unusual and excessive practice patterns in perspective with the more “normal”patterns of Dr. Blake and Dr. Fenton.

Patient Satisfaction Measures

Many health plans include patient satisfaction with the provider’s delivery of medical services inperformance measures. Patient satisfaction measures are typically behavioral measures andevaluate everything from the friendliness of the provider’s staff to the patient’s perception of howwell the provider addressed a particular medical problem.

As customers of the health plan, members offer critical feedback to the health plan about theirexperiences related to healthcare services received and interactions with providers. Thisinformation is used to validate the quality of service delivered by the providers and the plan andto assist in identifying and prioritizing areas needing improvement within the health plan’sdelivery processes.

Member feedback is available from a number of sources, including member satisfaction surveys,access to care surveys, data about member complaints and grievances, and member requests tochange PCPs.

Member Satisfaction Surveys

Member satisfaction surveys help a health plan gauge whether the care and services rendered byits providers are consistently being delivered in a manner that lives up to member expectations.Surveys conducted at or shortly after the point of service solicit the following specificinformation regarding a member’s reaction to services received during a specific encounter:

Wait times before appointments at the provider’s office or clinic Interactions and communications with providers and their staff Effect of utilization management procedures on member satisfaction Coordination of care Satisfaction with treatment plans and related outcomes Perceived value of services—the scope of benefits and services provided Effectiveness of explanations and education

Other surveys, conducted on an annual basis or at some other predetermined interval, solicit moregeneral information about the member’s overall satisfaction with the plan’s services. Oneexample of a periodic survey that is used throughout the industry is the Consumer Assessment ofHealth Plans (CAHPS) member satisfaction survey developed by AHRQ. A health plan can alsocollect more generalized feedback through focus groups or health status surveys.

Member satisfaction surveys are useful in evaluating provider performance because they mayyield information not evident in profiling. Because the request for feedback is initiated by thehealth plan, member satisfaction surveys reflect a broader range of the health plan’s member basethan complaint and grievance data and create the opportunity to collect both positive and negativefeedback. Although members may be quick to complain when they perceive a problem, they maynot always initiate contact to express satisfaction with their healthcare provider. Well-designed,statistically validated surveys and consistent collection methods can yield valid and reliable data

and, as desired, be directed at specific subsets of the health plan’s membership, for example, newmothers or elderly members

HEDIS

In order to allow for comparison between providers, a health plan must use standardized surveytools that provide consistent information about each provider. In addition to providing data formeasuring provider performance and fueling the health plan’s quality improvement programs,survey data help health plans meet accreditation requirements. NCQA’s performancemeasurement tool, HEDIS, which we discussed in a previous lesson, requires health plans tosurvey a sample of members to assess their health status and to measure patient satisfaction withthe delivery of care. NCQA uses the CAHPS, which is a combination of the original HEDISmember satisfaction survey and the CAHPS survey to measure consumer satisfaction. HEDISalso includes a survey that is designed to collect information from parents about their experiencewith their children’s healthcare.5

Although the HEDIS surveys are convenient and practical, a health plan may choose to conductadditional surveys to obtain more specific member feedback regarding the performance ofnetwork providers.

One issue a health plan must address when conducting member satisfaction surveys is whether toask for the name of the provider or the person completing the survey. Although making surveys“anonymous” may result in more candid answers, asking for provider names yields informationthat can be used to create provider profiles or that can be included in the provider’srecredentialing file.

Access to Care Surveys

The results of these surveys are compared at both the provider and health plan levels to determinethe extent of compliance with access standards adopted by the health plan.

Health plans also survey patients who did not access services during a specific period of time,such as a calendar year, and patients for whom services were authorized but not used. Lack of usemay indicate that members simply did not require medical services during the course of the year.However, lack of use may also indicate access problems with specific providers or an inadequatenumber of PCPs in the member’s immediate vicinity. These surveys may also find that some

members do not seek routine care because they are dissatisfied with their PCP or the health plan’sphysicians in general.

Complaints and Grievances

Complaints, grievances, and requests for change of PCP provide feedback regarding services thatare not delivered. Filing a complaint or grievance is an obvious indication that the member isdissatisfied with some aspect of his or her healthcare. It is also important to determine why amember changes PCPs. Such a decision may be a matter of poor “fit” between member andprovider, the member’s relocation to another geographic area, or some other unrelated reason. Itmay also be the result of dissatisfaction with the quality of the provider. Feedback—both positiveand negative—can be used to measure and profile provider performance.

Of course, no single measure is adequate to evaluate the performance of a provider. The providermay meet one or more of the measures but still fail to satisfy a patient’s expectations. In addition,a patient’s outcome may be positive even if the provider deviated from clinical practiceguidelines or negative even when the provider rendered the best possible treatment.

Performance measurement is a complex process that varies greatly from one health plan toanother. Insight 8B-1 describes the concept of transparency; standardized performance metricsand outcomes reports that are easily accessible to all players in the health care process.

Health care is a fragmented system," says Donald Berwick, MD, MPP, president and CEO of theInstitute for Healthcare Improvement. "It has many defects and broken parts, so it's impossible toisolate one element of it and say that's what's wrong. Most of us don't think in systems terms, soit's very difficult to gain momentum for change across the whole enterprise."

Call goes out But something is changing. The players — purchasers, plans, patients, even someproviders — are starting to call for the same thing: universal transparency, that is, standardizedperformance metrics and outcomes reports that are easily accessible to absolutely everyone.Hospital and surgical mortality and morbidity rates, physician compliance with chronic diseasemanagement, charges and reimbursements — everyone knowing everything at the click of amouse, and we know how elephants feel about mice.

Transparency is seen as the beginning of an awakening. It has the ability to create a paradigmshift, to move us from a model of acute care that primarily rewards episodic intervention to amodel of chronic care management that rewards — and here's a shocking thought — keepingpeople healthy.

The theory is that data exposure will lead to patient empowerment, which will result in anincrease in the demand for evidence-based medicine, because it demonstrates effectiveness,which will improve the quality of care. And better care means lower overall costs.

Everyone seems to agree on how to create transparency. It's the same way you eat an elephant:one bite at a time. First, create common standards. The information to create those standardsfrom already exists. It's in Medicare databases, hospital discharge forms, and commercial claimsdatabases. Clinical data are in charts. Electronic medical records, as they increase in popularity,make gathering clinical information easier. And HIPAA is no problem, as long as identifiers areremoved. Second, implement the information technology necessary to report outcomes. Accordingto a January 2004 report by Forrester Research, vendors are now developing the technology that

can achieve the promise of integration offered by transparency. Third, reward positive outcomeswith incentive payments. That means more of the kind of pay-for-performance programs nowbeing implemented in California by a coalition of purchasers, plans, and providers called theIntegrated Healthcare Association; in Boston, Atlanta, and other cities by individual health planslike Blue Cross Blue Shield of Massachusetts and Cigna HealthCare of Georgia; and byemployer coalitions like the Leapfrog Group, which rewards through purchase preferences, andBridges to Excellence, which rewards providers directly, for enhanced diabetes management, forexample.

Agreement that transparency is a good thing — or at least agreement that players need to gettogether and that something needs to be done — is virtually mandated by how bad things are, sayNess and others. The cost of systemic blindness is severe. The National Committee for QualityAssurance, which measures health plan performance through its Health Plan Employer Data andInformation Set program, said in its 2003 annual "State of Health Care Quality" that at least57,000 deaths occur each year because of what it calls "quality gaps." "These gaps are the resultof factors such as poor use of technology and irrational payment systems," says NCQA presidentMargaret O'Kane. "But they are not equally prevalent throughout the system. Among health plansthat measure and report on their performance, clinical quality is higher and showed strong gains.This is the fourth year that we found that among health plans that publicly reported theirperformance data, clinical care improved in most areas."

Savings potential Open sharing of data could save a lot of money, according to the Center forInformation Technology Leadership. According to a report given by CITL officials at theHealthcare Information and Management Systems Society Annual Conference in February 2004,standardized health information exchange among health care IT systems could save $86.8 billionannually. The savings would result from fewer tests and the improved efficiency of automateddata sharing among health care organizations. Fewer administrative tasks could lead to lessredundancy and reduced labor costs. CITL officials called the estimates "conservativeprojections," because the study only considered health care transactions involving providers. TheConsumer-Purchaser Disclosure Project's published three-year goal calls for nothing short of amiracle: "By Jan. 1, 2007, Americans will be able to select hospitals, physicians, physiciangroups/delivery systems and treatments based on public reporting of nationally standardizedmeasures for safety, timeliness, effectiveness, efficiency, equity and patient-centeredness." IOM'sreportThose measures are known by their acronym, STEEEP. They form the Rosetta Stone oftransparency, allowing for creation of a common set of standards, and come from anotherambitious text: the Institute of Medicine's 2001 report, "Crossing the Quality Chasm: A NewHealth System for the 21st Century." It called for Congress to create a fund of $1 billion tosupport projects with six targets:

that patients not be harmed by the care that is intended to help them (that is, safe); that care is based on sound scientific knowledge (effective); that care is respectful and responsive to individual preferences, needs, and values

(patient-centered); that unnecessary waits and sometimes harmful delays are reduced (timely); that care is not wasteful of equipment, supplies, ideas, or energy (efficient); and, that it should not vary in quality because of patient characteristics, such as ethnicity or

geographic location (equitable).

To achieve STEEP, IOM recommends 10 rules for reform (viewable at www.iom.edu), and reformnumber seven is replacing secrecy with transparency: "The health care system should makeavailable to patients and their families information that allows them to make informed decisionswhen selecting a health plan, hospital, or clinical practice or when choosing among alternativetreatments. This should include information describing the system's performance on safety,evidence-based practice, and patient satisfaction."

Excerpted from: “Can Transparency Save Healthcare” by Martin Sipkoff, in Managed CareMagazine, March, 2004.

Using the Results of Performance Measurement and Evaluation

Health plans use the results of performance measurement and evaluation to provide feedback toindividual providers and to develop health plan-wide quality-improvement activities. Onecommon form of performance feedback is provider profiling. A provider profile includescumulative performance data for an individual provider and can encompass all measurableaspects of the provider’s performance, from compliance with the health plan’s operationalpolicies and procedures to participation in the health plan’s quality and utilization managementactivities. A provider profile focuses on patterns of an individual provider’s care rather than onthe provider’s specific clinical decisions and expresses those patterns as a measure of resourceuse or quality during a defined period and for a defined population. For example, a providerprofile for a PCP might include an assessment of the average wait time to schedule routinephysical examinations, the number of hospital admissions, the number of referrals out of network,the extent of compliance with practice guidelines, or the level of member satisfaction with theprovider’s service.

Because they provide information about providers’ actual performance, provider profiles are avaluable tool for conducting periodic performance reviews and for recredentialing providers.Provider profiles are also useful in comparing a provider’s performance with that of his or herpeers, identifying practice patterns that deviate from the norm, and guiding quality improvementefforts. Health plans can also use provider profiles to identify high-value providers—thoseproviders who give quality medical care in a cost-effective manner. These high-value providerscan help set the performance standards that are critical to a health plan’s success.6

The major limitation of individual provider profiling is that health plans typically have accessonly to information about the provider’s activities with health plan members. The need to complywith industry and regulatory standards related to patient confidentiality and competition makes itdifficult for a health plan to evaluate the provider’s performance throughout his or her entirepractice.

Using the appropriate measures to assess different aspects of a provider’s performance shouldreveal an overall picture of the provider’s quality. With this overall picture in mind, the healthplan can begin to manage provider performance. It is important that the health plan focus onpatterns of performance rather than on individual instances because it is patterns that will helpidentify areas where improvement is necessary.

Modifying Provider Behavior

The health plan’s medical director plays a key role in managing provider performance byproviding leadership and credibility to all areas of medical management, including quality

management, utilization management, network management, and medical policy. The healthplan’s medical director also plays a key role in modifying physician behavior. When a physicianis identified as having a potential utilization or quality problem—during recredentialing or duringthe normal course of quality improvement activities—the pertinent medical records anddocumentation are typically reviewed by the health plan’s peer review or other appropriatecommittees. The medical director often participates as a member of these committees. Themedical director then contacts the physician to discuss potential and documented problems, withthe intention of changing the physician’s behavior.

Earlier in this lesson, we described how health plans use provider profiles to provide feedback tophysicians. In the following paragraphs, we describe other approaches health plans use to modifyphysician performance. Although our discussion focuses on modifying physician behavior, someof the ideas also apply to other types of providers.

Physicians are key partners of health plans. During regular office visits, physicians communicateface-to-face with plan members to direct the members’ care and to influence the members’attitudes toward their own health. In addition, physicians influence members’ attitudes towardhealth plans. Physicians are key customers of health plans as well. With the growth of healthplans over the past decade, physicians have become more dependent on health plans for theirpatients, and continued participation in one or more health plans is often critical for the survivalof their practice. Physicians also rely on the health plan to help them succeed in a health planenvironment and meet the standards that the health plan sets.

To meet the needs of the health plan and its members, health plans need physicians with high-quality, cost-effective practice patterns. However, provider availability in a market, customerexpectations, and regulatory and access requirements often make it necessary for health plans tocontract with physicians who meet the plans’ minimum standards rather than optimal standards.Occasionally, an individual physician’s practice patterns may fall outside established norms.Unacceptable practice patterns may relate to overutilization or underutilization of services, poorclinical quality, poor service quality, or inappropriate physician behavior. Figure 8B-3 givesexamples of unacceptable practice patterns. All unacceptable practice patterns must be addressed.

In extreme cases, it may be necessary for the health plan to terminate its contract with a provider.Removal of a physician from the network, however, can cause significant disruption for thephysician’s practice, for the members who go to that physician, and for the health plan, especiallyif the physician is in an area in which access to similar providers is limited. Therefore, it istypically in the best interest of all concerned for the health plan to attempt to modify unacceptablepractice patterns and to work with physicians to achieve desired quality, satisfaction, and costgoals.

The specific approach a health plan takes to modify physician behavior depends on the physicianand the nature of the problem that must be addressed. Basic to all approaches is a need to (1)overcome physician resistance to change and (2) address physicians’ needs.

Overcoming Resistance to Change

The field of medicine is constantly evolving and the practice of medicine requires continuousreevaluation of practice patterns based on new evidence. Nevertheless, for a variety of reasons,physicians are often resistant to change. The primary reasons for this resistance include aperceived threat to physician autonomy, a perceived conflict between the physician’s role ascaregiver and his or her role as agent of the health plan, and a negative perception of managedcare.

Physician Autonomy

The nature of the medical school selection process and the medical training experience emphasizethe need for self-confidence, decisiveness, willingness to accept responsibility and exerciseauthority, and the belief that what you are doing is right. While these characteristics are oftenadmirable and necessary to someone who must make life and death decisions on a regular basis,they do not necessarily predispose an individual to be open to change.

The medical training process also emphasizes progressive autonomy, from the medical studentwho is closely supervised by residents and attending physicians, to the resident who gainsprogressively more authority, to the attending physician who, until the advent of health plans, wasessentially free of supervision. Health plans’ introduction of medical management into healthcaredelivery was perceived as a threat to the physician’s control.

At one time, it was not uncommon for HMOs to require preauthorization of referrals to specialistsand many of the services provided by specialists. Many plans still attempt to manage utilizationby setting benefit differentials based on whether members use network or non-network providers.More restrictive plans also require prior authorization for high-cost or high-volume services.Although the trend among health plans has been to allow easier access to specialists and to bemore selective in applying authorization requirements, the perceived threat remains. In a nationalsurvey of physicians conducted in 1999 by the Kaiser Family Foundation and the HarvardUniversity School of Public Health, 47% of physicians responded that the controls inherent inhealth plans resulted in “not enough autonomy over clinical decisions” for physicians.7

Caregiver/Agent Conflict

Many physicians also perceive an ethical conflict between their role as the individual patient’scaregiver and their role as an agent of the health plan in determining what is medically necessaryand covered. As caregivers, physicians feel responsible for providing whatever services they ortheir patients believe are needed, without concern for cost or the true medical necessity of theservice. For some physicians, the fact that a health plan is financially liable for only thoseservices that meet the terms of the benefit contract can be problematic. These physicians see thehealth plan’s position as creating a conflict between what patients need and what patients canactually have, even though patients can have any care desired if they can pay for it themselves.This perceived conflict applies not only to care the plan deems to be medically unnecessary, butalso to care that is not covered because of benefit limitations and exclusions. The perception ofconflicting roles stems, in part, from a lack of understanding by some physicians of thecontractual nature of the coverage provided by the health plan. Although this conflict is not ascommon as physicians seem to believe, the perception of such conflicts must be addressed whenworking to modify physician behavior.

Attitude Toward Health Plans

Many physicians have an unfavorable view of health plans. For example, 68% of physiciansincluded in the Kaiser Family Foundation/Harvard University survey indicated that health planshave had a somewhat negative or mostly negative impact on their practice. Of the physicianssurveyed, 95% said that it had increased the amount of administrative paperwork, 83% said that ithad decreased the time that they spend with their patients, and 72% indicated that they believedthat health plans had decreased the quality of healthcare for people who are sick. On the positiveside, 68% indicated that health plans increased the use of practice guidelines and diseasemanagement protocols in patient care, and 45% said that it increased the likelihood that patientswill get preventive services such as immunizations, health screenings, and physical exams. Theperceived impact on healthcare costs was somewhat mixed, with 32% believing that health planshad increased them, 30% believing they were decreased, and 36% indicating that they believedthat there was no effect.8

It is essential for the health plan medical director and network management staff to overcomenegative attitudes and other barriers to change, both in their day-to-day interactions withphysicians and when approaching them with a performance issue that needs to be resolved.

Addressing Physicians’ Needs

As highly intelligent individuals with strong scientific backgrounds, physicians generally willrespond to information that is presented in a positive and collegial manner and that is supportedby evidence. Physicians may not respond to recommendations that they feel are demeaning orimply that their judgment is wrong. Health plan personnel must learn to communicate effectivelyand must use tools that provide support for their messages in order to be able to modifyphysicians’ behavior. Many of these tools have been discussed in previous lessons as normalhealth plan functions. In the following sections, they will be discussed in the context ofimproving provider behavior.

Communication

The key to all interactions between the health plan and its providers is effective communication.This should take place on a regular basis through formal communications, such as providermanuals, newsletters, mailings, Internet Web sites, and e-mails, and through personal contactwith network management and medical management staff, including the medical director. In allcases, it is important for provider communications to be

Focused on provider issues. It is important for the health plan to differentiatecommunications intended for the office staff (such as a notice of new billingrequirements) from information intended for physicians (such as new clinical guidelinesor quality initiatives).

Up-to-date and accurate. All physicians receive a provider manual when they join thenetwork. As you recall from The Provider Contract, the provider manual is often includedas part of the provider contract. However, physicians do not always receive, or do notinsert, updates. The health plan should document that physicians receive updates andmake sure that both physicians and their office staff understand the importance ofkeeping and using these updates.

Two-way exchanges. The health plan must be willing to ask physicians for their ideasand to listen to physician concerns and respond to them. It is also essential (and necessaryfor accreditation) that practicing network physicians have input into health plan programssuch as utilization management, quality management, and credentialing of new providers.Physician participation not only ensures appropriate clinical input into the programs, butalso helps to validate them in the eyes of the medical community and to establish thecontributing physicians as advocates for the programs. Soliciting input from physicianshelps to reinforce the message that the health plan values its providers.

Personalized. Dealing with sensitive issues is much easier when a good relationship hasalready been established. It is far more difficult when the parties are strangers or one hasa negative perception of the other, as providers often do of unfamiliar health planpersonnel. Medical directors (and other health plan personnel) should seek opportunitiesto meet with network physicians whenever possible, especially outside of their healthplan roles. Attendance at medical society, hospital, or community functions and atcontinuing medical education activities builds relationships and enhances the medicaldirector’s clinical and personal reputation in the community.

It is also important to remember that rewards are often more effective in modifying behavior thansanctions. The use of positive feedback and communication about good performance can be apowerful tool for change. The mailing of a thank-you note from the medical director to aphysician whose performance has exceeded service standards is a simple way to apply this idea.

Finally, when a potentially sensitive issue does arise, it is often helpful to approach the physicianwith a question rather than a conclusion. Many health plan decisions are based on limited reviewsof a specific case or issue. The provider often has more information or has a reason that is notreadily apparent for an action or decision. Even if the action appears to be unacceptable, theprovider deserves the opportunity to explain his or her perspective.

The medical director can most effectively interact with the physician by explaining whatinformation the plan has and then asking the physician to clarify why he or she chose the actionor made the decision. This approach gives the physician the opportunity to supply additionalinformation, to explain the reasoning behind the decision, or, in some cases, to acknowledge that

an action might not have been the most appropriate. Allowing providers to evaluate and criticizetheir own actions is nonthreatening and allows for a meeting of the minds rather than contention.When asked about the outcome of their most recent intervention with a health plan (other than aroutine request for a referral approval), physicians in the Kaiser Family Foundation/ HarvardUniversity survey responded that 42% of issues were resolved in favor of the patient, 22% wereresolved in the plan’s favor, 21% resulted in a compromise, and 15% had not been resolved at thetime of the survey.9 This would seem to indicate that neither party is right all of the time and thatthere is clearly a need for additional fact finding and collegial discussion.

Provider Services

Continuing Management of Network Adequacy and Provider Satisfaction details many of theservices an health plan’s network management staff offer physicians and other providers. As withcommunication, the key to effective provider service is for the health plan to develop a personalrelationship with the office staff and, whenever possible, with the providers. It is also importantfor the health plan to address the concerns shared by physicians and their staff. The health plan isnot likely to be able to supply everything the physician wants, but it can provide clear answersregarding what will be done and why the other requests cannot be met. The network managementstaff must be perceived by the physician and office staff as a valuable resource, if not anadvocate, in their dealings with the health plan.

One of the major concerns of physicians and staff is the impact that health plan policies andprocedures have on physician practices. According to the Kaiser Family Foundation/HarvardUniversity survey, 95% of physicians think that health plans have increased their administrativepaperwork. The level of concern physicians expressed was related to the number of health planswith which physicians contracted. For example, 39% of physicians who did not contract with ahealth plan expressed great concern, compared to 60% with 1 to 7 contracts, 72% with 8 to 14,and 75% with 15 or more.10 Efforts by a plan to reduce administrative requirements and eliminateunnecessary paperwork provide some relief and are recognized by physicians as an indication thatthe plan has heard their concerns and cares about them. These efforts make future requests orrecommendations by the health plan less onerous.

On the other hand, when administrative paperwork is necessary, it is important for the health planto communicate to physicians and their staff what function paperwork serves and what, if any,benefit it may offer the provider. Policies and procedures must be kept as simple and clear aspossible to avoid having the office staff make errors that require unnecessary duplication of work.Changes to policies, especially those requiring changes in the activities of the physician office,should be communicated clearly and well in advance of their effective date, whenever possible.Efforts are currently under way in several areas of the country to have all local health plans adoptcommon policies and guidelines (within the limits allowed by antitrust law) so that physicianswill have only one set of standards to meet. Some of these initiatives also involve local medicalsocieties or provider groups to enhance their acceptance by the medical community. Theseinitiatives will simplify the administrative work of the practices and should be supported byhealth plans whenever possible.

Physician Education about Health Plans

As noted earlier, physicians—especially those new to health plans—often lack knowledge of thebasic aspects of managed care. Health plans can prevent this lack of understanding fromdistorting physicians’ perceptions by providing information on such diverse topics as the

basic economics of healthcare basics of health insurance evolution of health plans regulatory and accreditation requirements that affect health plans reimbursement methodologies used by health plans focus on quality in health plans impact of continuous quality improvement programs on provider practices importance of medical management (including utilization management and case

management) use of clinical practice guidelines and pathways

Another topic that should be addressed on a regular basis is the need for documentation regardingboth the care being delivered (for quality management) and the medical necessity of services (forutilization management). As noted in the discussion of communications, providers often haveadditional information regarding patient care that is not clearly documented in the medical record.Many times, this information confirms the need for the proposed care. Helping the physician tounderstand the type of information that supports the need for a service and the importance ofdocumenting that information can reduce (1) the number of calls the physician gets from thehealth plan (which is a highly desirable goal for the provider) and (2) the number of potentiallycontentious issues for the medical director.

Physician education can be offered in a number of ways. For example, health plans can addressone or more of the issues described above during their regular interactions with physicians andstaff. Health plans can also present a basic introduction to health plans as part of CME programssponsored by hospitals or medical societies. In addition, some medical schools and residencyprograms are beginning to incorporate health plan topics into their curricula. This is an excellentopportunity for medical directors to meet with future network physicians and to positively impacttheir view of health plans.

Clinical Education

Clinical education for physicians can be delivered through clinical practice guidelines or ongoingmedical education programs that address immediate education needs. Another approach that hasgained some support is the use of opinion leaders.

Clinical Practice Guidelines

Most physicians currently practicing trained at a time when there was less emphasis on andunderstanding of the cost and quality of care. Many of their practice patterns were establishedduring their training or early in their careers based on the practices of their teachers or seniormembers of their departments. Much of the information about appropriate care was based on“expert” opinion, personal experience, and anecdotal evidence rather than on documentedscientific evidence. In many instances, scientific evidence about appropriate care was notavailable. Efforts to measure quality typically focused on structure, process, and short-termresults rather than long-term outcomes and patient satisfaction.

Over the last decade or more, interest in evidence-based medicine and the use of outcomes studiesto better document the true impact of the healthcare services being delivered have grown. Interestin the development of clinical practice guidelines and clinical pathways has also increased. Forphysicians, one of the most positive aspects of health plans has been the expanded use of clinical

practice guidelines and disease management protocols to promote and improve preventivehealthcare.

Clinical practice guidelines and pathways have been developed by a wide variety of entities,including government agencies (e.g., the Agency for Healthcare Research and Quality), nationalorganizations (e.g., the American Diabetes Association, the National Asthma EducationProgram), and national medical societies (e.g., the American College of Obstetrics andGynecology). Clinical practice guidelines have also been developed on the local level byhospitals, provider groups, and health plans. Health plans can adopt existing guidelines or modifyestablished guidelines to meet their specific needs. When no authoritative guidelines exist, healthplans can develop their own using evidence-based recommendations from network physiciansand internal staff.

In all cases, health plans must make certain that they use guidelines that are clinically sound andappropriately validated. Although many externally developed guidelines are based on solidscientific evidence, others, even when published in the peer-reviewed medical literature, do notmeet established methodological standards.11 To avoid potential problems, all clinical practiceguidelines should be reviewed by network physicians and approved by the plan’s qualitymanagement committee before implementation.

Distribution of clinical practice guidelines to physicians and members has a positive impact onboth clinical care and on the perception of health plans as working to improve the health of themember. Unfortunately, as has been demonstrated by a variety of measures, distribution does notensure application. For example, HEDIS includes measures of compliance with clinical practiceguidelines, such as measurement of the prescribing of beta-blockers after heart attacks. Nationalresults on these measures vary, but many fall below the norm.

Most physicians intuitively understand the importance of evidence-based information, but they donot necessarily change their practice patterns in response to it. Convincing them to adoptevidence-based approaches to healthcare is a major challenge for the health plan. Unfortunately,it is not yet clear what types of clinical education are most effective in changing providerbehavior.

Continuing Medical Education

Most ongoing clinical education for physicians is offered in the form of continuing medicaleducation (CME) programs available from accredited sponsors. Physicians typically spend asignificant amount of time in CME activities in order to update their knowledge and to meetrequirements for licensure (some states have minimum requirements), professional societymembership, or specialty certification. Many CME programs are patterned after undergraduatemedical education with lectures, audiovisual presentations, and printed materials.

A review of studies on the effectiveness of CME programs in changing physician practicepatterns found that there is a lack of evidence that typical didactic CME programs are effective.Programs that included interactive techniques (such as case discussions, role play, or hands-onpractice) and those that were sequenced (with multiple sessions) did show significant impact onchange, but results across multiple studies were not always consistent.12

In spite of the lack of evidence of change in behavior in response to CME programs, many healthplans do sponsor them, either themselves or by funding programs at healthcare facilities or

academic institutions. Given the lack of alternative means of educating groups of physicians, thisis not an unreasonable approach.

Opinion Leaders

Opinion leaders are providers in the local community who are willing to evaluate and adopt newideas before the majority does and who are respected by their peers. Identifying the local opinionleaders and having them support the appropriate guideline or practice enhances the likelihood ofacceptance and adoption by the majority of the medical community. Opinion leaders can also beutilized to present CME programs or to validate the information presented. This is a relativelynew concept in clinical education that warrants consideration by the health plan.13

Performance Profiles

Many health plans have taken the business adage, “You can only manage what you measure,” toheart and have invested in a variety of computer systems to help them analyze and report onphysician performance. Although as many as 70% of physicians nationwide are subject toprofiling,14 physicians do not always consider the data that health plans provide as useful. Forexample, only 25% of physicians surveyed in the Kaiser Family Foundation/Harvard Universitystudy reported that the data provided about their clinical practice had been useful in making thecare they delivered more effective and efficient.15

Whether profiles are likely to influence provider behavior depends on such factors as physicianacceptance of the validity of data and of internal and external standards, appropriate use ofprofiling information, and the usefulness of profiling data.

Encouraging Provider Acceptance

Physicians are often skeptical of data provided by an organization that they inherently distrust.Health plans can reduce this distrust and improve acceptance by providing data that are

Accurate. Most of the data used for provider profiles are derived from eitherauthorization data (which are entered by the health plan staff) or claims data (which aresubmitted by physicians). Both of these sources are only as good as the people doing thecoding and data entry. Nevertheless, each of these data sources provides a wealth ofinformation, which can help physicians improve the efficiency and effectiveness of theirpractice. The health plan must be prepared to provide information regarding the nature ofthe data and its strengths and limitations.

Sensitive to differences in patient populations. It is common for physicians to perceivethat they treat a sicker population than their peers (or whomever they are being comparedto). For this reason, a comparison of data about one physician with data about otherphysicians is generally more acceptable if it is case mix/severity adjusted. The use ofsophisticated profiling systems that make adjustments based on diagnoses, severity ofcondition, and presence of other illnesses, rather than rudimentary systems that makeadjustments only for age and sex, will improve the validity and acceptance ofcomparative data even more.

Statistically significant. Physicians typically learn basic statistics as part of theireducation and often question the statistical significance of any variance. It is important tolimit analysis to practices that have a large enough volume of patients and to focus onvariances that are large enough that they are likely to be significant. Whenever possible,

variance should be calculated in terms of statistical deviation from the mean. For mostphysicians, a value two standard deviations from the mean is recognized as a statisticallysignificant variance.

Using Profiles Appropriately

Providers often see profiling as a double edged sword. On one hand, profiling can be used as apositive tool to help physicians improve their practice. On the other hand, it can be used toimpose economic sanctions against poor providers. In spite of their fears, physicians are not likelyto be disciplined today based on profiling and only about 15% of physicians have economicincentives based on profiling.16

One approach to gaining acceptance of profiling data is to acknowledge that the data are notperfect and to use profiling to help identify areas to evaluate further. Health plans today largelyuse profiling as a means of identifying physicians whose practice patterns differ in some mannerfrom those of their peers. Data are often compared to data about other similar physicians in thenetwork or to some regional or national norm. Most provider profiles start with fairly high leveldata that look at performance across the entire population. It is important to acknowledge that astatistical variance in such data is just that and does not imply good or bad medical practice.Almost any variance may be medically appropriate given some unusual clinical circumstance.Once a variance has been identified, analysis of more specific data or review of medical recordswill help to identify the reasons for the variance and whether there is a true deviation fromaccepted patterns of care.

Making Profiling Data Useful

Provider profiles should provide physicians with information they can use to improve theirpractices. When an unacceptable pattern of care is identified, the plan should use the informationto help the physician identify ways to improve. Even if the pattern represents a substantial risk tothe members and requires immediate suspension of a physician from the network, the ultimategoal should be to help physicians address their shortcomings so that they may continue to practicesafely and effectively.

All too often, a physician receives a profile in the mail and has no idea what it measures or howto use it. The initial profile should either be delivered in person by the medical director ornetwork management staff or should be accompanied by a detailed explanation along with thetelephone number or e-mail address of a contact person for questions or further discussion. If thedata provided are high level, additional detail should be available for areas with substantialvariance. Additional detail might include further breakdown of the data into smaller categories orpatient-specific information to allow review of medical records. The medical director, or otherstaff familiar with the profiles and with data analysis, should be available to discuss the resultswith any interested physician. The key is to help physicians obtain information that allows themto identify what specific practice they need to change and to assist them to identify ways toimplement that change.

Pharmacy reports provide a good example of how different levels of data provide differentopportunities. A health plan may include some measure of pharmacy utilization as part of aprovider profile. This often is a high-level measure such as total pharmacy dollars or dollars permember per month. Knowing that pharmacy costs are high tells the physician to look atprescribing patterns, but does not indicate specifically where problems exist. Data on rates of use

of generics or on use of nonformulary drugs focus on more specific issues in the prescribingpattern and allow the physician to review practices in these areas. Data on the top 10 drugsprescribed by volume or total cost focus attention on utilization of specific drugs.

The more specific the information provided, the more easily the physician can implement thechanges. For example, a list of the most common brand-name drugs used when a generic isavailable or of non-formulary drugs and their formulary alternatives provides specific examplesof changes in prescribing patterns that the physician can make. A list of members receiving abrand-name drug when a generic is available or of those who received non-formulary drugsprovides specific patients to whom the physician can apply the change. The health plan mustmake sure that the data provided allow the physician to identify what change needs to be madeand, if possible, provide opportunities to implement that change in the near future.

Financial Incentives

Financial incentives may be based on a wide variety of performance measures, including cost andutilization measures, service measures, quality measures, and satisfaction measures. Surveys ofphysicians, looking at data from 1996 to 1999, found that only about 15% were subject to costand utilization incentives, while far more had incentives based on quality of care and patientsatisfaction.17

Whether financial incentive programs are effective or ineffective in motivating physicians tochange depends on the following factors:

Physician perception that the incentive is fair. Capitation must be clearly defined interms of what services are or are not included; incentives or withholds should not beperceived by the physician as punitive; and risk arrangements should not place thephysician or practice in financial jeopardy. In addition, the overall reimbursement planmust be understandable so that physicians can clearly identify what impact their actionswill have on their reimbursement.

Appropriateness of the incentive. A major concern of physicians, patients, employers,and regulators is that an incentive plan might reward physicians for not providingmedically necessary services or punish physicians for providing care that is medicallynecessary. When designing incentive programs, plans must be extremely careful not onlyto make certain that there are no inappropriate incentives, but also to avoid anyappearance that there might be such incentives. It is essential for plans that do provideincentives tied to utilization to carefully monitor physician practices for bothoverutilization and underutilization.

Alignment of incentives. Ultimately, financial incentive programs should be designed toalign the incentives of the plan with those of physicians. Such programs provide financial(or other) rewards for the physicians when the health plan performs well eitherfinancially or in terms of quality of care and member satisfaction.

Financial Incentives

In addition to direct financial incentives, health plans can also use indirect financial incentives toinfluence providers. For example, the development of a network-within-a-network, which wasdiscussed in Considerations for the Structure, Composition, and Size of the Network, rewardshigh-quality, cost-effective physicians by including them in the more selective network, whichprovides them with access to additional patients and, consequently, with more income.

Another example of an indirect financial incentive is the sharing of performance data withemployers or members or, in the case of specialists, with referring physicians. Although thisincentive does not limit or expand physicians’ access to additional patients, it does enhance thereputations of those physicians who have performed well and should result in their seeing morepatients.

Non-Financial Incentives

While the use of financial incentives has been part of the reimbursement methodology of healthplans for many years, plans have more recently begun to explore nonfinancial rewards. Non-financial incentives may include providing services for a physician’s practice, inviting thephysician or staff to attend an educational or a social function sponsored by the plan, or payingthe tuition for the physician or staff to attend an outside educational program.

Plans may also reduce administrative requirements for physicians with good practice patterns. Forexample, for practices that meet certain standards, the plan may allow direct referral to specialistsor not require precertification for procedures. This approach reduces the administrative work forthe practice and improves office staff morale. It may also reduce practice overhead (an indirectfinancial incentive).

Other actions that may be perceived as rewards include providing clinical practice guidelines,practice management tools, medical record forms, or solutions to common problems for thepractice. While provider support services may be offered on an ongoing basis, it can also bebeneficial to tie them to specific performance measures. An invitation to the physician or officestaff to participate on plan committees or on panels at plan presentations may also be perceived asa reward since it allows physicians and staff to learn about the health plan and to provide inputinto health plan operations. It also provides them (as well as their patients and their peers) with anindication of the plan’s respect. Such incentives also serve the needs of the plan.

Resolving Unacceptable Physician Practice Patterns

Although most physicians consistently practice within acceptable standards of care, there areoccasions when unacceptable practice patterns occur. In some cases, unacceptable practice mayentail a single incident involving an otherwise high-quality physician. In other cases,unacceptable practice may involve a series of events indicating a physician who does not meetacceptable standards. As we discussed earlier in this lesson, unacceptable practice may involveoverutilization or underutilization of services, poor clinical quality, poor service quality, orinappropriate provider behavior. Regardless of the pattern or the type of issue, the approach to thephysician is similar and involves identification, evaluation, and management of potential qualityissues.

The one exception to this approach is an event that indicates the potential for harm to futurepatients. Such events require immediate suspension of the physician from the network until theissue has been fully investigated and resolved. Suspension is a very serious step that should notbe undertaken lightly.

Identification of Potential Quality Issues

Unacceptable actions or practice patterns are identified by plans in a number of ways. Often aplan member will call member services to complain about a physician. Common complaintsinclude

lack of courtesy on the part of the office staff or physician lack of availability of the physician to see the patient prolonged waits in the physician’s office poor communication by the physician disagreement with the diagnosis and treatment lack of treatment

Quality issues may also be identified by health plan staff reviewing care in the hospital, pre-certifying outpatient care, or working with members in case management. These issues mayinclude

abusive behavior toward the health plan staff on the part of the physician or office staff medical errors or complications of care delays in care unnecessary or inappropriate care

Provider profiles may also reveal patterns of care that fall outside the acceptable standard, eitherthrough overutilization or underutilization

Evaluation and Management of Quality Issues

Once a potential quality issue is identified, it must be thoroughly investigated, evaluated, andmanaged.

Issue Investigation

The member complaint or health plan staff report is thoroughly documented and all relevantrecords, including hospital or office medical records, are obtained. Profiling data are analyzed toidentify specific unacceptable behaviors rather than just a statistical variance. Some health planscontact the physician during this process to obtain his or her perspective, while other health planswait until they have completed their initial investigation before contacting physicians.

Issue Evaluation

Once all of the relevant information has been gathered, the quality management staff reviews itand, if it involves clinical issues, submits the information for review by a medical director orother physician. Many plans use a numerical severity score to rate a quality issue. This score maybe based on the extent of the breach of the accepted standard of care (ranging from a minormisunderstanding to a flagrant violation of basic standards of care) or on the impact of the breachon the member (ranging from no negative impact to loss of limb or death). Severity scores allowthe plan to track the severity of breaches for any given physician as well as the overall pattern forthe plan. Severity scores also help the plan determine whether immediate suspension from thenetwork due to potential risk to future patients should be considered.

At this point, the plan medical director may contact the physician (if he or she has not previouslybeen contacted) to discuss the case. Depending on the nature of the issue, this contact may bemade by mail, over the telephone, or in person. This discussion should allow the physician topresent his or her side of the story and should involve an effort to reach agreement about whattook place and what corrective actions, if any, are needed. Whenever possible, discussions shouldbe kept collegial and should be approached as an opportunity to work with the network physicianto improve the quality of care for plan members. The use of questions (as discussed earlier) ratherthan accusations may help to avoid conflict. All interactions should be thoroughly documented.

Often, health plan reviewers determine that there was no unacceptable action and the case isclosed. Sometimes, the health plan lacks adequate evidence to determine if the single eventrepresents a quality issue, but the plan makes note of the event and documents its intent to trackand trend any future events to see if there is a pattern of unacceptable actions. When a true qualityissue is identified, the plan must decide how to proceed with further investigation and correctiveaction.

Most health plans have a quality management committee or other peer review committee that isresponsible for evaluating quality issues. Potential quality cases may be presented to the qualitymanagement committee prior to contacting the physician or after the physician has responded.The committee members evaluate the information provided and make the final determination onwhether the physician’s behavior represents a true quality issue. If necessary, the committee mayrequest review by an outside provider in the same specialty. If a quality issue is identified, thecommittee then recommends further action, up to removal from the network. The committee alsoreviews and approves any proposed corrective action plan and monitors its successful completion.

Issue Management

Once it has been determined that a true quality of care issue exists, the plan must work with thephysician to keep similar issues from recurring. Most health plans require the physician todevelop a corrective action plan that addresses the specific breach. The corrective action planincludes specific actions that will be taken and a timeframe for completion of those actions.Although the health plan medical director should work with the physician to develop anacceptable corrective action plan, preferably the physician takes responsibility for actual plandevelopment as the physician will have more invested in making it work. Once the peer reviewcommittee approves the plan, the plan is implemented and its progress is periodically monitored.Documentation of plan completion is presented to the quality management committee forapproval.

Disciplinary Action

In spite of efforts to resolve issues collegially with network physicians, there may be times whendisciplinary actions are necessary. For example, disciplinary action may be necessary forinappropriate behavior on the part of the physician, refusal to cooperate with a corrective actionplan, or a pattern of actions that indicate that the physician is not willing or able to change.Formal disciplinary actions should be undertaken only when other approaches have failed. Thedocumentation of formal disciplinary actions should be included in the physician’s credentialingfile so that it may be considered during the recredentialing process.

Disciplinary action can take several forms. A verbal reprimand may be the first step taken.Reprimands should be thoroughly documented, including the action that led to the reprimand,

how it was communicated to the physician, and what the consequences will be if there is nochange. A more formal approach is a disciplinary letter documenting all relevant information.Following either a verbal reprimand or a disciplinary letter, the physician may be required tomake an appointment with the medical director to discuss the issue. This allows time forreflection before the actual meeting.18 If formal discipline is not effective, or if it is notconsidered adequate by the health plan’s peer review committee, the plan may proceed withformal sanctions, such as not allowing the physician to accept new patients or referrals, ortermination. Health plan sanctions are typically based on quality issues or on the physician’sfailure to comply with plan policies. The plan may also sanction or terminate physicians based onactions taken by outside agencies, such as state medical boards or CMS. External sanctions maybe based on issues such as fraud, inappropriate actions with patients, or serious breaches of theaccepted standards of care. Plans must investigate such sanctions and take appropriate action.

Under the terms of the Health Care Quality Improvement Act (HCQIA), all sanctions that restricta physician’s ability to practice or result in termination must be reported to the NationalPractitioner Data Bank (NPDB). Health plans that terminate a physician from the network mustalso satisfy other regulatory requirements. One of the most important of these is due process, asoutlined by the HCQIA. The requirements for due process, which are described in EnvironmentalConsiderations for Network Management, apply to all terminations based on quality issues. Manystates have passed laws that require some form of due process for terminations that are not basedon quality issues as well.

The HCQIA also includes guidelines for the use of peer review. For example, HCQIA requirespeer review for services delivered to Medicare and Medicaid recipients enrolled in health plans.For services delivered to commercial plan members, physician participation in the peer reviewprocess is determined by the health plan or by state regulations. Health plans encourageparticipation in peer review by supporting full disclosure and fair evaluation and by guaranteeingprotection for participants from lawsuits and protection for documents generated during peerreview from legal discovery. These guarantees are critical to the success of the peer reviewprocess.

Unfortunately, the guarantees health plans have traditionally offered may not be available in thefuture. In June 1999, the Supreme Court issued a decision allowing individuals to subpoena peerreview records for federal lawsuits.19 This decision is likely to have a significant impact on theapproaches health plans use to modify physician behavior.

Physicians may also voluntarily withdraw from practice for a variety of reasons. One commonreason for physicians to be sanctioned or to withdraw from practice is recognition by a physicianor others that the physician’s practice is impaired by alcohol or substance abuse or by psychiatricillness. Although health plans cannot allow physicians to participate in the network while they arebeing sanctioned or during an absence from practice, many plans will consider allowingphysicians to rejoin the network if they successfully participate in a recognized assistanceprogram for impaired physicians.

Assistance Programs for Impaired Physicians

Physicians are no more immune to alcoholism, chemical dependency, or psychiatric disordersthan are members of the general population. When a physician suffers from an addiction orpsychiatric disorder, his or her ability to practice medicine safely is impaired, and the physician

must be viewed as a potential threat to patients. Health plans must be prepared to take appropriateaction when they have impaired physicians among their employees or contracted providers.

Health plans often become aware of impaired physicians through member complaints, reports bycoworkers, or observations made by health plan staff during an office site visit. When a healthplan learns of a possibly impaired physician, the plan can contact physician specific healthprograms run by the state or the state’s medical society in order to help the impaired physicianreturn to a healthy personal and professional life.

Unless the physician has committed a negligent act which affects the quality of patient care orcauses a serious incident which may result in disciplinary action by the state licensure board, theimpairment is not reported to the National Practitioner Data Bank. The situation usually remainsconfidential under medical peer review protection.

Many impaired physicians successfully complete treatment programs and are able to maintaintheir medical licenses and continue in practice. Figure 8B-4 outlines the key features of anassistance program for impaired physicians.

Some health plans take a proactive approach to treating impairment and inform providers throughnewsletters and other provider communications about impairment programs designed specificallyfor physicians and other healthcare professionals. Health plans may also communicate theappropriate process for a physician or other individual to report a suspected impaired physician tothe appropriate authorities.

Conclusion

Once its provider network is in place, a health plan must manage the network on an ongoingbasis. To ensure that it continues to offer plan members appropriate access to medical services,the health plan must regularly monitor the environment and its patient population, identify

changes that have occurred, and adjust the size and composition of the network to accommodatethose changes. In addition, the health plan must take steps to retain network providers byincreasing their satisfaction with the plan and increasing their involvement in plan management.To ensure that plan members receive quality medical care, the health plan must also manage theperformance of individual network providers. By effectively managing its provider network, thehealth plan can present evidence to its purchasers and plan members that it offers a qualityproduct.

AHM Network Management: Pharmacy Networks

Objectives

After completing this lesson you should be able to:

Describe the advantages early pharmacy networks had over direct pay and cost-sharingpharmacy systems

Identify the features that distinguish pharmacy networks from other health plan networks Describe the impact of pharmacy benefits management in managed care Explain the advantages and disadvantages of maintaining in-house management of

pharmacy benefits or outsourcing benefits through a pharmacy benefit managementcompany (PBM)

Describe the options available for delivering pharmacy services Identify the methods that health plans and PBMs use to reimburse network pharmacies

A pharmacy network consists of a group of individual pharmacies that provide pharmacy servicesto the members of a designated health plan.1 Although hospital and physician networks haveexisted for more than 60 years, pharmacy networks did not become formally organized until themid- 1960s. Since then, they have become an integral part of the managed healthcare system. Inthis lesson, we will provide a brief description of the history and development of pharmacynetworks and discuss the features that distinguish pharmacy networks from other providernetworks. We will also describe the impact pharmacy benefits management has had on the wayhealth plans deliver pharmacy services to plan members.

History and Development of Pharmacy Networks

Before the advent of prescription drug programs in the late 1950s and early 1960s, pharmacybenefits were delivered through open, direct contact between patients and pharmacies. Patientsneeded written authorization from a licensed physician to obtain prescription drugs, but therewere no restrictions on which drugs the physician could prescribe or which pharmacy the patientcould use. Payment was also direct. The patient either paid the pharmacy in full or sharedexpenses with an insurer under a major medical insurance policy. Prescription prices weredetermined by the pharmacy and were typically based on the cost of ingredients plus a percentmark-up that reflected the pharmacy’s desired gross profit margin.2

Early Pharmacy Networks

In the late 1950s and early 1960s, third-party prescription programs began to emerge. A third-party prescription program is a program in which prescription expenses are paid at least in partby someone other than the patient. Most early third-party prescription programs were sponsoredby labor unions and provided benefits to union members through designated pharmacies. Later,governments, insurance companies, and employers began offering similar programs. Becausethey were designed to serve specific groups, the networks associated with these programs wereorganized locally and often consisted of a single pharmacy that served a limited geographicalarea. The agreements between plan sponsors and network pharmacies were loosely structured,with little, if any, standardization. Payment to pharmacies was typically based on usual,customary, and reasonable (UCR) charges rather than on any structured reimbursement schedule.In the context of pharmacy benefits, UCR charges were typically the amount pharmacies charged

cash-paying customers for prescription drugs. These charges were determined by the pharmacyand varied widely from region to region.

The National Auto Prescription Drug Program

The first formally organized pharmacy network appeared in 1967, when the United Auto Workers(UAW) union negotiated a pre-paid prescription drug program for the automobile industry. TheNational Auto Prescription Drug Program went into effect in October 1969. It offered benefits toprogram members who used approved pharmacy networks to obtain legend drugs—those drugsthat required a written prescription from a licensed physician.

Under the terms of the program, plan members could obtain any legend drug from anyparticipating pharmacy by presenting a plastic ID card and making a small copayment. Thepharmacy would fill the prescription and then bill the plan directly for reimbursement. Planmembers could also obtain prescription drugs from non network pharmacies, but they wererequired to pay the pharmacy in full and file a claim with the plan for reimbursement. Claimsadministrators typically charged plan members a penalty—often as much as 25% of the cost ofthe prescription— for out-of-network purchases.

The networks that provided program benefits were organized regionally by the Blue Cross andBlue Shield plans that underwrote the program. Blue Cross and Blue Shield plans that hadautomobile manufacturing plants in their operating areas developed their own networks. If thehealth plan was not located in the same area as the manufacturing plant, the health plancontracted with third-party administrators (TPAs) to develop networks.3

Most pharmacy TPAs were claims processors that solicited contracts with independentpharmacies and administered pharmacy benefit programs at the regional level, but did notunderwrite the benefits or assume financial risk.

Requirements for participation in the network were simple. Pharmacies wishing to contract withthe National Auto Prescription Drug Program, either directly or through a claims processor, hadto be registered in the state and agree to the reimbursement formula specified in the agreement.Although pharmacy participation in the UAW’s program was limited, the National AutoPrescription Drug Program served as a model for most of the early pharmacy programs and forthe health plans that appeared later.

Advantages of Early Pharmacy Networks

Pharmacy networks offered the following advantages over direct pay and cost-sharing pharmacysystems:

Increased patient access to pharmacy services. The cost-sharing requirements of directpay systems and major medical insurance policies created barriers to patient care.Depending on the cost of drugs and the amount of deductibles and coinsurancerequirements, these barriers could be substantial. Pharmacy networks allowed planmembers to purchase prescription drugs for a small copayment. By reducing out-of-pocket costs for patients, pharmacy networks eliminated the price barriers created bydirect pay and cost-sharing systems

Increased administrative efficiency. Contracting with pharmacy networks allowed third-party administrators to develop economies of scale and systems capabilities that were not

available to individual plan sponsors. This advantage was especially important foradministrative tasks such as claims processing. Third-party administrators found thatreimbursing a single pharmacy for prescriptions for a block of patients was far less costlythan reimbursing that same block of patients individually. For example, a block of paperclaims that could be processed through a participating pharmacy for 40 cents per claimcould cost as much as 95 cents per claim if processed individually.4

Better data for monitoring and managing the benefit. Participating pharmacies wererequired to maintain records of all pharmacy transactions. These records containedinformation about prescription drugs, plan members, physician prescribing patterns, andutilization that administrators could use to assess and control plan performance.

Standardized claims processing. Early prescription card programs took a first step towardstandardized claims processing by requiring network pharmacies to submit claims ondesignated forms. Unfortunately, each plan had its own form and it was necessary forpharmacies that participated in more than one network to maintain and use separate formsfor each plan. In 1972, the National Council of Prescription Drug Programs (NCPDP)was formed to address thirdparty drug programs’ need for standardized information, andin 1977, the NCPDP developed the Universal Claim Form (UCF). The NCPDP laterdeveloped similar standards for electronic claims processing.

Health Plan Pharmacy Networks

Early pharmacy networks were typically open panels, in which any pharmacy that satisfiedregistration and reimbursement requirements could participate. These networks expanded patientaccess to pharmacy benefits, but they did very little to control costs. In a typical FFS prescriptionprogram, a payor (typically a government agency or employer) contracted with a third-partyadministrator which, in turn, contracted with networks of pharmacies to provide services to planmembers. This relationship is illustrated in Figure 6C-1.

TPAs could exert some control over participating pharmacies and plan members by establishingdispensing fees, encouraging the use of generic drugs, and requiring patient cost-sharing.Administrators, however, had no control over drug costs or prescriber habits, and cost increaseswere typically passed on to payors in the form of increased insurance premiums.

In the early years of pharmacy benefit programs, cost increases were often dramatic. Between1980 and 1990, annual expenditures for prescription drugs rose from $12 billion to $37.7 billion.5

Applying health plan strategies to network development offered plans a way of controlling thosecosts. A first step in the cost management process was to establish closed pharmacy panels ratherthan open panels.

Closed panels limit participation to a specified group of pharmacies. By directing patients tospecified pharmacies, closed networks offered significant cost savings and greater control overpharmacy benefits than was possible with open networks. Closed networks kept costs down forpayors by reducing contracting and administrative costs. Closed networks gave third-partyadministrators greater leverage in negotiating with pharmacies by allowing them to trade businessvolume for price discounts. They also gave administrators greater control over pharmacyperformance and made implementing additional cost-management programs easier. Figure 6C-2describes additional changes that are occurring as direct pay and cost sharing systems evolve intomanaged care pharmacies.

In the early years of pharmacy benefit programs, cost increases were often dramatic. Between1980 and 1990, annual expenditures for prescription drugs rose from $12 billion to $37.7 billion.5

Applying health plan strategies to network development offered plans a way of controlling thosecosts. A first step in the cost management process was to establish closed pharmacy panels ratherthan open panels.

Closed panels limit participation to a specified group of pharmacies. By directing patients tospecified pharmacies, closed networks offered significant cost savings and greater control overpharmacy benefits than was possible with open networks. Closed networks kept costs down forpayors by reducing contracting and administrative costs. Closed networks gave third-partyadministrators greater leverage in negotiating with pharmacies by allowing them to trade businessvolume for price discounts. They also gave administrators greater control over pharmacyperformance and made implementing additional cost-management programs easier. Figure 6C-2describes additional changes that are occurring as direct pay and cost sharing systems evolve intomanaged care pharmacies.

Unique Features of Health Plan Pharmacy Networks

In terms of structure and operation, pharmacy networks are similar to other managed careprovider networks. For example, like other provider networks, a pharmacy network must

be large enough to provide easy access to plan members within its geographical area ofoperation but small enough to be manageable and to offer an attractive volume of planmembers to network providers

provide plan members with comprehensive, quality services achieve maximum health outcomes for plan members at the lowest cost

Pharmacy networks, however, differ from other provider networks in three ways: (1) they aredesigned to deliver products as well as services; (2) they are developed around a national standardfor reimbursement; and (3) they rely on sophisticated information management systems.

Products versus Services

Perhaps the biggest difference between pharmacy networks and other provider networks is thatpharmacy panels are designed primarily to deliver tangible healthcare products to health planmembers. Unlike surgical procedures or diagnostic techniques, medications have a concretemarket value. In the minds of some payors, prescription drugs are similar to commodities andshould be purchased at the lowest possible price and distributed through the lowest-cost provider.

This cost-conscious attitude has given health plans economic leverage when negotiating contractswith drug manufacturers. Health plans have no direct control over pharmaceutical products, butthey do have control over the market for those products: health plan subscribers. Health planshave been able to offer access to a large patient base in exchange for price discounts and rebatesfrom manufacturers. Health plans have similar leverage over pharmacies as distributors ofpharmaceutical products. In order to maintain their customer bases, pharmacies must be willing toaccept the terms of network contracts.

Other types of prescription drug distributors, including chain pharmacies, mail-order drugservices, and pharmacies located at employers’ workplaces, also compete for the health planpatient base. In some locations, physicians dispense their own prescription drugs, without the useof pharmacies. In order to compete effectively against these lowercost distributors, pharmaciesmust now do more than simply sell prescription drugs. They must also provide services.

Pharmacies provide services by working with physicians, nurses, and other healthcare providersto incorporate medications into a patient’s healthcare plan. This process, which is referred to aspharmaceutical care,6 is designed to achieve both therapeutic and quality of life outcomes.***Therapeutic outcomes are measures of a drug’s effectiveness in treating disease and areachieved by incorporating medications into patient care.

Quality of life outcomes involve improving the patient’s physical, social, and emotional well-being as observed by both the healthcare team and the patient.7

***Therapeutic outcomes include

curing the patient’s disease preventing or slowing the progression of disease eliminating or reducing the patient’s symptoms preventing a disease or symptom diagnosing a disease avoiding drug-related problems

Standard Reimbursement

Reimbursement for prescription drugs and services in a third-party prescription drug plantypically follows one of two approaches: (1) a reimbursement approach or (2) a service approach.Early pharmacy networks followed a reimbursement approach, under which a covered individualpurchased prescription drugs directly from a pharmacy and then was reimbursed by the plan.Reimbursement, subject to any copayment, deductible, and coinsurance requirements, was mostoften based on UCR charges. Most major medical plans still follow a reimbursement approach.Under a service approach, plan members obtain prescription drugs from participating networkpharmacies by presenting proper identification and paying a specified copayment. The pharmacythen bills the plan directly for the remaining cost of the prescription. The majority of currenthealth plan prescription drug plans are service plans.

Reimbursement under virtually all service plans is based on an amount related to the cost of thedrug plus a specified dispensing fee for each prescription. In most contracts, the cost componentof the reimbursement formula is based on the average wholesale price (AWP), or averagewholesale cost (AWC), which represents the average price that wholesale suppliers ormanufacturers charge pharmacies for medicines. It is important to remember that although theAWP is the amount the health plan uses in calculating reimbursements for prescription drugs, it isnot necessarily the price the pharmacy pays for the drugs. Plans that purchase products directlyfrom pharmaceutical manufacturers and distribute those products through their own pharmacies—such as closed panel group and/or staff model HMOs—often receive volume discounts thatreduce the price they actually pay to the manufacturer. Open panel plans, such as IPA andnetwork model HMOs, that dispense drugs through network pharmacies typically reduce theircosts by negotiating manufacturer rebates that are calculated after purchase.

Products versus Services

From a pharmacy perspective, the AWP offers the following advantages:8

Unlike UCR charges, which are set by pharmacists and vary widely by region, averagewholesale prices are published periodically in accepted sources and serve as a universalpricing mechanism across all segments of the industry.

Because of volume discounts and rebates, the AWP is often substantially higher than theactual price the pharmacy pays for prescription drugs. For example, a pharmacy thatreceives a 15% discount under its contract with a drug manufacturer can purchase a drugwith an AWP of $25.00 for only $21.25 ($25.00 – $3.75). The difference between theAWP and the actual purchase price belongs to the pharmacy.

Increases in the AWP are passed on by the pharmacy, thereby providing a built-in hedgeagainst inflation.

Although the AWP offers benefits to pharmacies, it can result in unacceptable costs for healthplans. To avoid this problem, health plans typically use the AWP as a benchmark and thennegotiate the actual reimbursement. Most often, the contracted reimbursement to the pharmacy isa percentage off the AWP; for example, AWP minus 10%.9 Health plans have also establishedalternative methods of defining cost, including

estimated acquisition cost (EAC) wholesale acquisition cost (WAC) actual acquisition cost (AAC) maximum allowable cost (MAC)

We will discuss these alternate methods of reimbursement later in this lesson.

Standard Reimbursement

The fee component of the reimbursement formula consists of the pharmacy’s service costs.Service costs are those costs associated with dispensing prescription drugs, exclusive ofingredient costs and profit, and include operating expenses assigned specifically to theprescription department.10 Service costs consist of two components: costs for services associatedwith dispensing prescription drugs and costs for cognitive services. Dispensing services includemaking generic substitutions, switching prescriptions to preferred drugs, or providing patientmonitoring and education. These services are typically specified by the health plan. Cognitiveservices, or professional services, are services identified by the pharmacist as being medicallynecessary for the patient, and include (1) counseling patients about prescriptions and drugtherapy, (2) reviewing drug profiles to prevent or monitor adverse drug interactions, (3)implementing quality improvement programs, (4) documenting pharmaceutical care in patientrecords, and (5) monitoring program compliance. Fees can be uniform—for example, the samespecified amount added to each prescription—or variable, based on specified criteria such asbrand versus generic or the cost of the medication. Figure 6C-3 illustrates different types of fees.

Online Benefit Management

In many areas of managed care, information technology is still in its infancy. In pharmacy,however, information systems have been an integral part of operations since the 1980s. Theearliest application of information technology in pharmacy was in the area of claims processing.Prior to computerized claim processing, the cost of processing a claim and submittingreimbursement was often greater than the actual claim itself. Computerization has made claimsprocessing faster and more economical. Using software programs, pharmacies can obtaininformation about benefits, copayments, and member eligibility from a health plan’s database,link it with their own drug and utilization information, and then send a completed claim to thehealth plan for reimbursement.

Initially, each pharmacy had its own separate computer and database, and there were nocommunication links between the computers in various locations. As computers became moresophisticated, stand-alone systems with limited remote access gave way to systems whichprovided comprehensive online communication with health plans’ and other providers’ databasesand allowed pharmacies to manage their prescription departments and their patients’ needs. Theseonline information management systems are referred to as point-of-service systems.

Point-of-service capabilities are possible, in large part, because of the standardized formatsprovided by the National Council of Prescription Drug Programs. The NCPDP’sTelecommunication Standard Format provides standards needed for the exchange of electronicprescription drug claims. Other standards, such as those for communicating online drug useevaluation information, facilitate the exchange of pharmaceutical care information, includingdocumentation of drug problems, pharmaceutical care interventions, and outcomes.

Point-of-service systems allow pharmacies to perform a variety of tasks quickly, accurately, andeconomically. In addition to verifying patient eligibility for prescription drug coverage anddetermining copayment, deductible, and coinsurance requirements, point-of-service systemsallow pharmacies to

determine formulary compliance

determine drug therapy restrictions determine preauthorization requirements conduct prospective drug utilization review submit and process prescription drug claim information adjudicate claims in “real time.”11

Such point-of-service systems have become standard in many health plans and are currentlyrequired by 15 states for pharmacies serving Medicaid patients.

Point-of-service technology is also making it possible for physicians to forgo traditional paper“scrips” in favor of sending prescriptions electronically to pharmacies. Electronic prescriptionssave both time and money. Prescription software can check prescribed medications for genericequivalents and for formulary compliance, issue alerts for noncompliance, offer therapeuticalternatives, and generate drug-change requests. It can even alert the physician when patients failto pick up their prescriptions. Filing prescriptions online also

eliminates the danger of forged prescriptions reduces hospital admissions that result from pharmacists misreading doctors’ handwriting provides accurate records of patient medications allows physicians to check prescribed medications against patients’ medical histories to

prevent allergic reactions or possible drug interactions

Electronic transmission of prescriptions, however, does have drawbacks. Pharmacists contendthat electronic prescriptions represent unnecessary duplication of effort because pharmacists arealready performing the tasks that are included in prescription software programs—either becauseof regulatory requirements or as part of their pharmaceutical care efforts. Some physicians areunable to use the programs because of state laws prohibiting electronic prescriptions; othersworry that hackers will be able to break into the system and send their own prescriptions; stillothers find the system unpredictable. Patients express concerns about breaches of confidentiality.In spite of these drawbacks, experts predict that electronic prescriptions will become the norm inhealth plans by the year 2000.14

We have seen how the use of pharmacy networks allows prescription drug plans to reduce drugcosts. Pharmacy benefits management provides a way to control costs by managing the entirebenefit process. Pharmacy benefits management can be included in a health plan’s total benefitpackage, or it can be offered by an independent, external organization. We will discuss thesealternative approaches to pharmacy benefits management later in this lesson. For now, however,we will discuss pharmacy benefits management in the context of its contribution to health plans.

As you recall from Healthcare Management: An Introduction, pharmacy benefits management isa type of health plan specialty service that seeks to control the costs of prescription drugs whilepromoting more efficient and safer drug use. Pharmacy benefits management is an outgrowth ofthe third-party administration of prescription drug programs. Many PBMs operating today beganas TPAs. Unlike TPAs, which focus on providing administrative services such as contractnegotiations and claims processing, pharmacy benefit managers (PBMs) attempt to control costsby intervening in the way prescription drugs are priced, prescribed, dispensed, and used.

The shift toward pharmacy benefits management has had a significant effect on the role of healthplans, as shown in Figure 6C-4.

Health plans no longer simply administer the delivery of pharmacy benefits from payors, throughpharmacy networks, to patients. Instead, health plans influence each of the players in thepharmacy benefits process.

Influence over Manufacturers

One of the most pressing problems facing health plans has been the rising cost of prescriptiondrugs. Health plans and PBMs addressed the problem of rising costs by establishing andmanaging formularies.

Drugs and treatment protocols included in the formulary are considered preferred therapy for agiven managed population. A health plan with an open formulary covers drugs that are on thepreferred list as well as drugs that are not on the preferred list. A health plan with a closedformulary covers only drugs that are on the preferred list. Health plans continually update theirformularies in order to ensure that the medications included represent the current clinicaljudgement of providers and experts in the diagnosis and treatment of disease.

Most formularies encourage the use of generic and therapeutic substitutions to ensure that thedrug therapy patients receive is cost-effective as well as safe and appropriate. In someformularies, such substitutions are required. In order to compete against lower-cost producers fora place on the formulary, drug manufacturers have also lowered the price of brandname drugs.

Formularies also offer other benefits. For example, managed drug therapy contributes to betterdisease management, fewer physician visits, fewer laboratory tests, fewer emergency room visits,and less complicated, shorter hospital care.17

Influence over Prescribers

In most cases, physicians are accountable for the coordination of patients’ healthcare services,including pharmacy services. Much of this accountability is established through case managementand utilization management requirements and reinforced by financial incentives. PBMs exertadditional influence over physicians by using the following tools:

Drug utilization review Authorization requirements Second opinions Education requirements Peer review Penalties for violation of prescription policies

Influence over Pharmacies

By developing and managing preferred networks, health plans and PBMs exert direct control overcommunity-based pharmacies. PBMs determine which products and services pharmacies deliverto plan members and how they will be reimbursed. The more restricted the network becomes, themore control the health plan or PBM has. For example, contracting with a single chain ofpharmacies rather than with individual pharmacies reduces the PBM’s contracting, claimsprocessing, and administrative costs and increases its ability to monitor and manage pharmacyperformance. The overall high-volume, low-cost operations of chain pharmacies may also makethem more willing than independent pharmacies to accept lower reimbursement or to shareoperating costs.

Non-community-based distribution systems such as mail-order services also increase competitivepressures on traditional pharmacies. High-volume, low-cost delivery capabilities allow mail-ordercompanies to offer health plans and PBMs deep discounts on prescription drug prices. Mail-orderdistribution has also proved to be cost-effective for long-term therapy associated with chronicconditions and for distribution to patients, such as retirees and disabled patients, who havedifficulty traveling to pharmacies to have prescriptions filled. Faced with the prospect of losingclientele to these alternative providers, pharmacies are accepting the reimbursement offered byhealth plans and PBMs and emphasizing the value of services they provide.

Independent pharmacies can deflect some of this competitive pressure by joining forces to createa pharmacy service administration organization. A pharmacy service administrationorganization (PSAO) is an organized network of independent pharmacies created to marketcompetitive drug programs to health plans. A PSAO gives its members volume-buying power andalso provides assistance with claims processing and reimbursement.

Influence over Drug Use

By participating in outcomes and pharmacoeconomic research, the development of diseasemanagement and practice guidelines, drug utilization review (DUR), patient monitoring,academic detailing— that is, one-on-one visits to physicians to discuss prescribing patterns andformulary compliance—PBMs now play an active role in clinical and drug use decisions.

Establishing a Pharmacy Benefits Management Program

Pharmacy benefits management encompasses a broad range of activities, including benefitdesign, claims processing, utilization management, quality management, and networkmanagement. Pharmacy benefits management can be integrated into a health plan’s totalhealthcare package to form a unified pharmacy benefit, or it can be “carved out” through aseparate contract with an independent PBM company.

Unified Pharmacy Benefits

When pharmacy benefits management is incorporated into a health plan’s operations as a unifiedbenefit, the health plan assumes responsibility for establishing networks and managing theiroperation. Some health plans deliver pharmacy benefits only through retail pharmacy networks,while others combine retail networks with mail-order services to provide integrated deliverysystems. Some health plans require members to stay within the pharmacy network in order toreceive pharmacy benefits, while others allow members to use any pharmacy but offer richerbenefits for the use of network providers. Some health plans operate locally, while others operateregionally or nationally. In all cases, the health plan is responsible for recruiting, selecting, andnegotiating contracts with network pharmacies. The more pharmacies the network includes, themore complex this process becomes

After the network is established, the health plan must manage its operation. This includes

administration activities such as claims processing and reimbursement clinical activities such as utilization review, drug utilization review (DUR), and disease

management cost-containment activities such as developing and managing the formulary and

monitoring patient and prescriber compliance customer service activities such as establishing quality improvement programs.

Criteria for Selecting Pharmacy Providers

Health plans follow the same guidelines when establishing a pharmacy network that they followwhen designing the pharmacy benefit. Their purpose is to create a network that promotes quality,accessibility, efficiency, and member satisfaction. Figure 6C-5 outlines the various requirementsof a pharmacy network and the factors health plans use to measure the extent to whichpharmacies satisfy those requirements.

Using these requirements as a base, health plans can develop specific criteria for networkparticipation. Typically, pharmacies participating in the network must meet ***this criteria.

Be properly licensed and satisfy state-mandated requirements related to space,equipment, reference books, and appropriately trained and credentialed personnel

Conform to dispensing standards for prescriptions and controlled substances Adhere to auditing and reporting procedures Establish procedures for handling customer complaints

Contribute to patient drug therapy through interventions such as DUR and diseasemanagement

Provide patient counseling and education Establish quality management programs Provide service at a location and time that is convenient to plan members Maintain adequate inventory so that the proper drugs are available at the proper time and

in the proper amounts Have adequate online capabilities to process claims in real time Be able to access and contribute to the health plan’s plan/patient/provider database Satisfy customers’ expectations with regard to consideration, technical competence, and

adequacy of explanations

Advantages of Unified Pharmacy Benefits

The major advantage of managing pharmacy benefits in-house is that it gives the health planmaximum control over quality, access, cost, and customer service, as ***described here.

Unified benefits improve the quality of patient care and the value of pharmacy servicesby giving health plans control over the number and type of pharmacist/physicianinteractions, the direction and scope of drug therapy interventions, and the application ofdisease management programs.

Control over the formulary and network contracting gives the health plan control overpatient access to prescription drugs and to pharmacies. By contracting directly with drugmanufacturers and network providers, health plans can design the pharmacy benefitprogram to meet the specific needs of their subscribers.

In-house claims processing, administration, and database management allows healthplans to conduct plan operations from a single, central location, without the addedexpense of third party administration or contracting fees.

Finally, managing pharmacy benefits in-house gives health plans a greater hand incustomer satisfaction by integrating pharmacy services into the health plan’s totalbenefits package. Because there is a link from the health plan to providers to subscribers,health plans can monitor customer satisfaction and respond quickly to customer needs.

Managing the entire benefits package in-house, however, requires substantial human, financial,and technological resources. It also requires market power. As a result, in-house pharmacybenefits management is typically available only to health plans operating in markets that offer alarge patient base in a limited geographic area. Health plans that serve small markets often do nothave the resources necessary to build and maintain the systems capabilities needed to administerpharmacy benefit programs. For health plans whose markets are widely dispersed, consistentadministration of benefits is difficult, if not impossible. Health plans that are unable to managethe entire benefits program in-house do not have to relinquish all control. Health plans canmaintain those parts of the management function that fit their needs and capabilities and carve outother management functions to independent pharmacy benefits management companies.

Pharmacy Benefits Carve-Outs

The trend in recent years has been to carve out pharmacy benefits management to specializedPBM companies. According to industry statistics, HMO and PPO use of external PBM companiesto perform some or all pharmacy benefits management functions rose from 37% in 1994 to 93%in 2002.19

A number of factors have contributed to the increased use of PBM carve-outs. The three mostimportant factors are cost advantages, access advantages, and quality advantages.

Cost Advantages

As you recall from our earlier discussion, many of the leading PBM companies began operationsas claims processors for third-party prescription drug programs. Claims processing is still a majorpart of PBM operations. It is not unusual PMBs to process as many as 1 million claimstransactions per day.21 The volume of claims processed by PBMs gives them economies ofscale—and therefore cost savings— that are not available to individual health plans.

Although there are no national statistics linking expertise and better cost control, studies ofindividual plans show that PBMs do save money. For example, a 1995 study conducted by theGeneral Accounting Office of plans participating in the Federal Employee Health BenefitsProgram (FEHBP) showed that PBMs saved over $600 million.22

Access Advantages

PBMs offer access advantages on two fronts: access to pharmacies and access to pharmaceuticalproducts and services. A health plan contracting directly with pharmacies represents a singlepatient base. While that base may be large, it is only part of the total market in any givengeographical area. PBMs, on the other hand, typically represent several health plans and otherhealth plans and can use this expanded patient base to draw pharmacies into the network. MostPBMs also offer a complete package of pharmacy services, including drug formularymanagement, programs for generic and therapeutic substitutions, drug utilization reviewprograms, and mail-order prescription delivery systems. These services, designed initially to

reduce costs by improving the health plan’s ability to monitor and control utilization, have anadded benefit: they expand patient access to pharmaceutical products and services.

Quality Advantages

Today’s PBMs add a quality dimension to the services they provide. Industry studies show thatalthough the primary appeal of PBMs is their ability to control costs by managing drug pricingand drug use, increasing numbers of employers and health plans are turning to PBMs because oftheir ability to promote safe and effective drug use, contribute to disease management, andimprove patient and provider education and compliance.

Guidelines for Selecting a PBM

With the number of PBMs increasing annually, finding a PBM to handle a health plan’spharmacy benefits program is relatively easy. Finding the right PBM can be difficult. For manyhealth plans, selection of a PBM is based on the PBM’s response to questions related to thefollowing topics:

Contract arrangements. Does the PBM require fee-for-service reimbursement, or is itwilling to contract on a risk-sharing or capitation basis?

Network development. Is the network open or closed? Does the network include mail-order services? How are participating pharmacies selected?

Network reimbursement. How does the PBM reimburse network pharmacies? Isreimbursement available for non network purchases? If so, how is this reimbursementhandled? Does the PBM reimburse pharmacies for cognitive as well as dispensingservices?

Formulary development. What incentives do pharmacies have to dispense genericproducts? Do pharmacies have the authority to make generic or therapeutic substitutionsor to recommend prescription changes? Is the formulary open or closed?

Drug pricing. What system does the PBM use to reimburse participating pharmacies fordrug costs? Do pharmacies share risks for the costs of drugs dispensed? If so, who isresponsible for establishing a risk-sharing program and for selecting, pricing, andassuring the quality of the drugs under the program?

Online capabilities. Does the PBM operate a comprehensive point-of-service system?How does the PBM handle utilization review and authorization? Does the system link thePBM to individual pharmacies and to other providers in the health plan?

Quality management. How does the PBM measure, monitor, and manage the quality ofservices provided by network pharmacies? What quality indicators does the PBMevaluate?

Customer satisfaction. How does the PBM measure, monitor, and manage the quality ofservices provided by network pharmacies? What quality indicators does the PBMevaluate?

PBM ownership. Is the PBM controlled by a pharmaceutical manufacturer through anownership agreement or other strategic alliance? Are manufacturer discounts limited tospecific drugs because of contract requirements?

Delivery Options for Pharmacy Services

Health plans have five major options for delivering pharmacy services to their subscribers. Eachof these options is briefly described below. Figure 6C-6 summarizes their advantages anddisadvantages and their availability in the health plan system.

Closed Networks

In closed networks, selected pharmacies agree to supply services to plan members at discountedrates in exchange for guaranteed sales volume. For health plans, closed panels have a number ofadvantages over open panels. Closed panels reduce costs by directing members to specifiedproviders. In addition, closed panels make it easier for health plans to set standards, monitorperformance, and implement cost-control programs. For many plan members, restricted access isa major disadvantage of closed panels.

Pharmacy Networks

Open Networks

As you recall, open networks allow any pharmacy willing to accept the terms of a providercontract to participate. Requirements for participation are generally simple: pharmacies must beproperly licensed and must agree to the reimbursement specified in the contract. In a number ofstates, open panels are mandated by any willing provider laws designed to put participating andnonparticipating pharmacies on equal footing by preventing favorable reimbursement for selectedproviders. In these states, closed networks are allowed only for staff or group model HMOs thatown and operate their own pharmacies. The primary advantage of open networks is that theyprovide convenient patient access to pharmacies. Plan members can choose and switch providers

at their own discretion. The major disadvantage for health plans is that their control over costs islimited to setting reimbursement levels.

Performance-Based Open Networks

Performance-based networks are similar to other open networks in terms of requirements forparticipation and patient access. Reimbursement, however, is based on a pharmacy’s performanceon specified criteria such as generic substitutions, formulary compliance, and average cost ofprescriptions. Provider contracts may also include drug utilization review and willingness toadhere to specified pricing schedules as key performance factors. Pharmacies that meet thespecified standards receive payment in addition to the standard rate specified for prescribingservices.

Performance-based systems give health plans greater control over costs, but they tend to reduceparticipation. In addition, compliance among network pharmacies that are unaccustomed to suchtightly managed operations is often minimal.

Customized Networks

Customized networks are networks designed to meet the needs of a specific population. Mostoften, these networks take the form of company pharmacies that are owned by large employersand operated at workplace sites. Because of the large number of employees they serve, companypharmacies can negotiate favorable price discounts from manufacturers. In addition, companypharmacies provide convenient access for employees. However, the use of company pharmaciesis typically limited to those companies whose employee base is large enough to warrant theexpense of setting up the network and whose facilities are large enough to accommodate in-houseoperations. According to industry guidelines, a company pharmacy requires 4,000 to 6,000employees, a daily volume of at least 150 prescriptions, and a minimum of 500 square feet ofoperating space.23

Mail-Order Services

One of the fastest growing delivery options today is mail-order pharmacy. Most PBMs offer mail-order services as part of their pharmacy benefits management program. Health plans can alsocontract directly with mail-order services to provide all or part of their prescription drugs.Mailorder pharmacy can offer low prices to health plans and plan members because of volumediscounts and simplified delivery. However, selecting and managing mail-order services requiresspecial attention. Figure 6C-7 presents guidelines that health plans can use to select mail-ordervendors.

Reimbursement Options

In order to achieve its quality, access, and cost objectives, a health plan must include a cleardefinition of reimbursement methods in its provider contracts with pharmacies or PBMs. Healthplans have a number of reimbursement options from which they can choose.

Fee-for-Service Reimbursement

Fee-for-service reimbursement, the most widely used option among health plans, is based on acombination of drug costs, service costs, and profit requirements. We have already described theuse of average wholesale price (AWP) as a basis for determining the drug cost component of thefee-for-service formula. Health plans can also calculate drug costs according to these pricingsystems.

Reimbursement for service costs covers both dispensing services and cognitive services. Wedescribed these different services in our discussion of managed care pharmacy networks earlier inthis lesson. Service costs are negotiated by the health plan and participating pharmacies and arespecified in the provider contract. Unlike incentive payments, which are based on performance,service cost payments are based on utilization.

Estimated Acquisition Cost (EAC)Estimated acquisition cost (EAC) involves establishing a purchasing profile for each pharmacyin the network and basing reimbursement on the profile. EAC-based reimbursement to smallpharmacies that lack enough leverage to secure volume discounts or rebates is typically close tothe AWP. For large pharmacies whose volume and purchasing power allows them to securemanufacturer discounts, the EAC results in lower drug costs than the AWP.

Wholesale Acquisition Cost (WAC)Wholesale acquisition cost (WAC) is based on published prices charged by wholesalers andtherefore represents what pharmacies are actually charged for prescription drugs. This approachreduces the price inflation inherent in the AWP because discounts and rebates are alreadydeducted. This system, however, has not been very successful because not all pharmaciespurchase drugs through wholesalers.

Actual Acquisition Cost (AAC)Actual acquisition cost (AAC) is equal to the initial price of a prescription drug minus any and alldiscounts, including volume discounts, free goods, and any other mechanisms used to reduceprice. It is the most accurate method of calculating drug costs and provides the lowest level ofcost, but it is also the most complicated method, and the expense of implementing the systemoften eliminates its cost savings.

Maximum Allowable Cost (MAC)Maximum allowable cost (MAC) represents the maximum reimbursement a health plan willallow for a particular product. The MAC is attractive to health plans because it allows the healthplan to put a maximum limit on the drug cost component of the reimbursement formula and offerscontrol over multiple-source products. Most MAC formulas specify that if the cost to thepharmacy is higher than the MAC, the pharmacy cannot bill the subscriber for the extra amount;if the cost to the pharmacy is lower than the MAC, the pharmacy cannot charge the health planthe higher MAC price. For example, the MAC list may specify a cost of 8 cents per tablet for aparticular drug. If the pharmacy purchases that drug for 10 cents per tablet, the health plan willreimburse only 8 cents of the cost and the pharmacy may not bill the subscriber for the remaining2 cents. If the pharmacy purchases the drug for 6 cents per tablet, it can charge the health planonly 6 cents, and not the 8 cents specified on the MAC list. MAC pricing is used primarily formultisource and generic products.

Capitation

Capitation, which is a common method of reimbursement for physicians, is now being used forpharmacies by a limited number of health plans and PBMs. Health plans and PBMs can establishthree different types of capitation relationships within the pharmacy benefit system.

Capitation in pharmacy networks has produced mixed reactions. In order for capitation to besuccessful, patients must receive all prescriptions from the same pharmacy and pharmacies mustbe able to influence prescribing through generic and therapeutic substitutions. Health plans tendto see these requirements as benefits because they reduce unknown costs. Subscribers, in turn,benefit from the ongoing relationships with providers and the continuity of care that arise fromalways dealing with the same pharmacies, but only at the expense of open access to providers.For pharmacies, the benefits of capitation are less certain. If the plan’s patient base is large,reimbursement based on average utilization per patient is often accurate, and pharmacies benefitfrom the guaranteed cash flow generated by the patient population. However, for small patientbases, actual utilization may be far different than the industry average. In addition, pharmaciesoften have little control over which drugs will be prescribed and how often they will be used, sothat control over utilization is limited.

1. The health plan or PBM can establish a capitated contract with individual pharmaciesparticipating in the network. This arrangement is similar to that used for capitatingphysicians.

2. Health plans and PBMs can establish capitated contracts with drug manufacturers. Theagreement may apply to a specific product or to all drug treatment options for a specificdisease. It may cover only the products themselves, or it may include educationalprograms.

3. Health plans or PBMs can accept capitated payment for pharmacy benefits from privateor public sponsors. Reimbursement to network pharmacies is independent of theagreement between the plan sponsor and the health plan or PBM.

Other Risk- Sharing Reimbursement Arrangements

Health plans and PBMs have responded to the limitations of capitation systems by developing avariety of risk-sharing reimbursement options. Like capitation systems, these options typically setan annual cost-per-member target, but rather than requiring providers to assume the entire risk ofdeviations from the target, risksharing arrangements divide the risk. If the cost-per-member islower than the target amount, the health plan and the PBM, the health plan and the pharmacy, orthe PBM and the pharmacy (depending on the parties to the risk-sharing arrangement) share thesavings. If the cost-per-member is higher than the target amount, the parties to the risk-sharingagreement share the extra costs.

Risk-sharing arrangements are still relatively new approaches to reimbursement in pharmacybenefit programs, and there is not enough historical data to show that risk-sharing really works.But for those health plans and PBMs that can effectively manage drug utilization, thesereimbursement approaches offer an attractive alternative to traditional formulas

Usual, Customary, and Reasonable Charges

UCR charges are common in direct pay and cost-sharing systems, and are often used in physicianreimbursement. However, they are not commonly used for reimbursing network pharmacists. One

reason why UCR charges are not widely used in pharmacy networks is that, unless pharmaciesoperate in markets where prices are regulated by competition, UCR charges have very littlemeaning. A pharmacy can charge whatever it wants. A second reason is that drug prices chargedby manufacturers often increase frequently and dramatically, making it difficult for health plansand PBMs to maintain a current profile of UCR charges. Some health plans incorporate UCRcharges into their reimbursement schedules by specifying in network contracts thatreimbursement will be based on the lower of UCR charges or the pricing formula included in thecontract (e.g., AWP – % AWP + dispensing fee).

Incentive Payments

Another innovation in pharmacy reimbursement is the use of incentive payments. Incentivepayments are payments made to pharmacists who meet specific performance goals or engage incertain cost-management activities such as generic and therapeutic substitution or patienteducation. The amount of the incentive depends on the pharmacy’s performance on a specifiedactivity and on the total savings from the activity by all network pharmacies. For example, apharmacy that exceeds the target rate for generic substitutions might receive an incentivepayment from the health plan or PBM. The amount of the incentive would depend on thepharmacy’s substitution rate and on the savings generated by generic substitutions for thenetwork as a whole.

Endnotes

1. Chester S. Hejna, “Pharmacy Networks: Origins, Functions, and Future Directions,” in APharmacist’s Guide to Principles and Practices of Health Plan Pharmacy, ed. Susan M.Ito and Suzanne Blackburn (Alexandria, VA: Foundation for Managed Care Pharmacy,1995), 119.

2. Ibid., 120.3. Ibid.4. Ibid., 119.5. K. R. Levit et al., “National Health Spending Trends in 1996,” Health Affairs (1998):

17:35–51.6. Academy of Health Plan Pharmacy, “Pharmaceutical Care,” Concepts in Health Plan

Pharmacy, 1997, http:// www.amcp.org/public/pubs/concepts/ pharm.html (1 October1998).

7. Ibid.8. Albert H. Taubman and Chester S. Hejna, “Pharmacy Benefits Design,” in A

Pharmacist’s Guide to Principles and Practices of Health Plan Pharmacy, ed. Susan M.Ito and Suzanne Blackburn (Alexandria, VA: Foundation for Managed Care Pharmacy,1995), 133.

9. Ibid.10. Mary Sevon, “Managing the Pharmacy Benefit: Employer Options,” Employee Benefit

Plan Review (April 1998), 29.11. Marvin D. Shepherd and Michael F. Gremillion, “Information Systems in Health Plan

Pharmacy,” in A Pharmacist’s Guide to Principles and Practices of Managed CarePharmacy, ed. Susan M. Ito and Suzanne Blackburn (Alexandria, VA: Foundation forHealth Plan Pharmacy, 1995), 115.

12. Sevon, 29.13. Maureen Glabman, “Hold the Phone! Going Online with Prescriptions,” ACP-ASIM

Observer, American College of Physicians— American Society of Internal Medicine,

October 1996, http://www.acponline.org/ journals/news/oct96/presconl.htm (23September 1998).

14. Ibid.15. Norrie Thomas, Lon N. Larson, and Nancy N. Bell, Pharmacy Benefits Management

(Brookfield, WI: International Foundation of Employee Benefit Plans, Inc., 1996), 6.16. U.S. Bureau of Labor Statistics, “Trends in Medical Care Costs—Evolving Market

Forces,” Statistical Bulletin (July–September 1998): 14.17. Thomas, Larson, and Bell, 39.18. Vicki Bladassano, “Lead Report: Pharmacy Benefit Management,” BNA’s Health Plan

Reporter 4, no. 19 (1998): 471.19. Kenneth W. Schafermeyer, “Overview of Pharmacy in Managed Health Care,” in A

Pharmacist’s Guide to Principles and Practices of Health Plan Pharmacy, ed. Susan M.Ito and Suzanne Blackburn (Alexandria, VA: Foundation for Managed Care Pharmacy,1995), 23.

20. Bladassano, 471.21. Hejna, 121.22. “The Increasing Dominance of the Pharmacy Benefit Manager,” Health Plan Interface

(May 1998): 46.23. U.S. General Accounting Office, “Pharmacy Benefits Managers,” Medical Benefits

(March 30, 1997).

Network Management in Health Plans: Provider Networks for Workers’Compensation

Objectives

After completing this lesson you should be able to:

Explain why a state might want to institute managed workers’ compensation Explain why the selection process for workers’ comp providers differs from that for other

types of networks Describe some of the nonfinancial tools that a health plan can use to manage the

performance of its workers’ comp providers

Introduction

Workers’ compensation (often referred to as workers’ comp) is a state-mandated insuranceprogram that provides benefits for medical expenses that are incurred and wages that are lost byworkers who suffer work-related injury or illness. Traditionally, the primary goal for medicalservices provided under workers’ comp has been to return the employee to work as soon aspossible in order to control the expense of reimbursing workers for lost wages. Because of theemphasis on quick recovery, workers’ comp providers are usually less concerned aboutoverutilization and strict definitions of medical necessity than other providers. Health plans offera way for workers’ comp programs to manage medical costs as well as the costs of lost wages. Ahealth plan that provides medical care under workers’ comp may need to adjust its goals forhealthcare delivery in order to manage both medical expenses and the cost of lost wages. Part ofthe adjustment process is tailoring the management of the provider network to emphasize rapidrecovery as well as appropriate care and cost-effectiveness.

In this lesson, we explore how the application of health plan concepts, such as provider networks,can improve the quality and cost-effectiveness of medical services delivered under workers’comp programs. We discuss legal considerations for managed care workers’ compensationnetworks and issues that affect the selection of providers for a network. We also describecompensation options and other tools that may be used to manage provider performance.

Opportunities for Health Plans in Workers’ Compensation

The application of managed care principles to workers’ compensation (sometimes referred to asmanaged workers’ comp or simply managed comp) is still in its early stages. Nevertheless, manyexperts see potential advantages to managed comp. Specifically, health plans can reduce the costsand improve the quality of the care provided under workers’ comp. In situations in which healthplans have already been applied to workers’ comp, studies show that these objectives have beenachieved.1

Although they constitute a relatively small percentage of all healthcare costs, workers’ comphealthcare costs still amount to billions of dollars a year in expenses for employers. In addition, inrecent years, medical costs grew as a percentage of overall workers’ compensation costs.

Studies have demonstrated that, for the same health problems, treatment costs under workers’comp are higher than under other types of group health coverage. A study published in 1996

showed that, in California, the average reimbursement to providers for the four most prevalentwork-related injuries was several times higher under workers’ compensation than under grouphealth coverage. For example, the average reimbursement for a back injury under workers’ compwas 4.2 times the average reimbursement under group health ($961 vs. $228). The averagereimbursement for a strain, sprain, or dislocation was 2.6 times higher under workers’ comp($902 vs. $348).2 Some of this difference in cost can be traced to the different philosophy ofmedicine practiced under workers’ comp, which we will discuss later in this lesson. However,some of the cost difference may also be attributable to overutilization and other problems thathealth plans can help to correct.

Lack of Control Over Providers

One reason often cited for the relatively high cost of medical care delivered under workers’ compis that unmanaged (traditional) workers’ comp programs still feature fee-for-service (FFS)provider compensation. Thus, providers still have an economic incentive to maximize the numberand intensity of services provided. In addition, few mechanisms are in place to monitor thequality and appropriateness of the care given to workers’ comp recipients. These problems arecompounded by the fact that workers’ comp claimants (employees who suffer work-relatedillnesses or injuries) typically have free choice of providers and little, if any, incentive to choosecost-effective providers.

Health plan strategies, such as alternative compensation schedules, provider networks, casemanagement, quality management (QM), and utilization management (UM), can help controlthese cost factors by ensuring that the services provided are appropriate and cost-effective.

Potential for Fraud and Abuse

Unlike group health insurance, workers’ comp coverage includes no deductibles, coinsurance, orbenefit limits. Workers’ comp coverage is also available to all employees, regardless of theireligibility for health insurance coverage. In addition, workers’ comp coverage providesreimbursement for lost wages, a benefit that is not available through group health plans. Thesefeatures may tempt employees to represent illnesses or injuries that are not work related or thatare not covered by group health plans as work-related in order to receive medical benefits andreimbursement of lost wages through workers’ comp. This practice is referred to as cost-shifting.

Providers can also abuse workers’ comp programs through provider self-referral, which occurswhen a provider refers claimants to healthcare facilities, such as ancillary services facilities, inwhich the provider has a financial interest. An orthopedist who refers a patient with a back injuryto a physical therapy center in which the physician is a partner would be guilty of provider self-referral.

Case management and utilization review can help health plans detect and prevent cost-shifting.The credentialing carried out by health plans can curb self-referral by identifying facilities inwhich providers have a financial interest.

Duplication of Expenses

Most workers’ comp programs are administered separately from group healthcare plans, eventhough functions such as record-keeping, claims, and customer service are similar for both. As a

result, resources are often used to provide duplicate functions. Administrative duplication isincreased further if the employer offers separate disability benefits. Additional resources arerequired to keep work-related illness or injury separate from non-work-related conditions.

Managing workers’ comp benefits and medical benefits under one plan rather than separatingbenefits into different plans reduces administrative expenses. It also reduces the need todistinguish between work-related illnesses and injuries and non-work-related conditions. In anintegrated system, cause is irrelevant. The focus is on returning all employees to work as quicklyas possible. Health plans can offer this integration through a concept known as 24-hour coverage.

24-Hour Coverage

If managed workers’ comp offers the potential to improve quality and reduce costs, then manybelieve that 24-hour coverage offers even greater potential. Twenty-four-hour coverage,sometimes called comprehensive medical event management, is the integration of workers’compensation coverage—both the medical and the disability components—with non-workers’comp healthcare and disability coverage. Twenty-four-hour coverage offers several cost andquality advantages.

Health plans offering 24-hour coverage can realize efficiencies and cut overall costs bycombining administrative services. They can also improve the quality of care members receive bymaintaining comprehensive information about patient care from all sources in one location.Providers can use this information to coordinate services and ensure that patients receiveappropriate care. Health plans can gain control over utilization and can avoid unnecessary costs.Members benefit from the convenience and simplicity of combined operations. They have thesame point of entry to the healthcare system (they call the same number or contact the sameperson) whether their condition is job related or not.

Twenty-four-hour coverage minimizes the reasons for and effects of cost-shifting. It can also helpthe health plan identify and avoid other forms of fraud. For example, UM and QM programs thatmonitor the treatment delivered to plan members from all sources can help prevent a practicesometimes called double-dipping, in which patients claim benefits for the same healthcareservices both from workers’ comp and from their group health coverage.

Developing and Managing Workers’ Compensation Networks

Many of the characteristics of managed workers’ comp networks are similar to those of otherprovider networks. Like other provider networks, workers’ comp provider networks consist ofcarefully selected, appropriately credentialed medical professionals who provide their services toclaimants at a discounted cost. The network is designed to ensure quality and reduce medicalcosts. Providers who participate in the network agree to accept the reimbursement specified bythe health plan, cooperate with the health plan’s quality initiatives, and participate in the healthplan’s UM efforts in return for increased patient volume. However, a managed comp networkmust comply with certain legal requirements specific to workers’ comp. In addition, it mustsatisfy a unique set of patient and sponsor needs and expectations.

Legal Considerations for Workers’ Compensation Provider Networks

Employers in 47 states are required to provide workers’ comp coverage for their employees. Statelaws mandate the type of coverage that must be provided and the circumstances under whichbenefits are payable. As long as an employee seeks treatment for a work-related illness or injury,an employer cannot deny liability, even if it is not at fault. In return for this coverage, employeesare bound by the exclusive remedy doctrine, which requires them to accept workers’ compbenefits as their only compensation in cases of work-related injury or illness. Employees cannotsue their employers for additional amounts, except in certain extreme situations.

Laws governing workers’ comp differ from state to state, which creates considerable complexityfor organizations offering workers’ comp coverage in multiple states. However, certainrequirements are uniform in all states. For example, workers’ comp is first dollar coverage,meaning that employees cannot be required to contribute to the costs of their own care throughdeductibles, coinsurance, copayments, or disability waiting periods. In addition, workers’ comp islast-dollar coverage, meaning that health plans may not place limits on the benefits they will payfor a given claim. Worker’s comp programs must pay 100% of work related medical anddisability expenses. From the health plan’s point of view, one major disadvantage of first-dollarand last dollar coverage is that employees are insulated from the cost of the healthcare theyreceive and have little incentive to seek cost-effective care.

Most states place limits on an employer’s or workers’ comp program’s ability to requireemployees to obtain medical treatment only from members of a provider network. In some states,employees have an unlimited right to choose whichever provider they prefer, so long as theprovider is licensed and qualified to furnish the required medical care. In many other states,employers or insurers can require employees to obtain care from a network provider only for acertain period of time (such as one month) or for a certain number of visits. After that time, theemployee may switch to a non network provider. Because of state limitations on employers’ andhealth plans’ abilities to direct care to network providers, many workers’ comp networks areorganized as preferred provider organizations (PPOs). The American Accreditation HealthCareCommission/URAC (the Commission/ URAC) has established an accreditation program forworkers’ comp networks.

When the employee has the option to choose a non-network provider, all the health plan can do isencourage the employee to choose a network provider. In this situation, employee satisfactionwith the network is of extreme importance. An employee with the option of choosing a non-network provider from the onset may be more likely to choose a network provider if he or sheknows of other employees who have been satisfied with the network. An employee who isrequired to use a network provider during the initial part of his or her treatment is more likely tostay with that provider after the initial period if he or she is highly satisfied with the care receivedfrom the provider.

Provider Requirements for a Workers' Comp Network

For a health plan, supplying a network of providers to furnish healthcare to workers’ compbeneficiaries is not simply a matter of reapplying a network that has already been created for agroup health plan. Some providers who are suitable for the health plan’s other networks may notoffer the specialized services required to treat workers’ comp patients. Others may not understandthe clinical practice guidelines for occupational illnesses or injuries. As a result, the compositionof a workers’ comp network is different from the composition of other networks. In addition, the

providers in a workers’ comp network need a different set of experiences and skills and adifferent approach to practicing medicine than providers in other networks.

Appropriate Specialists

With the exception of specialty networks, most provider networks emphasize primary care andconsist mostly of generalists. A smaller number of specialists are available on referral from theprimary care provider. The predominant types of treatment delivered to workers’ compbeneficiaries differ significantly from the types of treatment most often furnished to other healthplan members. In workers’ comp, musculoskeletal injuries, such as sprains, strains, and fractures,account for almost two-thirds of medical expenses, compared to about 10% of medical expensesin other member populations. In addition, minor injuries account for about 20% of workers’ compclaims but only 1% of other groups’ medical expenses.4 These conditions often require theimmediate attention of medical specialists such as orthopedic physicians or emergencyphysicians. The extended rehabilitation associated with work-place injuries and illnesses alsorequires the services of physical and occupational therapists and chiropractors. In order to meetthese patient needs, a network serving workers’ comp patients typically includes a higherconcentration of specialists than do other networks.

The nature of the work done by the covered employee group also influences the composition ofthe network. Workers in certain industries may be prone to certain types of illness or injury. Forexample, coal miners and textile workers are more likely to suffer lung ailments than are mostother types of workers, so their managed comp networks need to include an adequate number ofpulmonologists.

In addition to the basic credentials described in previous lessons, health plans typically haveadditional training and experience requirements for their workers’ comp providers. Health plansoften look for the following credentials in providers for workers’ comp networks:

Training or certification in occupational medicine A minimum number of years of experience in occupational medicine A minimum percentage of the provider’s practice devoted to occupational medicine

The Appropriate Philosophy

As we have discussed, workers’ comp provides two distinct types of benefits. In addition toproviding medical expense benefits, workers’ comp also replaces any wages an employee loses asa result of a work-related illness or injury. This disability benefit is often referred to as theindemnity component of workers’ comp.

With workers’ comp, employers are interested in minimizing the total costs of work relatedinjuries and illness, which are the sum of the medical and indemnity components of workers’comp. Indemnity benefits currently account for almost half of all workers’ comp expenses. In thefuture, these benefits are likely to account for an even greater percentage of total costs. Theintroduction of health plans have allowed health plans to control and even reduce medical costs.The costs associated with lost wages, because they are driven by external environmental factors,are more difficult to control. Therefore, the goal of most workers’ comp treatment decisions is toreduce disability costs by returning employees to work as quickly as possible.

When building a network for workers’ comp, a health plan looks for providers who understandthat the approach to treating workers’ comp beneficiaries should focus on rapid recovery ratherthan cost. This approach contrasts with the approach generally taken by other health planproviders, who base their treatment selection on medical necessity and the cost-effectiveness ofthe appropriate treatment options.

In order to achieve faster recoveries, workers’ comp providers often administer intensive, high-cost care early in the treatment of the employee. For example, suppose that a health plan membersuffering from back pain visits a physician. If the treatment is covered by a standard health plan(not workers’ comp), the physician would begin with conservative approaches to easing the backpain, such as bed rest or medication. If these approaches did not succeed in easing the back pain,the physician might later recommend a brief course of physical therapy. After exhausting moreconservative approaches, the physician might order a costly diagnostic test, such as magneticresonance imaging (MRI), in order to determine the cause of the pain and develop the next phaseof treatment. Depending on the severity of the injury, the process can be quite lengthy. On theother hand, if the treatment is covered by workers’ comp and the employee is missing workbecause of the back pain, the physician would likely send the employee for an MRI during thefirst stages of treatment. The physician can then select a treatment appropriate to the cause and,hopefully, make sure that the employee returns to work quickly. The higher up-front costassociated with this more aggressive approach is likely to be offset by savings in lost wages.

Ability to Determine Disability Status

Because returning employees to work is so important in workers’ comp, providers need to haveexperience and expertise in determining whether or not employees are disabled from thestandpoint of being able to perform their work duties. In many situations, providers must also beable to decide whether an employee who is not ready to return to his or her original job caninstead return to light duty. Light duty is work that is less physically demanding than theemployee’s original job. Many occupational medicine providers also have expertise indetermining disability status.

Health plans and many employers have begun to address disability issues by implementingintegrated disability management (IDM) programs that include guidelines on the expectedduration of various types of disabilities, clinical practice guidelines, return-towork protocols, andguidelines for reducing the number of work-place accidents. Most employers, health plans, andproviders rely on disability duration guidelines to estimate how long an employee will be absentfrom work. Integrated disability management programs require the participation and cooperationof all of the network’s providers.

Reporting and Communication Capabilities

Providers with occupational medicine backgrounds should have experience generating the reportsthat are required for workers’ compensation. The state, the health plan, and the employer must bekept apprised of the employee’s treatment and progress toward return to work. Often these reportsmust be in a specified format. When deciding whether to include a provider in a workers’ compnetwork, a health plan must consider whether the provider has the knowledge and informationsystem capability to create the necessary reports.

The health plan must also consider the provider’s skills at communicating the employee’s statusto the various interested parties. These parties may include the employee, the employee’s

supervisor and other representatives of the employer, such as an occupational health nurse ordisability case manager, representatives of the health plan, and state authorities.

Compensating Providers

Like other health plans, managed comp plans use alternatives to the fee-for-service compensationsystem to help control costs and to increase quality. Compensation systems that health planstypically use for managed comp providers include fee schedules, discounted fee-for-service, risk-sharing bonuses, capitation, case rates, and bonuses based on achieving certain outcomes.

Fee Schedules and Discounted Fee-for-Service

Many states have tried to curb rising workers’ comp healthcare costs by instituting fee schedules.Each fee schedule lists the maximum amounts that providers may charge for specific healthcareservices rendered under the state’s workers’ comp program. Many health plans reimburseworkers’ comp providers according to state workers’ comp fee schedules or state schedules forMedicare and Medicaid. Fee schedules allow health plans to regulate increases in medical care bylimiting how much medical fees may increase each year. They also ensure that the fees paid tovarious providers for workers’ comp benefits are consistent.

Many other health plans use discounted fee-for-service (DFFS) arrangements. Under a DFFSagreement, the provider accepts a discount from his or her usual rates or from the state feeschedule. In return for this discount, the provider gains a potential increase in patient volumefrom participation in the health plan’s workers’ comp network. The health plan may also pay theprovider a bonus if the provider meets certain cost-reduction goals for workers’ comp cases. A1996 survey found that around 80% of HMOs surveyed used state fee schedules or discountedfee-for-service to compensate workers’ comp network providers.5

Risk-Sharing Arrangements

Some health plans use a modified form of capitation or some other risk-sharing arrangement tocompensate workers’ comp network providers. One form of risk-sharing compensationarrangement used under workers’ comp is case rates. For example, with case rates, a providerwould receive the same fee for each instance of carpal tunnel syndrome treated.

In some cases, health plans capitate occupational health provider groups or clinics. However,certain features of workers’ comp coverage tend to make capitation rates difficult to establish:

Difficulty in establishing actuarially sound capitation formulas. The variation in claimsexperience among different industries and occupational groups is much greater inworkers’ comp than in group health, making it difficult to determine meaningfulutilization averages.

Exposure to higher levels of risk. Because of the long “tail” on workers’ comp claims, aworkers’ comp claim can result in treatment that continues for many years.6 Workers’comp provides benefits for a covered medical condition for as long as the conditionrequires treatment. An employee who changes jobs during the course of treatment may beentitled to continued benefits even though he or she is no longer an active employee or amember of the original employer’s group healthcare plan. This contrasts sharply with therisks associated with treating isolated disease episodes.

Because of these factors, capitation and other risk-sharing arrangements are used far lessfrequently in managed workers’ comp than in other types of health plans.

Outcomes Bonuses

Some health plans give providers bonuses for achieving certain outcomes. For example, aprovider might receive an outcomes bonus us if a specified percentage of injured workers returnto work in advance of or by their predetermined target dates. Target dates are set according toestablished guidelines for the expected duration of different disabilities.

Other Tools to Manage Workers’ Comp Provider Performance

Although not all network management principles are applicable for use with workers’ compnetworks, some health plan concepts offer a clear potential to reduce costs and improve quality.The tools that may be applied to workers’ comp networks include case management, clinicalpractice guidelines, utilization review, and prevention programs.

Case managers for workers’ comp are generally registered nurses or physicians with experiencein occupational medicine or in disability management. The case manager coordinates the carefurnished to the employee by various types of providers. The case manager can improve thequality of care and facilitate the return-to-work process by ensuring that the care provided isappropriate and by verifying that the care conforms to available guidelines. The case manager canalso reduce the overall costs of care by making sure that the different providers furnish servicesthat are complementary and non-duplicative. The case manager can also discourage unnecessarycare.

Clinical practice guidelines are gaining increasing prominence in workers’ comp. In fact, manystates are creating mandatory workers’ comp guidelines. In addition, health plans may create oradopt their own managed comp guidelines. Guidelines help ensure that employees receiveappropriate, evidence-based treatment and they discourage under- and overutilization.

Utilization review is another tool that can be used in a workers’ comp setting to ensure thatemployees are receiving quality, appropriate care and to identify instances of overutilization.Health plans use utilization review results to educate providers concerning improvements theycan make in their practice patterns.

Just like other health plan products, workers’ comp health plans promote good health throughpreventive care initiatives. Workers’ comp prevention initiatives often include components suchas

analysis of the work site for safety or health hazards injury-prevention programs programs to increase employee awareness of safety and health issues7

Endnotes

1. Patrick A. Gallagher and William L. Granahan, “Report on Third Annual Milliman &Robertson Survey: HMO Managed Workers’ Compensation Strategies and Products,”

Milliman & Robertson, 1997, http:// www2.milliman.com/milliman/publications/reports/HDP01/ (12 October 1998).

2. Sheryl Tatar Dacso and Clifford C. Dacso, M.D., Health Plan Answer Book, 2nd ed.(New York: Panel Publishers, 1997), 11-5.

3. “Musculoskeletal Injuries Most Common Cause of Lost Time,” Workers’ Comp HealthPlan (November 1998): 10.

4. Dacso and Dacso, 11-6.5. Gallagher and Granahan.6. Ibid.7. Michael Weipner, “Bringing Health Plan to Workers’ Comp,” Business Insurance (May

25, 1998): 31.

AHM Network Management: Responsibilities of Health Plans and Providers UnderProvider Contracts

Objectives

After completing this lesson you should be able to:

Describe a low enrollment guarantee clause and explain how health plans use lowenrollment guarantee clauses in capitated contracts

Explain two situations in which health plans modify existing provider contracts and twomethods of modification

Describe the issues about physician/patient communication that may be of concern toproviders

List several reasons why a contract with a primary care provider should describe thescope of service in detail

List and describe two types of termination clauses Explain the role of the due process clause in the termination of providers

The Initial Bargaining Meeting

In The Provider Contract, we discussed the purpose of contracting, the standard sections includedin provider contracts, and some of the contractual strategies that plans use to achieve their goals.In The Negotiation Process for Provider Contracting, we introduced the ways in which providersand payors prepare for contract negotiations. This lesson examines in detail the contractprovisions that explain the responsibilities of each party in the contract, pointing out areas that areoften subject to negotiation. Such provisions are included in the contract to

provide a clear understanding of the healthcare services that are to be delivered to thehealth plan's members and to identify which party is responsible for delivering thoseservices

document procedures and processes designed to reduce the possibility of confusion ordisagreements about contractual obligations

address the various concerns of the contracting parties establish prudent and reasonable standards of operation for the health plan and its

healthcare providers

The lesson begins with a discussion of the contract provisions that describe the health plan'sresponsibilities. It then goes on to describe the providers' contractual responsibilities andconcludes by describing the areas in which the health plan and its providers have mutualresponsibilities.

The Health Plan's Contractual Responsibilities

In the broadest sense, the health plan is responsible for giving providers a contractual frameworkfor delivering healthcare services and for being paid for those services. This framework includesthe administrative and operational support providers need to effectively implement the terms of ahealth plan contract. Typical health plan support includes the following activities:

Ensuring that providers have a sufficient patient volume by using various marketingstrategies to attract plan members

Fulfilling administrative service commitments, especially the processing and payment ofclaims in a timely manner

Conducting credit checks on self-insured employer groups Maintaining the health plan's licenses and accreditation Giving providers information on member eligibility, utilization management (UM),

quality management (QM), and claims Notifying providers of changes to the contract

Marketing Strategies

Provider contracts often include a provision outlining the rights of each party to use the namesand trademarks of the other party. Generally, the health plan wants the right to use providers'names and addresses to market its network to purchasers, members, and potential members. Ofcourse, the provider's name, specialty, address, and telephone numbers will be listed in the healthplan's provider directory. The plan usually grants providers the right to post approved signsindicating the providers' participation with the health plan. Generally, aside from these specificuses, neither party is allowed to use the name or trademarks of the other party in any other waywithout the approval of the other party. Other uses can be negotiated as part of the contract or canbe negotiated later. One purpose of this limitation is to maintain confidentiality and to prohibit theuse of such information after the contract is terminated. Figure 5A-1 shows an example of acontract clause that describes the allowable use of names.

Announcing its participation in a particular health plan may offer a greater patient base to theprovider. In return, a well-known and respected provider's inclusion in the health plan's providerdirectory is likely to draw new purchasers or members to the health plan. A provider who cansubstantially contribute to the health plan's growth may seek to negotiate a higher rate ofreimbursement.

The provider and the health plan will also want to come to an agreement regarding the provider'sability to comply with the health plan's marketing strategy. For example, a health plan'smarketing may generate a large demand for routine physicals among members by advocatingannual comprehensive physical examinations or may promise members extended hours of accessto providers. These strategies may have an impact on the provider's operations, and it makessense to outline any specific requirements in the contract.1

Delivery of Patients

A fundamental component of the relationship between the health plan and the provider is theability of the health plan to deliver patients to the provider. Health plan contract provisionsrelated to patient delivery refer to the ability and commitment of the health plan to enroll andmaintain a sufficient number of members for providers to have an adequate patient base. Patientdelivery is one of the most significant factors a health plan considers when determining whetherprovider services should be reimbursed on a capitated or a fee-for-service (FFS) basis. Largerpatient bases help to dilute the risk of capitation and make this payment method more appealingto providers.

Low Enrollment Guarantees

Without the promise of an adequate number of members, PCPs may not have the financialincentive to contract with a health plan. To reduce concerns regarding the number of membersassigned to PCPs, health plans often include a low enrollment guarantee clause in capitatedcontracts. This clause requires the health plan to reimburse the PCP on an FFS basis until apredetermined number of members, such as 100, have selected the PCP. When the number ofmembers reaches the enrollment threshold, the PCP's reimbursement changes to a capitatedarrangement. A low enrollment guarantee can help to ease a provider into capitation, although atgreater risk to the health plan.

Once an enrollment threshold has been established, some health plans use the low enrollmentguarantee on an ongoing basis to determine PCP reimbursement when the provider's patient loadfluctuates. For example, if the threshold is set at 250 members and the PCP's assignedmembership falls below that level during the contractual relationship, the reimbursement methodreverts to FFS until the PCP's assigned patient load reaches the enrollment threshold again.

If a health plan capitates all PCPs regardless of the number of members assigned to them, PCPsmay be able to negotiate a per member per month (PMPM) dollar amount higher than the normalcapitation rate. The higher rate helps protect the provider against financial loss during the periodwhen health plan enrollment is low. Unless otherwise specified, capitation rates will remain at thehigher level, regardless of the number of members who select the PCP, until the contract isrenegotiated. Low enrollment guarantees usually do not apply under reimbursement arrangementsother than capitation.

Physician Practice Size

The health plan may contractually establish a minimum number of members that each PCP mustaccept before the PCP can close his or her practice to new health plan members. If the contractalso has a low enrollment guarantee clause, the minimum enrollment should at least equal the lowenrollment guarantee threshold so providers cannot close their practices at levels just below thethreshold in order to continue receiving FFS reimbursement. However, the health plan and theprovider must negotiate these terms realistically based on the total capacity of the provider'spractice.

When PCPs determine that their practices have reached maximum patient capacity, and they haveaccepted at least the minimum number of health plan members established in the contract, theymay close their practice to new members. Some health plans require that, if a provider closes itspractice to the health plan's members, the practice must also be closed to all other health plans in

which the provider participates. Providers are usually contractually obligated to give the healthplan advance notice (90 days, for example) when they close (or reopen) their practice to newmembers so that health plans have time to provide the most current information to membersregarding provider availability. Even when a provider's practice is closed to new health planmembers, the provider's existing patients who enroll in the health plan are not excluded.

Administrative Service Commitments

Health plans frequently offer, and providers increasingly require, commitments regarding thehealth plan's administrative service responsibilities. The most common commitment made by thehealth plan is for the timely payment of claims. Typically, the health plan agrees to pay anycomplete claim within 30 days of submission. In fact, many state insurance departments mandatethat health plans pay or send notification of nonpayment on a certain percentage of claims withina specified number of days (usually 30 days). Both the provider and the health plan should beaware of any state requirements for timely payment of claims. Claims that are not complete andthat require additional information, such as medical records or coordination of benefitsinformation, are not subject to strict application of the timely payment of claims clause. Thecontract or the provider manual should clearly specify the requirements for a complete claim.When a health plan negotiates on behalf of other payors (other health plans or self-insuredemployers), the plan typically commits these other payors to also pay claims on a timely basis.Some state insurance departments require health plans to pay interest on complete claims that arepaid after a certain time limit, such as 30 days.

Checking the Financial Soundness of Self-Funded Employer Group Plans

The health plan generally does not take financial responsibility for claims generated by self-funded plans. If an employer group covered by a self-funded plan goes bankrupt and fails toprovide funds to the health plan for payment to providers for services rendered to the employergroup's members, most plans disavow any responsibility to the provider. While many providersrecognize the practical necessity of working with self-insured employers, providers are beginningto demand a health plan's assurance, by way of a clause in the health plan-provider contract, that aprocess is in place to examine the self-insured group's financial soundness.

Health Plan's Maintenance of Licensure and Accreditation

As discussed later in this lesson, a health plan requires its providers to maintain their professionalcredentials and their privileges (such as admitting privileges and specific procedure privileges fornetwork hospitals). As we discussed in Collecting and Verifying Data for CredentialingPurposes, the health plan verifies a provider's professional qualifications through thecredentialing process and reconfirms and updates this information during periodicrecredentialing. The credentialing standards typically are non-negotiable; however, the partiesmay negotiate the issue of who will perform the credentialing process. The health plan maydelegate this activity to a provider organization or to a third party, such as a CVO. However, it isimportant that both the health plan and the provider have trust and confidence in the quality andaccuracy of the delegate's credentialing processes.

In turn, the provider expects the health plan to commit to maintaining the appropriate operatinglicenses and accreditation. Adding this reciprocal commitment to the contract helps reassure theplan's providers that the agreement is one of mutual commitment and not a set of unilateraldemands imposed on providers by the health plan. In addition, this contract section communicates

to the provider the health plan's standards for operation. For example, if the health plan states thatit will maintain accreditation from NCQA or the Commission/URAC, many network providerswill understand the type of credentialing and information-reporting requirements the plan willplace on network providers.

Reports and Information Required of the Health Plan

Particularly in contracts that involve risk-sharing or capitation payment systems, providers relyon reports from the health plan to assist them in managing their own costs and quality. It is in thebest interests of the health plan, then, to provide regular data reports to providers. Such reportshelp each party meet contractual obligations, identify potential problems, and meet state orfederal reporting requirements. A health plan that commits to these reports in the contract is likelyto earn more confidence from potential provider partners. Reports and information typicallyfurnished to providers by health plans include:

a provider manual eligibility and capitation reports periodic performance data and comparisons with other providers the plan's intended use of medical incident reports

Figure 5A-2 provides further details on each of these sources of information.

Modifying the Provider Contract

The managed healthcare industry is still evolving, and contracts must be updated or amended tokeep up with the industry, as well as changing state and federal laws. Contract modifications arerequired when (1) the health plan updates any programs or benefit plans that may affect provider

compensation or the ability of the provider to fulfill the obligations of the contract or (2) legal,accreditation, or regulatory requirements mandate changes to the contract. Amendments areformal contract provisions that are attached to an existing contract and allow binding changes tobe made without having to revise or renegotiate the entire contract. For example, an amendmentto the contract may change the frequency with which providers must submit certain reports.

All provider contracts must include a provision that clearly outlines the procedures andexpectations for contract amendments and modifications. The provision usually requires contractmodifications or amendments to be sent to providers by certified mail. Typical contract languagepermits the health plan to amend an existing contract as long as the provider is given advancenotice (such as 30 days before the amendment becomes effective). This delay in implementationallows providers advance notice of a change and gives them the opportunity to terminate thecontract before the change becomes effective. 3 If there is no response from the provider duringthe lead time, the amendment becomes effective. If the provider objects to the change, theprovider may negotiate for the change provision to allow the original contract terms to remain ineffect until the end of the contract.

In one situation, however, providers do not have the opportunity to approve or respond tochanges. Under the change in law provision, which many contracts contain, health plans areallowed to change or amend contracts without the approval of their providers as long as themodifications are made in order to comply with new legal and regulatory requirements thatimpact all health plans and providers. For example, a state regulatory agency may imposestandards for member’s access to provider services, such as a maximum time frame (perhaps 30days) within which a member should be able to obtain an appointment for a routine physicalexamination.

The contract often cites revision of the provider manual as an avenue for advising providers ofchanges in operational and administrative procedures and guidelines. If the provider manual is tobe used in this way, the contract should contain language that specifically addresses theprovider’s right to object to changes that are not mandated by law, regulatory, or purchaserrequirements. If the provider is contractually bound by changes noted in a provider manual, thecontract should contain wording that guarantees the provider advance notice of changes and theright to terminate the contract without cause if the changes are unacceptable. We will discusscontract termination provisions later in this lesson. Advance notice also gives the provider time tocomply with the changes. Figure 5A-3 presents an example of an amendment provision.

Many provider contracts are automatically renewed through an evergreen clause, which allowsthe terms of the contract to renew unchanged each year. If providers desire changes to thecontract, they must be aware of the renewal date and notify the health plan of their intent torenegotiate the contract within the time contractually specified.6

Prior to signing a contract with a health plan, it is the provider's responsibility to review allcontract provisions and to negotiate any changes that seem appropriate. Over the next severalpages, this lesson will describe the major responsibilities that providers are expected to acceptunder most contracts.

Agreement to Provide Services

The essential purpose of any health plan-provider contract is to reach an agreement that theprovider will deliver services to health plan members according to certain terms and conditions.The responsibility of the provider to deliver services is usually subject to the provider's receipt ofinformation regarding the eligibility of the member as indicated by a member ID card or someother certification of eligibility. In addition, the provider is typically required to deliver servicesto the health plan's members with the same quality, timeliness, duration, and scope as theprovider would deliver to other patients. The provider is also prohibited from discriminatingagainst members on the basis of age, sex, religion, or national origin. Other antidiscriminationprovisions may cover physical disability, political beliefs, or health status. The contract may alsorequire providers to refer patients only to other participating providers.

Providers may also want to include in the contract a provision that allows them to change thelevel or scope of services they provide without notice to or consent from the health plan. Forexample, under such a provision, a provider that has offered a specific surgical procedure that iscovered by the health plan can later choose to stop performing that procedure if the providerdetermines that it can no longer offer that service on a cost-effective basis.

Responsibility for Medical Care

Many health plans now include in their contracts statements that explicitly place responsibility formedical care on the providers rather than on the health plan. Usually such statements indicate thatthe provider must make all final decisions regarding the delivery of care and that the provider isencouraged to discuss with the patient all treatment alternatives, including treatments not coveredby the plan. Before actually rendering a non-covered service, the provider must document inwriting that the member is aware that the service is not covered by the health plan. Some providercontracts also explicitly allow participating providers to discuss health plan payment

arrangements with patients who are covered by the plan. Providers who are concerned about anyperceived restrictions on their relationships with patients may insist upon negotiating specificcontract language that will avoid misunderstandings.

Provider-Patient Communication

Some contracts contain provisions relating to provider communications with plan members. Theterm gag clause or gag rule has been used to refer to any statement in a health plan-providercontract that could be interpreted as preventing a provider from discussing alternative treatmentoptions with patients. As we mentioned earlier, health plans should make sure that nothing in planpolicies or provider contracts can be interpreted as prohibiting providers from discussing alltreatment options with their patients.

Most health plans have placed in their contracts a clause which clearly states that providers mustmaintain open communications with patients regarding appropriate treatment plans, even if theservices are not covered by the member's health plan.

There are several provisions related to the business aspects of health plans that may be presumedto limit physician-patient communication, depending on who is interpreting the contract. Some ofthe business-related provisions that may be so misinterpreted include the following.

Antidisparagement clauses, which prohibit a provider from making comments that couldweaken a patient's confidence in a health plan. This type of provision is meant to protecta health plan's business interests and require that a provider who is dissatisfied complainto the health plan rather than the patient. 7

Nonsolicitation clauses, which prohibit providers from encouraging patients to switchfrom one health plan to another. 8

Business confidentiality clauses, which require providers to maintain the confidentialityof the health plan's proprietary information, such as financial data, reimbursementstructure, and utilization and quality management programs, unless the health plan grantswritten permission for the provider to release this information. 9

America's Heath Insurance Plans (AHIP), a trade association representing health plans, requiresAHIP member health plans to provide certain information to members who request it. Thisinformation includes

a summary description of how participating physicians are paid, including financialincentives

in the event of a dispute about coverage-the procedures and medically based criteria ahealth plan uses to determine whether experimental treatments and technologies shouldbecome covered services

The Centers for Medicare and Medicaid Services (CMS) mandated that health plans providingcoverage to Medicaid and Medicare beneficiaries could not include in their provider contracts anylanguage that could be construed as gag clauses. 11

NCQA, through its standard QI 3.1.3, requires health plans to include in their contracts a clausethat allows open communication between the provider and patient regarding treatment optionsand does not prohibit the provider from discussing medically necessary and appropriate care withthe patient, even if the services are not covered by the health plan. The standard does not make

any reference to restrictions regarding antidisparagement, nonsolicitation, or businessconfidentiality clauses.12

However, all parties to a contract generally agree that a true gag clause would prohibit providersfrom speaking candidly to patients about treatment options and alternatives available, whether ornot the services are covered by the member's health plan. In actuality, a detailed analysiscompleted in August 1997 at the request of Congress included a review of 1,150 contracts from622 HMOs. None of these contracts included wording that expressly prevented opencommunication about treatment options between provider and patient. Sixty percent of thecontracts contained antidisparagement, nonsolicitation, or business confidentiality clauses; ofthose contracts, 67% included language that promotes physician-patient communication. 10

Covered Services

The term covered services refers to all of the healthcare services available to health plan membersunder the benefits provided by their health plan. To assure that contracted providers have a clearunderstanding of their obligations to provide specific covered services, the health plan shoulddetail in the contract all the applicable covered healthcare services for each provider type. When aprovider's contract applies to more than one benefit plan, an attachment or exhibit to the contractshould define covered services according to each benefit plan.

Covered services defined in the health plan contract are usually related to the reimbursementmethods agreed upon with the physician or other provider. The covered services are identified ascapitated services or services to be reimbursed under another payment method, such asdiscounted fee-for-service (DFFS).

Contractually covered benefits that are excluded from the provider's responsibility should beclearly listed in the contract. For example, benefits that are excluded from a PCP's responsibilitiesinclude out-of-area treatment, procedures that are more appropriately performed by a surgeon orother specialist, and ambulance service.13

PCP Scope of Services

Primary care providers who contract with a health plan under capitated payment arrangementsshould receive a detailed scope of services listing as an exhibit in the contract. The scope ofservices provision details exactly which services are covered under the capitation payment,differences between each benefit plan, and services that are reimbursed under another paymentmethod or that require prior authorization. Generally, all services included in the scope ofservices are covered by a PCP's monthly capitation payment and may be provided as medicallynecessary and without authorization to the health plan's members within the constraints of theirbenefit plan. A detailed PCP scope of services listing

eliminates the guesswork about payment responsibility avoids disputes about responsibility for specific services enables the health plan's claims operation to adjudicate claims more accurately because

payment responsibility is clearly defined deters inappropriate referrals to specialists for services that should be rendered by the

PCP

In addition to a detailed scope of services listing, the contract may also identify the use of aformulary and any restrictions on prescribing nonformulary drugs.

Practice Capabilities and Limitations

This section of the contract identifies services that are covered benefits but are excluded from theprovider's responsibility, usually based on specialty. For example, internists who are contracted asPCPs may specify that they do not see patients under the age of 17, or an orthopedic surgeon mayexclude podiatry services, back problems, bone tumors, and revision of joint replacements.Identification of service capabilities and limitations can prevent disputes over the performance ofthose services in the future.14

In some cases, a health plan limits the scope of services for its providers by contracting with otherproviders for specific services, such as laboratory or radiology services. Providers who have thefacilities and capability to handle the services that have been removed from the list of requiredservices may wish to negotiate with the health plan to perform and be reimbursed for theseservices.15

Benefits with Special Limitations

Some benefits are limited to a specific number of visits, treatments, or supplies during eachbenefit year. For example, a plan may cover one routine Pap smear a year for adult females, orbehavioral health benefits may cover a maximum of 30 days at an inpatient chemical dependencyfacility during the benefit year.

To assure that a provider does not unknowingly deliver services in excess of the allowed numberof services without first informing the patient of his or her responsibility for any related charges,the contract details any benefit plan limitations. In addition, the health plan must have proceduresin place that allow the physician to verify if a member's benefits for a specific type of servicehave been exhausted. The contract must also state who bears financial responsibility for servicesthat are rendered after a benefit has been exhausted.

Compliance with Administrative and Operational Policies

The health plan will want a commitment from providers to comply with the rules and procedurescontained in a provider manual. This manual will include detailed billing instructions, such as thetype of claim form to be used, the coding system to be used to describe services, and thedocumentation required to support a claim. Prior authorization requirements, methods forverifying member eligibility, and other processes are typically described in similar detail.

Prior Authorization Requirements and Referrals

The primary goal of the health plan's prior authorization program is to review a physician'srequest to provide nonemergency outpatient and inpatient services. This review examines themedical necessity and appropriateness of proposed services and determines if the services arecovered. The authorization program (along with other required procedures) is generally describedin detail in the health plan's provider manual and any other documents that explain the healthplan's UM program.

To assure that providers are contractually obligated to follow the requirements of theauthorization and referral programs, the contract includes provisions that explain theresponsibilities of both the health plan and provider under such programs. Most health plansapply these authorization and referral conditions.

Contracted PCPs must make referrals only to specialty providers that are contracted withthe health plan. (A contracted provider listing is provided by the health plan to all PCPs.)

PCPs have a blanket authorization to refer members for routine specialty care that isconsistent with specific diagnoses. (The diagnoses and services are generally included inthe health plan's provider manual or as an attachment to the contract.) A dollar limit isplaced on services that can be provided without preauthorization (for example, radiologyservices up to $300).

PCPs must obtain prior authorization (preauthorization) for all referrals that do not meetthese requirements

The contract must clearly document the steps involved in the referral authorization process andthe responsibilities of each party. Figure 5A-4 lists the elements that must be included in thecontract.

Contracts include a provision to advise the contracted specialists about procedures to obtainauthorization to render services outside the scope of the original referral from the PCP. Forexample, a PCP might refer a patient to an orthopedist for treatment of a fracture, with a specifiedfollow-up period based on the diagnosis. If complications arise during the patient's treatment orrecovery, the orthopedist may need to request authorization for extension of the treatment periodor for additional procedures. Some health plans may require that the specialist's request besubmitted to the PCP; others request that the specialist contact the health plan's UM departmentfor authorization of additional services. In all instances, the contract should require the specialistto provide consultation reports to the PCP for services rendered. This requirement supportscoordination of care between the PCP and any involved specialists regarding the patient's currentmedical condition.

Providers are more likely to comply with referral guidelines when they are clearly and simplyspelled out in the contract or in the appropriate supplementary materials, such as a providermanual. If possible, the health plan should try to make these guidelines available in a format thatis convenient for the provider. For example, Henry Ford Hospital in Detroit, Michigan, makesreferral guidelines available in this variety of formats.

A scripted, descriptive form in paper format The same guidelines accessible through the hospital's computerized medical information

system A summary condensed version on laminated sheets contained in a loose leaf binder for

quick review.17

In response to recent legislation and questions of liability arising from utilization reviewprograms and authorization requirements, health plans now routinely include an exculpationclause which states that a plan's actions based on its UM provisions (such as denying payment fora certain procedure) do not constitute a medical opinion and are not intended to interfere with theprovider-patient relationship. This clause is intended to place the ultimate responsibility for apatient's medical care on the provider.

The American Medical Association (AMA) has adopted guidelines which state that physiciansare obligated to treat the patient to the best of their ability. Furthermore, if a health plan does notpermit referral to a noncontracting specialist or facility, and if the physician believes that thepatient's condition requires such services, the physician must inform the patient of the healthplan's policy. This information allows the patient to decide whether to accept the outside referralat his or her own expense or to use only the medical services available within the health plan.18

Health plans typically have an appeals process that allows the patient to appeal the health plan'sprohibition of outside referrals.

Access

Access standards are guidelines defined by health plans to assure that every member receives thebenefits provided by his or her health plan in a timely manner appropriate to the member'smedical condition and consistent with the reason for seeking care. For example, a health planmight specify that a member wishing to see his or her PCP for a routine preventive health examshould be able to schedule an appointment within 30 days. These standards may also be mandatedby state regulator or purchaser requirements.

To ensure that providers comply with a health plan's access standards, contracts include aprovision that outlines

the minimum acceptable office hours a provider can maintain the maximum amount of time allowed for a provider to schedule members for various

types of appointments (routine office visit, follow-up visit, preventive healthexamination, urgent care)

access to urgent or emergency care during and after hours

Covering Physicians

Contracted physicians routinely make arrangements with covering physicians to meet theobligation of availability under a contract's access standards. In a covering arrangement, several

physicians with similar specialties within the same practice or in local proximity will usuallyrotate and cover for each other after business hours. Through the use of covering physicians,contracted providers can assure the availability of routine services during business hours andemergency services 24 hours per day, 7 days per week. The health plan contract should include aprovision that details the requirements for a contracted physician's use of covering physicians. Atypical provision addresses the following issues:

Is the covering physician required to be credentialed and contracted by the health plan? Is the contracted physician solely responsible for obtaining coverage from a licensed

physician who will comply with the health plan's UM and peer review procedures, acceptpayment from the contracted physician, and not bill members for services rendered? 19

Is the contracted physician required to indemnify the health plan for any professionalliability issues that may occur as a result of a patient's treatment by a noncontractedcovering physician?20

These provisions may also apply to PCPs located in rural areas, when the PCP does not havehospital admitting privileges and must refer a patient requiring hospitalization to a physician whodoes not contract with the health plan.

Emergency Procedures

There are three issues regarding emergency treatment that must be addressed in the health plancontract: (1) the definition of an emergency, (2) the preauthorization requirements for emergencytreatment, and (3) the physician's responsibility in emergency situations.

As we discussed in The Provider Contract, the industry philosophy regarding emergencytreatment and payment for unauthorized emergency services has been changing since the mid-1990s, and the prudent layperson standard of an emergency situation has become more acceptedand is now used by many health plans. Between 1993 and 1998, 20 states and the District ofColumbia have adopted emergency care regulations that reflect the prudent layperson criteria, andthe Balanced Budget Act of 1997 incorporated the prudent layperson standard for emergency carein Medicare and Medicaid health plans.21 AHIP's Code of Conduct states that "health plans havepledged to pay for emergency care if a patient has a medical condition that a reasonable personwould believe requires immediate medical attention."22

In emergency situations PCPs and the health plans are bound by these contractual responsibilities.

When the patient's condition permits, a PCP must be available by phone to determine thebest place for the patient to obtain service, such as the PCP's office, an urgent care center,or an emergency department.

Patients with conditions considered to be an emergency should be seen as soon asmedically required and always within the same day.

If the PCP instructs a patient to seek emergency care in- or out-of-network, the plan isresponsible for payment of the medical screening exam and other medically necessaryemergency services without regard to whether the patient meets the prudent laypersonstandard.23

Many health plans have followed the lead of the Balanced Budget Act and AHIP's Code ofConduct and adopted the prudent layperson language in their contract definition of emergencies

for all lines of coverage. Some contracts only authorize providers to stabilize a patient and thenrequire further authorization for additional treatment

Participation in Utilization Management Programs

As a condition of participating in the health plan network, providers are required to accept andabide by the health plan's UM program. As a partner with the health plan in the delivery ofhealthcare to members, a provider's cooperation is fundamental to implementing UM programsthat ensure quality care and cost-effective treatment.

Utilization management programs usually include preauthorization and concurrent andretrospective review of services to assure that members receive appropriate services for medicallynecessary care. UM programs also extend to the areas of discharge planning and casemanagement. In addition to stipulating compliance with the UM program, the health plan contractdocuments how the health plan monitors and responds to noncompliance.

A provider's agreement to participate in the health plan's UM program is documented by acontract provision specifically outlining the participation requirement. Typically, the health plancontract provision describes the participation requirement briefly and then cites an attachment tothe contract that describes the UM program in detail. In other instances, the provider manual isreferenced in the contract as the source of a detailed description.

The provider's participation in the UM program usually involves

meeting the health plan's authorization program requirements, which may involveprospective, concurrent, and retrospective reviews of services rendered

coordinating care with specialty providers so the UM program can review the medicalnecessity and appropriateness of inpatient and outpatient services to determine coverage

complying with a review process that includes provider or member reconsiderationrequests and appeals of health plan decisions

Providers may negotiate to include in the contract a provision that a peer reviewer must reviewany case in which the health plan denies a service for medical necessity. This provision may alsospecify that the peer reviewer will be available to discuss with the provider any denials made bythe health plan.

Changes to the UM program should be documented in an amendment to the contract or an updateto the UM program description. Health plans frequently, but not always, agree to notify providersof changes in UM programs 30 to 60 days before the changes are implemented.

Participation in Quality Management Programs

Quality of care and service improvement have taken center stage as a national issue because ofintensive healthcare cost-containment efforts and increasingly competitive pressures in thehealthcare industry. As a result, health plans have established quality management programs that

monitor and evaluate the quality of care and service rendered by providers monitor performance and compliance with UM programs, contractual and regulatory

obligations, and other programs related to service and quality, such as credentialingproviders and resolving member or provider complaints and grievances

develop and implement remedies to problems with access, quality of care, utilization, andadministrative problems

meet regulatory and accreditation agency requirements and standards

To ensure the successful implementation of a QM program, health plans require the support andcooperation of their contracted providers. Health plan contracts include a general provision thatobligates the provider to participate in the health plan's QM program. In addition, the provider isrequired to treat all QM activities and findings in a confidential manner.

Providers may wish to negotiate a provision that addresses a possible situation in which a patientrefuses treatment despite the recommendations of the provider and the health plan. If the providerhas informed the patient of the consequences of refusing treatment, the patient's choice is termedan informed refusal. If such a provision is included in the contract, the requirements fordocumenting informed refusal should be specified.

The health plan, in turn, is required to maintain ongoing communications with providersregarding QM activities, findings, and resulting program changes. The health plan's basicexpectations for provider participation in the QM program are outlined in the contract. In fact, thehealth plan should seek the participation of network providers in the QM program in order toachieve commitment and buy-in to the program. Some federal and state programs imposerequirements for provider compliance with QM programs. The QM program description isincluded as an exhibit to the contract or in the health plan's provider manual

Reports and Information Required of Providers

Just as health plans are required by contract to deliver certain information to providers, soproviders have a responsibility to submit reports and information to their health plans. The typesof information typically required of providers are listed in Figure 5A-5.

Credentialing and Recredentialing

Providers are typically required to participate in the credentialing and recredentialing processesestablished by the health plan. Health plans that are accredited by NCQA and theCommission/URAC are required to maintain control over the credentialing process. Otherlicensing and accrediting bodies (such as CMS and state insurance departments) have similar

requirements. However, as we discussed in Delegation of Network Management Activities andCollecting and Verifying Data for Credentialing Purposes, the health plan may delegatecredentialing activities to its provider networks, integrated delivery systems, or credentialingverification organizations (CVOs) if the health plan maintains adequate oversight and audit rightsfor this process. The health plan must define in this section who will be responsible forcredentialing and what information will be required from providers who perform credentialingactivities.

Health plan contracts should require providers to maintain the credentials and privileges (such ashospital admitting or specific procedure privileges) that were required for initial participation inthe provider network.

Patient Grievance and Complaint Processes

The health plan wants to know if members are unhappy with their healthcare or theadministration of the health plan. Therefore, contracts usually require providers to notify the planof complaints from members and to participate in complaint resolution processes. Some types ofcomplaints should be reported as they occur; others may be studied on a long-term basis. Forexample, it may be more useful to survey members periodically about their satisfaction with wait-times at physicians' offices than to have physicians report every complaint about a long stay inthe waiting room. On the other hand, any complaint about the healthcare given by the providershould be reported immediately.

Mutual Obligations

While the health plan and its providers each have different responsibilities under the providercontract, some commitments are the responsibility of both parties. In this section, we discusssome of the most important mutual obligations under the provider contract, including theresponsibility to

verify members' eligibility define the specific elements of the billing and payment process maintain accurate records share information as appropriate maintain patient confidentiality maintain appropriate liability insurance understand and comply with the contract's termination and due process clauses maintain compliance with federal and state requirements

Eligibility Verification

The health plan and the provider are jointly responsible for verifying the eligibility of membersseeking medical care. While providers must initiate the verification process, the health plan musthave established mechanisms to verify the member's eligibility for covered services. Adescription of the provider's responsibility in the eligibility verification process should beincluded in the contract along with verification methods. The financial responsibility for servicesprovided to ineligible patients should also be defined in the contract.

Providers commonly use these sources to verify eligibility.

Eligibility reports, which list members who selected or were assigned to a specific PCP.These reports include member demographic data, such as name, birthdate, address, sex,benefit plan, coverage-effective date, and termination date. Eligibility reports aredistributed to PCPs on a regular basis, usually monthly, via paper or electronic means.

Member identification (ID) cards that include demographic data, along with the benefitplan and the coverage-effective date.

Automated telephone eligibility verification lines which allow providers to get dailyupdated member eligibility information over the telephone.

The health plan's member services representatives who have access to the most currentmember eligibility data as well as to other information related to benefits andadministrative issues.

Another eligibility verification method that is growing in popularity allows providers to access ahealth plan's Internet website to verify member eligibility. We will discuss this method inContinuing Management of Network Adequacy and Provider Satisfaction.

Most health plan contracts require PCPs to verify eligibility by reviewing the member ID cardand eligibility report. If eligibility cannot be verified through these methods, the PCP may beinstructed to call the telephone verification line or the health plan's member service department.This requirement is more common among HMOs than PPOs or POS products.

Health plan-contracted specialists and other providers are usually required to verify eligibility onthe date services are rendered. This procedure is especially important for services that werepreviously authorized but not actually provided on the day of authorization.

Financial Responsibility Issues Occasionally, providers render services unknowingly to anineligible patient and then become financially liable for the error because the capitation for thatpatient has already been deducted from the health plan’s payment to the provider. Figure 5A-6describes two possible liability situations that are frequently addressed in provider contracts.

In Situation 1 in Figure 5A-6, an ineligible patient received services because the purchaser failedto report changes in member status to the health plan in a timely manner. In Situation 2, theprovider was unable to verify eligibility despite pursuing all of the proper procedures forverification. To avoid potential disputes that arise from situations such as these, the health plancontract should define financial responsibility for services provided to ineligible patients.

Some health plans use an eligibility guarantee clause in the contract to protect providers whoreceive confirmation of a patient’s eligibility for services from the health plan. Providers are notfinancially responsible for the services rendered if the patient is later found to be ineligible. Thehealth plan may also include a clause in the purchaser’s contract relating to retroactive enrollmentchanges. Such a clause typically places a time requirement on a purchaser’s reporting of changesin a member’s eligibility status. Such a clause insulates both the provider and the health plan fromfinancial responsibility.

Providers can also stipulate a time limit for retroactive capitation deductions, such as 60 days. Ifthe health plan does reverse capitation payments, it may agree to reimburse physicians for anyservices provided after the member’s termination date at a discounted FFS rate.

Different Product Lines

If the health plan has multiple product lines such as commercial, Medicare, and Medicaid plans,the contract should specify which health plan members have access to a provider's services andhow the members will be differentiated. This information is particularly important in situationswhere providers are not contracted to provide services to health plan members in all product lines.

Different Benefit Plans

To remain competitive in today's health plan market, most health plans offer multiple benefitplans, such as an HMO, a PPO, and a POS option, within each product line. This profusion ofplans can create a challenging situation for a provider who is unaware of the variables in coveredservices, the member's financial responsibility (such as copayments or deductibles), or the out-of-network options for each benefit plan. Any confusion about a specific plan's benefit schedule canresult in a member not receiving services that are covered or being asked to pay an incorrectcopayment and perhaps filing a grievance against the physician or the health plan.

To eliminate any confusion about benefits and covered services, the health plan contract shouldinclude an exhibit that summarizes all benefit plans by product line. Some states require separateand different contracts for each product line. More detailed benefit plan information is usuallyincluded in the health plan's provider manual

Provider Payment

The specific rates that the health plan agrees to pay to providers are usually included in a paymentexhibit that is part of the contract. By using an exhibit, the health plan can adjust payment overtime without changing the entire contract.

The detailed process of coding and submitting a claim for payment is generally described in theprovider manual. The main body of a comprehensive contract typically defines the following keyelements of the billing and payment process.

No-balance-billing clause. It is important for health plans to assure plan members thatthey will not encounter unexpected costs. A major goal of health plan contracting,therefore, is to obtain a commitment from providers that they will accept the healthplan's payment as payment in full and will not bill members for anything other thancontracted copayments, coinsurance, and deductibles. This commitment is made in theno-balance-billing clause of the provider contract. In return for acceptance of the healthplan's payment as payment in full, providers receive a guarantee that the health plan willpay them directly.

Payment for services not covered. While the obvious focus of a provider contract is thebusiness relationship for covered services, the health plan must also address issuesrelated to services that are not covered under the contract. The plan usually allowsproviders to collect payment from the member for services that are explicitly excludedfrom the benefit plan. For example, most cosmetic surgery is excluded from coverage bymost health plan contracts. If a member elects to have cosmetic surgery, a contractingprovider may bill the patient directly for this service. The situation is less clear forservices that are not specifically excluded but that the health plan judges to be notmedically necessary or for care that is delivered outside the referral rules of the healthplan. Most commonly, the health plan allows contracting providers to bill patients forservices considered not medically necessary if the provider notifies the patient inadvance that the service will not be covered by the health plan. Some plans allow aspecialist who did not receive the necessary referrals or prior authorizations to bill forcare if the patient is informed in advance that the care will not be covered by the plan.Other plans do not allow such billing.

Insolvency of the health plan. Most state insurance departments and CMS require thatHMO provider contracts bind providers to deliver care even if the health plan isinsolvent or goes out of business. This provider requirement is usually limited to theduration of the group or member contract with the plan. In addition, a state insurancedepartment will usually intervene in health plan insolvency to identify another healthplan that is willing to assume responsibility for the customer contracts. However,virtually all HMO contracts bind providers to continue to provide services even if thehealth plan cannot pay for them.

Insolvency of self-insured groups. Until recently, most health plan contracts were silenton this issue. However, health plans have recently begun to clarify their fiduciaryresponsibility for paying the claims of self-insured groups. Some health plan contractsnow explicitly state that the ultimate responsibility for paying claims lies with the self-insured group, not the health plan. The health plan commits to pay providers for claimsrelated to these groups only if the group provides funds to the health plan to allow forpayment. If the group fails to provide funds, the plan will not pay the claims, and theprovider may pursue the member for payment. In turn, some providers are beginning torequire higher payments from self-funded plans than from fully funded plans or todemand assurances on the credit-worthiness of these purchasers.

Claims Filing Procedures

While detailed claim filing procedures are usually described in the provider manual, acomprehensive contract includes some billing process requirements. The contract may specify theacceptable claim form, such as UB-92 or CMS-1500. The contract should specify the time frames

during which the plan will accept claims. For example, many health plans require claims to besubmitted within 60 or 90 days of the last date of service for a particular patient encounter. A fewplans accept claims filed within one year of the last date of service. Health plans generally do notpay claims submitted outside these time limits. If claim-filing time limits are not addressed in thehealth plan-provider contract, the health plan may find itself subject to legal action if it declinesto pay late claims.

The health plan may also specify requirements for the electronic filing of claims. The federalHealth Insurance Portability and Accountability Act (HIPAA) has mandated electronic filing ofclaims, but the time frames for implementing this requirement are uncertain.

Finally, the plan should specify the procedures for recouping claims paid in error. Typically, theplan simply deducts erroneous payments from the next payment to the provider.

Coordination of Benefits and Subrogation

The health plan has a legitimate concern to pay only its fair share of provider bills when morethan one payment source is involved. Where two or more health plans are involved, coordinationof benefits rules determine which health plan is primary and which is secondary. Providercontracts typically require providers to submit information to the health plan regarding othercoverage a patient may have. Provider contracts may also restrict how much a provider cancollect from the plan if the plan is secondary. Usually, contracts limit secondary collections to anamount, when considered together with the payment of the primary health plan, that would notexceed the payment rates agreed to under the contract with the secondary plan.

Subrogation is a health plan's contractual right to recover from a third party some portion of thebenefits paid to a member by the health plan. For example, if a third party is responsible forinjuries to a plan member, the health plan may file a claim for the resulting healthcare costsagainst the third party. If a plan member receives payment for healthcare costs as a result of alegal action against a third party, the health plan1 may be entitled to recover from the member allor part of the benefits the plan paid to the member for the related illness or injury. When theprovider is aware of a court settlement that includes payments for medical expenses, the contracttypically requires the provider to cooperate with the plan in subrogation efforts. Subrogation willreduce plan payments to account for the settlement amounts assigned to medical expenses.

Records, Confidentiality, and Audit Rights

Provider contracts normally include provisions that require providers to keep legible andcomplete records of care rendered to patients treated under the health plan agreement. Suchprovisions also give the health plan access to these records so it can audit providers' businessoperations and complete UM or QM activities, such as medical-record compliance reviews,clinical studies, complaint or grievance resolution, authorization of services, or determinations ofmedical necessity. At the same time, however, federal and state laws safeguard the confidentialityof patient records, particularly for mental health and chemical dependency services, and providercontracts usually acknowledge the requirements of law with regard to patient recordconfidentiality. The health plan may pledge to comply with these laws and require its providers tocomply as well.

To assure that health plans and their providers comply with state and federally mandatedprograms, such as Medicare or Medicaid, state and federal regulatory agencies also require accessto medical records. Figure 5A-7 describes typical medical record access stipulations.

As part of a member's enrollment, health plans generally obtain member consent to access andreview medical records. The member signs the authorization while completing the necessaryenrollment forms. Members also authorize providers to access their medical records for purposesof rendering treatment by completing the history and release forms during the first visit to aprovider or by signing a release form at the time the medical information is needed.

The contractual provision relating to the confidentiality of medical records is usually brief andrequires that providers maintain the medical records of the health plan's member in a confidentialmanner, in accordance with health plan requirements and applicable state and federal laws, andprohibits the unauthorized disclosure of medical records or related patient information. Thisclause is often incorporated with the contractual provision which allows access to medicalrecords.

Finally, the health plan often requires providers to keep the contents of the provider contractconfidential. Similarly, when the plan sends reports to providers comparing the performance ofthe individual provider to other similar providers, the plan may require that the comparison databe kept confidential. On the other hand, the plan frequently reserves the right to reveal someprovider-specific data to current and prospective customers or their representatives, such asinsurance brokers. Such information is used as part of the plan's strategy for marketing itsproducts and its network of providers.

Liability Insurance and Indemnification Requirements

The health plan wants to know that providers have adequate malpractice and general liabilityinsurance. The plan usually requires this coverage to protect the plan against being included inlawsuits that members bring against providers. Contracts should specify the amounts of insurancerequired for individual judgments and aggregate amounts for multiple judgments. If the providerparty is an organization or aggregation of practitioners, the insurance amounts should be specifiedboth at the provider organization level and at the individual practitioner level. The plan shouldrequire a notice of claims made against the provider if the claims are related to the health plan orits members.

Health plans typically require providers to sign agreements with indemnification or hold-harmlessclauses. An indemnification clause requires the provider to reimburse a health plan for costs,expenses, and liabilities incurred by the health plan as a result of a provider's actions. A hold-harmless clause specifies that the provider agrees not to sue or file any claims against a planmember for covered services, even if the health plan becomes insolvent or fails to meet itsfinancial obligations.

Contract Term and Termination

Every provider contract must specify the term (or length) of the contract, as well as the renewaland termination processes. The most common term for provider contracts is one year with anautomatic renewal unless the contract is terminated by either party. Payment terms are usuallynegotiated annually. Health plans have recently begun to request longer contract terms (up tothree years) in order to offer their customers more stability in benefits, network access, andpricing.

A termination clause (also referred to as a deselection clause) describes how and under whatcircumstances a contractual relationship can end. There are many types of termination clauses-without cause (or at will), with cause, and immediate with cause. Figure 5A-8 lists the primarycharacteristics of each type. Not all contracts include all three types of termination clauses. Thissection will describe each type of termination clause and the circumstances under which each isused. The section will also describe the due process which is afforded to providers who areterminated for cause. The upcoming discussion focuses primarily on the manner in which healthplans may terminate their contractual relationship with their providers (specifically physicians),since these terminations represent the majority of such actions. However, providers have equalrights to terminate their contracts with health plans. Both parties to the contract have the right toterminate the agreement either at renewal or prior to the end of the contract term, providedadvance notice is given according to the terms of the contract.

Termination Without Cause

Termination without cause allows either the health plan or the provider to terminate the contractwithout any obligation to provide a reason for the termination or to offer an appeals process. Thedecision to terminate the contract can be made at any time during the course of the contract orupon contract renewal. There is no hearing or appeal process, and regulatory and accreditationagencies do not require a report regarding the termination.

When a health plan terminates a provider's contract without cause, the termination decisionshould be careful to state that the decision is based on nonclinical criteria. For instance, the healthplan may say that its network contains "more practitioners than necessary to serve member'sneeds" or that the terminated provider "lacks appropriate credentials." Increasingly, terminationwithout cause provisions are under attack from providers and medical associations because of theunfavorable perception such terminations create. Although most terminations without cause havemore to do with economics and business operations than with provider competence, there is aperception that most provider terminations are related to quality or utilization issues. Without aclear explanation of the reasons for the termination, a provider may be unable to combat theperception that the termination was based on the provider's medical competence or UM skills.

Termination without cause by either party may require notice periods from 90 days up to 365days. Both long and short notice periods have advantages and disadvantages. Longer periodsallow more time for renegotiation and give the health plan more time to create alternatives formeeting member needs. On the other hand, long termination periods do not allow the plan tomake necessary changes quickly, either in the provider panel or the agreement.

The termination with cause contract provision requires the health plan to give the provider areason for the termination action. Termination with cause gives each party the right to end thecontract if either party breaches the terms of the contract. The acceptable grounds for terminationwith cause must be specifically stated in the contract and clearly worded. The contract should not

include ambiguous terms or language that allows the health plan to immediately terminatecontracts based on its "sole judgment of what is in the best medical interest of members." Thesetypes of provisions are often the basis for disputes and result in contract loopholes.25

Figure 5A-9 describes some of the reasons health plans or providers terminate a contract withcause.

Contracts containing the termination with cause provision usually include a cure provision. Acure provision (also called a remedy or corrective action provision) specifies a time period(usually 30 to 90 days, depending upon the problem) for the party who has breached the contractto remedy the problem and avoid termination of the contract. The cure period is useful incircumstances where the problem can be objectively measured and remedied, such as failure tomake timely payments, failure to provide required services, or noncompliance with stated billingprocedures. In addition, contracts that contain an opportunity to cure breaches of the contractusually include some type of contractually specified penalty for repetitive breaches.26

Immediate Termination with Cause

There are times when termination without an opportunity to cure is appropriate. These situationsinclude

provider practices that pose a clear danger to members, such as failure to maintainadequate instrument sterilization procedures

a provider's failure to comply with state or federal certification sanctions against or loss of the provider's medical license

provider's loss of participating status in Medicare or Medicaid programs gross negligence by the provider.27

Any of these situations should constitute grounds for immediate termination of the contractbecause the plan's members are placed at risk.

Due Process

Due process is an important provision of the health plan contract, particularly if immediatetermination with cause is contractually allowed. The due process clause, which defines theprovider's right to appeal the health plan's termination decision and to defend its position, shouldbe included in all contracts that allow termination with cause. The contract or other supportingdocumentation to the contract should clearly outline the due process procedures that will befollowed if a provider decides to appeal a termination decision.

Many states have recently enacted or are considering enacting legislation governing contractterminations and due process. In general, these new laws stipulate that health plans must list inwriting the reasons for the provider's termination and allow the provider to appeal. In addition,most of the new legislation establishes time frames for the communication, review, and appeal ofprovider contract terminations. Some of the state legislation has gone so far as to prohibit healthplans from terminating physicians to avoid jeopardizing the physician-patient advocacyrelationship.28

Providers argue that termination from a health plan's network, whether with or without cause, cancreate severe financial hardship for a provider if a significant portion of his or her patient base iscovered by the health plan. For this reason, providers may seek to include a contract provisionthat gives them the opportunity appeal any type of termination through the due process provision.

Transition of Care

When a provider terminates his or her contract with a health plan, the health plan must have anaction plan for reassigning members to new providers. The reassignment method must assure thattreatment plans in progress are not disrupted and that each member's overall care is transitioned ina seamless manner that avoids gaps or inconsistencies in care.

Provider contracts should clearly state the responsibilities of both the provider and health plan toavoid disrupting care. The health plan protects its interests by stipulating that the physician isresponsible for rendering services to members until the treatment plans are complete or until thehealth plan has made reasonable and medically appropriate provision for the transfer of patientsto a new physician. The contract also includes the prescribed period of time for the transition, aswell as how the provider will be reimbursed during the post-termination period.29

Endnotes

1. Kerry McDonald, “Critical Issues in Negotiating Capitated Contracts,” in Building andManaging Effective Physician Organizations Under Capitation, ed. Douglas Goldstein(Gaithersburg, MD: Aspen Publishers, Inc., 1996), 284.

2. Richard Liner, “Physician Deselection: The Dynamics of a New Threat to the Physician-Patient Relationship,” American Journal of Law and Medicine 22, no. 4 (1997): 515 and“Percentage of Nonfederal Physicians in Practices with Health Plan Contracts, 1997”

(Table 100), Physician Marketplace Statistics 1997/1998 (Chicago: American MedicalAssociation, 1997).

3. Tom Neal, “The Legal Issues of Managed Care Contracts” in Health Plan, Outcomes, andQuality: A Practical Guide, ed. Steven F. Isenberg (New York: Thieme MedicalPublishers, Inc., 1998), 57, 63.

4. M. Toni Waldman and Alan Gneissen, “Reviewing the Provider Contract,” in HealthPlan Contracting, ed. Wendy Knight (Gaithersburg, MD: Aspen Publishers, Inc., 1997),66.

5. Thomas R. Miller and Judith E. Belt, “Conducting a Health Plan Contract Review,”Healthcare Financial Management (January 1998): 41.

6. Liner, 516.7. Bernice Steinhardt, Health Plan: Explicit Gag Clauses Not Found in HMO Contracts, But

Physician Concerns Remain (Washington, D.C.: U.S. General Accounting Office, 1997),6.

8. Ibid., 7.9. Ibid., 8.10. Ibid., 10–11.11. John Hoff, “Regulation of Health Plan Contracting,” in Health Plan Contracting, ed.

Wendy Knight (Gaithersburg, MD: Aspen Publishers, Inc., 1997), 276–77.12. National Committee for Quality Assurance, 1998 Standards for Accreditation of Health

Plans (Washington, D.C.: National Committee for Quality Assurance, 1998), 42.13. McDonald, 285.14. Denise Cameron, “Health Plan Contracting: A Review of the Process,” Managed Care

Contracting Signature Series, Managed Care Resources, Inc., 1997, http://www.mcres.com/mcrmcc05.htm (14 November 1997).

15. Gary Scott Davis, “Specific Contract Terms: Non-reimbursement Terms,” in ManagedCare Contracting: Advising the Provider, BNA’s Health Law and Business Series No.1800 (Washington D.C.: The Bureau of National Affairs, Inc., 1996), 1800.04.A.

16. Waldman and Gneissen, 67.17. Michael S. Benninger, M.D., “Referral Guidelines” in Health Plan, Outcomes and

Quality: A Practical Guide, ed. Steven F. Isenberg (New York: Thieme MedicalPublishers, Inc., 1998), 26.

18. Davis, “The Management of Health Plan,” in Health Plan Contracting, 1800.06.B.3.19. Dolores M. Blanco, Michael J. Alper, and Richard A. Gold, “Exploring Issues for Group

Contracting” in Health Plan Contracting, ed. Wendy Knight (Gaithersburg, MD: AspenPublishers, Inc., 1997), 57.

20. Maria K. Todd, The Health Plan Contracting Handbook: Planning and Negotiating theHealth Plan Relationship (Chicago: Irwin Professional Publishing, 1996), 131.

21. H.R. 815/S, 356, “Access to Emergency Medical Services Act,” Legislative Update, 10April 1998.

22. American Association of Health Plans, Code of Conduct (Washington, D.C.: AmericanAssociation of Health Plans, summer 1998), 5.

23. Sally K. Richardson, “State Medicaid Director Letter (Emergency Services),” Centers forMedicare and Medicaid Services, 20 February 1998, http://www.hcfa.gov/medicaid/bba2208c.htm (20 June 1998).

24. Janice Perrone, “Medical Record Privacy: Open Secrets,” Hospitals and Health Networks71 (November 5, 1997): 68.

25. Paula Nelson, “Health Plan Contracting: Term and Termination Clauses,” Managed CareContracting Signature Series, Health Plan Resources, 1997, http://www.mcres.com/mcrmcc06.htm (25 November 1997).

26. McDonald, 274.

27. Ibid.28. Ken Terry, “No Cause Terminations: Will They Go Up in Flames?” Medical Economics

75 (January 12, 1998): 130.29. Nelson, 3.

AHM Network Management: Special Considerations for Medicaid Networks

Objectives

After completing this lesson you should be able to:

Explain the origin and purpose of the Medicaid program Describe the characteristics of the three major segments of the Medicaid population and

the challenges these groups present for health plans Define a safety net provider and explain the role that safety net providers can play in

Medicaid health plans Define the two types of Medicaid health plan entities — health plans and primary care

case managers (PCCMs) Explain the differences between open contracting and selective contracting Discuss some of the challenges that health plans face in applying managed care strategies

to Medicaid Describe the type of information a health plan might include in its response to a Medicaid

Request for Proposal (RFP) Explain some of the important considerations in a Medicaid health plan contract List some of the questions a health plan might ask when credentialing providers for a

Medicaid network Discuss the compensation of Medicaid providers, including some of creative

compensation methods that health plans can use

Introduction

Although most of the requirements for building commercial health plan networks also apply tonetworks that serve the Medicaid population, there are a number of special considerations thathealth plans must take into account when building Medicaid networks. Both federal and statelegislation set forth certain requirements and protections for Medicaid program recipients, withthe result that health plans must consider a more complex set of issues when entering theMedicaid health plan market. The Academy for Healthcare Management’s course AHM 510,Health Plans: Governance and Regulation, addresses the full impact of the legal and regulatoryenvironment on Medicaid managed care.

In this lesson, we will discuss the factors that health plans must consider when assembling andmanaging networks of providers to serve Medicaid recipients. We will begin with a briefdiscussion of the history of the Medicaid program and the characteristics of the Medicaidpopulation. We will then consider the specific requirements for Medicaid network developmentand the issues involved in applying health plan strategies to Medicaid.

A Brief History of the Medicaid Program

The Medicaid program was enacted by Congress in 1965 and established in 1966 under Title XIXof the Social Security Act. Medicaid is a joint federal and state program that provides healthcarecoverage for low-income, medically needy, and disabled individuals. The Medicaid program isjointly financed by the federal and state governments. The role of the federal government inMedicaid is to establish overall regulations for the program, to provide partial funding to thestates, and to set minimum standards regarding eligibility, benefit coverage, and provider

participation and reimbursement. Many of CMS’ requirements for Medicare health plans, whichwe discussed in the previous lesson, also apply to Medicaid managed care plans. In addition, thefederal government mandates that the following basic benefits be provided by state Medicaidprograms:

Inpatient hospital services Outpatient hospital services Prenatal care Vaccines for children Physician services Nursing facility services for persons 21 or older Family planning services and supplies Rural health clinic services Home healthcare for persons eligible for skilled nursing services Laboratory and X-ray services Nurse-midwife services Pediatric and family nurse practitioner services Federally qualified health center (FQHC) services Ambulatory services of an FQHC that would be available in other settings Early and Periodic Screening, Diagnostic, and Treatment (EPSDT) services for children

under age 21

The individual states administer the Medicaid program and make claim payments, using statefunds and some matching funds from the federal government. The federal financial participation(FFP) in a state’s Medicaid program ranges from 50% to 80% of the state’s total costs, withpoorer states (based on per capita income) receiving a higher percentage of reimbursement. Stateshave considerable latitude to expand the benefits offered under Medicaid, so long as they meetthe minimum federal standards. Because states have the option to expand their programs beyondthe minimum standards set by the government, Medicaid programs vary greatly from state tostate.

Health plans have been an option for state Medicaid programs almost from the beginning ofMedicaid. In fact, most plans have traditionally operated in the manner of preferred providerorganizations (PPOs), as state Medicaid agencies negotiated with individual providers to acceptdiscounted fee-for-service payment. However, it was not until the early 1980s that Congressexpanded states’ options to use health plan techniques to help manage rising medical costs. In1981, Title XIX was amended to allow states to request waivers to depart from standard Medicaidcoverage by experimenting with new programs aimed at managing costs and improving thequality of care.

A Brief History of the Medicaid Program

The transition to health plans in Medicaid has been slow but steady. Figure 7B-1 shows the shiftin Medicaid enrollment from FFS plans to health plans between 1991 and 2003. CMS reportsthat, as of June 2003, 58% of all Medicaid beneficiaries were enrolled in a health plan program,up from 9.5% in 1991.

The move toward health plans in Medicaid has opened the door to a new market for health plans,as state Medicaid agencies have sought out health plans to serve the Medicaid population. State

Medicaid agencies have moved from the relatively simple role of payor to that of value-basedpurchaser, negotiating comprehensive contracts with providers and commercial healthcare plans.However, Medicaid agencies must consider issues that do not commonly affect privatepurchasers, and those issues also affect the strategies of health plans that hope to win Medicaidcontracts. One issue is that the Medicaid program has historically provided healthcare at a lowercost than commercial health plans; therefore, some studies indicate that the maximum potentialsavings an health plan can offer to a Medicaid agency is estimated to be between 5% and 15%,and these may be one-time savings.1 However, health plans may be able to achieve greatereconomies for Medicaid programs through reductions in enrollees’ use of high-cost services, suchas emergency room visits for routine care or inpatient hospitalization for conditions that can bemanaged on an outpatient basis.

The Nature of the Medicaid Population

The Medicaid population differs from the typical membership of a commercial health plan,posing a challenge for health plans as they attempt to establish Medicaid provider networks thatefficiently and effectively address the needs of these special populations.

A major issue that states and health plans must consider in negotiating Medicaid-managed carecontracts and establishing Medicaid provider networks is the vulnerability of the Medicaidpopulation, which includes the young, the poor, the disabled, and the elderly. Medicaid recipients,by definition, are economically disadvantaged and do not have the discretionary income that istypical of commercial plan members. If care is not available under Medicaid, the Medicaidrecipient does not have the resources to seek medical care outside the system, making itespecially important that Medicaid health plans provide the appropriate services at the appropriatetime. It is, therefore, important that Medicaid health plans cultivate relationships with traditionalMedicaid safety net providers.

Medicaid safety net providers of care are defined as those providers that have historically hadlarge Medicaid and indigent care caseloads compared to other providers and that are willing toprovide health and related services regardless of the patient’s ability to pay. Because many oftheir patients are uninsured and unable to pay for services, these safety net providers often relyupon Medicaid payments, government grants, and private donations to maintain their financialviability. We will discuss the special considerations for contracting with safety net providers laterin this lesson.

Further, this economic disparity between Medicaid enrollees and commercial enrollees limits thecost-participation elements— such as copayments, deductibles, or coinsurance —that are inherentin most managed care plans. Federal Medicaid guidelines actually limit the cost participation thathealth plans can require of Medicaid recipients. Without cost participation, demand managementis more difficult, because Medicaid recipients can utilize services without incurring any personalcost and thus may seek medical services that are not considered medically necessary.

The majority of individuals participating in Medicaid managed care are families with children,children living in low-income households, and low-income pregnant women. In most states, theoption of health plan enrollment is also offered to disabled individuals, as well as to low-incomeindividuals who are eligible for Medicare.

Serving the Majority

The majority of the Medicaid population is younger (including a high volume of children), lesseducated, composed of broader categories of racial and ethnic minorities (including immigrants),and inclined to have more health problems than low-income enrollees in commercial health plans.To serve this large group of recipients, the Medicaid program requires health plans to provideprenatal, perinatal, and neonatal care to pregnant women and newborns. The program alsomandates well-child care and preventive healthcare services in order to improve the long-termhealth of growing children. It is obvious, then, that a Medicaid managed care organization mustinclude a large number of obstetricians and pediatricians in its provider network.

Federal Medicaid regulations mandate specific minimum benefits for Medicaid recipientsyounger than 21 under the Early and Periodic Screening, Diagnostic, and Treatment (EPSDT)program. EPSDT provides for health screening, vision, hearing, and dental services at intervalsthat meet recognized standards of medical and dental practices and at other intervals as necessaryto determine the existence of physical or mental illnesses or conditions. Health plans contractingwith the Medicaid program must provide to EPSDT recipients any service that is potentiallycovered under a Medicaid state plan and that is necessary to treat an illness or condition identifiedby screening, even if the health plan does not normally cover the service. States have the optionto add ***these additional services.

***

Emergency hospital services Intermediate care facility/mentally retarded (ICF/MR) services Optometrist services and eyeglasses Prescription drugs Tuberculosis-related services Prosthetic devices Dental services (nonmedical or surgical)

Many members of the Medicaid population are not accustomed to having an establishedrelationship with a healthcare provider. They may typically have used the emergency room as asource of first-line care for illness and injury and may be unfamiliar with—and not necessarilyreceptive to—the concept of managed healthcare and health maintenance. As a result, Medicaidhealth plans must be prepared to assemble a provider network that offers support services toenrollees, including foreign language translation and transportation to the offices of medicalproviders, in order to ensure that enrollees have adequate access to healthcare and to encourageappropriate utilization of healthcare services. The health plan should also encourage its Medicaidenrollees to seek care in appropriate settings—for example, to seek treatment for non-emergencyillnesses or injuries in the PCP’s office rather than in the emergency room.

Finally, although nearly 75% of Medicaid beneficiaries are nondisabled adults and children inlow-income families, this group accounts for only 32.3% of direct Medicaid spending. Theelderly and disabled individuals who make up the other 25% of Medicaid beneficiaries areresponsible for 67.7% of total direct spending.3 Healthcare plans must be prepared to meet theneeds of these smaller, more demanding segments of the Medicaid population.

Serving the Disabled

Disabled individuals are more likely than other Medicaid recipients to use hospital outpatientservices, which are often provided by hospital specialty clinics at academic medical centers,spinal cord injury units, and children’s hospitals; by rehabilitation centers; and occasionally bycommunity-based specialty clinics. Many of these facilities are not currently a part of the healthplan industry, although they may have the most experience and skill in managing the healthcareneeds of individuals with disabilities. In order to serve both the Medicaid and non-Medicaiddisabled populations effectively, health plans must make the effort to include these traditionalsafety net providers of Medicaid service in their provider networks.

Individuals with disabilities also require a variety of ancillary services more often thancommercial health plan members. Some Medicaid recipients, including adults with mentalretardation or developmental disabilities, receive care in group homes, assisted living programs,or supervised apartments. Some Medicaid recipients require ***these ancillary services and othercommunity-based, long-term care services.

***

Home healthcare Rehabilitation therapy Durable medical equipment and supplies Adaptive equipment, such as telecommunications devices for the deaf Infusion therapy Long-term mental health services, including treatment for substance abuse Personal assistance Respite care Transportation

Most commercial health plans are accustomed to covering these ancillary services only on anacute, short-term basis—if at all— while disabled individuals often require the services on a long-term basis in order to function from day to day and to avoid institutionalization. Whenconsidering participation in Medicaid, health plans must assess their ability to provide suchservices and either factor the expenses into their projected budgets or determine if the stateagency is prepared to provide these services through a carve-out.

Primary Care Providers for the Disabled

Because of the intensive and specialized nature of their treatment, many disabled individuals havecome to consider their specialists as their primary care providers, even though specialists do notroutinely see their role as coordinators of care. Specialists do not usually provide routine healthscreenings or immunizations and do not treat medical conditions unrelated to their area ofspecialty. However, typical PCPs may not have the experience, skill, or comfort level tocoordinate the complex program of care required by patients with disabilities. As a result,disabled individuals often do not receive coordinated care unless they or family members are ableto handle that role. In fact, individuals who have become accustomed to managing their own caremay find it difficult to turn this role over to a healthcare plan.

There are several approaches—each requiring additional provider training—that an health planmay take to bridge the gap between primary and specialty care for the disabled. The health planmay utilize PCPs as case managers, with the requirement that they receive additional training inthe diagnosis and treatment of specific disabilities. Alternately, the health plan may enlistspecialists who are currently treating the disabled and require the specialists to receive additionaltraining in primary care techniques to help them coordinate their patients’ overall medical care.Some health plans use certified medical assistants (CMAs), who are specially trained andcertified nurse practitioners, to coordinate patient care. Whichever approach the health plan takes,the expectations for each provider should be spelled out clearly in the contract.

Case Management

Essential to serving Medicaid’s disabled population is establishing effective case managementprograms. Some disabled individuals, such as those with mental retardation, may require morecommunity support than medical care, while those with other disabilities or chronic healthconditions may require more medical coordination but less long-term support. The key tomanaging this care is to identify an individual’s particular medical management needs as soonafter enrollment as possible and to provide access to the most appropriate level of care for theindividual, using a team approach to provide services at the appropriate level. CMS’s proposedamendments to its Medicaid managed care regulations require that a treatment plan be developedfor persons with complex and serious medical conditions. If appropriate, the treatment planshould specify an adequate number of direct access visits to specialists. This provision is intendedto ensure that enrollees with complex and serious medical conditions can be seen by appropriatespecialists without having to obtain a referral for each visit. Insight 7B-1 describes an HMOthat provides effective case management for its enrollees.

Credentialing Providers for the Disabled

Just as in commercial health plans, Medicaid managed care plans should credential theirproviders. However, the credentialing of a provider for the disabled should be modified to obtaininformation and documentation about the provider’s training and experience in working with thedisabled, as well as the accessibility of the provider’s offices to disabled individuals. Figure 7B-2lists some questions that health plans should ask when credentialing providers to serve disabledpatients.

During the provider selection process, health plans must also consider the accessibility of aprovider’s location to individuals disabilities. Health plans should perform site visits or requestinformation to determine provider has:

accessible office space, including handicapped-accessible entry, examining rooms,hallways, waiting rooms, and restrooms

appropriate equipment, including examining tables, scales, dental chairs, ormammography equipment to accommodate individuals with different disabilities

a telecommunications device for deaf, a teletypewriter, and American Sign Languageinterpreter capacity

the ability to offer services and information for people with visual impairments training/experience in communicating with individuals with cognitive disabilities.4

Serving the Elderly: Medicare, Medicaid, and PACE

Medicaid also serves the low-income elderly population, typically providing standard Medicaidservices that are not covered by Medicare. Individuals who are covered by both Medicare andMedicaid are referred to as being dually eligible. Because Medicare is the primary coverage fordually eligible individuals, Medicaid managed care networks should include Medicareparticipating providers.

As we discussed in the previous lesson, the Balanced Budget Act (BBA) of 1997 formallyestablished a program called Programs of All-Inclusive Care for the Elderly (PACE) as a stateoption. Originally developed as a demonstration project, PACE was the first health plan programdesigned to serve a special needs population. PACE operates within both the Medicare and theMedicaid programs, with Medicare providing the primary coverage for individuals who arecovered by both programs. States may elect to contract with health plans to provide PACEprogram services to individuals who are Medicaid-eligible and meet the PACE criteria. Theseindividuals are not required to be enrolled in Medicare to be eligible for a state’s PACE program.PACE-qualified adult day health centers typically function in a manner similar to staff-modelHMOs or integrated delivery systems (IDSs) because they provide all of a PACE beneficiary’scare under a capitated reimbursement rate. Most PACE programs are smaller than other healthplans, rarely exceeding 100 enrollees.

Waivers and the Balanced Budget Act of 1997

States and health plans must maintain a delicate balance between managing costs and providing ahealthcare “safety net” for persons unable to afford private healthcare coverage. States’ efforts tofind creative ways to serve the Medicaid population, including mandatory enrollment in healthplans, have opened new opportunities for health plans to expand into this market. One way thatstate Medicaid agencies have found the flexibility to serve this population is through waivers.

Since 1981 states have had the option to experiment with new approaches to their Medicaidprograms under freedom of choice waivers. Section 1915(b) waivers have allowed states tomandate certain categories of Medicaid recipients to enroll in health plans. The 1915(b) waiver iscalled the “freedom of choice” waiver because it allows states to bypass (or waive) the Medicaid

program’s usual requirement of giving recipients complete freedom of choice in selectingproviders. Mandated managed care enrollment creates an instant market for health plans that areselected to serve the Medicaid population. Most mandatory Medicaid managed care programshave evolved in urban areas where health plans are well established in the private sector andproviders are already familiar with managed care techniques.

Waivers and the Balanced Budget Act of 1997

Another category of waiver, Section 1115 waivers, has allowed states to establish demonstrationprojects in order to test new approaches to benefits, services, eligibility, program payments, andservice delivery. In cooperation with health plans, a number of states have developed innovativeprograms under these waivers. The first such program was the Arizona Health Care CostContainment System (AHCCCS), which was implemented in 1982 and is a statewide systemconsisting entirely of prepaid health plans. AHCCCS depends upon a competitive bidding processthat has resulted in a considerable decline in the state’s Medicaid capitation rates. ***Insight 7B-2 offers further discussion of the AHCCCS program.

Prior to the passage of the BBA, states were required to apply for special waivers to make healthplan enrollment mandatory for Medicaid recipients or to offer more comprehensive services tocertain categories of recipients. The BBA eliminated the need for formal application for waivers.

Mandating Medicaid Health Plans

Under the greater freedom granted by the BBA, more states have begun to require health planenrollment for Medicaid recipients. Mandatory enrollment in Medicaid allows state Medicaidagencies to establish better management of costs, utilization, and quality. However, Medicaidhealth plans must be especially aware of secondary consequences when managing healthcare,especially because of the large number of children who are covered by Medicaid. For example, ifthe immunization program is not pursued aggressively, young Medicaid recipients may contractchildhood diseases that lead to further health problems. Plans must also address the ongoingneeds of the disabled, the chronically ill, and the elderly who are Medicaid recipients to the extentthat state Medicaid health plan programs cover these populations. Special-needs children,Medicare beneficiaries, and enrolled members of federally recognized Native American tribes areexempt from the BBA’s mandatory Medicaid health plan enrollment. States may still obtainwaivers to require special-needs children and dually eligible individuals to enroll in Medicaidmanaged care programs.

Medicaid Health Plan Entities

If a state mandates Medicaid managed care enrollment, federal regulations require that Medicaidbeneficiaries be given a choice between at least two managed care entities. However, forMedicaid beneficiaries living in rural areas that have minimal health plan development, the stateis allowed to offer only one option for health plans. Medicaid defines health plans as eithermanaged health plans or primary care case managers (PCCMs). Note that the definitions thatfollow are specific to Medicaid.

Under Medicaid regulations, managed care organizations (MCOs) have the characteristics ofHMOs in that they provide inpatient and outpatient care and are subject to extensive regulatoryrequirements. Medicaid considers the following entities to be MCOs:

Federally qualified HMOs that meet CMS requirements Any other public or private organization that meets federal requirements, has a

comprehensive risk contract, and meets the other requirements of the Medicaid statute

The two main categories of Medicaid managed care organizations are (1) licensed HMOs that arealready operating within the state and (2) startup plans that are developed specifically for theMedicaid program. An HMO accepts fully capitated risk for comprehensive services. The startupplans are typically sponsored by local practitioners who are traditional Medicaid providers withan established Medicaid patient load. A number of traditional Medicaid providers are formingprovider-sponsored organizations in order to continue contracting with the Medicaid program.Some startup plans are established as prepaid health plans (PHPs), which accept financial riskfor a limited set of clearly defined services, such as ambulatory care or behavioral healthcare.

Primary care case managers (PCCMs) are organizations or individuals who contract with thestate’s Medicaid agency to provide primary care services, as well as administrative casemanagement. A primary care case manager may be a physician, a physician group practice, anentity employing physicians, or—at state option —a nurse practitioner, nurse-midwife, orphysician assistant. While PCCMs have been particularly popular in rural areas with low healthplan penetration, they tend to be a transitional type of managed care entity, with minimal healthplan controls, and are decreasing in numbers as health plans become more common.

Because PCCMs are often individual practitioners or small groups and focus almost exclusivelyon primary care, our discussion of provider networks will refer to health plans, rather than usingMedicaid’s umbrella term health plan entities.

If a Medicaid enrollee does not choose an health plan, the Medicaid agency may assign theenrollee to a health plan or a PCCM. Typically, the agency tries to preserve any preexistingrelationship the enrollee may have with a PCP who is part of a Medicaid health plan network.Some states give assignment preference to health plans that include safety net providers in theirprovider networks. Other states assign enrollees on a random basis to health plans and PCCMs,making an effort to be equitable in the distribution of assignments. Many states use enrollmentbrokers, which are third-party entities that handle the recruitment and enrollment of Medicaidrecipients for health plans. Enrollment brokers must present the various options available to theenrollee, but they add an extra layer of communication between the enrollee and the health planand provider.

Serving the Uninsured

Some states have used the cost savings from health plans to expand Medicaid eligibility underSection 1115 waivers to low-income uninsured adults and children who do not qualify forcoverage under the standard Medicaid guidelines. In order to encourage broader healthcarecoverage for children, the BBA also established Title XXI of the Social Security Act, theChildren's Healthcare Insurance Program (CHIP), which gives states latitude—and additionalfederal matching funds—to provide healthcare coverage to low-income uninsured children whodo not qualify for Medicaid or other health coverage. Approximately 11.4 million children underage 19 were uninsured in 2003.5 In addition, there are several million other children who areeligible for Medicaid but not enrolled. These numbers illustrate the need for outreach to theseunprotected children.

One of the options available to states for implementing CHIP is the expansion of the state’sMedicaid program. Prior to CHIP, a number of states had already expanded Medicaid coveragefor uninsured children under Section 1115 waivers.

Serving the Uninsured

States that incorporate the CHIP program into the existing Medicaid program offer the samebenefits to both Medicaid enrollees and CHIP enrollees, including EPSDT benefits. States thatdevelop separate CHIP programs have a great deal of flexibility in designing the benefits. Thosebenefits plans must meet the criteria for one of the following three categories:

1. Benchmark coverage2. Benchmark-equivalent coverage3. Approved alternative coverage

Figure 7B-3 provides additional detail about these categories.

One challenge for CHIP programs is to move children into new healthcare situations with as littledisruption to their healthcare as possible and to maintain this status, while dealing withoverlapping funding issues.

As we previously mentioned, Medicaid must also provide prenatal care for pregnant women whoqualify for Medicaid. The intent of these programs directed at children and pregnant women is topromote the improved health of infants and children, under the premise that healthy childrenincur fewer medical costs. Prenatal care and infant health services are especially suited to casemanagement programs, especially when the covered population has high rates of neonatalmortality or morbidity or infant mortality.

The success of this approach is illustrated by North Carolina’s Baby Love program. Under thisprogram, which was begun in 1987, a statewide network of specially trained nurses and socialworkers—called maternity care coordinators—provides comprehensive prenatal care and infanthealth services to Medicaid recipients in the state’s 100 counties. The program includestraditional case management, as well as social support services, such as transportation, housing,job training, day care, in-home skilled nursing care for high-risk pregnancies, nutritionalcounseling, psychosocial counseling, and postpartum/newborn home visits. Since 1987, thestate’s Medicaid infant mortality rate has dropped 27%. Researchers estimate that the NorthCarolina Medicaid program has saved $2 in medical costs for newborns for every $1 spent on theBaby Love program.8 North Carolina’s program is typical of prenatal and infant health programsthroughout the nation.

As we previously mentioned, Medicaid must also provide prenatal care for pregnant women whoqualify for Medicaid. The intent of these programs directed at children and pregnant women is topromote the improved health of infants and children, under the premise that healthy childrenincur fewer medical costs. Prenatal care and infant health services are especially suited to casemanagement programs, especially when the covered population has high rates of neonatalmortality or morbidity or infant mortality.

The success of this approach is illustrated by North Carolina’s Baby Love program. Under thisprogram, which was begun in 1987, a statewide network of specially trained nurses and socialworkers—called maternity care coordinators—provides comprehensive prenatal care and infanthealth services to Medicaid recipients in the state’s 100 counties. The program includestraditional case management, as well as social support services, such as transportation, housing,job training, day care, in-home skilled nursing care for high-risk pregnancies, nutritionalcounseling, psychosocial counseling, and postpartum/newborn home visits. Since 1987, thestate’s Medicaid infant mortality rate has dropped 27%. Researchers estimate that the NorthCarolina Medicaid program has saved $2 in medical costs for newborns for every $1 spent on theBaby Love program.8 North Carolina’s program is typical of prenatal and infant health programsthroughout the nation.

Medicaid Compared to Commercial Health Plans

Because of the nature of Medicaid’s main constituencies, Medicaid programs often have differentemphases than commercial health plan programs. For example, private insurers or health planstypically receive premiums in exchange for assuming risk, and they limit coverage to treatmentthat is medically necessary to restore a patient’s ability to function after an illness or injury.Medicaid, on the other hand, is not insurance but third-party financing of healthcare. The

Medicaid program is designed to provide preventive care for young, healthy individuals and tohelp sick, elderly, and disabled individuals access necessary primary, acute, and long-termhealthcare. Medicaid covers services that are needed to maintain maximum functional levels forindividuals who have chronic or permanent conditions from which they may never fully recover.The sicker and more needy patients covered under Medicaid can increase the financial risk for ahealth plan, but health plans are prohibited from health-screening potential enrollees. In otherwords, a health plan cannot “pick and choose” only the healthier recipients for enrollment.

Some state Medicaid agencies carve out high-volume, difficult-to-manage services such asbehavioral healthcare and programs for AIDS patients and nursing home residents. These carve-outs are similar to those used in commercial health plans to provide effective management ofhigh-risk categories of care. The PACE program described earlier in this lesson is one example ofa carveout. Just as with commercial health plans, provider compensation for carve-out programsmay be on a capitated or FFS basis, depending upon the nature of the services.

The Nature of Medicaid Managed Care Contracts

Because a health plan’s success depends upon its ability to contract with both state Medicaidagencies and network providers, we will address both sides of the contracting picture. The natureof a health plan’s contract with the Medicaid agency greatly influences the way that the healthplan can contract with providers. Although federal contracting requirements exist, state Medicaidagencies have considerable flexibility in selecting and contracting with health plans. As a result,unlike Medicare contracts, Medicaid contracting requirements vary from state to state. If multiplehealth plans operate within an area that has few Medicaid enrollees, the state may be moreselective in choosing only a few plans. However, the opposite situation may exist when there is alarge Medicaid population but very few established health plans. In this situation, the Medicaidagency may have little choice in selecting health plans. The two basic approaches to contractingwith health plans are open contracting and selective contracting.

Open contracting allows any health plan that meets the state’s performance standards and thefederal Medicaid requirements, and is willing to accept Medicaid’s reimbursement levels, to enterinto a Medicaid contract. This approach may be attractive to enrollees, because it gives them achoice among a variety of health plans. The success or failure of a health plan’s Medicaidcontract will depend upon the number of Medicaid enrollees who select the plan and the networkproviders’ ability to manage costs. Open contracting makes it impossible for the Medicaid agencyto offer enrollment volume guarantees, because enrollment is spread among a large number ofplans. A health plan needs to have a certain number of enrollees in order to operate efficiently andprofitably; therefore, the Medicaid agency can attract more interest from health plans if it is ableto offer enrollment guarantees.

Selective contracting represents a more competitive approach to contracting, requiring healthplans to meet minimum performance standards outlined in a state’s Request for Proposal (RFP)and to bid competitively for Medicaid contracts. The performance standards for Medicaidmanaged care plans must be clear and measurable. The state agency evaluates the proposalssubmitted by health plans and selects what it considers to be the best plans for participation in theMedicaid program. The selection process also includes a thorough evaluation of a health plan’sexisting programs in addition to its proposal for Medicaid.

The Nature of Medicaid Managed Care Contracts

State Medicaid programs are subject to very specific legal constraints, such as state procurementlaws. The RFP issued to health plans is typically very specific about the requirements andexpectations a health plan must meet to participate in a Medicaid program. In developing theRFP, the state Medicaid agency may assign weights to such essential components as the healthplan’s provider network design, case management approach, and capitation rates.

Setting specific standards for health plans streamlines the evaluation and selection process forboth the Medicaid agency and the applicant. Some state insurance departments have establishedcompliance standards for private plans that conform to the Medicaid requirements for suchfunctions as management information systems, credentialing programs, and geographic accessstandards. When this is the case, the Medicaid agency may accept documentation from theDepartment of Insurance that a health plan is in compliance with standards. The RFP can list anumber of minimum performance requirements that the health plan must meet, ranging fromprovider network composition to member service and quality assurance activities. The health planis required to provide specific examples of how its plan will meet the requirements.

The RFP also typically spells out minimum standards for

data collection reporting education communication with Medicaid recipients medical service delivery provider network and staffing ratios other factors that are pertinent to providing Medicaid services

Under selective contracting, the state can offer a minimum enrollment guarantee to a health planin exchange for the plan’s development of a better product that offers enhanced benefits toenrollees. The competition among plans to win a Medicaid contract may encourage moreinnovation among plans, resulting in more effective approaches to Medicaid managed care plans.In this sort of competitive contracting, however, newer or local plans may lose out because theyare not as competitive on price or performance as larger, more established national plans.

Selection of Medicaid Managed Care Organizations

After reviewing the proposals submitted by health plans, the state scores and evaluates eachhealth plan, performs site visits, hears any oral presentations, then verifies the references offeredby the health plan. State Medicaid officials will most likely also conduct interviews with a healthplan’s chief financial officer (CFO), medical director, department managers, and contractedproviders.

In order to succeed in obtaining and keeping a Medicaid contract, health plans must offerassurance that their participating providers are capable of delivering clinically appropriatehealthcare services to all enrollees on an ongoing basis. The credentialing process, discussedearlier in this lesson and in Collecting and Verifying Data for Credentialing Purposes, providesinformation that allows the health plan to make an informed decision regarding a provider’squalifications. The Medicaid agency will require health plans to submit ongoing informationabout network providers’ performance through monthly or quarterly summary reports on service

delivery, including encounter level data, quality monitoring, and outcomes reporting. Ideally, thestate Medicaid agency will use the information to provide feedback to the health plan, which inturn can give feedback about performance to its network providers.

Medicaid agencies typically ask health plans to show how they can serve the state’s local andregional market. A health plan will be required to provide maps of the service area it can coverand to identify the locations of specific PCPs, specialists, and hospitals. The state can then noteany gaps within the service area. The state may also require the health plan to identify the officesites of the Medicaid safety net providers included in the network. Finally, health plans areusually expected to describe their outreach programs, quality improvement programs, complaintand grievance processes, and member satisfaction assessment programs, as well as themodifications they will make to these programs to serve the Medicaid population.

Because of the greater complexity of providing healthcare to the Medicaid population, thecontracts between state Medicaid agencies and health plans must be precise and specific in theirstatement of plan responsibilities and accountability. The frequently changing environment offederal and state regulation makes it difficult for contracts to remain current. As a result, somestates have begun to merge their contracting and regulatory processes by codifying in their stateregulations many of the service and performance specifications that are typical of Medicaidmanaged care contracts. The contracting health plan is bound by these regulations, even if theyare not spelled out in the contract. These regulatory requirements may cover a number of issues,such as capitalization of the plan, immunization practices, and network composition. A state maymodify requirements in the regulations without having to make amendments to its Medicaidcontracts. Contracting health plans should be aware of any requirements outside of the contractitself. However a state chooses to impose such requirements, a health plan should analyze anyMedicaid managed care contract within the context of federal and state laws governing theMedicaid program.9

Just as with the Medicare program that we discussed in a previous lesson, CMS imposes penaltieson Medicaid MCOs that violate regulations governing plan performance. These penalties mayinclude civil monetary penalties or intermediate sanctions. These penalties should be clearlyspecified in the Medicaid agency’s contract with health plans.

Fluctuating Medicaid Enrollment

The member base for a Medicaid managed care organization may fluctuate widely because anindividual’s eligibility for Medicaid may change from month to month, based on a change in theindividual’s employment or income status. This fluctuation can make it difficult for the healthplan to determine its ongoing network needs. The BBA contains provisions to encourage morestability in Medicaid coverage by allowing states to grant a six-month period of coverage ortransitional coverage for individuals who may suddenly no longer meet the Medicaid coveragecriteria but are ineligible for other healthcare coverage. This minimum coverage period assuresindividuals of a certain amount of healthcare and helps health plans predict network needs basedon the anticipated Medicaid enrollment in their plans. Still, providers should take care to verifyMedicaid patients’ current eligibility in order to be assured of reimbursement. Health plansshould also account for this potential enrollment volatility in their business and computer systemsplanning for Medicaid contracts.

Some state Medicaid agencies reward plans that meet certain standards, such as including safetynet providers in the health plan’s network, by assigning to the plan Medicaid enrollees who havenot selected a plan. In a small way, this practice “guarantees” the plan some degree of enrollment.

Provider Compensation

As we previously mentioned, Medicaid programs have traditionally directly compensatedproviders on a reduced fee-for-service basis. However, as health plans enter the Medicaid market,more state programs are using capitation to compensate health plans for services rendered toMedicaid enrollees. Most states use their FFS experience to set health plan capitation rates at theaverage FFS cost reduced by some percentage, thereby ensuring that health plan costs are lowerthan FFS and providing the state with some cost savings. For example, a state may set itsMedicaid capitation rate at 95% of the average historical FFS rate for providing care. Federalregulations require that Medicaid capitation rates be no higher than the Medicaid FFS average forall covered services and that the rates be actuarially sound. Health plans must operate within thatcapitation to compensate network providers. Most health plans have found it critical to theirfuture profitability to challenge capitation rates that seem unreasonable prior to entering intoMedicaid contracts.

State Medicaid agencies have often found it difficult to set capitation rates for chronically illpopulations, for whom the cost of care is significantly higher than for healthier Medicaidenrollees. There is also a wide variation in the cost of treatment among individuals with a specificdisabling condition. Therefore, capitation that is based on average cost may put at a disadvantagea health plan that effectively treats and, therefore, attracts a high number of severely disabledindividuals. Some states are considering diagnosis-based rate-setting techniques to distribute riskmore equitably. Colorado is one state that has already implemented a diagnosis-based system thatmore accurately reflects the actual costs of health plans that provide care to individuals withdisabilities and other chronic illnesses.

As we discussed in Strategies for the Specialist Component of the Provider Network, capitation ofprimary care services is simpler than capitation of specialty services, which are likely to be lesspredictable in occurrence, as well as more intensive—and more expensive —in nature. Specialistsmay not see enough Medicaid members to make capitation practical. Some state programs havetaken the approach of capitating primary care, while continuing to provide compensation forspecialists’ services on an FFS basis until enough data has been accumulated to determine a moreeffective way of managing the costs of specialist care.

Capitation helps the state Medicaid agency determine its cost for providing healthcare toMedicaid enrollees. However, some health plans believe that they have not been adequatelycompensated under Medicaid capitation. These plans maintain that the preventive care andimproved access to healthcare services mandated under Medicaid health plans have increasedutilization beyond the traditional FFS costs. Costs have also increased because of mandatedoutreach and member services programs, increased administrative and reporting requirements,and health education and quality assurance standards. Therefore, some health plans havewithdrawn from the Medicaid program. Several states, including Tennessee and Rhode Island,have analyzed their health plans’ actual cost data and raised their capitation rates, rather thanfollow historical FFS data.

In turn, Medicaid providers—particularly safety net providers that provide a wide variety ofservices—often find that a capitation payment from a health plan does not cover their costs for

the case management of chronically ill or disabled patients. Some health plans have developedcreative ways of compensating these providers, such as developing an enhanced ca capita pitacapitation rate or an encounter rate for the greater number of services required to manage thesepatients. In order to develop enhanced capitation rates, the health plan must determine caseloadlevels, service or visit expectations, and salary costs. These additional costs can be calculated as acost per member per month and added to the usual capitation rate for primary care.

Health plans may encourage providers to use outpatient settings to render care by offering PCPs ashare in any savings from reductions in emergency room or inpatient hospital services. This typeof incentive is different from the withhold procedure we discussed in CompensationArrangements Between Health Plans and Providers, in that the health plan typically also offersenhanced payments for office or home visit services. The emphasis is on changing the location ofthe care to a more cost-effective setting, rather than on limiting the quantity of services.10

In order to fill gaps in the service delivery system, health plans may hire consultants or specialistsat an hourly rate. For example, a consultant might provide specialty services at a communityhealth center or a practice that needs assistance on an occasional basis to serve members withcomplex needs. A specialist might be hired on an hourly contract to review patient files, assistwith diagnoses, and train staff. This approach can complement the provider network in a cost-effective manner to provide more comprehensive services and coordinate care.

Another approach a health plan may take is to hire salaried staff to provide or develop servicesthat are not typically included in its provider network. For example, the health plan might hirenurse practitioners, social workers, or other staff to develop and administer such services asassisted living programs, outreach programs, adult foster care, or personal care services. If theseservices already exist in the community, the health plan may simply contract with community-based providers. Especially if Medicaid enrollment levels are low or unpredictable, payingcontract rates for specific services may be more attractive for the health plan than building thecapacity to provide those services. Contracting with safety net or community based providers mayprovide more culturally appropriate services, while strengthening relationships with communityproviders and building enrollment. Health plans may consider providing the following services ona contractual basis:

On-call services for provider groups Sub-acute beds Designated substance abuse treatment beds Assisted living units Case management11

More Than Just a Health Plan

In addition to paying for healthcare, the Medicaid program has traditionally funded community-based human service providers, such as community health centers, financed many state-sponsoredservices for mentally ill and disabled persons, and funded medical education in public academichealth centers. Medicaid payments have also traditionally subsidized providers who renderservices to indigent, uninsured individuals. However, the implementation of managed care inMedicaid poses a threat to this traditional role.

One way Medicaid has subsidized indigent care is through payments to disproportionate sharehospitals. Disproportionate share hospitals (DSHs) are qualified hospitals that provide inpatient

services to a disproportionately large share of Medicaid patients and uninsured patients and,therefore, are at higher risk of operating at a loss. DSH payments are not made for servicesrendered to a specific patient; instead, the payments provide supplemental assistance to hospitalsthat serve the uninsured. The federal government matches state funds designated for DSHpayments. DSH payments are usually made directly to the hospital, rather than being included inthe capitation payment made to the health plan. In this way, the Medicaid agency continues tosubsidize DSHs so that they can afford to serve the Medicaid and uninsured populations.

Because providers who have traditionally provided care to Medicaid patients may not be part ofexisting health plan networks, some state Medicaid agencies require health plans to take steps toinclude those providers, which include federally qualified health centers (FQHCs), large urbanteaching hospitals, public health departments, rural health clinics (RHCs), and other government-funded health clinics.

State and local public health departments have traditionally served low-income patients, andmany believe that they are better than private providers in meeting the needs of these patients.Some state health departments have started to assume a broader role in providing oversight andmonitoring of Medicaid services and participating with health plan networks to provide clinicaland “enabling” services. There is some evidence to suggest that many Medicaid patients prefer tocontinue receiving direct services from local health departments, rather than from the primarycare providers offered by Medicaid managed care. Health plans can make effective use of stateand local health departments to provide niche services that will improve the health plan’s overallquality of care. At the very least, health plans should be aware of the level of services provided byhealth departments in order to make allowances for any gaps in healthcare.12

Many health plans pursue contracts with traditional safety net providers because a number ofMedicaid enrollees have an established relationship with a PCP at the safety net provider site andbecause these traditional providers are often efficient at delivering care for the Medicaidpopulation. However, contracting with safety net providers can present special challenges tohealth plans and to states. This is especially true with regard to provider reimbursement. Prior tothe BBA, federal law required states to pay certain safety net providers—specifically RHCs andFQHCs—a cost-based reimbursement (CBR). Cost-based reimbursement (CBR) is aretrospective payment methodology that reimburses providers for their reasonable costs forservices as determined according to specific cost allocation and apportionment rules. Under CBR,safety net providers received 100% of their reasonable costs of providing services Medicaidrecipients.

Between the years of 2000 and 2003, the BBA provides for phasing out CBR for RHCs andFQHCs under the following schedule:

For services provided in 2000, payment must be 95% of reasonable costs. For services provided in 2001, payment must be 90% of reasonable costs. For services provided in 2002, payment must be 85% of reasonable costs. For services provided before October 2003, payment must be 70% of reasonable costs. For services provided after October 1, 2003, the provision regarding payment for RHCs

and FQHCs based on reasonable costs is repealed.

Between October 1, 1997, and October 1, 2003, the BBA requires states to make supplementalpayments to FQHCs and RHCs for services provided pursuant to a contract with a health plans.These payments must be equal to the amount by which the payment described above exceeds the

health plan’s payment to the FQHC or RHC. CMS has indicated that states may not delegate tohealth plans the responsibility for meeting this supplemental payment requirement. However,Medicaid managed care plans that enter into arrangements with an FQHC or RHC are required toprovide payment that is not less than the level and amount of payment that the health plan wouldmake for the services if they were rendered by a provider that was not an FQHC or RHC. Thisrequirement will be repealed as of October 1, 2003.

If the state Medicaid agency does not require health plans to include safety net providers in theirnetworks, the health plan may wish to consider a number of issues when deciding whether or notto contract with safety net providers. Some of these issues are shown in Figure 7B-4.

Traditional Medicaid providers often have little or no experience with health plans and may bewary of the changes that managed care will bring to their practices. As result, health plans mayhave to work with these providers to bring them up to speed in health plans. For example, safetynet providers may be accustomed to operating independently without formal referral relationshipswith other providers. Contracts with safety net providers should be very specific about referralrequirements, and the health plan should educate providers about their roles in relation to otherproviders in the network.

Health plans may also consider providing assistance to safety net providers to help them improvetheir systems, infrastructure, or processes, as long as the health plan’s compliance with Medicaidrequirements is not compromised. For example, a health plan might allow a provider a period oftime to comply with certain standards, or provide or support any necessary administrative orclinical training. Because of the precarious financial situation of many safety net providers, theymay need assistance in finding capital to invest in the facilities, staff, or equipment to meetcertain standards. For example, the provider might need a grant or loan to install extra phone lines

to meet call waiting standards. The provider might also need assistance in obtaining the computersystems needed to comply with reporting requirements.

One key to successful relationships between health plans and safety net providers is to treat theproviders as partners in providing quality, cost-efficient care to the Medicaid population. Theseproviders’ experiences in treating this population can serve as an extremely valuable—and oftencost-effective—resource for the health plan and the other providers in the network.

States have taken several different approaches to ensure that traditional Medicaid providers areincluded in the networks of health plans that receive Medicaid contracts. For example, California,Michigan, Texas, and Washington—among others—have given extra credit in their selectionprocesses to health plans that include traditional safety net providers. Ohio mandates relationshipsbetween HMOs and providers that have traditionally provided care for disabled Medicaidrecipients.

California’s “Two-Plan” model allows Medicaid enrollees to choose either a private or a publichealth plan. The public plans include county hospitals, clinics, and traditional Medicaid providers.The public plans are also mandated to contract with federally qualified health centers. The stateoffers higher capitation rates and minimum enrollment guarantees to public health plans in aneffort to ease the plans’ transition to health plans.13

To encourage health plans to participate in the Medicaid program, some states tie Medicaid-health plan contracts to contracts for state employee health plans. In other words, in order to beawarded a contract to serve state employees, a health plan must also agree to serve Medicaidbeneficiaries.

Endnotes

1. James M. Verdier, Implementing Medicaid Health Plan Amid Skepticism, Anxiety, andControversy: Suggestions for Program Design, Monitoring, and Reporting (Princeton,NJ: Center for Health Care Strategies, Inc., November 1997), i.

2. The Alpha Center, Medicaid Health Plan and Safety Net Providers: A TechnicalAssistance Guide for Health Plans (Princeton, NJ: Center for Health Care Strategies, Inc.,April 1998), 1.

3. David Liska, “Medicaid: Overview of a Complex Program,” Assessing New Federalism:Issues and Options for States, The Urban Institute, 1998, http://newfederalism.urban.org/html/anf_a8.htm (26 June 1998).

4. Adapted with permission of the publisher from Carol Tobias, Health Plan for SpecialPopulations: Developing Responsive Provider Networks (Princeton, NJ: Center forHealth Care Strategies, Inc., November 1997), 11.

5. Ron Shinkman, “Week in Healthcare: Problem Takeoff,” Modern Healthcare (August 10,1998): 30.

6. Health Care Financing Administration, “Child Health Insurance Program State Plans,” 20August 1998, http:// www.hcfa.gov/init/chip-map.htm (31 August 1998).

7. Paul B. Ginsburg, “Health System Change in 1997,” Health Affairs 17, no. 4 (1998): 168.8. North Carolina Department of Health and Human Services, Division of Medical

Assistance, “Medicaid in Depth,” State of North Carolina, 26 January 1997, http://www.dhr.state.nc.us/DHR/DMA/ depth97.htm (29 September 1998) and Elements ofEffective Health Service Delivery for the Low-Income Population: Background Papers(Henry J. Kaiser Family Foundation, 1993).

9. Center for Health Policy Research, The George Washington University Medical Center,“A Nationwide Study of Medicaid Health Plan Contracts,” 2nd ed., Center for HealthCare Strategies, 1998, http:// www.chcs.org/oview.htm (29 July 1998).

10. Carol Tobias, Health Plan for Special Populations: Developing Responsive ProviderNetworks (Princeton, NJ: Center for Health Care Strategies, November 1997), 21.

11. Ibid., 20–23.12. Susan Wall, “Transformations in Public Health Systems,” Health Affairs 17, no.3

(May/June 1998): 76–79.13. Patricia Barry and Sharon Connors, Medicaid Health Plan Contracting Guide (Princeton,

NJ: Center for Health Care Strategies, Inc., August 1997), 11–14.

AHM Network Management: Special Considerations for Medicare Networks

Objectives

After completing this lesson you should be able to:

Identify federal legislation that has affected the Medicare program and describe its impacton Medicare health plans

List the three types of health plans that are authorized to apply for Medicare contractsunder the Medicare+Choice programs, and identify the two types of health plans that areallowed to establish closed networks of providers

Describe the steps that Medicare+Choice health plans must take to ensure that networkservices are available and accessible to enrollees

Describe the restrictions on the use of physician incentive plans by Medicare+Choicehealth plans

Discuss several other CMS regulations affecting the relationship betweenMedicare+Choice health plans and network providers

Discuss some special needs of Medicare beneficiaries that health plans should considerwhen establishing Medicare networks

This lesson discusses the special needs that health plans must consider when establishingMedicare networks. We begin with a brief overview of the Medicare program and its growingacceptance of health plan concepts. We then describe how the Balanced Budget Act of 1997 hasfurther encouraged the use of health plans in Medicare. Finally, we present an extensivediscussion on the effects of CMS regulations on the operations of Medicare health plan networks.

A Brief Overview of the Medicare Program

Medicare is a federal program enacted in 1965 under Title XVIII of the Social Security Act toprovide healthcare coverage for persons age 65 years and over, persons eligible for a railroadpension, qualified disabled individuals, and certain other beneficiaries. As originally enacted,Medicare consisted of the following two parts:

Medicare Part A, which provides automatic coverage to eligible beneficiaries for basicinpatient hospital care, inpatient skilled nursing facility care, and hospice care

Medicare Part B, an optional program requiring payment of a premium to CMS to coverthe costs of physician professional services provided in a hospital, a physician’s office, anextended care facility, a nursing home, or an insured’s home. Benefits under MedicarePart B also include ambulance services, medical supplies and equipment, outpatienthospital services, diagnostic tests, and other services necessary for the diagnosis ortreatment of an illness or injury. The premium for Part B is usually deducted from thebeneficiary’s monthly Social Security check

A Brief Overview of the Medicare Program

The Medicare program is administered and monitored by the Centers for Medicare and MedicaidServices (CMS) formerly known as the Health Care Financing Administration (HCFA) , which isa division of the U.S. Department of Health and Human Services (HHS) that was created in 1977to administer the Medicare and Medicaid programs.

For the most part, the Medicare program has operated as indemnity health insurance, payingproviders for services based on Medicare’s determination of reasonable costs and reasonablecharges (R&C). Within the context of Medicare Part B, a reasonable charge is the lowest of***these amounts.

Various limitations on Part B reasonable charges have been imposed over the years to helpcontrol rapidly rising medical costs. In addition, for many Part B services CMS now basespayment on a fee schedule.

Because of concerns about managing costs, the Medicare program has also implemented somehealth plan techniques, such as utilization review and second surgical opinion. The originalMedicare amendments to the Social Security Act allowed payments to entities that are nowreferred to as healthcare prepayment plans (HCPPs). On a more formal level, amendments to theSocial Security Act in 1972 allowed certain types of HMOs to participate in the Medicareprogram on either a partial risk-sharing or a cost basis. The HMO Act of 1973 encouraged thedevelopment of federally qualified HMOs and their participation in the Medicare program.

***

The actual charge billed by the provider The charge the provider customarily bills patients for the same service The prevailing charge that most providers in the locality bill for the same service

The Evolution of Medicare Health Plans

Subsequent legislation has allowed the expansion of health plans in Medicare, including theestablishment of demonstration projects that have pioneered innovative concepts in providingcare to the elderly and the disabled. This legislation includes the following acts:

The Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982 The Deficit Reduction Act of 1984 The Omnibus Budget Reconciliation Act (OBRA) of 1986 The Balanced Budget Act (BBA) of 1997 Medicare Prescription Drug, Improvement and Modernization Act (MMA) of 2003

We will discuss the impact each of these legislative acts has had on Medicare.

TEFRA HMOs

In 1982, the Tax Equity and Fiscal Responsibility Act (TEFRA) initiated the Medicare Risk HMOprogram. A Medicare risk contract is “a contract payment methodology between HCFA (nowCMS) and a health plan (HMO or competitive medical plan—CMP) which requires the deliveryof at least all Medicare-covered services to members as medically necessary in return for a fixedmonthly payment [capitation] from CMS and sometimes an additional fee paid by the enrollee[for supplemental services]. The health plan is then liable for those contractually offered serviceswithout regard to cost.”1

Prior to the enactment of the Balanced Budget Act of 1997 (discussed later in this lesson), whichreformed Medicare managed care program methodology, TEFRA risk HMOs and CMPs enrolled

Medicare beneficiaries and provided for their Medicare-covered primary and acute care servicesin return for a capitated payment equivalent to 95% of the adjusted average per capita cost(AAPCC). The adjusted average per capita cost (AAPCC) was the FFS amount that CMS wouldhave expected to pay for a Medicare beneficiary who lived in a particular county, adjusted forage, sex, institutional status, and other factors.

CMPs had fewer restrictions, as applied to commercial enrollees, than federally qualified HMOsregarding limitation on the scope of services, cost-sharing requirements (deductibles andcopayments), and use of noncontracted providers.

A number of health plans widely marketed HMOs and CMPs via the mass media to the Medicarepopulation. Advertisements typically emphasized that the HMO or CMP offered a wider range ofbenefits than traditional Medicare coverage and sometimes stated that enrollees were not requiredto pay plan premiums. A TEFRA HMO or CMP was not allowed to charge the enrollee a feegreater than the actuarial value of the Medicare deductible and coinsurance for the basicMedicare-covered benefits. However, the HMO or CMP was allowed to charge the enrollee apremium for any additional benefits over and above Medicare benefits —for example,prescription drug benefits— if the cost of the additional benefits exceeded the payment fromCMS. Health plans that did not require additional premiums usually were located in areas wherethe AAPCC was highest, typically the seventieth percentile and above.

Social Health Maintenance Organizations (SHMOs)

Under the Deficit Reduction Act of 1984, Congress established the social health maintenanceoranization (SHMO) demonstration authority for the purpose of determining whether providingcoordinated healthcare, preventive services, and social services might prevent costly medicalcomplications among the elderly. Initially, four SHMO demonstration projects were approved. In1990, Congress extended the SHMO demonstration authority. SHMOs provide Medicareparticipants with standard HMO benefits, such as hospital, physician, skilled nursing facility, andhome health services, together with limited long-term care benefits, such as social benefits forfrail elderly who reside at home. The SHMO philosophy is that “an integrated system can supportmedical care by ensuring that medical appointments are kept, that transportation is available, thatmedical regimens (for example, diets and medications) are followed, and that emergent medicalproblems are spotted and reported (through both in home helpers and covered emergencyresponse systems).”2 Later in this section we will discuss subsequent legislation that hasexpanded this program.

SHMOs provide a greater number and variety of supportive services than traditional HMOs,because one of their goals is to avoid institutionalization of participants through the use ofcommunity-based care. Insight 7A-1 describes how the SCAN Health Plan’s Social HMO inLong Beach, California, has approached this challenge.

Social Health Maintenance Organizations (SHMOs)

Of course, the breadth of services provided by SHMOs requires a much greater variety ofprovider types, as well as more complex reimbursement mechanisms, than standard HMOs.Health plans that offer this type of plan must be able to establish and maintain a network ofproviders, such as social workers and home healthcare providers, that can support therequirements and intent of an SHMO. SHMOs receive a capitated payment that is comparable to100% of the AAPCC.

The Balanced Budget Act of 1997—which we will discuss in detail in a later section —extendedthe SHMO demonstrations through December 31, 2000. The limit on the number of enrollees perplan was increased from 12,000 to 36,000. Congress instructed CMS to develop a plan thataddresses the transition of SHMOs to the Medicare+Choice programs.3

Programs of All-Inclusive Care for the Elderly (PACE)

The Omnibus Budget Reconciliation Act of 1986 (OBRA 1986) established a demonstrationprogram to grant waivers of certain Medicare and Medicaid requirements to no more than tenpublic or nonprofit private community-based organizations that provide integrated healthcare andlong-term care services to frail elderly persons who are at risk of institutionalization. Thisprogram, Programs of All-Inclusivee Care for the Elderly (PACE), sought to duplicate thesuccess of an earlier demonstration project, On Lok Senior Health Services in San Francisco’sChinatown. The On Lok project is a staff-model medical program that requires enrollees to attendadult day health centers, which are the site for their primary and preventive healthcare. This careis provided through a multidisciplinaryteam style of care management that brings together acuteand long-term care. Because of the program’s success, OBRA 1990 expanded to 15 the number oforganizations eligible to conduct PACE demonstration projects.

PACE provides an alternative to intensive institutional care for persons aged 55 and over wholive in a PACE service area, are certified as eligible for a nursing-facility level of care, and meetthe eligibility requirements for the program within their state of residence. PACE programsprovide and manage all healthcare, medical, and social services to program participants andmobilize other preventive, rehabilitative, curative, and supportive services as needed. This care isprovided primarily in adult day health centers, but also in homes, hospitals, and nursing homes,with the goal of helping the individual maintain as much independence and quality of life aspossible. PACE participants receive all benefits solely through PACE.

PACE programs are reimbursed on a capitated basis through both the Medicare and Medicaidprograms, as well as by private insurance, when available. The monthly capitation payment for aPACE program is set at 239% of the AAPCC in order to account for the frailty of the PACEpopulation and their accompanying need for more intensive services than healthier Medicarerecipients. Medicare PACE enrollees who are not eligible for Medicaid pay a premium equal tothe Medicaid capitation amount.

Regardless of the source of funds, PACE providers receive capitated payment only through thePACE agreement and must make available all items and services covered under both Title XVIII(Medicare) and Title XIX (Medicaid) without limitations on amount, duration, or scope of serviceand without requiring any deductibles, copayments, or other cost-sharing. The PACE programmust provide participants with access to necessary covered items and services 24 hours a day, 7days a week.

Just as with SHMOs, PACE programs provide a greater variety of services than traditional healthplans and address multiple areas of a participant’s life. The provider network for each type ofplan must include the appropriate numbers and types of providers to serve participants’ needs. APACE program differs from an SHMO in several ways. Unlike PACE, SHMOs have very little todo with Medicaid and provide minimal long-term care. In addition, SHMO benefits have an upperdollar limit, while PACE benefits do not.

The Balanced Budget Act of 1997 established PACE as a permanent program and gives states theoption to provide these services to Medicaid beneficiaries. The number of PACE programs hasbeen limited to no more than 60 in the first year after the BBA’s enactment, with no more than 20programs to be added each year thereafter. Many of the PACE provisions parallel those of theMedicare+Choice program.

In 1997, Congress made significant changes in the use of managed healthcare under Medicare byenacting the Balanced Budget Act (BBA) of 1997. The BBA established the Medicare+Choiceprogram, which replaces the Medicare risk program and provides beneficiaries with new healthplan options. In addition, as previously discussed, the BBA established SHMOs and PACE as astate option under Medicaid, no longer requiring special authorization by CMS but limiting thenumber of PACE providers.

Medicare+Choice

Medicare beneficiaries may continue to receive benefits through the traditional Medicare FFSprograms; however, Medicare+Choice —pronounced “Medicare Plus Choice”—establishedunder the new Medicare Part C, allows additional types of health plans to apply for Medicarecontracts. The legislation also changed the system for determining the rates that will be paid toorganizations with Medicare contracts. The new payment methodology was implemented underthe Medicare risk program in 1998. The Medicare+Choice contracts became effective January 1,1999, and all Medicare risk contracts were transitioned to the Medicare+Choice program on thatdate. Medicare cost contracts will be phased out as of December 31, 2002. As illustrated in Figure7A-1, original government estimates indicated that by the year 2008 nearly 40% of all Medicareenrollees would be members of risk-based Medicare+Choice plans. Because of some difficultiesthat health plans have encountered under the Medicare+Choice program —especially in the areaof payment— it remains to be seen if these estimates will be realized.

Health Plan Networks Under Medicare+Choice

The Medicare+Choice program expands the types of organizations that may contract with CMSto provide covered services to Medicare beneficiaries. The Medicare+Choice program includesany of the following plans:

A coordinated care plan (CCP), which is offered by a health plan such as an HMO withor without a point-of-service option, a preferred provider organization (PPO), a provider-sponsored organization (PSO), or a managed healthcare plan offered by a religiousfraternal organization

A Medicare+Choice organization that offers a medical savings account (MSA) A private fee-for-service (PFFS) plan

Coordinated Care Plans

The BBA describes in detail the rules that govern how HMOs that hold a Medicare risk contractmust transition to a Medicare+Choice contract. If the HMO makes the transition to aMedicare+Choice contract, beneficiaries who are enrolled in the HMO’s risk plan as of December31, 1998, will be automatically transferred to the Medicare+Choice plan.

PPOs may apply to CMS for participation in the Medicare+Choice program. The PPO must meetall Medicare+Choice requirements.

The types of PSOs that may apply for participation in the Medicare+Choice program include

physician-sponsored organizations hospital-sponsored organizations physician/hospital entities that have joined together to apply for a Medicare+Choice

contract

The BBA has addressed several issues specifically related to the establishment of PSOs. Theseinclude the establishment of solvency standards for PSOs and a one-time three-year waiver ofstate licensure requirements for PSOs. Although the BBA requires Medicare+Choiceorganizations to be licensed as risk-bearing entities under state law, a PSO may apply for awaiver of this requirement under the following circumstances:

The state fails to process the PSO’s licensure application within 90 days of receiving acomplete application

The state denies the application based on solvency standards that are different from thefederal standards

The state denies the application due to applying standards or a review process that is notgenerally applicable to similar entities

The state requires the PSO to offer a product other than Medicare

Medicare+Choice Medical Savings Accounts

Medicare+Choice medical savings account (MSA) plans are designed to be “health insurancearrangements that give consumers a financial incentive to control their own healthcare costs bycombining a high-deductible health insurance policy with an individual savings account.”5

Under a Medicare+Choice MSA, CMS pays the premium for a catastrophic health policy withhigh annual deductibles and out-of-pocket expenses of not more than $6,000 for 1999. Thedeductibles and out-of-pocket maximums will be increased by a certain factor annually. BothCCP plans and FFS plans may offer MSA options. CMS also makes contributions on behalf of

the enrollee to a savings account in the amount of any difference between the usual capitatedMedicare+Choice payment and the MSA plan premium.

After the enrollee pays the deductible and out-of-pocket expenses up to the established annualmaximum, Medicare-covered services are paid at 100% of the Medicare allowable payment. Theprovider is free to bill the enrollee for any charges that exceed the payments made by the MSAplan. The MSA enrollee may make tax-free withdrawals from the MSA to meet qualified medicalexpenses that are not paid by the high-deductible health insurance policy. The enrollee may alsomake withdrawals from the MSA for nonmedical expenses, but those amounts are taxed asincome. Any money remaining in an MSA at the end of the benefit year is carried over to the nextbenefit year. Enrollees in other Medicare plans may change from one type of plan to another atany time until January 1, 2002, when a lock-in will be imposed. However, MSA enrollees muststay in the MSA plan for a minimum of one year.

Private Fee-for-Service Plans

Under a Medicare-approved private fee-for-service (PFFS) plan, Medicare pays a privateindemnity health insurance plan a premium to provide Medicare-covered services. The PFFS planthen provides all Medicare benefits to the covered individual. The plan must agree to

pay non-network providers the amounts that would ordinarily be paid by Medicare PartsA and B for covered services rendered

maintain a provider network that is capable of providing all Medicare-covered services a combination of both

The provider under a PFFS plan is required to accept as payment in full an amount no greaterthan 115% of the Medicare payment rate, including any deductibles, coinsurance, or balancebilling. The enrollee may also have to pay an additional premium to the PFFS plan. Providers arenot at risk, and members may access any provider that has agreed to accept the plan’s payment. Infact, a healthcare provider is treated as having an agreement with the PFFS Medicare+Choiceorganization if

the provider furnishes to an enrollee services that are covered under the plan and, before furnishing the services, the provider has been informed of the patient’s entitlement

under the plan and has also been made aware of the terms and conditions for paymentunder the plan or has been given a reasonable opportunity to obtain such information.

Although all of these plans are authorized to provide services under the Medicare+Choiceprogram, there are differences in the ways in which the plans are permitted to establish and useprovider networks. For example, a Medicare+Choice plan that operates as a CCP may establish anetwork of providers that enrollees must use in order to receive covered services except in somelimited situations. We will discuss these limitations later in this lesson. A Medicare+Choice CCPplan may also limit the size of its network to the number of providers that are necessary to meetthe needs of the plan’s enrollees. On the other hand, a PFFS plan must allow enrollees to obtainservices from any provider who is authorized to provide services under Medicare Part A and PartB and who agrees to provide services under the plan.

In addition, a PFFS plan may not refuse to pay claims for providers who are authorized Medicareproviders and who submit claims for services covered under the PFFS plan. Because PFFS plans

are restricted from establishing closed networks of providers, we will focus our discussion in thislesson on the use of networks by Medicare+Choice CCPs and MSA CCP plans.

The Medicare Prescription Drug and Modernization Act of 2003

On December 8, 2003, President George W. Bush signed into law the Medicare Perscription Drugand Modernization Act of 2003 (MMA), taking steps to expand private sector health care choicesfor current and future generations of Medicare beneficiaries. The MMA proposes short-term andlong-term reforms that build upon more than 30 years of private sector participation in Medicare.

The centerpiece of the legislation is the new voluntary prescription drug benefit that will be madeavailable to all Medicare beneficiaries in 2006. Additional changes to the Medicare+Choice(M+C) program include:

Medicare+Choice program’s name is changed to Medicare Advantage (MA); Increased funding is provided for MA plans in 2004 and 2005; MA regional plans are established effective 2006.

On January 16, 2004 CMS announced new county base payment rates for the MA program.Beginning March 1, 2004, all county MA base rates received an increase which plans are requiredto use for enhanced benefits. Plans may use the extra money in one of four ways:

Reduce enrollee cost sharing; Enhance benefits for enrollees; Increase access to providers; Utilize the stabilization fund.

The short-term reforms have already improved benefits and reduced out-of-pocket costs formillions of Medicare beneficiaries who are covered by health plans in the Medicare Advantageprogram, previously known as the Medicare+Choice program. These coverage improvementsbecame effective on March 1, 2004.

On June 1, 2004, beneficiaries saw additional improvements in Medicare under another importantMMA initiative, the Medicare-Endorsed Prescription Drug Discount Card Program, which willremain in effect through the end of 2005. This program gives beneficiaries the option ofpurchasing prescription drug discount cards—sponsored by private sector entities and endorsedby Medicare—which offer discounted prices on prescription drugs. Furthermore, the discountcard program is providing low-income Medicare beneficiaries with up to $600 annually inassistance, in both 2004 and 2005, to help cover their prescription drug costs.

Beginning in 2006, the MMA will provide beneficiaries with a broader range of private healthplan choices similar to those that are available to working-age Americans and federal employees.In addition to the locally-based health plans that currently cover more than 4.6 million Medicarebeneficiaries, regional PPO-style plans will be available as a permanent option under theMedicare Advantage program.

Also beginning in 2006, all beneficiaries will have the option of choosing prescription drugcoverage delivered through private sector entities. This coverage will be available as a stand-alone drug benefit or, in other cases, as part of a comprehensive benefits package offered byMedicare Advantage health plans.

Other important provisions of the MMA address Medigap choices and specialized MedicareAdvantage plans for beneficiaries with special needs. Final regulations are scheduled to bereleased in the spring of 2005, and at that time additional content updates will be made to thiscourse.

Quality in Medicare Health Plans

The Balanced Budget Act required health plans to establish quality assurance programs that

focus on health outcomes provide for review by physicians and other healthcare professionals of the processes

followed in the provision of healthcare services make necessary changes based on collected data about health services evaluate continuity and coordination of care include written protocols for utilization review, based on current standards of medical

practice

Several other federal programs have established quality requirements for Medicare+Choice (nowknown as Medicare Advantage) organizations. These programs include the Health Care QualityImprovement Program (HCQIP) and the Quality Assessment Performance Improvement (QAPI).

Health Care Quality Improvement Program (HCQIP)

CMS initiated the Health Care Quality Improvement Program (HCQIP), which seeks toimprove the quality of care provided to Medicare beneficiaries by shifting the emphasis of qualityreview programs from identifying individual lapses to improving the overall quality of care. TheHCQIP requires Medicare health plans to contract with an outside quality improvementorganization (QIO) to conduct periodic quality reviews . A quality improvement organization(QIO) is an association of practicing providers that reviews medical services ordered or furnishedby other practitioners in the same specialty. QIO reviewers determine the reasonableness andmedical necessity of the services provided and monitor the quality of care given to Medicarepatients. External review requirements may be waived for a specified period of time if the healthplan has an excellent record of quality assurance and compliance with other Medicare healthrequirements. A plan may be deemed to have met requirements regarding confidentiality andaccuracy of patient records if the plan is fully accredited and periodically reaccredited by anaccreditation agency that is approved by CMS.

Quality Assessment Performance Improvement (QAPI)

The regulations that support the BBA established quality assurance and performanceimprovement (QAPI) standards for Medicare health plans. Health plans are required to achievecompliance with these standards to assist Medicare health plans developing mechanisms formeasuring improved outcomes of healthcare and services. Begun in 1996, QAPI has several***major goals.

As of this writing, CMS had established QAPI Interim Standards and Guidelines which apply toall services provided by Medicare health plans for all Medicare enrollees, including those withspecial needs, with some variations based on the organization’s structure. QAPI standards applyto any Medicare coordinated care plan and, at state discretion, to Medicaid health plans andprepaid health plans. Exceptions include PACE programs and Medicaid primary care case

management programs. Some standards also apply to non-network Medicare MSAs and privatefee-for-service plans.

*** clarifying the responsibilities of CMS and the states (as value-based purchasers of

services for vulnerable populations) in promoting quality promoting opportunities for partnership among CMS and the states and public and private

entities involved in quality improvement efforts developing a coordinated Medicare and Medicaid quality oversight system that would

reduce duplicate or conflicting efforts and send a uniform message on quality toorganizations and consumers

making the most effective use of available quality measurement and improvement tools,while allowing sufficient flexibility to incorporate new developments

The QAPI Interim Standards and Guidelines address the following four major areas:

Quality assessment and performance improvement Enrollee rights Health services management Delegation

CMS plans to expand QAPI to include sample QAPI projects, advice on cultural competency, andother information that will assist plans in developing their quality assurance programs. CMS hasset forth interim quality assurance standards for Medicare+Choice organizations as described inFigure 7A-2.

The Importance of CMS Regulations

CMS is responsible for implementing the various laws that have an impact on Medicare,including the Balanced Budget Act of 1997. CMS accomplishes this task by establishingregulations that affect many aspects of provider networks under the Medicare+Choice program.We will discuss the regulations throughout this lesson.

CMS Regulations Governing Access and Availability

CMS has adopted extensive regulations to ensure that all services covered by theMedicare+Choice program are available and accessible to plan enrollees. CCPs or network MSAplans that require Medicare+Choice enrollees to use providers from a specified network mustcomply with CMS’ requirements; therefore, plans must pay careful attention to the regulationswhen establishing their networks. An exhaustive discussion of these regulations is beyond thescope of this lesson, but we will highlight the most important requirements. Later in this lesson,we will discuss some of the other factors health plans may need to consider to ensure that theirnetworks meet the special needs of Medicare patients.

General Requirements Regulating Access

CMS regulations require all Medicare+Choice CCPs and network MSA plans to maintain andmonitor a network of providers that is sufficient to provide adequate access to covered services inorder to meet the medical needs of the enrollees. For example, health plans must provide anadequate number of primary care providers, specialists, hospitals, skilled nursing facilities, homehealth agencies, and ambulatory clinics. Subject to some limitations, if more than one type ofprovider is qualified to furnish a particular service (for example, primary care by either aphysician or a nurse practitioner), the health plan may select the type of provider to be used.However, the health plan must not discriminate, in terms of network participation,reimbursement, or indemnification, against a provider solely on the basis of license orcertification.

One of the most important issues in establishing provider networks is the determination of theservice area—the geographical area that the health plan will serve. The service area determinesthe number of potential enrollees, which will in turn determine the requirements for the providernetwork. The service area must be consistent with community patterns of care in order toencourage enrollment.

In establishing a network, the health plan must also ensure that the office hours of networkproviders are convenient for and do not discriminate against Medicare+Choice enrollees. Thehealth plan must make covered services available 24 hours a day, 7 days a week when medicallyappropriate. The health plan must also ensure that services are provided in a manner that issuitable to the plan’s enrollees, including those with limited proficiency in English, diversecultural and ethnic backgrounds, or physical or mental disabilities.

The health plan must ensure that enrollees receive timely access to care and services by adoptingwritten timeliness standards that meet or exceed the standards established by CMS. Bothproviders and enrollees must be educated regarding the health plan’s provisions and requirementsfor access to services. In addition, the health plan must continuously monitor whether access tocare within the network is timely and must take corrective action whenever necessary.

Access to Specialists

In establishing a network, a Medicare+Choice health plan must provide for any specialty care thatmay be required to meet the healthcare needs of enrollees. Female enrollees must be able to haveaccess without a referral to a participating women’s health specialist, such as a gynecologist, forwomen’s routine and preventive healthcare services. Health plans must also have procedures for

identifying individuals with complex or serious medical conditions diagnosing, assessing, and monitoring those conditions on an ongoing basis establishing and implementing treatment plans for complex or serious conditions, with an

adequate number of direct access visits to specialists to accommodate the treatment plans

If a health plan or specialist is terminated from the Medicare+Choice program, the health plan isrequired to inform enrollees of their right to maintain access to specialists and to provide theenrollees with names of other Medicare+Choice health plans that contract with specialists of theenrollees’ choice.

Continuity of Care and Integration of Services

A Medicare+Choice health plan is required to ensure continuity of care and integration ofservices for Medicare enrollees. Specifically, CMS regulations require that health plans

designate a practitioner who has primary responsibility for coordinating each enrollee’soverall healthcare

provide an ongoing source of primary care for each enrollee adopt programs for coordinating services with community and social services, including

nursing homes and community-based services establish procedures to ensure that enrollees are informed of specific healthcare needs

that require follow-up and to ensure that enrollees receive training in self-care implement systems to help enrollees comply with prescribed treatments or regimens

Emergency, Urgently Needed, and Renal Dialysis Services

Medicare law requires Medicare+Choice plans to cover emergency services without regard toprior authorization or the provider’s network participation status, using the prudent laypersonstandard. Medicare regulations further require that the plan may not deny payment when anetwork provider or an organization representative instructs an enrollee to seek emergencyservices within or outside the plan. The physician treating the enrollee must decide when theenrollee may be considered stabilized for discharge or transfer to a network provider, and thatdecision is binding on the plan. If an enrollee obtains emergency services outside the healthplan’s network, the enrollee may not be required to pay more than $50, or the amount the enrolleewould have paid if he or she had obtained the services from a network provider, whichever islower. In addition, services provided following the enrollee’s stabilization will be consideredapproved by the plan if the plan does not respond to a request for authorization within one hour orcannot be contacted for approval.

The health plan must also have provisions for covering urgently needed services, which CMSdefines as treatment of an unforeseen illness or injury that occurs outside of the network area orunder unusual circumstances within the network area, requiring the services of a non-participating provider. Finally, Medicare+Choice plans must cover renal dialysis servicesprovided by a non-participating provider when the enrollee is temporarily outside the plan’sservice area

Effective Patient Care and Quality Review

A Medicare+Choice health plan must establish procedures to ensure that both the health plan andits provider network have the information necessary for effective patient care and quality review.The health plan must ensure that an initial assessment of each enrollee’s healthcare needs iscompleted within 90 days of enrollment. In addition, each provider in the network must maintainenrollee health records in accordance with standards established by the health plan. The healthplan must also establish procedures that enable the various providers, suppliers, and practitionersin the network to share information in an appropriate and confidential manner and to provideinput into medical management policies and procedures.

CMS regulations require Medicare+Choice health plans to establish written policies andprocedures that allow medical necessity determinations to be made on an individual basis and thatallow providers to consider enrollee input in developing treatment plans.

CMS Regulation of Physician Incentive Plans

In enacting the laws that authorized the use of health plans in the Medicare program, Congresswas concerned that certain types of compensation arrangements between Medicare health plansand providers might result in enrollees’ receiving a lower level of services than medicallynecessary. To help avoid this situation, Congress placed additional regulatory requirements on theuse of certain physician incentive plans by Medicare+Choice health plans. A physician incentiveplan (PIP) is any method of compensating a physician or physician group that may directly orindirectly have the effect of reducing or limiting the services provided to plan enrollees.

The first basic rule governing the use of physician incentive plans is that a health plan may notmake any payments to a physician as an inducement for the physician to reduce medicallynecessary services to a particular enrollee. This rule applies to both direct and indirect paymentsto physicians. The prohibition against indirect payments means, for example, that a health planmay not attempt to induce a physician to reduce medically necessary services to a particularenrollee by waiving a debt that the physician owes to the health plan or by giving the physicianstock options in the health plan. CMS regulations also specify that PFFS plans may not enter intophysician incentive plans.

Physician Incentive Plans Creating Substantial Financial Risk

In addition to prohibiting health plan from making payments to physicians as an inducement toreduce medically necessary services to specific enrollees, CMS regulations place additionalregulatory requirements on the use of physician incentive plans that place physicians (orphysician groups) at substantial financial risk for services that they do not furnish themselves.Whether a physician is at substantial financial risk depends on the extent to which the physician’scompensation may be reduced because the costs of referral services exceed a targeted level.

The concept of substantial financial risk as defined by CMS regulations is somewhat complex. Inbasic terms, however, substantial financial risk exists when the amount for which a physician isat risk for referral services is more than 25% of the maximum potential total compensation thatthe physician could receive. The example discussed in Figure 7A-3 illustrates how substantialfinancial risk is calculated.

Examples of compensation arrangements that can put physicians at risk for referral servicesinclude bonuses, withholds, and capitation payments. The common types of compensationarrangements were discussed in previous lessons. Figure 7A-4 describes situations in which thesecompensation arrangements create substantial financial risk. Regardless of the type ofcompensation arrangement used, substantial financial risk is not considered to exist if thephysician (or physician group) has a patient panel that exceeds 25,000 patients. In such a case, thephysician’s risk is spread over a large enough population that excessive referral costs caused byindividual patients can be absorbed without serious financial harm to the physician, therebyeliminating any potential incentive to reduce services. If a physician incentive arrangement placesa physician or physician group at substantial financial risk, the health plan is required to ensurethat the physician or physician group has adequate stop-loss protection and to conduct annualmember surveys.

Requirement of Stop-Loss Insurance

A Medicare+Choice health plan must ensure that all physicians who are at substantial financialrisk because of a physician incentive plan have stop-loss insurance protection. A physicianobtains this insurance so that if the financial liabilities exceed what is expected based on priorexperience, the insurer will “stop” further losses by paying the excessive liabilities.

Stop-loss insurance may be provided on either an aggregate basis or a per-patient (individual)basis. Aggregate stop-loss insurance must cover at least 90% of the costs of the total referralservices for all plan members that exceed the substantial risk threshold of 25%. In other words, aphysician may be liable for no more than 10% of the costs of referral services for which thephysician is at substantial financial risk.

When per-patient stop-loss insurance is used, the stop-loss threshold per patient is based on thesize of the physician’s patient panel. The larger the patient panel, the higher the stop-lossthreshold per patient may be, and, as mentioned earlier, if the patient panel exceeds 25,000patients, no stop-loss insurance is required. When certain conditions are satisfied, a physician isallowed to pool several classes of patients to determine the size of the patient panel. Patients thatmay be pooled with Medicare enrollees when these conditions are met include (1) commercialenrollees, (2) Medicaid enrollees, and, under certain circumstances, (3) enrollees of otherMedicare+Choice health plans with which the physician has contracts. Once the per-patient limitis determined, stop-loss insurance must cover at least 90% of the costs of any referral servicesthat exceed that amount.

Member Surveys

If a Medicare+Choice health plan uses a compensation arrangement that puts providers atsignificant financial risk, the health plan must conduct annual surveys of current enrollees, as well

as some categories of enrollees who have recently disenrolled from the plan. In these surveys, thehealth plan is required to measure the enrollees’ satisfaction with the quality of services providedand the degree to which enrollees have access to the services provided by the health plan. Asummary of the survey results must be provided to CMS and to any Medicare beneficiary whoasks for it.

Disclosure Requirements

Each Medicare+Choice health plan must provide enough information to CMS about the healthplan’s physician incentive plan to enable CMS to determine whether the health plan is incompliance with PIP regulations. This information must be provided at the time of the healthplan’s application for a Medicare contract or a service area expansion, at the contract renewaldate, and within 30 days of a request by CMS. Currently, CMS requires Medicare+Choiceorganizations to submit annual disclosure data on March 31 of each year. CMS will not approve anew health plan’s application for Medicare contract unless the health plan discloses the physicianincentive arrangements for that contract. Health plans must also provide certain information abouttheir physician incentive plans to any Medicare beneficiary who requests it

Changes in Payment Under the BBA

In 1997, the BBA authorized CMS to establish a new payment methodology for Medicare. Healthplans that contract with Medicare are paid the highest of these three amounts.

A rate that is a blend between national and local FFS costs, subject to certain adjustments The health plan’s payment rate for the previous year plus 2% A minimum payment amount that increases in succeeding years to reflect the annual

national rate of growth in per capita Medicare expenditures, decreased until 2002 by astatutorily specified adjustment amount

Editor's Note

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) returnedto the idea of linking managed care rates and local fee-for-service costs. The MMA mandatedthat for 2004, a fourth amount of 100 percent of projected fee-for-service Medicare (withadjustments to exclude direct medical education and include a VA/DOD adjustment) be added tothe payment methodology. For the years after 2004, the Secretary is required to recalculate 100percent of the fee-for-service Medicare costs at least every 3 years, so at least every three yearsthe MA capitation rate will be the higher of the fee-for-service rate and the minimum increaserate.

In addition, for 2004 and succeeding years, the MMA modifies the minimum increase (2 percentin 2003) to be the larger of:

1. 102 percent of the previous year’s rate, or2. An increase by the Medicare growth percentage over the previous year’s rate, with no

adjustment to this rate for over- or under-projection for years before 2004.

Medicare Advantage plans may charge beneficiaries monthly premiums and other charges, suchas copayments, for Medicare-covered services. A plan’s average monthly charge for premiums

and copayments may not exceed the national average fee-for-service beneficiary liability. For2004, that amount is $113.07 per month. Prior to 2006, Medicare Advantage plans may also offeradditional benefits such as prescription drugs or a reduced monthly premium, and plans also maycharge premiums and other copayments for certain extra benefits. Beginning in 2006, Medicarebeneficiaries will have a prescription drug benefit, and most MA plans must offer that benefit aspart of the basic plan.

Because the new payment methodology has reduced the rate of growth in health plan paymentsand the BBA imposed substantial new regulatory requirements, some health plans with Medicarerisk contracts have chosen to leave the Medicare program or to reduce their service areas.

In 2000, CMS implemented a risk-adjustment methodology that will account for variations in percapita costs based on health status. This risk adjustment will provide higher compensation forhealth plans with higher-risk enrollment, but may have a negative impact on payments to healthplans with relatively healthy membership.

The Academy’s Health Plan Finance and Risk Management provides a more thorough discussionof Medicare financial arrangements. Because the BBA is a large and comprehensive document,discussion of all its provisions is beyond the scope of the AHM courses. Health plans shouldfamiliarize themselves with the provisions of the BBA that may have an impact on theiroperations, as well as the revisions to these provisions.

Other CMS Regulations Regarding Providers

In addition to the regulations we have already discussed, CMS has adopted numerous otherregulations that govern the relationship between Medicare+Choice health plans and their networkproviders. We will highlight the most significant of these regulations in the following sections.

Credentialing of Providers

CMS Medicare+Choice regulations prescribe the manner in which health plans must ensure thatnetwork providers are properly credentialed. When credentialing physicians and other healthcareprofessionals, a health plan must obtain a signed and dated application from each providerattesting that the information in the application is correct and complete. The health plan mustverify that the provider is properly licensed and eligible to participate in the Medicare programand must verify the applicant’s disciplinary status. In some cases, the health plan may be requiredto make a site visit to verify the information in the provider’s application. Of course, health plansshould also perform their usual credentialing activities to assure that the provider meets the healthplan’s network standards.

Health plans must also recredential Medicare healthcare providers at least every two years.During recredentialing, the health plan is required to update the material received during theinitial credentialing process and to consider additional indicators of the provider’s performance.These performance indicators may be collected through quality assurance programs, utilizationmanagement systems, enrollee satisfaction surveys, or other activities of the health plan.

Different requirements apply to credentialing providers who are not healthcare professionals—social workers or personal care assistants, for example. For these providers, the health plan mustensure that each provider is licensed or credentialed to operate in the state and is in compliance

with all federal and state requirements. The health plan must also ensure that each provider iseither properly accredited or meets the standards established by the health plan.

Provider Participation Rights

CMS Medicare+Choice regulations specify the procedure a health plan must use when it adoptsor changes the rules governing the participation of healthcare providers in the health plan’snetwork. Under these regulations, health plans must give providers written notice of any rules forparticipation, including the terms for payment, utilization review, quality improvement programs,credentialing, data reporting, confidentiality, and the guidelines for furnishing particular services.Health plans must also give providers written notice of any material changes in these rules beforethe changes are put into effect. When a health plan makes a decision under these rules that isadverse to a provider, the health plan must give the provider written notice of the decision andallow the provider an opportunity to appeal it.

A Medicare+Choice health plan must also consult with network physicians and other healthcareprofessionals about the health plan’s medical policies, quality management program, and medicalmanagement procedures. The purpose of these consultations is to ensure that the health plan’spractice guidelines and utilization management guidelines

are based on reasonable medical evidence or a consensus of healthcare professionals inthe relevant field

consider the needs of the enrollees are periodically reviewed and updated

As this course manual was completed, CMS had agreed to adopt a narrower interpretation of therules pertaining to notification and appeals. As with all federal and state laws and regulations,health plans must be aware of current legislation and interpretations.

Provider-Patient Communications

CMS regulations prohibit health plans from using so-called gag clauses in their contracts withnetwork healthcare providers. The term gag clause is sometimes applied to clauses in health planprovider contracts that restrict providers from discussing alternative courses of treatment withtheir patients. Although these clauses are rarely, if ever, actually used in health plan-providercontracts, they have received some attention in the media in recent years.

Under CMS regulations, a health plan may not restrict network healthcare providers fromadvising patients or advocating on behalf of patients about

patients’ health status, medical care, or treatment options, including alternative treatmentsthat may be self-administered

the risks, benefits, and consequences of treatment or nontreatment the opportunity to refuse treatment and to express preferences about future treatment

decisions, even if the plan does not provide coverage for the treatment

Conscience Protection Exception

The CMS regulation prohibiting the use of so-called gag clauses in provider contracts alsocontains a provision known as the conscience protection exception. Under the conscienceprotection exception, a Medicare health plan is not required to cover or furnish a particularcounseling or referral service if the health plan objects to providing that service on moral orreligious grounds. For example, Catholic health plans may exempt coverage of abortions foryounger, disabled Medicare beneficiaries. To obtain the benefit of this exception, an health planmust provide written information about its policies concerning the counseling or referral serviceto CMS and to prospective enrollees before or during their enrollment. A health plan may obtainthe benefits of this exception with respect to current enrollees if it submits the proposed change inpolicy to CMS for review and provides enrollees with advance notice of the policy change.

Financial Relationships with Providers

The CMS Medicare health plan regulations many aspects of the financial relationships betweenhealth plans and their providers. For example, any contract between a Medicare health plan andits providers must contain a provision assuring that the health plan will pay the providers withinthe time period agreed upon by both the health plan and the provider. In addition, Medicare plansare required to pay non-network providers in accordance with the prompt payment provisions ofMedicare law, which require that 95% of clean claims be paid within 30 days. Further, non-network providers are required to accept the Medicare-allowed amount as payment in full fromthe health plan. If the health plan fails to make payment to non-network providers according to itsprompt payment obligations, CMS may pay the providers directly. CMS will then reduce theamount it pays to the health plan to reflect the direct payments to the provider and anyadministrative costs incurred in making those payments. Health plans must also pay interest, at arate specified annually, on the payable amounts of all clean claims that are not paid to theprovider within 30 days of receipt by the health plan.

A Medicare health plan must also ensure that enrollees are protected from any liability for feesthat are the legal obligation of the health plan entity. To accomplish this, any contract between ahealth plan and its providers must contain a hold-harmless clause that prohibits the providersfrom billing enrollees for services the health plan is legally obligated to pay for.

Prohibition Against Indemnification by Providers

Under CMS regulations, health plans may not include in their contracts with providers arequirement that providers indemnify the health plan for damages arising as a result of the healthplan’s denial of medically necessary care, and health plans may not impose such requirements onproviders by any other means. The CMS prohibition against indemnification by providers meansthat a health plan may not require providers to compensate the health plan for any monetaryliability the health plan incurs because the health plan denied medically necessary care to anenrollee.

Denial, Suspension, and Termination of Provider Contracts

CMS regulations impose procedural requirements on a health plan’s denial, suspension, ortermination of contracts with network healthcare providers. For example, a health plan thatdenies, suspends, or terminates a contract with such a provider is required to give the providerwritten notice of

the reasons for the action the standards and profiling data the health plan used to evaluate the provider the number and mix of healthcare providers the health plan needs the provider’s right to appeal the action, including the process for requesting a hearing

If a health plan wants to terminate a contract with a healthcare provider without cause, the healthplan is required to give the provider at least 60 days written notice. A provider who wants toterminate a contract with the health plan without cause must also give the health plan 60 dayswritten notice.

If a health plan suspends or terminates a contract with a healthcare provider because ofdeficiencies in the provider’s quality of care, the health plan must give written notice of thataction to the appropriate licensing or disciplinary authorities.

Penalties for Violating CMS Regulations

CMS, the Office of the Inspector General (OIG), and the Department of Justice (DOJ) mayimpose various penalties against health plans that violate the regulations governing health planscontracting with Medicare. CMS has the authority to impose a variety of intermediate sanctions.For example, CMS may require the health plan to suspend its marketing activities and refrainfrom enrolling any new Medicare beneficiaries and may also provide for the suspension ofpayments to the health plan for Medicare beneficiaries who do enroll. These intermediatesanctions remain in effect until CMS is satisfied that the violations have been corrected and arenot likely to recur. CMS’s intermediate sanctions also include civil monetary penalties of$15,000 to $100,000 per determination of a violation or $10,000 per week, depending on the typeof violation. Some examples of the violations that can result in civil money penalties orintermediate sanctions are listed in Figure 7A-5.

Penalties for Violating CMS Regulations

CMS also has broad authority to terminate a health plan’s contract if the health plan:

fails substantially to carry out the terms of its contract with CMS fails to provide certain required data to CMS experiences severe financial difficulties violates certain Medicare requirements

In general, before terminating a contract, CMS must give the health plan a reasonable opportunityto correct the deficiencies that are grounds for the proposed termination. However, CMS mayimmediately terminate a plan with financial difficulties if the plan’s financial status poses aserious risk to the health of its enrollees.

The BBA provides that the Medicare+Choice standards will preempt any inconsistent state lawsregarding benefit requirements, inclusion or treatment of providers, or coverage determinations asthey apply to Medicare health plans.

The health plan’s network contracting staff should be familiar with state laws, as well as federallaws.

Accommodating the Needs of Medicare Enrollees

Up to now, our discussion has focused on the CMS regulatory requirements that govern the use ofMedicare health plans' provider networks. These requirements are important considerations forhealth plans because, as we discussed earlier, health plans that violate the requirements may facecivil money penalties and intermediate sanctions. health plans should also be aware of otherconsiderations that may affect the success of Medicare networks. Some of these considerationsarise from the heightened medical needs of Medicare patients, while others derive from thesepatients’ special preferences and expectations. As the number of Medicare health plans increase,Medicare patients will have more health plans from which to choose. A health plan thatestablishes a reputation for providing a high quality of care that meets the special needs ofMedicare patients will find it easier to enroll new members and retain members after they enroll.

Special Medical Needs of Medicare Patients

Medicare enrollees typically utilize more healthcare services, including office visits, than doyounger members of commercial healthcare plans.

Office visits by Medicare enrollees also last longer than those of younger, healthier patients,because elderly and disabled patients often have more health problems to discuss and morequestions to ask. In order to allow physicians an adequate amount of time to spend with Medicarepatients, a health plan may be required to reduce the size of each physician’s patient panel and tocontract with more network providers than would be necessary to serve the same number ofyounger, healthier enrollees. For example, a physician serving enrollees in a commercialhealthcare plan may often have as many as 2,000 to 3,000 patients; in Medicare health plans,physicians typically are able to care for only 500 to 1,000 patients.8

Another challenge facing health plans in establishing networks to serve Medicare patients is thatMedicare patients are more likely to be disabled than are younger patients.

Health plans use disease management strategies more vigorously with the disabled, andcoordinate with community resources and programs. Health plans implement risk assessmentsand health status assessments and assign case managers to provide constant outreach andeducation to both the members and their families.

Preferences and Expectations of Medicare Patients

In addition to the medical needs we just discussed, Medicare patients often have differentpreferences and expectations of their healthcare plans than do the typically younger members ofcommercial healthcare plans. Health plans that are responsive to these preferences andexpectations when they design their Medicare provider networks may find it easier to recruit andretain plan members. As with other health plan products, the costs of recruiting new planmembers is high, and profitability can be jeopardized if large numbers of enrollees leave the planbecause it does not meet their expectations.

Medicare patients typically do not want to travel long distances to obtain healthcare, for example,and they often prefer going to smaller facilities where they can receive more personal attention.Health plans can respond to these preferences by ensuring that network facilities are located inareas that are convenient to Medicare patients and by contracting with providers who havesmaller facilities. Elderly patients also expect to be treated in a respectful, non-patronizingmanner by providers and their staffs and to receive a high level of customer service. Health planscan meet these expectations by selecting providers who provide the appropriate level of serviceand by offering providers additional training in customer service and the needs of elderly patients.

Health plans can also help meet the needs of Medicare enrollees by ensuring that networkfacilities are easily accessible to elderly patients, many of whom are disabled or frail. Some waysof increasing accessibility for the elderly are listed in Figure 7A-6.

The Future of the Medicare Program

The future of the Medicare program is being considered by the National Bipartism Commissionon the Future of Medicare, which was established by the Balanced Budget Act and consists ofRepublican and Democratic lawmakers, health industry executives, academic health policyexperts, and a Medicare caseworker for a Republican senator. The commission has formed taskforces to examine the role of Medicare in America’s healthcare system and to study the currentsystem, as well as possible new program designs. The commission’s report was initiallyscheduled to be presented to Congress in March 1999.

Endnotes

1. Health Care Financing Administration, “Medicare Health Plan Terminology,”http://www.medicare.gov/managedcare/ glossary.html (25 September 1998).

2. W. Leutz, M.R. Geenlick, and J. Capitman, “Integrating Acute and Long-Term Care,”Health Affairs (fall 1994): 58.

3. Carl Peterson, “Social HMOs: Making Seniors’ Lives Better at Home,” Healthplan(March/April 1998): 45.

4. Health Care Financing Administration, “Medicare,” ASPE’s Disabilities and ManagedCare Website, 27 July 1998, http:// managedcare.hhs.gov/program_descriptions/medicare/index.html (21 September 1998).

5. Gail A. Jensen and Robert J. Morlock, “Why Medical Savings Accounts Deserve aCloser Look,” Journal of American Health Policy (May/June 1994): 14.

6. Health Care Financing Administration, ”Project Activities: Quality AssessmentPerformance Improvement (QAPI),” Quality of Care Information, 28 September 1998,http://www.hcfa.gov/quality/docs/ qismc-in.htm (29 November 1998).

7. Roger S. Taylor and Craig Schub, “Medicare Risk Plans: The Health Plan’s View,” inThe Managed Health Care Handbook, ed. Peter R. Kongstvedt, M.D., 3rd ed.(Gaithersburg, MD: Aspen Publishers, Inc., 1996), 751.

8. Gloria Gerrity, “When Is a Group Practice Ready for Medicare Risk Contracting?”Healthcare Financial Management (May 1998): 63.

AHM Network Management: Strategies for Contracting with Hospitals andSubacute Care Facilities

Objectives

After completing this lesson you should be able to:

Explain why health plans sometimes contract with centers of excellence List issues that a health plan considers when selecting a center of excellence List and describe methods that health plans commonly use to reimburse hospitals for

inpatient and outpatient services Define ambulatory payment classifications (APCs) and compare this system to diagnosis-

related groups (DRGs) Explain why health plans contract with facilities for subacute care and describe the main

criteria for selecting subacute care providers

Introduction

Health plans that offer comprehensive healthcare services include one or more hospitals in theirprovider networks. Many health plans also contract with other types of healthcare facilities,including subacute care facilities, rehabilitation centers, and skilled nursing facilities (SNFs), sothat plan members can receive care in the setting that is most appropriate to their needs. Becausehospitals and other healthcare facilities provide a large proportion of essential healthcare services,contracting with these facilities is an important aspect of network development.

This lesson begins with a discussion of strategies for contracting with hospitals for inpatient andoutpatient services, including the use of centers of excellence in a provider network. We alsodescribe considerations for contracting for emergency care. In the second part of the lesson, weexplore the need for subacute care providers in the network, and discuss options for reimbursingsubacute care and criteria for selecting subacute care providers.

Contracting with Hospitals

The process for adding hospitals to the provider network follows the same basic pattern ascontracting with practitioners: first, the selection of providers according to the needs of the healthplan’s members; second, negotiation; and third, formalization of the contract between the planand the provider. The time required to complete the selection, negotiation, and contracting withhospitals may be longer than with practitioners because of the volume and scope of servicestypically provided by hospitals.

In a previous lesson, we described some general criteria that a health plan considers whenselecting hospitals for its provider network. You will recall the following primary considerationsfor hospital selection:

Location and accessibility to the health plan’s members. How far is the hospital frommembers’ homes and workplaces (in miles and in driving time)? Are there anygeographic barriers or other factors that might limit accessibility?

Types and quality of services offered. How do the types of services offered by thehospital compare to the services covered by the benefit plan? Does the hospital’s recordfor quality services meet the standards of the health plan and its accrediting body?

Accreditation status according to the Joint Commission on Accreditation of HealthcareOrganizations (JCAHO) or other nationally recognized accrediting body. What is thehospital’s current accreditation status? What quality problems were identified during thehospital’s last review for accreditation and how have those problems been addressed?

Utilization level and cost of services. How do the hospital’s utilization of resources andcosts for services compare to the health plan’s standards? To other area hospitals?

The overall reputation of the institution. How is the hospital viewed by consumers andpurchasers in the geographic area? By area providers?

The health plan also considers the hospital’s affiliations with other providers in the community.For example, how many of the network’s physicians have admitting privileges or privileges toperform procedures at the hospital? Does the hospital have arrangements with another facility forthe provision of services not available at the hospital? Does the hospital belong to a physician-hospital organization or other provider organization that contracts on behalf of the hospital? Inaddition, if the health plan has or is contemplating Medicare, Medicaid, or workers’compensation products, the health plan examines the hospital’s capabilities to serve thesepopulations.

In order to ensure that its members have access to appropriate, high-quality acute care services, ahealth plan may also contract with one or more centers of excellence.

Centers of Excellence as Network Providers

A center of excellence is a healthcare institution that, because of its combination of clinicalexpertise, equipment, and other resources, has the ability to provide specific medical proceduresor treatments more effectively and efficiently than other providers in the same region.1 A centerof excellence typically focuses on complex, costly procedures and conditions such as organtransplants, bone marrow transplants, open heart surgery, cancer, neurological diseases andinjuries, trauma, and high-risk obstetrical cases. The center of excellence may be located within ahospital or in a separate facility. Centers of excellence are often affiliated with teaching hospitals.The number of centers of excellence in a network depends on the size and geographic scope ofthe health plan.

The perceived value of a center of excellence is based on the relationship between the center’sclinical outcomes and the provider’s level of experience with a particular disease or condition.Multiple studies have shown that, for many surgical procedures and medical diagnoses, betteroutcomes occur when a provider treats a large volume of patients who have the specificcondition. For example, in a study conducted for the Office of Technology Assessment,researchers validated the volume-outcomes relationship for a variety of procedures, includingappendectomies, cardiac catheterization, hysterectomy, coronary artery bypass graft surgery, andtotal hip replacements, as well as for medical diagnoses including acute myocardial infarction andnewborn diseases. 2 One explanation for the improved outcomes is that increased experience witha medical problem results in superior knowledge and skills for a facility’s clinical staff. Inaddition, a provider that regularly treats a certain condition is more likely to have appropriateequipment available. For instance, a center of excellence for neurological conditions is morelikely to have sophisticated lasers for brain surgery, such as a gamma knife, than are otherfacilities.

When a health plan contracts with a center of excellence for the evaluation and treatment of aselected condition, the health plan usually refers all plan members who suffer from that problemto the center of excellence. The health plan may offer richer benefits to members who use thepreferred center rather than another provider.3

Before selecting a center of excellence, the health plan evaluates the center for evidence ofoutstanding quality of care and efficient utilization of resources for the given procedures orconditions. The center of excellence makes available to the health plan documentation of itsquality, utilization, and research activities, and representatives from the health plan visit thecenter to further assess its facilities, equipment, and staff. When evaluating quality andutilization, the health plan should consider these questions.

Does the center of excellence have the appropriate equipment on hand and an adequatenumber of well trained, experienced clinical staff members?

How many procedures have been performed or how many patients have been treated inthe past year, and over the past several years?

What is the center’s track record for successful treatment of the condition? How does thisrecord compare to other regional providers and to other centers of excellence?

How efficiently does the center use its resources? How do its costs compare to the costsof other providers with similar quality of care?

Will the center work with a member’s PCP to coordinate care before and after treatmentat the center of excellence?

Does the center seek to advance knowledge and improve treatment processes for thedisease?

How accessible is the center’s location to plan members? If the center is not in the healthplan’s service area, how feasible is it to transport members to the center for care?4

Does the center offer reasonable accommodations for plan members when plan membersdo not require admission to an acute care unit?

What accommodations does the center offer for family members who accompany thepatient to the center?

The health plan also checks healthcare industry report cards for information about the center’sperformance. Because members’ needs vary greatly according to their medical conditions, eachhealth plan establishes standards for its centers of excellence according to the particular medicalfocus of the center. For example, Figure 6B-1 lists some quality requirements for a center ofexcellence that performs heart transplants.

The services of a center of excellence may be included in a health plan’s contractual arrangementwith a hospital, or the health plan may contract directly with the center of excellence. Contractswith centers of excellence are typically renewed annually, often on an automatic basis, assumingthat the center continues to meet the plan’s quality standards. The payment methods for centers ofexcellence vary among health plans. The reimbursement approaches include case rates such asglobal fees and diagnose is related groups (DRGs), per diem payment, and discounted fee-for-service (DFFS) payment.5

After the health plan identifies a hospital as an appropriate addition to its network, the health planand the hospital prepare for contract negotiations. In many instances, the executive director,finance director, and medical director from both parties participate in the negotiation.

The health plan and the hospital gather information about each other in order to determine thebenefits and drawbacks of the proposed affiliation. In addition to comparing quality andutilization policies and procedures, the health plan and the hospital consider the financial effectsof the contractual relationship.

The factors that influence the financial impact of the contract include the hospital’s capacity toprovide inpatient and outpatient services, as well as the costs and current level of usage of theseservices. Both parties also estimate the volume of plan members (inpatient and outpatient) and theresulting revenue the health plan can shift to or away from the facility. The health plan and thehospital can then develop proposals for reimbursement arrangements.6

In less mature health plan markets, where hospitals are still operating at high profit margins, ahealth plan may be able to negotiate significant discounts on charges, especially if the hospitalhas unused service capacity. The health plan’s negotiating position is even stronger if the plan candeliver a significant number of new patients to the hospital. A new health plan, especially a smallone that cannot immediately deliver large numbers of new patients, will probably receive lessfavorable terms from hospitals. If the market is more mature in terms of managed care, hospitalshave probably already reduced their operating margins and will be unable to offer deep discounts.In this case, the health plan and the hospital may both want to use another type of reimbursementarrangement, such as per diems, case rates, or capitation.7 The following section provides furtherdetails on the reimbursement methods that health plans typically use with hospitals.

Reimbursement Options for Hospitals

The hospitals in a provider network typically provide both inpatient and outpatient services to theplan’s members. Health plans often use different approaches to reimburse a hospital for inpatientand ambulatory services.

Reimbursement for Inpatient Services

The most common methods health plans use to reimburse hospitals for inpatient services are

discounted fee-for-service (DFFS) payments case rates per diem fees capitation

Discounted Fee-for-Service Payments

Initially, hospitals and other inpatient facilities that participated in health plans were paid on astraight FFS basis. As contracting for inpatient services became more competitive, health plansbegan to offer DFFS payments. DFFS payment systems, or discount on charges arrangements,apply a negotiated discount to all inpatient charges submitted by a hospital. The hospital agrees toaccept the discounted payment as payment in full for services rendered.

As with provider discounts, hospital discounts can take the form of either a straight discount oncharges or a sliding scale discount. Under a straight discount on charges arrangement, a hospitalreceives the same percentage payment for all charges. Under a sliding scale discount on chargesarrangement, the percentage payment varies according to the total volume of services delivered.For example, a health plan might negotiate a 10% discount for 0 to 100 total bed days, a 20%discount for 101 to 200 bed days, and increasing discounts for additional bed days up to aspecified maximum. Straight discount on charges arrangements and sliding scale discounts aremost commonly used in markets with low health plan penetration. They are only infrequentlyused in mature health plan markets.

DFFS payments have the advantage of being easy to calculate. Discounts, however, do notalways result in cost savings. For example, unless the contract specifically limits cost increases,hospitals can increase reimbursement by simply increasing their charges. In addition, reductionsin inpatient costs are often offset by increasing costs for outpatient services. Discounts also do notdiscourage overutilization.

Case Rates

Like case rates for physicians, case rates for hospitals establish a fixed fee for all servicesassociated with a course of treatment. The case rates used to reimburse hospitals, however, aretypically based on diagnosis codes, such as diagnosisrelated groups (DRGs), rather than onprocedure codes. As you recall from Compensation Arrangements Between Health Plans andProviders, DRG systems classify patients into groups on the basis of such factors as primary andsecondary diagnoses, surgery and other procedures, complications, age, and gender. Payment isbased on the average expected use of hospital resources for a specific DRG in a specificgeographical area. Case rates can be limited to hospital inpatient services or they can be bundledto include some or all physicians’ services delivered during a hospital inpatient stay.

Because case rates are based on diagnosis rather than on the intensity of services delivered orlength of stay, hospitals have an incentive to manage utilization and expedite patients’ discharge.On the other hand, case rates do not provide hospitals with an incentive to reduce the number ofadmissions. As a result, case rate systems can put hospitals at odds with physicians whosereimbursement often depends on their success in keeping patients out of the hospital.

Per Diem Payments

Like case rates for physicians, case rates for hospitals establish a fixed fee for all servicesassociated with a course of treatment. The case rates used to reimburse hospitals, however, aretypically based on diagnosis codes, such as diagnose is related groups (DRGs), rather than onprocedure codes. As you recall from Compensation Arrangements Between Health Plans andProviders, DRG systems classify patients into groups on the basis of such factors as primary andsecondary diagnoses, surgery and other procedures, complications, age, and gender. Payment isbased on the average expected use of hospital resources for a specific DRG in a specificgeographical area. Case rates can be limited to hospital inpatient services or they can be bundledto include some or all physicians’ services delivered during a hospital inpatient stay.

Because case rates are based on diagnosis rather than on the intensity of services delivered orlength of stay, hospitals have an incentive to manage utilization and expedite patients’ discharge.On the other hand, case rates do not provide hospitals with an incentive to reduce the number ofadmissions. As a result, case rate systems can put hospitals at odds with physicians whosereimbursement often depends on their success in keeping patients out of the hospital.

Straight Per Diem Payments

Under a straight per diem payment system, the hospital receives the same fee for each hospitalday, regardless of the number and costs of services delivered. The hospital benefits if actual costsare less than the negotiated fee. If actual costs are higher than the negotiated fee, the hospitalmust absorb the loss.Stratified Per Diem Payments

A stratified per diem payment system pays different fees for different types of services. Forexample, a hospital receiving stratified per diem payments might receive one fee for a medical-surgical day, another fee for an intensive care day, and another fee for an obstetric day. If a planmember hospitalized for a heart attack spends one day in the hospital’s intensive care unit andtwo days in a medical-surgical unit, the hospital would receive one intensive care per diem andtwo medical-surgical per diems from the health plan.

Differential Per Diem Payments

Hospitals typically incur higher costs during the first day a member is hospitalized than they incurfor subsequent days. For example, the first day of a surgical case might include costs forpreoperative testing, operating room supplies and equipment, and surgical team fees. Subsequentdays might include only nurses’ fees, supplies, and room and board. A differential per diempayment system, or “front-loaded” per diem payment system, accounts for differences in dailyutilization by paying one rate for the first hospital day and a lower rate for subsequent days. Forexample, instead of receiving a straight $800 per diem payment, a hospital might receive $1,000for the first day a member is hospitalized and $600 per day for any additional days.

Sliding Scale Per Diem Payments

A sliding scale per diem payment system is based on the total volume of member hospital beddays for a given period. The health plan first establishes a scale of per diem payments. As withother sliding scale methods, the per diem rate decreases as the number of bed days increases. Forexample, a health plan might agree to pay a hospital $800 per day for 0 to 100 member bed days,

$700 per day for 101 to 200 member bed days, and so forth. The health plan then estimates theexpected number of bed days that members will use during the year and uses the correspondingscaled per diem rate to make periodic payments to the hospital. At the end of the year, or atspecified intervals (e.g., monthly, quarterly), the health plan calculates the actual number ofmember bed days used and adjusts payment to the hospital accordingly.

Straight per diems, stratified per diems, differential per diems, and scaled per diems all tend toencourage utilization management. Stratified, differential, and scaled per diems also allow thehealth plan to more accurately allocate funds for inpatient care. However, none of these paymentsystems provides hospitals with an incentive to reduce the number of hospital admissions or thelength of stay for inpatient care.

Capitation

Under capitation arrangements, hospitals receive a pre-established amount per member per monthfor providing inpatient services to plan members. Payments may be adjusted to account for ageand gender differences in the member population, but they do not vary according to actualutilization or total volume of services. All capitation arrangements require the contractinghospital to assume financial risk for providing inpatient services. The amount of risk the hospitalmust assume depends on whether the contract is established on a full-risk, shared-risk, or partial-risk basis.

Full-risk Capitation A full-risk capitation arrangement requires the hospital to assumeall financial risk for providing contracted services. The hospital is also at full risk forservices delivered by subcontracted providers. If no risk pool has been established or thefunds in the risk pool are not sufficient to cover the costs of subcontracted services, thehospital is required to pay for those services out of its own operating funds.

Shared-risk Capitation In a shared-risk capitation arrangement, a health plan typicallyplaces a capitated amount for inpatient services in a risk pool and then reimburses thehospital out of funds in the pool. If the hospital subcontracts with additional providers,those providers are also reimbursed out of funds in the risk pool. Actual payments tohospitals and subcontractors can be made on a per diem basis or any other basis. Anyfunds remaining in the pool after all payments have been made are shared by the hospitaland the health plan. Subcontracted providers may also share in risk pool surpluses.

In most shared-risk arrangements, the hospital shares only upside risks. That is, thehospital can receive additional reimbursement if utilization is lower than expected, but itdoes not have to pay money back to the health plan if utilization exceeds the expectedlevel.

Partial-risk CapitationA partial-risk capitation arrangement requires a hospital to shareboth upside and downside risks. In other words, if the costs for inpatient services arelower than expected, the hospital shares the risk pool surplus with the health plan. If costsare higher than expected, the hospital is required to pay money back to the health plan.Unlike a full-risk arrangement however, a partial-risk arrangement does not require thehospital to pay any amounts beyond those associated with the risk pool.

Capitation of inpatient hospital services offers a number of benefits. First, it spreads the riskassociated with providing inpatient services to those parties who actually deliver the services.Second, capitation reduces costs by making hospitals active partners in utilization management.Finally, by offering similar rather than conflicting incentives, capitation allows hospitals and

physicians to focus their efforts on a common goal—improving the quality and costeffectivenessof patient care.

Reimbursement for Outpatient Care

Health plans use many of the same methods to reimburse hospitals for outpatient services thatthey use to reimburse inpatient services. For example, many health plans negotiate DFFSpayments or some type of package pricing, such as case rates, for specific treatments. Thesemethods can be used alone or in combination with other methods. As an alternative, some plansbase reimbursement for outpatient services on ambulatory patient classifications.

Reimbursement According to Ambulatory Payment Classifications

Ambulatory payment classifications (APCs), also known as ambulatory patient groups (APGs),are a patient classification system designed to explain to the payor the amount and type ofmedical resources used during an outpatient visit to a healthcare facility. The patients in a specificambulatory payment classification have similar clinical characteristics and resource usagepatterns.8 That is, the patients in an APC have similar diagnoses and undergo similar tests andtreatments. Under the Balanced Budget Act (BBA) of 1997, health plans will be required to use aprospective payment system for outpatient services delivered by healthcare facilities to Medicarebeneficiaries. The Centers for Medicare and Medicaid Services (CMS) funded the developmentof APGs (now called APCs) for use as an outpatient prospective payment system (OPPS).However, the APC system is designed for the entire population, not just Medicare beneficiaries.9

The intended purposes of requiring a prospective, fixed-fee payment system are to:

control the growth of costs for outpatient care streamline the administrative processes for payment encourage efficient use of outpatient resources reduce or even eliminate unnecessary services lower out-of-pocket costs to Medicare beneficiaries by decreasing the percentage of costs

that they pay over time10

APCs and DRGs

APCs bear some resemblance to DRGs. Both systems provide a method of calculating theappropriate reimbursement for a facility and do not include reimbursement for professional fees.DRGs and APCs both assign a weight to each patient category, based on the expected resourceuse. The assigned weight multiplied by a specific facility’s payment rate is the basis for the levelof payment that is due the facility.11 A discussion of how Medicare and other payors determineaverage expected resource use for specific categories and calculate facility rates is beyond thescope of this course.

There are, however, significant differences between DRGs and APCs. One of the most obviousdifferences is that DRGs were designed as a payment system for inpatient services, while APCsare for care delivered in outpatient settings. In addition, the primary variable for DRGclassification is the patient’s diagnosis, and the DRG classification applies to an entire hospitalstay for the patient. For APCs, the critical variable is the procedure or other treatment that isperformed during a single visit. The DRG system assigns each patient to a single DRGclassification for a hospital stay, but the APC system allows for the assignment of multiple APCsfor an outpatient visit. Further, DRG classification is based mainly on diagnostic and procedural

codes from the International Classification of Diseases, Ninth Revision, Clinical Modification(ICD-9- CM), while APCs incorporate ICD-9-CM diagnostic codes with Physicians’ CurrentProcedural Terminology (CPT-4) codes. The ICD-9-CM and CPT-4 codes used for APCs aretaken from the UB-92 hospital claim form.12

There are four types of APCs, as presented in Figure 6B-2.

Certain services that contribute to the cost of an APC will be packaged into the APC with whichthe services were delivered, and no separate payment will be made. Packaged services includeoperating room, recovery room, and anesthesia services, medical/surgical supplies,pharmaceuticals (except for chemotherapeutic agents), observation, blood, intraocular lenses,casts and splints, donor tissue, and various incidental services.

The BBA requires the OPPS to include most providers and services; however, the BBA excludescertain rural hospitals from the OPPS. Several services will be excluded from OPPS and paidunder another prospective method. Medicare will pay for laboratory, ambulance, speechpathology, physical therapy, and occupational therapy services, durable medical equipment, andprosthetics and orthotics according to a fee schedule. Also, Medicare has established a compositerate for end-stage renal disease services and a national rate for screening mammography.

Hospital Reimbursement and Long-Term Contracting

Since hospital inpatient and outpatient services account for a large proportion of total healthcarecosts, the reimbursement arrangements between a health plan and a hospital typically have asignificant impact on the financial success of both parties. In many cases, health plans andhospitals prefer to contract for at least two years in order to lock in a reimbursement rate for alonger period of time and to control the costs associated with creating new, different contractualagreements.

Insight 6B-1 discusses issues that health plans and hospitals may consider when contemplatinglong-term provider contracts. Although this insight focuses on HMO-hospital contracts, thisinformation may also apply to other types of health plans that contract with hospitals on acapitation basis. In this insight, the medical loss ratio refers to an index that compares the costs ofdelivering health benefits with the revenues received by the plan. The medical loss ratio iscalculated by dividing total medical expenses by total revenue. 13 For example, if a health plan’stotal medical expenses for a certain time period are $450,000 and total revenues for the sameperiod are $500,000, the medical loss ratio for that period is 0.90 or 90% ($450,000 ÷ $500,000).

Contracting for Emergency Care

Contracts between health plans and hospitals usually include emergency services, but managingmember access to emergency care and provider payment for emergency services is oftenchallenging for health plans. Plan members often visit emergency departments for care that wouldbe more appropriately delivered in another setting. In some cases, members seek care from anemergency department rather than contacting their primary care provider (PCP) because they donot know the severity of the medical condition and fear that the problem may be more seriousthan it actually is. Other instances of unnecessary emergency department use occur when amember is unable to contact the PCP for advice on the illness or injury or the member simplyforgets the plan’s instructions to contact the PCP for non-emergency care.

When health plan members without true medical emergencies come to the emergency departmentfor care, providers are often uncertain about whether to treat them and whether the health planwill pay for treatment in the emergency care setting. Although some health plans have developedlists of procedures that are automatically approved for payment when performed in an emergencydepartment, most health plan contracts do not attempt to list all emergency services that arecovered under the benefit plan. Instead, contracts usually include a provision that describesemergency care. The provision is often based on the prudent layperson standard.

The contract should also describe other aspects of emergency care, such as the health plan’sauthorization procedures, responsibilities of the PCP, and payment arrangements. ***The linkedsegment on contracting for emergency care is excerpted from the chapter titled “Ambulatory andAncillary Care Contracting” in Managed Care Contracting, published by Aspen Publications.†

***PCP Responsibilities

Plans that require members to select a PCP usually obligate the PCP or affiliated medical group toprovide, direct, or authorize a member’s emergency care. The PCP or designee is contractuallyobligated to be on call 24 hours a day, 7 days a week, to assist members needing emergencyservices. The health plan may stipulate under what conditions a PCP should refer members for

emergency treatment and often monitors emergency room referral patterns to determine if thePCP is in compliance with plan procedures.

Care Outside the Service Area

If a member is injured or becomes ill while temporarily outside of the service area, the health planwill pay nonparticipating providers reasonable charges for emergency services rendered if theyare required because of unforeseen illness or injury. Except in rare instances, the health plan doesnot pay for follow-up or continuing treatment provided by nonplan providers. Payment forcovered services outside the service area is limited to treatment that is necessary before themember can reasonably be transported to a participating hospital or returned to the care of thePCP.

Special Payment Provisions

Providers should also understand the health plan’s payment policies to ensure appropriatepayment. Many health plan contracts include a provision that precludes payment for emergencycare services rendered if the member is admitted immediately following an emergency room visit.Obstetrical observation rates are negotiated to compensate the provider for services provided toan obstetrical patient when she presents to the hospital with false labor and is monitored for ashort time and not admitted. Observation rates can be reimbursed at a discount off billed charges,a single flat rate, or an hourly rate.

Compensation Arrangements

Most financial arrangements between health plans and emergency departments are structuredthrough the health plan’s contract with the hospital. They may include both the technical(facilities and equipment) and professional component of services rendered. Depending on therelationship between the hospital and its emergency care providers, health plans may negotiateseparate contracts with emergency care physicians, such as anesthesiologists or trauma surgeons.Payments for services rendered in the emergency room by participating primary or specialty careproviders are covered in the applicable contract with that provider.

Fee-for-ServiceReimbursement for emergency room services can be negotiated as a single discount off usual andcustomary (U&C) charges, such as a 20 percent discount per emergency room visit, or a discountwith a maximum allowable charge, such as a 20 percent discount up to a maximum dollar amountof $150 per visit. To reduce the high costs associated with emergency care and to increase thepractice options available to members, many health plans contract with urgent or immediate carecenters for the treatment of nonemergency care such as fever, minor wounds, and nausea.

Flat RatesFlat rates pertaining to emergency care are structured as per visit fees, such as $150 per visit.Sliding scale rates based on U&C charges or diagnoses can also be structured. For example, thecontract might reimburse the provider $150 for U&C charges up to $200 and $275 for U&Ccharges up to $400. Flat rates for emergency care can include ancillary services, such aslaboratory and radiology, and can include payments for the hospital-based physicians, as well.

CapitationAs with other specialty care capitation contracts, capitated arrangements for emergency care

services must be structured to avoid the unintended effects of capitation, such as PCPsunnecessarily referring members for emergency treatment. As with any provider, the emergencycare provider contemplating a capitation contract must have available to him or her the basicinformation needed to evaluate a proposed capitation arrangement, including the services coveredunder the capitation rate, the member demographics, the covered benefits and plan designs, andthe historical utilization of the services. Other considerations are outlined in Figure 6B-3.

Adding Subacute Care to Provider Networks

In many cases, an acute care hospital is not the appropriate setting for patients in need of medicaland rehabilitative services. While some patients do not require the level of care and resourcestypically offered by acute care hospitals, they are often so ill or debilitated that home healthservices are inadequate. In order to provide these plan members with the appropriate care in themost cost-effective setting, health plans contract with healthcare facilities for subacute care.

According to the Joint Commission on Accreditation of Healthcare Organizations (JCAHO),subacute care is comprehensive inpatient care designed for someone who has had an acuteillness, injury, or exacerbation of a disease process. It is goal-oriented treatment renderedimmediately after, or instead of, acute hospitalization to treat one or more specific active complexmedical conditions or to administer one or more technically complex treatments, in the context ofa person’s underlying long term conditions and overall situation. Generally, the individual’scondition is such that the care does not depend heavily on high-technology monitoring orcomplex diagnostic procedures. Subacute care requires the coordinated services of aninterdisciplinary team, including physicians, nurses, and other relevant professional disciplineswho are trained and knowledgeable in assessing and managing these specific conditions and inperforming the necessary procedures. Subacute care is given as part of a specifically definedprogram, regardless of the site. Subacute care is generally more intensive than traditional nursingfacility care and less intensive than acute care. It requires frequent (daily to weekly) recurrentpatient assessment and review of the clinical course and treatment plan for a limited (several daysto several months) time period until a condition is stabilized or a predetermined treatment courseis completed.”14

Subacute Patients and Providers

Subacute patients are typically elderly; however, many younger patients are also candidates forsubacute care. Subacute patients vary greatly in terms of the types of disease or injury, treatmentsrequired, and length of stay.15 Figure 6B-4 lists some examples of patients for whom subacutecare may be an appropriate option. The most common settings for subacute care are

hospital-based subacute skilled nursing units subacute units in freestanding skilled nursing facilities (SNFs) long-term care hospitals16

Hospital-based subacute units are often used for hospital patients who still need daily medicalcare and monitoring as well as regular rehabilitative and, perhaps, respiratory therapy before theyare stable enough to be discharged home or to a separate nursing facility. For example, a strokepatient may spend several days or weeks in a hospital-based subacute unit after leaving thehospital’s acute care unit.17 When subacute care at hospitalbased units is more costly than similarcare at skilled nursing facilities or longterm care hospitals, health plans typically use the hospital-based units only for patients who need higher levels of care.

Subacute units at freestanding SNFs may be oriented toward patients who need rehabilitation,wound care, or intravenous therapy, but are otherwise medically stable. Another type of subacuteunit found at freestanding SNFs addresses the needs of patients who still require periodicmonitoring and rehabilitation, such as exercises to maintain range of motion for limbs, althoughtheir overall conditions are unlikely to improve. Examples of the latter type of case areventilatordependent patients and patients with progressive neurological disease. At longterm carehospitals, subacute units typically provide daily medical care on an extended basis for patientswith complex medical conditions, such as multiple organ system failure.18 For example, acomatose patient who requires ventilator support, nasogastric tube feeding, and multiplemedications each day might be a candidate for subacute care at a longterm hospital.

Reimbursement Options and Selection Criteria

To conclude this lesson, we present an excerpt from Kathleen Griffin’s chapter on “SubacuteCare and Health Plan” from The Managed Health Care Handbook, 3rd edition.† This excerptdescribes the various types of reimbursement that health plans may use for subacute care andsome guidelines for selecting a quality subacute care provider. In this excerpt, the phrase “theJoint Commission” refers to the JCAHO, and the word “payor” is spelled as “payer.”

Endnotes

1. Richard Rognehaugh, The Managed Health Care Dictionary (Gaithersburg, MD: AspenPublishers, Inc., 1996), 32.

2. Daniel Dragalin and Philip D. Goldstein, “The Centers of Excellence Phenomena,” inThe Physician’s Guide to Health Plan, ed. David B. Nash, M.D. (Gaithersburg, MD:Aspen Publishers, Inc., 1994), 163–66.

3. Sheryl Tatar Dacso and Clifford C. Dacso, M.D., Health Plan Answer Book, 2nd ed.(New York: Panel Publishers, 1997), 15-20.

4. Ibid., 15-21,15-22.5. “Health Plan Company Strategies for Centers of Excellence,” Health Plan Week

(September 21, 1998): 6.6. Peter R. Kongstvedt, M.D., “Negotiating and Contracting with Hospitals and

Institutions,” in Essentials of Managed Health Care, ed. Peter R. Kongstvedt, M.D., 2nded. (Gaithersburg, MD: Aspen Publishers, Inc., 1997), 166.

7. Ibid., 166–67.8. ORION Consulting, Inc., APC Essentials, © 1999, http://www.orion-consulting.com/

apc.9. Ibid.10. Harris Meyer, “Prospective Payment Gets Legs,” Hospital & Health Networks (August

1998): 50.11. ORION Consulting, Inc.12. Ibid.13. Marianne F. Fazen, St. Anthony’s Managed Care Desk Reference, 1996–1997 ed.

(Reston, VA: St. Anthony Publishing, Inc., 1996), 175.14. Joint Commission on Accreditation of Healthcare Organizations (JCAHO), 1995 Survey

Protocol for Subacute Programs (Oakbrook Terrace, IL: Joint Commission onAccreditation of Healthcare Organizations, 1995).

15. Kathleen M. Griffin, “Subacute Care and Health Plan,” in The Managed Health CareHandbook, ed. Peter R. Kongstvedt, M.D., 3rd ed. (Gaithersburg, MD: Aspen Publishers,Inc., 1996), 389.

16. Ibid.17. Ibid., 400.18. Ibid., 400–401.19. Joint Commission on Accreditation of Healthcare Organizations, Subacute Care Protocol

(Oakbrook Terrace: Ill.: Joint Commission, 1994).20. Commission on Accreditation of Rehabilitation Facilities (CARF), “Standards for

Comprehensive Inpatient Rehabilitation Programs,” in 1995 Standards Manual andInterpretive Guidelines for Medical Rehabilitation (Tucson, Ariz.: CARF, 1995).

† Excerpted from Wendy Knight and Lisa A. Sansone, “Ambulatory and Ancillary CareContracting” in Managed Care Contracting, ed. Wendy Knight (Gaithersburg, MD: AspenPublishers, Inc., © 1997), 214–216. Used with permission.

† Excerpted from Kathleen M. Griffin, “Subacute Care and Health Plan” in The Managed HealthCare Handbook, ed. Peter R. Kongstvedt, M.D., 3rd ed. (Gaithersburg, MD: Aspen Publishers,Inc., © 1996), 393–397. Used with permission.

AHM Network Management: Strategies for the Specialist Component of theProvider Network

Objectives

After completing this lesson you should be able to:

Describe some of the challenges health plans face when contracting with hospital-basedspecialists

Describe the different reimbursement options that health plans typically use forspecialists

Discuss some common problems that health plans encounter when using capitation forspecialty care

In previous lessons, we discussed the roles of specialists in a health plan provider network anddescribed the basic processes that health plans use to select and contract with specialists. You willrecall that specialists are healthcare professionals who have additional training in specializedfields and practice only a certain branch of medicine. To distinguish them from primary careproviders (PCPs), specialists are sometimes referred to as specialty care providers (SCPs.)

In this lesson, we address specific concerns for developing the specialist component of thenetwork, including the challenges of contracting with providers who work in the healthcarefacility-based specialties of radiology, anesthesiology, emergency medicine, and pathology. Wethen describe the major methods health plans use to reimburse network specialists.

Selecting and Contracting with Specialists

Health plans use a variety of approaches to arrange member access to specialty care. The type ofarrangement often depends on the organization of the provider community. In more mature healthplan markets, specialists are often affiliated with provider organizations such as multi-specialtyindependent practice associations (IPAs), physician-hospital organizations (PHOs), integrateddelivery systems (IDSs), or multi-specialty group practices. By contracting with one of theseentities, the health plan gains access to specialists as well as to primary care providers and, in thecase of a PHO or IDS, to hospital services.

Some health plans contract directly with individual specialists or single-specialty groups,especially in areas where the local specialists have not formed alliances with other types ofproviders. Health plans also use direct contracting to supplement their other specialty carearrangements with provider organizations. For example, if a multi-specialty group that otherwisemeets the health plan's requirements does not include any dermatologists, the health plan maycontract directly with a dermatology group to provide access to dermatology services. Healthplans that contract directly with specialists typically select and contract with these practitionersafter developing their primary care physician (PCP) and hospital networks. Health plans oftenattempt to form specialist panels that are compatible with the previously established PCP referralpatterns and hospital access privileges. However, in order to stay within budget requirements fornetwork development and to assemble the specialist panel in a timely manner, health plans oftenfind it necessary to contract with specialists outside the PCPs' common referral patterns.

Considerations for Including Hospital-Based Specialists in Provider Networks

In previous lessons, we discussed issues that arise when the provider network includes facultypractice plans (FPPs) from teaching hospitals. Health plans may also contract with specialistsbased at non-teaching facilities, that is, healthcare centers that do not offer residency programs.

A specialist who practices exclusively or almost exclusively in a healthcare facility is known as ahospital-based specialist, even though some practitioners in this category actually practice atsurgical centers, imaging centers, or other ambulatory care centers instead of a hospital. Themedical specialties that have traditionally been hospital-based are radiology, anesthesia,emergency medicine, and pathology. These practitioners typically have a contractual arrangementwith a hospital or ambulatory care facility, and may be considered employees of the facility.1

When a health plan contracts with a hospital or other healthcare facility that employs specialists,those specialists may have an obligation to provide medical care to the health plan’s members,depending on (1) the relationship between the practitioners and the facility and (2) the terms ofthe contract between the health plan and the facility. Sometimes these contracts specificallyinclude the professional services of employed specialists. In many other cases, healthcare facility-employed specialists are a distinct business entity and the health plan must contract separatelywith them in order to ensure member access to their services.

Like many academic practitioners, some hospital-based specialists prefer managed care contractsthat do not include UM measures such as authorization systems and clinical practice guidelines.2

Many hospital-based practitioners feel that, because their medical fields require such specializedknowledge, treatment decisions should be left to the sole discretion of the provider. Hospital-based specialists are more likely to accept and comply with health plan contracts if the healthplan’s UM programs

are based on clinical outcomes research incorporate specialist input include mechanisms for evaluating individual patient care situations and approving

exceptions

Some health plans have attracted hospital-based specialists by paying a set salary, perhaps withan incentive pay plan linked to productivity, utilization, or quality standards.

Reimbursement for Specialist Services

As you recall from Compensation Arrangements Between Health Plans and Providers, healthplans use a variety of methods to reimburse providers for the services they deliver to planmembers. These reimbursement methods can be divided into the following three broadcategories:

Fee-for-service (FFS) reimbursement systems pay providers for the actual medicalservices they deliver.

Salary reimbursement systems offer providers a guaranteed income that is not tied toutilization. All risk remains with the health plan.

Capitation reimbursement systems offer providers a specified amount per member permonth regardless of the actual volume and cost of services delivered. Providers assumepart or all of the risk associated with providing services.

In the following screens, we will describe how these methods are used to reimburse specialistservices.

FFS Systems

A recent study of more than 200 HMOs showed that an overwhelming majority of plans (99.3%)used FFS methods, alone or in combination with other methods, to compensate specialists. Thespecific distribution of payment methods is shown in Figure 6A-1. Of those plans that used FFSmethods to reimburse specialists, 43.3% indicated that they used FFS methods to reimburse allspecialists.3

FFS systems may encourage providers to see a large number of patients and provide an incentivefor providers to perform difficult or unpleasant procedures. Because charges are based onstandardized diagnostic and procedure codes, FFS systems also allow health plans to track andevaluate the services providers actually deliver to plan members. However, FFS reimbursementoffers very little incentive for providers to manage utilization and cost.

To overcome the drawbacks of straight FFS reimbursement, health plans have implemented anumber of modifications for compensating specialists, including discounted fee-for-service,relative value scales, fee schedules, and flat fees.

Discounted Fee-for-Service

Rather than receiving full payment for services, specialist providers under a discounted fee-for-service (DFFS) system receive a reduced amount in the form of either a straight discount (e.g.,20% off all UCR charges) or a volume discount based on predetermined service levels. Forexample, assume that the UCR charge for a particular procedure is $100. Under a 20% discountarrangement, a specialist who submits a claim for $100 for that procedure would receive $80from the health plan. Under a volume-based system, the specialist might receive $90 perprocedure for 0 to 10 procedures performed during a specific period, $80 per procedure for 11 to20 procedures, and $70 per procedure for 21 to 30 procedures.

Relative Value Scales

Under a relative value scale system, each service is assigned a relative value, based on proceduralcodes, and that value is multiplied by a conversion factor to arrive at a payment amount. Thehigher the value of the service is, the higher the reimbursement. Separate conversion factors maybe used for different types of services, such as surgical and nonsurgical services, to account fordifferences in the complexity of the service. The resource-based relative value scale (RBRVS)described in Compensation Arrangements Between Health Plans and Providers is an example ofa commonly used relative value scale.

Fee Schedules

Under a fee schedule system, the health plan and specialists negotiate a maximum fee for eachservice based on procedural codes. The specialist must accept the fee as payment in full, even ifthe specialist’s charge exceeds the established fee. If a specialist’s charge is less than theestablished fee, however, the plan pays the smaller amount.

Flat Fees

Flat fee systems allow the health plan to make a single payment to cover all services associatedwith a course of treatment. Under a standard case rate system, the health plan establishes a flatfee for all professional services associated with a particular treatment. The payment amount is thesame each time the treatment is performed regardless of the intensity of the actual servicesdelivered. For example, a health plan that establishes a case rate for delivery of a baby would paythe same amount to the OB/GYN for either a vaginal delivery or a cesarean section.

A health plan can expand the case rate system by establishing global fees, which combine chargesfor multiple services and multiple episodes of care into a single pre-established payment. If thehealth plan in our previous example used a global fee for maternity services, it would make asingle payment to the OB/GYN and that payment would cover all prenatal, delivery, andpostnatal services. For treatments that require professional and institutional services, such assurgical procedures and inpatient care, health plans may combine all of the hospital andphysician’s charges for a course of care into a single preestablished payment. A single feeestablished to cover services delivered by multiple providers is referred to as a bundled case rate.

Because flat fees such as case rates shift the focus of reimbursement from individual services toepisodes of care, they shift the risk for the intensity of services to the provider. Case rates alsoreduce the incidence of coding abuses such as upcoding and unbundling.

Salary Systems

Salary systems, which change the status of providers from independent contractors to health planemployees, are used most often in staff model HMOs, plans that use hospitalists to coordinateinpatient care, and certain multispecialty physician groups to stabilize plan administrativeexpenses and provider income. Salary systems can also be used to guarantee access to services fora defined block of time. For example, a health plan might contract with specialists on a salarybasis to provide emergency department coverage or to provide on-call coverage outside of regularnetworkhours.4 Most often, salaries are paid to specialists on a monthly basis and cover allservices delivered during the period. Salaries can also be paid on an hourly basis.

A variation of salary reimbursement is a retainer, which is a negotiated amount paid to aspecialist each month to ensure access to specialist services. Health plans typically evaluate theactual services delivered by retained specialists periodically and reconcile payment accordingly.A retainer arrangement offers the specialist a steady income, but allows for adjustments based onutilization.5

Capitation Systems

Health plans have not been able to establish specialty capitation on the same scale as capitationfor primary care providers because the patient base needed to support specialty capitation is muchlarger than the patient base needed to support primary care capitation. Under standard capitationsystems, providers are paid a flat rate per member per month (PMPM) for all services delivered toplan members. The capitation rate is based on the following factors:

The range of services to be delivered by the provider The expected rate of utilization for each service The average fee for each service

To arrive at the actual PMPM amount, the annual utilization rate for the services delivered by aprovider to each plan member is multiplied by the average FFS charges for those services and thetotal is then divided by 12 to arrive at the PMPM rate.

PCPs tend to provide a wide range of services to a large number of patients each year, so eventhough the average cost of primary care services may be low, the capitation rate is usually fairlysubstantial. For example, suppose patients utilize PCP services an average of three times per yearat an average cost of $48. The PMPM capitation payment the PCP would receive each month foreach plan member would be $12.00 [(3 × $48) ÷ 12]. A PCP serving 2,000 plan members wouldreceive $24,000 in reimbursement each month.

The costs of specialist services are typically higher than the costs of primary care services, but therange of services provided by specialists is narrower and the utilization rates for those servicesare typically much lower than those for primary care. As a result, the capitation rate for specialistsis often significantly lower than that for PCPs. For example, average utilization of cardiologyservices might be as low as 0.2 per year. Even if the average cost of cardiology services is $72.00,the PMPM capitation rate for the cardiologist would only be $1.20 [(0.2 × $72) ÷ 12]. Thecardiologist would have to be capitated for approximately 20,000 patients to receive an amountcomparable to the amount received by the PCP.

In determining the PMPM rate for specialist services, it is essential for the health plan toaccurately project utilization rates. If projected utilization is higher than actual utilization, thehealth plan may contract at a capitation rate that is unnecessarily high. If projected utilization istoo low, the capitation rate may be too low to support participation by specialists. It is important,therefore, for the health plan to control utilization of SCPs before attempting to place theseproviders under a capitation arrangement.

Case mix/severity creates a second obstacle to establishing capitation reimbursement systems forspecialists. Because a PCP’s patient base consists of a large number of healthy patients, the riskof treating a few very sick patients is generally easy to manage. Specialists, on the other hand,typically treat a high number of patients with serious conditions. If more than a few of thesepatients require costly care or services in a given period, the capitated specialist could operate at aloss.

Health plans have addressed these obstacles by developing alternatives to standard specialtycapitation. One of these alternatives is to use contact capitation to reimburse specialists. Anotheralternative is to offer capitated rates to various specialty groups or organizations.

Contact Capitation

Contact capitation is a method of paying individual specialists out of a fixed pool of funds that isactuarially determined for each specialty on the basis of expected utilization and costs of servicesfor that discipline.6 Unlike standard capitation, which pays the specialist a fixed rate each monthregardless of the services actually delivered, contact capitation goes into effect only after a planmember has an encounter with the specialist. Payments to the specialist continue each month untilthe referral period or authorized course of treatment for the member is over.

Under contact capitation, a specialist who is under contract to the health plan accumulates pointsbased on the number of new referrals (contacts) made to the specialist by PCPs. Some healthplans categorize referrals by the difficulty of the case or according to some other criteria, andaward different levels of points to the different categories. For instance, a health plan maycategorize referrals as “uncomplicated” or “complicated,” and award more points for complicatedreferrals. At the end of a given period, based on the total number of points accumulated, the poolof available funds is divided among the specialists who received new referrals during the period.The specialists often receive copayments from patients as well.7

The determination of payment under a contact capitation arrangement requires a series ofcalculations. As an example, suppose that a health plan with 10,000 members contracts withdermatologists on a contact capitation basis. The health plan’s actuaries have determined that theappropriate PMPM capitation for dermatology services is $1. The health plan plans to distributethe fund once each quarter based on the point totals accumulated by each physician. For each newuncomplicated referral, a provider receives 1 point. If the referral is classified as complicated, theprovider receives 1.5 points. During the first quarter, the plan’s PCPs make 300 referrals todermatologists, and 60 of these referrals are complicated. Figure 6A-2 shows the steps tocalculate the value of each referral point and the payment for a dermatologist who received 50referrals including 7 complicated cases.8

Contact capitation allows the health plan to compensate providers based on actual episodes ofcare without having to pay on a FFS basis. In addition, contact capitation tends to rewardspecialists who have earned the trust of their PCP colleagues. A trusted specialist is likely to

receive a high proportion of the referrals, which results in a higher level of income for thatpractitioner.

Contact capitation may be an appropriate option when projected utilization of a specialty carefield is low. Under standard capitation approaches, a smaller patient base increases the likelihoodthat a specialist will experience a disproportionately high incidence of catastrophic cases that arenot adequately compensated by the PMPM capitation amount. A health plan might use contactcapitation as a transition method of compensation while the plan’s membership is growing.However, contact capitation is quite complex in terms of administration, and providers may havedifficulty understanding and accepting this payment plan. Also, a health plan that uses contact

capitation must establish a system that gives specialists an incentive to promptly submitencounter forms for visits with plan members. Otherwise, the plan will not receive the data itneeds for UM and QM.

Group CapitationAs an alternative to contracting with individual specialists, health plans can contract withspecialist organizations. Many of these contracts are established on a capitation basis. Undercapitated contracts with specialist organizations, the health plan typically capitates theorganization for all contracted services. The specialty organization or vendor is then responsiblefor making payments to individual specialists. Although payments to providers come out of thefixed amount paid by the health plan, the group can pay providers on a FFS, salary, or capitationbasis. The specialist organization can also use blended reimbursement methods to pay individualspecialists. For example, the organization might capitate a specialist for core services and pay foradditional services on a FFS basis. The specific reimbursement method used by various specialistorganizations depends on state insurance regulations.

Specialist organizations can be structured in a variety of ways. The most common specialistorganizations include

specialty medical groups specialty IPAs specialty carve-outs specialty network management agreements

In some cases, specialist organizations function only as contracting mechanisms for providers. Inother cases, specialist organizations offer additional administrative and medical managementsupport, including claims processing, provider reimbursement, provider credentialing, qualitymanagement, and utilization management.

A health plan’s ability to capitate a specialist organization successfully depends on thecharacteristics of the organization. Specialist organizations that focus on care management andhave their own utilization and quality management programs in place are typically better preparedto manage financial risk-sharing under capitation than are organizations that function mainly asnegotiating and contracting mechanisms for providers. When contracting on a capitation basis,specialist groups with less emphasis on medical management may need to rely on financialincentives, at least temporarily, to support quality of care, patient satisfaction, utilization, orproductivity goals. Organizations that lack internal systems for utilization management may haveto delay capitation contracts until such systems are established.

Specialty Medical Groups

Specialty medical groups consolidate physicians’ practices into a single parent organization. Theorganization owns all tangible and intangible assets, employs the physicians, and operates thegroup practice. Specialty medical groups can be organized as single specialty groups ormultispecialty groups. A single specialty group consists of specialists who practice in a singlemedical field, such as neurosurgery, cardiology, or oncology, or who perform a specific type ofclinical service, such as radiology or anesthesiology. A multispecialty group includes specialistsfrom two or more fields and usually consists of those specialties most often required by patients.Multispecialty groups often include primary care providers as well.

Capitation arrangements are generally simple to establish in specialty medical groups, especiallymultispecialty groups that include both PCPs and specialists. PCPs in multispecialty medicalgroups typically refer members to specialists in the same group. As a result, specialists haveaccess to a large and fairly stable patient population. Capitation also works well for singlespecialty groups that are large enough to cover the health plan’s entire service area or a specifiedgeographical section of the service area.Specialty IPAs

A specialty IPA is an association of individual specialists formed to facilitate contracting withhealth plans and other purchasers. The organization provides administrative support to members,but physicians in the association maintain individual practices and facilities. A health plancontracts with the IPA for specified services and then reimburses the IPA for those services. TheIPA contracts with individual physicians to provide contracted services and is responsible forreimbursing individual specialists. The IPA thus serves as an intermediary between the healthplan and individual physicians.

Health plans commonly pay IPAs an established capitated fee for all contracted services. Such asystem shifts the financial risk of providing specialist services to the IPA. The IPA may or maynot transfer the risk to individual association members, depending on the type of reimbursementmethod the IPA uses.

Specialty Carve-Outs

Health plans and employers frequently contract with external organizations for highly specializedhealthcare services such as behavioral healthcare, vision care, and dental care. These contractarrangements are referred to as specialty carve-outs. Increasing numbers of health plans are alsoestablishing carve-out arrangements with other specialty groups, such as cancer centers andambulatory surgical centers, and with ancillary services providers, such as laboratories andpharmacies.

Some health plans also carve out the delivery of care for certain illnesses, such as cancer,diabetes, heart disease, and asthma, to disease management companies that provide a full range ofclinical and administrative services. Disease management companies typically have staffs ofhealthcare professionals who specialize in particular common medical conditions. Under manycarve-out arrangements, the disease management company is responsible for providing specialtycare to all of a plan’s members who have a particular medical condition, sometimes on a capitatedbasis.

Management Agreements

Under a specialty network management agreement, a health plan contracts with a single specialistor a single institution or organization, such as a faculty practice plan, to manage all servicesassociated with a particular specialty. An individual contractor is referred to as a specialtynetwork manager and an institutional contractor is referred to as a specialty network managementcompany. The specialty network manager or network management company typically receives acapitated amount for providing a full range of services to plan members. The specialty networkmanager or network management company subcontracts with other specialists to provide anyservices the manager cannot provide and is responsible for reimbursing those subcontractors.Because the costs to the network manager of administering multiple payments can be quite high,this arrangement is not often used.9

Benefits of Group Capitation

Establishing a capitation arrangement with a specialty provider organization has advantages forboth health plans and specialists. For example, group capitation can reduce the amount offinancial risk that must be assumed by any of the parties responsible for the delivery of specialistservices. Capitated group contracts allow health plans to shift financial risk to the specialistorganization, thereby reducing their overall healthcare costs. The specialist organization can thentransfer some or all of this risk to individual specialists depending on the reimbursement methodsit uses. Specialists paid on a FFS or salary basis assume very little, if any, risk. Specialists paid ona capitated basis assume some risk, but that risk is typically lower than the risk under individualcapitation contracts because the group’s payments to individual practitioners are usually based ononly those services the specialist actually delivers rather than on the full range of servicesavailable.

Group capitation can also reduce the impact of case mix/severity. As you recall from our earlierdiscussion, case mix/ severity is a major obstacle to establishing capitation arrangements withindividual specialists. Group capitation reduces this obstacle by distributing revenues tospecialists according to the costs their patients are expected to incur. Specialists whose patientsrequire a greater number of more costly services are generally allocated a greater portion of totalrevenues.

Another potential benefit of group capitation is a reduction in administrative costs. For healthplans, group capitation reduces the need to negotiate individual provider contracts and administermultiple reimbursement agreements. Providers also benefit. Although the specialist organizationmight contract with a number of different health plans, member specialists contract only with theorganization and receive reimbursement from only one source. The specialist organization oftenprovides additional administrative support, such as claims processing and credentialing, as well.

Finally, group capitation can improve quality of care. In many of the specialist organizationsdescribed in this lesson, provider reimbursement is only one function performed by theorganization. Organizations that have established medical management programs can alsoencourage physicians to modify their practice patterns to focus on efforts, such as preventive care,that result in high quality, cost-effective care.

Further Considerations for Capitating Specialty Care

Health plans often view capitation as an attractive reimbursement option for specialty caredisciplines with variable and unpredictable utilization, such as cancer treatment, or for care that isexpensive due to the nature of the services provided.10 However, a health plan may have difficultycapitating a particular specialty if the scope of services provided varies from one practitioner toanother.11 For example, within the field of cardiology, some physicians do not perform invasiveprocedures. An invasive procedure involves entry into the patient’s body by way of an incision orinsertion of a medical instrument. 12 Many patients with heart disease require invasive diagnosticand therapeutic procedures such as cardiac catheterization and angioplasty. When a patient is inneed of one of these tests or treatments, a noninvasive cardiologist must refer the member toanother cardiologist who does perform invasive procedures. Unless the noninvasive cardiologistand the invasive cardiologist both belong to the same provider organization, and that organizationhas a policy for allocating fees among practitioners who treat the same patients, the health planmay be obligated to reimburse both practitioners for cardiology services, even if the noninvasivecardiologist is capitated.

Specialty capitation is also difficult to implement for specialties that involve highly specializedservices, such as bone marrow transplants and pediatric neurosurgery. The overall incidence ofthe medical conditions requiring such specialized care is typically very low and many healthplans are unable to offer a large enough patient population to support capitation. For thesespecialties, reimbursement is likely to remain on a modified FFS basis.

In addition, some specialists resist case rates, capitation, and other reimbursement options that arenot directly based on the amount and nature of the services provided, in the belief that thesepayment methods will greatly decrease their income. The health plan may be able to overcomespecialists’ fears about lower reimbursement through a payment plan that guarantees a certainlevel of patient volume or provides additional compensation for achieving utilization and qualitygoals.13

Another important consideration for specialty capitation is the need for sophisticated informationmanagement systems. These factors must be considered by health plans and providerorganizations.***

The need to manage multiple contracts with multiple variables. An health plan orphysician organization that contracts with individual specialists must manage a variety ofindividual reimbursement methods. Some physicians may receive monthly capitatedamounts, while others receive FFS payments or complex salary plus incentive payments.Each different contract involves different variables that can affect data collection,distribution of revenues, and physician reimbursement.

The need to manage multiple forms of capitation. Common specialties for whichutilization and costs are easy to measure often lend themselves to standard capitationarrangements. Specialties with variable utilization may require modified capitationarrangements, such as contact capitation or carve-out arrangements.

The need for systems that can collect clinical, financial, and operational data and make itusable for internal and external reporting.

The need for systems that can track and measure services covered by a single capitatedpayment. Capitated payments provide little incentive for physicians to documentindividual services. In addition, capitated encounters do not produce claim forms. As aresult, data collection is often time-consuming and difficult.

To address these issues, health plans and provider organizations are likely to need more advancedtechnologies, such as decision support systems, data warehouses, and electronic medical records,that can provide better methods of managing utilization and outcomes, physician practices,coordination between hospitals and physician organizations, data collection and analysis, andexternal reporting by provider organizations.14

Endnotes

1. Richard Ferreira, “Health Plan Contracting and Reimbursement for PhysicianOrganizations in a Capitated and Risk- Sharing Organization,” in Building and ManagingEffective Physician Organizations Under Capitation, ed. Douglas Goldstein(Gaithersburg, MD: Aspen Publishers, Inc., 1996), 239–40.

2. Ibid.3. American Association of Health Plans, 1999 Industry Profile: A Health Plan Reference

Book (Washington, D.C.: American Association of Health Plans, 1999), 102.4. Peter R. Kongstvedt, M.D., “Contracting and Reimbursement of Specialty Physicians,” in

Essentials of Managed Health Care, ed. Peter R. Kongstvedt, M.D., 4th ed.(Gaithersburg, MD: Aspen Publishers, Inc., 2001), 154.

5. Ibid.6. Kevin M. Kennedy and Daniel J. Merlin, “Alternatives to Traditional Capitation in

Health Plan Agreements,” Healthcare Financial Management (April 1998): 48.7. Ibid.8. Ibid., 49.9. Kongstvedt, 151–52.10. Norbert Goldfield et al., “Methods of Compensating Health Plan Physicians and

Hospitals,” in Physician Profiling and Risk Adjustment, ed. Norbert Goldfield and PeterBoland (Gaithersburg, MD: Aspen Publishers, Inc., 1996), 128–29.

11. Geoff Baker and Tom Wargo, “To Capitate Its Specialists, HealthAmerica Sticks to theBasics,” St. Anthony’s Health Care Capitation Report (July 1997): 4.

12. Merriam-Webster’s Collegiate Dictionary, 10th ed. (Springfield, MA: Merriam-Webster,Inc., 1996), 616.

13. James A. Rodeghero, “Physician Compensation in Groups and Integrated DeliverySystems,” in The Managed Health Care Handbook, ed. Peter R. Kongstvedt, M.D., 3rded. (Gaithersburg, MD: Aspen Publishers, Inc., 1996), 159–60.

14. Mark Hagland, “Payment Challenges,” Healthcare Informatics (November 1999): 40.

AHM Network Management: The Negotiation Process for Provider Contracting

Objectives:

After completing this lesson you should be able to:

List some circumstances that may result in renegotiation of a provider contract List and describe some of the functions that are often represented on health plan and

provider negotiating teams Describe some types of information that the health plan typically seeks about a provider,

and vice versa, when preparing for provider contract negotiation Describe the process for setting objectives for negotiation

The development of effective health plan contracts is crucial for both health plans and providers.A health plan depends on its providers to deliver the healthcare services described in its benefitsplan, and in most areas of the United States, providers increasingly rely on health plans for accessto patients. Because the contracting goals of providers and health plans differ in many respects,the two parties must often negotiate a variety of issues before they reach mutually agreeableterms. As a result, negotiation skills have become an important asset for health plans and manyproviders.

The degree of health plan-provider negotiation that takes place varies according to the contractingsituation. The negotiation process for health plans and hospitals or health plans and large providerorganizations is generally quite extensive. However, health plans usually do not negotiate withindividual practitioners and small provider groups. Instead, these providers typically receive astandard contract from a health plan and have the opportunity to choose to participate or notparticipate in the network, based on their evaluation of the contract's terms. Health plans are morelikely to negotiate with individual practitioners and small provider groups located in geographicareas with an undersupply of providers.

This lesson discusses the fundamental elements of provider contract negotiation. First, we providean overview of the role of negotiation in provider contracting. We then describe the steps in thenegotiation process, starting with preparation. Next, we explore the bargaining stage and, finally,the way to close negotiation. Much of the information in this lesson focuses on negotiationbetween health plans and physicians, especially primary care physicians (PCPs). Differences inthe negotiation process for other types of providers will be noted in Network ManagementConsiderations for Different Types of Providers.

The Role of Negotiation in Health Plan Contracting

Provider contract negotiation is a communication process that utilizes information exchangesbetween a health plan and a provider to establish an agreement for the delivery of healthcareservices to the health plan's members. Each health plan-provider negotiating situation is unique,but the negotiation process is typically driven by the following factors:

A common desire to deliver quality healthcare services to a particular population Conflict based on the contract parties' differing motivations and constraints Give-and-take exchanges between the health plan and the provider to resolve the areas of

disagreement

Both parties typically want contract negotiations to result in favorable terms for the delivery ofhealthcare services and acceptable reimbursement arrangements. However, the health plan andthe provider often have different points of view about the meaning of favorable terms andacceptable reimbursement. For example, providers usually desire a reimbursement arrangementthat maximizes their income, while the health plan wants to minimize the cost of reimbursement.

Another mutual objective for negotiating is the establishment of a framework for futurerelationships. The interpersonal relationships developed during the negotiation process areimportant to effective implementation of the contract and to problem solving during the term ofthe contract. The health plan has an additional goal of developing a provider panel that meets theplan's needs for access and adequacy, while the provider typically wants to maintain or increasepatient volume.1

The give-and-take exchanges between a health plan and a provider involve key business andmedical management issues of care delivery, including

patient volume directed to the provider levels and timing of payment operational issues financial risk associated with the delivery of care utilization and quality management programs

Negotiation often requires the health plan, the provider, or both to make concessions in someareas in order to receive favorable terms in other areas. For instance, the health plan may agree tolimit the total number of providers in the network and guarantee a certain volume of patients to aprovider in exchange for the provider's acceptance of a lower reimbursement rate.

Health plans and providers have varying degrees of knowledge and expertise in negotiatingcontracts. A common perception is that health plans always have the advantage because they aremore knowledgeable and sophisticated about the negotiating process. Another widely held beliefis that most providers accept standard contract terms and health plan reimbursement arrangementswithout question in order to establish relationships with health plans and to maintain their patientbases. In reality, health plan contract negotiations may favor either the health plan or the provider,depending on each party's negotiation skills, abilities, and preparation. Many providers, especiallyhealthcare institutions and provider organizations, have recognized the importance of negotiatinghealth plan contracts and have devoted the resources necessary to develop an effective approachto negotiation.

Health plan contract negotiation typically involves face-to-face meetings, written correspondence,and telephone conversations, along with multiple reviews of the contract's legal and financialaspects. The intensity and length of the negotiations depend in part upon the volume and scope ofservices covered under the agreement. For example, health plan contract negotiations with anintegrated delivery system (IDS) or a hospital are usually lengthier and more complex thannegotiations with a single-specialty provider organization.

Many provider contracts automatically renew at the end of the specified contract period unlessone of the parties notifies the other in writing of its desire to renegotiate terms or terminate therelationship. If a contract is not automatically renewable, the health plan and the providerrenegotiate contracts annually or at the end of the specified contract term. Even when both partiesfind the initial agreement satisfactory, changing circumstances may necessitate amending the

contract or even developing a new contract. Any of ***these changes may result in significantmodification of the provider contract.

The process for renegotiation is similar to that for the initial negotiation of the contract, althoughrenegotiation usually requires less time and effort, depending on the number and type of issues tobe reexamined.

****

Actual utilization of services that is higher or lower than projected utilization Demographic changes, such as membership growth or an increase in the average age of

the member population Changes in the health plan industry, such as competition from a new entrant into a

particular market or a merger among health plans New product offerings, such as the addition of Medicare, Medicaid, and workers'

compensation plans Changes in the provider community, such as the development of provider organizations

or new affiliations among provider organizations Technological advances, such as newly approved medical procedures

The Negotiation Process

The process of negotiating health plan contracts typically includes the following activities:

Preparation Bargaining Closing

Contract negotiators often feel that the bargaining phase of the process is the most difficult, butthe rigors of bargaining can be greatly reduced through adequate preparation. Thoroughpreparation is often the key to successful negotiation, while lack of preparation is frequentlyidentified as the reason for failure. Figure 4B-1 lists the activities that health plans and providersshould conduct to prepare for contract negotiation

Assembling the Negotiation Team

When health plans negotiate with independent practitioners and small groups of providers whoare not affiliated with a provider organization, these providers usually do their own negotiating.In these situations, the health plan usually sends one or two representatives to conduct thenegotiation. However, because of the complexity of the issues involved in provider contracting,health plans, providers organizations, and healthcare facilities often assemble teams of skilledpersonnel who work together to negotiate agreements. Negotiation teams vary in size andcomposition based on the volume and nature of the services covered by the contract, the expecteddifficulty of reaching an agreement, and the perceived importance of securing the agreement. Inmany instances, the size and composition of the health plan's team mirrors that of the provider'steam.

The various team members have different levels of authority to make contracting decisions. Somemembers of the negotiation team provide information and other support for the team and do notparticipate in or even attend bargaining sessions. The role of the health plan's medical directorvaries greatly. As you will recall from The Role of Network Providers Management in a HealthPlan, in some health plans, the medical director has no involvement in network management. Inother health plans, the medical director oversees the network management function and mayparticipate in provider contracting, especially if the health plan has a strong desire to contractwith a particular provider. The next sections list the major functions that are often represented onhealth plan and provider negotiation teams and describe the role of each representative in thenegotiation process.

Team Leader

Each team has a leader who assumes overall responsibility for the negotiation process. The role ofthe team leader is to coordinate the activities of team members, provide direction and support,and act as a spokesperson. As the primary contact with the other party, the team leader typicallymanages the flow of information to and from team members. Effective negotiation team leadersoften have the following characteristics:

A thorough understanding of provider contracting issues The ability to be appropriately assertive The ability to consider the other party's position while pursuing the goals of his or her

own organization Experience in dealing with a variety of personalities under stressful situations Knowledge of the local healthcare market and patient population

For provider teams, the leader is usually a vice-president or director of health plans, the chiefexecutive officer (CEO), chief financial officer (CFO), or chief operating officer (COO) of theorganization. On the health plan side, a provider relations coordinator, contracting specialist, ordirector of network development often fills the leadership role, although the CEO or COO maylead negotiations with a large provider organization.

Financial Manager

The financial manager's primary role is to guide the negotiation of financial aspects of thecontract. The financial manager analyzes all contract provisions that involve monetary values,such as reimbursement arrangements, liability insurance clauses, and claims submission andpayment. Based on this analysis, the financial manager determines the team's financial objectives.For health plan and large provider organization teams, the organization's CFO or the director offinance or accounting usually assumes the financial manager role. In smaller providerorganizations or medical groups, the office manager provides assistance with financialnegotiating.

Legal Counsel

Both health plans and providers frequently include an attorney on their negotiating teams or atleast consult with an attorney. Ideally, an attorney who offers advice about provider contracting isknowledgeable about health plans and has previous experience with the negotiation process. Theattorney's role is to evaluate the wording of specific clauses in the agreement to ensure that theclient's legal rights are protected and to ensure compliance with state and federal regulations.Attorneys pay close attention to issues that involve legal or financial risk. The attorney may be acontracted consultant or an employee of the health plan or provider.

Information Systems Manager

Providers and health plans need a great deal of clinical, financial, and administrative informationin order to negotiate effectively. Negotiating teams rely on data provided by their organization'sinformation systems (IS) manager to help them assess the opportunities, risks, benefits, anddrawbacks presented by a proposed agreement. IS managers typically provide an analysis of acontract's impact on information systems for

claims processing and payment billing and accounts receivable membership and benefit management utilization management (UM) administrative support

Actuarial Support

A health plan or a provider may retain an actuary to assist the financial manager in the analysis ofthe contract's financial provisions. An actuary is an insurance professional who appliesprobability rules and statistics to calculate values relevant to a health plan's operations. Actuarieshave the training to design provider reimbursement arrangements and estimate costs and revenuesunder a given contract.

Health Plan Consultants

Either party may enlist health plan consultants to assist with preparation and bargaining. Anexperienced health plan consultant understands industry-specific factors, such as currentreimbursement rates, health plan contract models, and UM policies. In addition, a local consultantoften has direct knowledge of the other party's negotiating team and contracting strategies.

Gathering Information

To prepare for negotiation, health plan and provider negotiating teams compile and evaluateinformation about their own organizations, the other party to the contract, and local marketconditions. A team with extensive knowledge about the other party is in a better position to assessthe other side's strengths, weaknesses, position in the market, and relative negotiating power. As ageneral rule, the organization with the most to lose by not securing the agreement has lessnegotiating power and is more willing to compromise. For example, if providers are in shortsupply in a geographic area, the health plan will probably need to offer more generousreimbursement and looser controls on UM to ensure that it can assemble a network adequate tomeet member needs. If a health plan's membership is very large, providers may need to makemore concessions in order to have access to the plan's members.

It is also important for each party to collect data about its own strengths and weaknesses. Internalanalysis can help the negotiating team identify organizational goals, capabilities, and limitations.For instance, a provider must know the costs of the services it offers in order to effectivelynegotiate reimbursement. A health plan must determine the capabilities of its claims departmentbefore it negotiates turnaround time for claims processing. By examining its own characteristics,each party can also predict the negotiating strategies that the other party is likely to use.

Information About the Provider

Before a health plan begins negotiating with a provider, the health plan must first evaluate theprovider's ability to meet the plan's needs regarding

access scope of services quality utilization

cost-effectiveness administrative capabilities adherence to health plan concepts

The provider performs a self-assessment for the same criteria. Figure 4B-2 describes some of theprovider capabilities and characteristics that are relevant to contract negotiation.

Figure 4B-2http://www.educode.com/Images/ahm530A10fig4b2.pdf

A health plan may not have access to detailed information about quality and utilization for aparticular provider unless the provider has previously participated in one of the health plan'snetworks. If the provider has participated with the health plan in another network, the health plancan review claims, encounter forms, performance management assessments, and membersatisfaction reports for the provider.

For providers who are new to the health plan, the health plan can learn a great deal by examiningthe application that the provider submitted. Health plans also check with purchasers andprospective purchasers for information about candidates for the network. Another way to gaininformation is to ask the provider directly for further details on the scope of services offered, QMprogram, UM program, and other capabilities. Providers are often willing and able to provideuseful information to health plans with whom they wish to contract. Accrediting agencies areanother source of information about healthcare facilities and provider organizations that havesought accreditation or certification.

Information About the Health Plan

A provider contemplating a health plan contract seeks information about the health plan and itsoperations. Factors of particular interest to the provider include

the health plan's financial condition characteristics of the health plan's member population network management policies and procedures the UM program the QM program

A provider that is contemplating a financial risk-sharing arrangement with a health plan shouldinvestigate the health plan's information systems capability. Adequate data from the health planon UM, QM, costs, and other performance measures are critical for the successful management ofrisk by providers. Figure 4B-3 describes specific questions that may yield useful information forthe provider or for a health plan evaluating its own operations.

The health plan usually sends the provider an application, a list of credentialing requirements, anda copy of the proposed contract, which will offer some information about the health plan. Thecontract may or may not include the proposed reimbursement schedule.2 The provider may alsorequest a copy of the health plan's policy and procedures manual for more details about UM andQM programs.

Providers may also check ***these sources for additional information about the health plan.***

Health plans and healthcare professional societies and publications State insurance department records, including financial analyses of health plans Health plan annual reports, if the company is publicly held Newspaper and magazine articles Websites for the health plan and other healthcare organizations, such as regulatory or

accrediting agencies Marketing and promotional materials from the health plan Employees and former employees of the health plan Customer surveys and focus groups Industry consultants

Local Market Conditions

For further information to aid in provider contract negotiation, the health plan and the provideralso examine the local market for answers to the following questions:

How does the supply of providers in the community compare to the health plan's needsfor providers?

What affiliations exist among local providers? How many other health plans operate in the same local market? What terms and

reimbursement arrangements do these competitors offer? Which providers do local consumers and purchasers prefer?

The answers to these questions will give some indication of each party's need to secure thecontract and willingness to negotiate.

Developing Negotiating Objectives

Based on the information gathered, the health plan and the provider set negotiating objectives toidentify the specific outcomes desired. Each objective typically defines a negotiating range toindicate how much the health plan or provider is willing to compromise on a particular point. Thenegotiating range often specifies the best possible outcome that could be achieved, the most likelyoutcome, and the least desirable outcome that a party will accept.

For each point subject to negotiation, the health plan and provider should identify both an initialoffer (asking) position and a final offer (bottom-line) position. For example, suppose that thehealth plan per diem reimbursement (overall daily rate) for an acute care hospital in a geographicarea ranges from $700 to $1,500 per day. A hospital that expects to receive $1,100 per day mightestablish its negotiating range between $1,500 (initial offer position) and $1,000 (final offerposition). If the health plan expects to pay $1,100 per day, it may set a negotiating range betweenan initial offer position of $700 per day and a final offer position of $1,200. The health plan andthe provider generally try to keep their initial and final offer positions secret, although each mayattempt to estimate the other's final offer. It is common practice to make an initial offer that islower or higher than actual expectations; however, the parties should not waste valuablenegotiating time with offers that are completely unrealistic.

Health plans and providers also set objectives for issues other than financial provisions. Figure4B-4 lists some examples of issues that health plans and providers often negotiate.

The health plan and provider should set priorities for achieving their different objectives anddetermine which points they are willing to negotiate. Some provisions or characteristics of theprovider contract are always non-negotiable, such as compliance with

state and federal laws on antitrust and fraud and abuse state laws on corporate practice of medicine federal laws regarding tax-exempt operations certificate of need (CON) requirements state licensure regulations.3

We will discuss the negotiation of specific issues and provisions in further lessons.

Formulating a Negotiating Strategy

For each objective, the health plan or the provider team plans and rehearses how to state itsposition. When time permits, the team members may role-play the presentation under variousscenarios. The team attempts to anticipate the other party's response to the presentation anddevelops contingency positions for each possible response from the other party. When practicingpresentations, the team members critique their own positions in order to identify and correctweaknesses or omissions. The presentation should highlight the value that the provider or healthplan brings to the agreement. For example, the provider's presentation may emphasize its scope ofservices and high level of patient satisfaction. The health plan may choose to stress prompt

payment and simple administrative requirements for providers. A health plan can alsodemonstrate the volume of plan members that it can direct to the provider.

For successful negotiation to occur, each party should present its points in a manner that leavesissues open for discussion. A negative relationship is likely to develop if either party feelscoerced by perceived threats.

A negotiating team may prepare a written outline of its positions and proposals for distribution atthe initial meeting. The outline should indicate the order in which topics will be negotiated.Typically, the parties negotiate the scope of services and contract language before reimbursementbecause the reimbursement arrangement should reflect the services to be reimbursed and the wayin which those services are to be delivered.

The parties also organize the other information that they will need for bargaining. Both teamsusually bring the following materials to the first meeting:

Background information on the other party Data on their own organization to aid in the explanation of positions and to serve as a

resource to answer questions from the other team A copy of the proposed contract with potential problem areas marked A list of suggested changes in contract wording and provisions Specific questions for the other party

In addition to preparing the content of their positions, health plans and providers should alsoconsider negotiating style options. Much has been written about negotiation styles and a detaileddiscussion of this topic is beyond the scope of this course. In general, the ideal negotiation stylefor provider contracting is a collaborative approach, with both sides focused on reaching mutuallyagreeable terms. In reality, however, health plans and providers adjust their negotiation styles tosuit the specific situation. The teams may test different negotiating styles during practice sessions.Health plans and providers should consider the impact of each negotiating style on futurerelations with the other party.

The negotiating plan also covers logistical issues, such as where and when to negotiate.Negotiating in a familiar environment can be a major advantage. An organization negotiating inits own surroundings has a distinct advantage in terms of comfort level and ready access toadditional data and support. To level the playing field, health plans and providers commonly holdnegotiations in a neutral location or rotate meetings between each other's locations. In the case ofsolo or small group practices where individual practitioners negotiate their own contracts, healthplans often conduct the negotiation process at the provider's office for the provider's convenience.

The critical issue for the timing of negotiation is to allow adequate time for preparationbeforehand. In many cases, the health plan, the provider, or both are eager to establish thecontractual relationship, but the parties should resist the temptation to rush into a contract withouta complete understanding of the contract's provisions and a plan for negotiation

Bargaining

Bargaining is often the most challenging stage of the negotiating process. Contract bargainingrequires the health plan and provider to focus on achieving their own goals while managing the

needs and expectations of the other party. Bargaining may take place through face-to-facemeetings, correspondence by mail, electronic mail or facsimile, or telephone conferences.

The bargaining process varies greatly from one contracting situation to another. In many cases,the negotiating teams need multiple contacts before they reach agreement on all issues, especiallyif the proposed contract covers a broad scope of services. Although the course of negotiations isnot predictable, many health plans and providers find that establishing a time frame forcompleting the bargaining process motivates both sides to manage negotiations efficiently.

During each meeting, a member of each team should document in writing and in detail the issuesdiscussed and the outcome of the discussion. The written record of the meeting serves asreference for the team as it plans strategies and tactics for subsequent meetings. Each meetingrecord should indicate the following information:

Date Names and titles of participants Names of any observers and their relationship to the negotiation Proposals made Issues resolved Areas of disagreement still outstanding

In the next screens, we provide more information about bargaining during the initial meeting andfollow-up contacts.

The Initial Bargaining Meeting

In many cases, the negotiating teams meet in person for the initial meeting. The main purpose ofthe first meeting is to set the stage for detailed discussion of the issues. The initial meetingbetween the provider and the health plan is also an opportunity for the teams to establish personalrelationships that will facilitate both the negotiation process and the subsequent administration ofthe contract.

Although some meetings are less structured, the first meeting often follows a written agenda. Thetwo parties sometimes collaborate to prepare the agenda. An agenda developed under acollaborative approach is more likely to reflect the objectives and priorities of both sides and toestablish a feeling of cooperation. The agenda lists the topics to be discussed and the time allottedto each issue. Figure 4B-5 provides a simple example of an initial meeting agenda.

Sometimes the entire first meeting is devoted to introductions and the exchange of backgroundinformation, especially if the health plan and the provider have had little previous contact.

Follow-up Contact Between the Teams

After the initial meeting, the negotiating teams review the outcome of the first meeting and adjusttheir negotiating plans accordingly. Attorneys for each of the parties review the contract in lightof the initial meeting and create alternative provisions or language to address specific issues. Atfollow-up meetings, or through other contacts, the teams make additional proposals andcounterproposals and discuss areas of disagreement.

Ideally, the health plan and the provider ultimately reach agreement on each issue so that thecontract can be formalized within the projected time frame. In reality, however, negotiationssometimes reach an impasse when neither party is willing to compromise further to reachagreement. When negotiations stall, the parties sometimes choose to postpone further talks toallow each side to reassess its position. After a period of time, negotiations resume if the partiesbelieve they can resolve the disagreements. If neither team is willing to alter its stance, thennegotiations cease.

Negotiations are often delayed while the parties exchange and evaluate data. In some cases, thenegotiation process must readdress already negotiated issues when a decision on one section ofthe contract affects the terms in an earlier section.

Closing the Agreement

At the final meeting, the negotiating teams clarify any unresolved details, review the contract toensure that the document includes the agreed-upon terms, and submit any final wording changesfor the contract. It is essential for both sides to have a clear understanding of the contract'sprovisions and the procedures for dealing with questions and problems that may arise after thecontract becomes effective.

The teams also finalize the procedures necessary to implement the contract. For example, theparties determine who will prepare the final contract and when the contract will be available for

review by the team leaders and their attorneys. The closing meeting presents another opportunityfor the parties to build their relationship as the teams designate contact persons and establishprocedures for administering the contract.

The actual signature of the contract takes place after negotiations are completed. In many cases,provider contracts require the signature of a health plan or provider executive in addition to thatof the negotiating team leaders. Once executed, the contract becomes a part of the health plan'sofficial provider file.

Endnotes

1. Sheryl Tatar Dacso and Clifford C. Dacso, M.D. Health Plan Answer Book, 2nd ed. (NewYork: Panel Publishers, 1997), 13-11.

2. John L. McDonald, "The Contract Negotiations," in Health Plan Contracting, ed. WendyKnight (Gaithersburg, Md: Aspen Publishers, Inc., 1997), 37.

3. Irwin M Birnbaum, "Legal Issues Associated with Health Plan Contracting," in Buildingand Managing Effective Organizations Under Capitation, ed. Douglas Goldstein(Gaithersburg, Md: Aspen Publishers, Inc., 1996), 266.

AHM Network Management: The Provider Contract

Objectives:

After completing this lesson you should be able to:

Explain why health plans enter into legal contracts with providers Describe the essential elements of a contractual relationship Identify the differences and similarities between a comprehensive and a brief provider

contract Describe the major elements in a comprehensive contract Discuss the goals that a health plan may try to reach through its contractual strategies

Introduction

With the exception of Blue Cross and Blue Shield health plans, which have traditionally hadparticipating provider contracts, most health insurance companies did not have contracts withproviders until the 1980s. The use of contracts increased with the development of preferredprovider organizations (PPOs), when health plans sought price discounts from providers in returnfor encouraging patients to go to contracted (or preferred) providers. Health plans learned thatcontracts that define business relationships with providers have a number of advantages over lessformal business relationships. Currently, PPOs, health maintenance organizations (HMOs), andpoint-of-service (POS) options use contracts to define a complex array of payment, risk-sharing,utilization management (UM), and quality management (QM) specifications. Although in manycases, the parties to a provider contract are a health plan and a single provider, such as aphysician, pharmacy, or a hospital, a growing number of contracts are now made between ahealth plan and an organized group of providers, such as a multi-specialty physician group, anintegrated delivery system (IDS), a physician-hospital organization (PHO), an independentpractice association (IPA), or a management service organization (MSO). Thus, in this lesson,keep in mind that the term provider may indicate an individual practitioner or institution, or anorganized group of healthcare professionals or institutions.

In this lesson, we will discuss the business goals of modern provider contracts, the typical stylesand components of contracts, a brief overview of each party's responsibilities under the contract,and some of the business strategies and objectives that can be pursued through the use of aprovider contract.

Purpose of Contracting

The primary purpose of a provider contract is to describe and document the intended businessrelationship between the health plan and a provider. Important elements of this businessrelationship include the various responsibilities of both parties and the method of payment forservices rendered. In addition, the contract either spells out the processes to be used in conductingbusiness or includes them by a reference to manuals or exhibits that describe the rules andprocesses of the business relationship in greater detail. For example, contracts sometimes includeby reference policy and procedure manuals for UM and QM programs and exhibits that containthe details of the payment arrangement.

The contract also gives the parties an opportunity to specify the tone and objectives of therelationship. The working relationship between a health plan and its providers can be arms-length

or collaborative, detailed and formal or open-ended and informal. The parties can have substantialindependent authority or there can be multiple checks and balances built into the contract.

Before drafting a contract with its providers, a health plan should consider (sometimes inconjunction with its provider partners) the quality, accessibility, and cost goals it wants toaccomplish, the strategies it expects to use, and the type of relationship it wishes to establish withits providers.

Essential Elements of the Contractual Relationship

Among the major elements that define the relationship between a health plan and its providers,the following five elements are essential and should be clearly stated and explained in theprovider contract:

1. Parties to the contract. This element is not as simple as it may sound. In manyinstances, more than one party exists on the payor side of the equation. Some health plansprovide services to self-insured employers or groups that have fiduciary responsibilitiesunder provider contracts. For example, a self-insured employer may be the partyultimately responsible for payment, not the health plan. In addition, the health plan maywish to rent the provider network governed by this agreement to other health plans,making these other plans party to the agreement. On the other hand, the provider that isparty to a contract may be an association of independently practicing providers. In thiscase, not only the provider organization itself but each of its affiliated providers may beparties to the contract.

2. Services provided. The contract should give the health plan positive assurances that theprovider agrees to deliver specific services to members of the health plan and that theprovider has all the legal and regulatory authority or certifications required for deliveringthe services. In the case of provider organizations that cover multiple independentproviders, assurances that the individual providers are bound to this agreement should bepresent.

3. Payment terms. The health plan wants to reach agreement with providers on the pricesto be paid to providers for their services, and it wants a commitment that providers willaccept these amounts as payment in full (except for copayments and deductibles). Inaddition, payment terms frequently describe incentive programs and financial risk-sharing, such as capitation and fee withholds. Finally, contracts need to address howpayment will be made when a member has coverage from more than one health plan.

4. Responsibilities of the parties .The health plan wants commitments from providers tofollow the rules and the procedures of the health plan, particularly with regard to billingfor services, credentialing, utilization review, and quality-assurance activities. Providerswant assurances from the health plan concerning service expectations, such as thetimeliness of payment and the availability of accurate information on the eligibility ofmembers and the benefits for which they are eligible. In some cases, one or both sidesalso want to know that the other party carries adequate liability insurance.

5. Business processes. While a health plan often places detailed information about businessprocesses in a provider manual rather than in the contract itself, many contracts at leastoutline the processes. The processes that are likely to be described in the contract includethe following:

Procedures for claims submission, processing, and payment Reimbursement processes

Procedures for authorization of services and referrals

6. Procedures for verification of membership and determination of applicable benefits7. Agreements to exchange information and to the right to access and audit plan members'

medical records8. Grievance processes and an agreement to indemnify the health plan from claims due to

the negligence of providers and vice versa9. The term of the contract and the amendment and termination processes10.

In each of these areas, the contract can set the tone of the health plan-provider relationship. Forexample, the health plan may specify that the provider must comply with the utilization reviewprocedures of the plan, or the plan and the provider may agree to work together to establishpractice guidelines. The tone will also be affected by the extent to which covenants are reciprocal.For example, if the health plan requires malpractice insurance, the plan may commit to maintainliability insurance itself. If the plan retains the right to cancel the contract immediately if theprovider loses a license or certification, the provider may also be given the right to cancel if theplan loses any required accreditations or licenses.

Within each of the business relationship areas listed above, there are many detailed issues that canbe addressed in the body of the contract itself or in a provider manual or exhibit that is made apart of the contract by reference. Most provider contracts can be categorized into two differenttypes: comprehensive contracts and brief contracts. The primary difference between the two isthe amount of information included in the contract document itself. The majority of providercontracts are comprehensive, and we will discuss first these types of contracts.

Elements of a Comprehensive Contract

A comprehensive contract includes in the contract document itself a large amount of detail aboutthe business relationship between the health plan and the provider. The purpose of including somuch detail is to furnish the parties to the contract with a single document that both can refer towhen dealing with the intricate details of contract issues. However, even comprehensive contractsfrequently include payment information in exhibits attached to the contract, and additionalpayment and administrative details are included in the provider manual which becomes a part ofthe contract by reference.

A comprehensive contract typically starts by defining the parties to the contract and the scope ofthe agreement. Next, the contract usually provides definitions of key terms. Following thedefinitions section, comes the representations and warrantees section in which the parties affirmthat they meet the legal and regulatory requirements to perform the duties of the contract. Theresponsibilities of each party are then discussed in detail. While actual payment rates are usuallycontained in exhibits so that they can be updated or changed easily, comprehensive contractsinclude detailed information about how the provider is to bill for services, who the provider cancollect payment from, and how multiple sources of payment will be coordinated. Comprehensivecontracts include additional information regarding record-keeping, confidentiality, audit rights,insurance coverage, the contract term, termination provisions, and many other legal and businessissues.

Introductory Paragraph

Typically, a contract between a health plan and a provider or provider group will begin with anintroductory paragraph. This paragraph, which may or may not include the date of theagreement, will usually identify the primary parties to the contract and any acronyms or shortnames that will be used to identify the parties in the body of the contract. A sample introductoryparagraph is given in Figure 4A-1.

Recitals

The introductory paragraph is generally followed by a section called the recitals that identifies thepurpose of the agreement. For example, this section may state that the health plan wishes tosecure the services of the provider, and the provider wishes to make those services available. Inaddition, the recitals may identify the products to be covered by the agreement. The contract maybe limited to a single product line, such as a Medicare HMO product, or it may cover multipleproduct lines. Typically, the recitals further define the parties to the agreement in legal terms (forexample, "ABC HMO is a health maintenance organization duly licensed in the state of Maine").If the primary parties represent other parties, as in the case of a PHO or an IPA, the connectionbetween the primary and secondary parties may be identified.

Definitions

The recitals are usually followed by definitions of key terms to be used in the contract. These areterms that have very specific meanings within the contract that may vary from common oreveryday definitions. The terms included for definition vary widely from contract to contract, butmost contracts define certain common key terms. As a rule of thumb, a term should be defined if(1) it is being used in a highly specific or unusual way in the contract, (2) it is a term that is notwidely understood by the general public, or (3) it is critical in defining the business relationshipamong the parties.

The next several sections discuss some of the most typically defined terms. Other termsfrequently defined in provider contracts are listed in Figure 4A-2.

Agreement or ContractSince most contracts include references to exhibits and manuals, the definition of the contractshould include the exhibits and manuals as parts of the contract.

CustomerThe definition of customer states who is a customer and which words in the contract are used toidentify customers, such as client, covered group, member, and covered person. Since healthplans frequently work with an array of group purchasers, members of groups, and individualpurchasers of healthcare coverage, it is important to define these types of customers. Self-insuredgroups may need to be separately defined for several reasons. A self-insured group-not the healthplan-is the fiduciary for the employee benefit plan and is ultimately responsible for payment tothe provider. In addition, risk-sharing and incentive arrangements with providers may not be thesame for self-insured groups as they are for fully insured groups.

Finally, if the health plan is contracting on behalf of multiple payor organizations, such as otherhealth plans, or is renting the provider network to other organizations, these intermediarypurchasers need to be defined. Some contracts refer to these other payor organizations as affiliatepayors.

Covered services are usually defined simply as the services included in contracts with customers.However, this definition may also be the place where the health plan defines the types ofprograms (HMO, PPO, Medicare, Medicaid) covered by the contract. In addition, the plan maywish to acknowledge that some providers may not offer all of the services included in the

customer contract. For example, a participating hospital may not have the medical equipmentnecessary to perform all the types of diagnostic and therapeutic procedures covered under thebenefit plan.

Complete ClaimsMany health plans define a complete claim (also called a clean claim) as a claim that contains allthe information necessary for processing by the health plan. This definition allows the plan toagree to certain time frames for routine claims processing without giving up the right to pursuenecessary information for claims that are incomplete or inaccurate. Based on the standard timesfor processing complete claims, providers can anticipate when they will receive reimbursement.

Medical Necessity

The definition of medical necessity or medically necessary services is a critical point becausehealth plans are contractually obligated to pay only for services they determine to be medicallynecessary. In addition, the concept of medical necessity is the foundation of UM and QMactivities. Here is the description of ****medically necessary services used by many healthplans in their contracts.

Because decisions related to medical necessity can be the cause of conflict between providers andhealth plans, contracts should attempt to define medically necessary services as clearly aspossible. Determinations regarding medical necessity should be based on accepted medicalstandards and UM guidelines developed by nationally recognized organizations. It should benoted in the contract that the criteria used to make utilization decisions are available to physiciansupon request.

Some health plans have started to define medically necessary services as care that allows thecovered person to make reasonable progress in treatment. Definitions of this type are designed toallow the health plans to stop paying for care that is no longer having a beneficial effect.However, the phrase “reasonable progress” is vague and difficult to interpret or enforce. Is aperson with a chronic disease making reasonable progress? One health plan company suggeststhat a patient with a stable chronic condition would be considered to be making reasonableprogress. On the other hand, could a health plan stop paying for the care of an unstable diabeticon the grounds that reasonable progress is not being made? It may be better for health plans todescribe in a provider manual certain limited situations where payment for ongoing care may becurtailed than to include vague language in the definition of medically necessary services.

****Services or supplies as provided by a physician or other healthcare provider to identifyand treat a member's illness or injury which, as determined by the payor, are

consistent with the symptoms of diagnosis and treatment of the member's condition in accordance with the standards of good medical practice not solely for the convenience of the member, member's family, physician or other

healthcare provider furnished in the least intensive type of medical care setting required by the

member's condition1

Emergency Services

Another area of considerable controversy for health plans is the definition of emergency services.In the past, some health plans required preauthorization of emergency services. Through aretrospective review of emergency claims, which based its conclusions on the final diagnosisinstead of the member's symptoms at the time of the emergency visit, these health plans coulddeny claims for unnecessary emergency room visits. This practice has come under increasingscrutiny by regulatory and accrediting bodies.

In June 1996, the National Association of Insurance Commissioners (NAIC) adopted a standardfor health plan coverage of emergency services based on the prudent layperson standard, whichdefines emergencies as "a medical condition manifesting itself by acute symptoms of sufficientseverity (including severe pain) such that a prudent layperson, who possesses an averageknowledge of health and medicine, could reasonably expect the absence of immediate medicalattention to result in placing the health of the individual in serious jeopardy, serious impairmentto body functions, or serious dysfunction of any bodily organ or part." 2

Consistent with the prudent layperson standard, a large number of health plans have pledged topay for emergency department screening and stabilization of conditions that reasonably appear toconstitute an emergency, based on the patient's symptoms at the time of the visit for emergencycare.3

The prudent layperson definition is also applicable if a health plan member seeks emergency carefrom a noncontracted provider, believing that the delay required to access care from a contractedprovider might worsen the emergency.4 The challenge for health plans in defining emergencyservices is to accommodate the legitimate concerns of members without allowing uncontrolleduse of expensive emergency services.

Utilization Management, Quality Management, and Risk Management

Most provider contracts define utilization management and quality management, list the activitiesincluded in these programs, and describe the responsibilities of the provider and the health planwith respect to UM and QM. Some plans also define risk management and the parties' roles incontrolling risk. Usually these definitions and descriptions are not controversial. Health plansoften reference policy manuals or exhibits for detailed descriptions of UM, QM, and riskmanagement activities. If a health plan plans to rent its network to other payors or to delegateutilization or quality functions, the plan should make it clear to providers whether otherorganizations are involved in UM or QM.

Representations and Warranties

Following the definitions, many comprehensive provider contracts include a representations andwarranties section. A warranty is a statement guaranteed to be true in all respects, and if thestatement is untrue in any respect, the contract of which the statement is a part can be declaredvoid. Unlike a warranty, a representation is a statement of facts that need not be true in allrespects, but only in those respects material to the provider contract.

In this section, both the health plan and the provider attest that they have the necessary licenses,permits, and approvals to legally conduct the business described by the contract. In addition, theprovider may be asked to warrant that the information in the provider application for membership

in the network is correct. When a provider organization (PHO, IPA, or IDS) is the primarycontracting entity, this section often assures the health plan that the provider organization has theauthority to act on behalf of the individual providers in the organization.

Responsibilities and Obligations

A large portion of a provider contract is dedicated to describing, sometimes in great detail, theresponsibilities of each party to the contract. These responsibilities can be divided into providerresponsibilities, health plan responsibilities, and mutual obligations. The next few sectionsprovide a brief overview of these topics, and Responsibilities of Health Plans and ProvidersUnder Provider Contracts discusses responsibilities in depth.

Provider ResponsibilitiesThe provider responsibilities under the contract may be grouped into one section or they may bedistributed over several sections. However, comprehensive provider contracts have a number ofcommon elements relative to provider responsibilities. The topics covered under providerresponsibilities include ***these issues.

Agreement to provide services *** Responsibility for medical care and members' medical records Responsibility to meet requirements of the health plan's credentialing and recredentialing

programs Participation in UM, QM, and risk management programs Patient grievance and complaint resolution Compliance with administrative and operating procedures Reporting requirements for UM, QM, and risk management programs and for compliance

with regulatory and accrediting bodies

Health Plan Responsibilities

While the health plan may be primarily interested in obtaining commitments from its providers,the providers can expect reciprocal commitments from the plan. ***Here is a list identifyingareas in which health plans often make commitments to their providers.

Verification of the plan's eligibility to do business*** Minimum guarantees on the volume of patients directed to the provider Service commitments to providers Dispute resolution Credit checks on self-insured employer groups or guarantee of payment for services

rendered to these groups Reporting requirements to help providers manage utilization, quality, and costs Marketing provisions

Mutual Obligations

Besides the responsibilities that each party to the contract owes to the other, there are certainresponsibilities or obligations required of both parties. The main areas of mutual obligation are***here.

Payment arrangements, including no-balance billing and the hold-harmless clause*** Claim filing procedures

Access to and confidentiality of members' medical records, and audit rights Insurance coverage, liability, and, when appropriate, indemnification Contract term and termination Compliance with applicable federal and state laws

Other Contract Clauses

The preceding sections covered the major aspects of the business relationship between a healthplan and its providers. However, many other provisions are used to describe the expectedperformance of the parties under the contract and to protect the legal integrity of the contract.Figure 4A-3 provides brief descriptions of some common contract clauses.

Brief Contracts Supplemented by a Comprehensive Provider Manual

The comprehensive contract is the most common form of provider contracting vehicle. However,some health plans prefer a brief contract that includes, by reference, a provider manual thatcontains much of the information in the comprehensive contract, as well as additional detailedoperational information. Because the provider manual is part of the contract, health plans usingbrief contracts must ensure that their provider manual is comprehensive and up-to-date.

A number of sections normally included in the comprehensive contract can be moved to theprovider manual, including the sections on responsibilities and obligations, definitions, payment,information exchange, record keeping, confidentiality, auditing, insurance and liability, marketingprovisions, term and termination, and dispute resolution. One advantage to using a brief contractsupplemented by a provider manual is the ease with which the health plan can make changesaffecting all providers or a certain subset of providers. Rather than having to amend eachindividual provider contract to reflect a modification, the health plan can issue a revision to theprovider manual, or a new manual if the changes are substantial, to those providers affected bythe change.

A key factor in determining whether a section can be moved to the provider manual will bewhether the health plan is willing to negotiate contract terms with an entire class of providers. Ifthe terms of the agreement vary from provider to provider within a class of providers, then less ofthe contract can be moved to the manual. In general, the health plan may prefer to have more inthe manual and less in the contract because the manual can usually be amended unilaterally by thehealth plan as long as advance notice is given. On the other hand, providers are less likely to becomfortable giving the health plan this increased power. Areas that probably need to remain inthe body of a brief contract include the following:

Parties to the contract, including a definition of subcontractors or other parties that canbenefit from the contract, such as organizations that rent the provider network

Warranties and representations of the legal status of all parties to perform the obligationsof the contract

Responsibilities of provider networks, such as PHOs, IPAs, and IDSs Specific payment rates Relationship of the parties Governing law Amendment process

These elements need to be in the body of the contract either because they are likely to vary fromone contract to another or because they relate to specific legal issues rather than operational orbusiness issues.

Strategies for Contracting

Earlier in this lesson we mentioned that the tone and structure of the contract represent anopportunity for the health plan to influence the nature of its business relationship with providers.The contract should clearly and specifically state the parties' rights and responsibilities. Inaddition, as the early tools of health plans, such as utilization review and case management, reachtheir full potential, health plans will find it increasingly necessary to develop long-term,collaborative relationships in order to implement the next generation of care management tools.For example, cooperative and stable provider relationships are necessary for the successfulimplementation of disease and outcome management programs.

It is important to remember that long-term relationships are not established by merely offering athree-year contract instead of a one-year contract. Long-term relationships are established throughthe development of collaborative processes and through reciprocal obligations. One of the keycomplaints that providers have with the contracting process is the "one-way street" attitudeexpressed in some provider contracts. If health plans want to build long-term relationships,contracts need to reflect a two-way, mutually beneficial relationship.

For example, if a health plan requires providers to maintain their credentials in good standing, thehealth plan should similarly maintain its licenses and accreditation. If the health plan wantsproviders to accept risk on self-insured accounts, the plan should inform providers of the credit-checking policies it uses for self-insured groups. If the health plan cannot guarantee the accuracyof its eligibility information, it should share the risk of bad debts with providers. If the providersincur financial penalties for late billing, the health plan should incur financial penalties for latepayments.

In addition to such reciprocal covenants, the plan should work with providers to develop practicepatterns and protocols for care, disease management programs, and outcome measurementprocesses. Grievance processes should include providers who are not employees or paidconsultants of the plan. Providers can be consulted on the design of products, benefits, andincentive programs. The plan can provide data comparing the costs, quality, and patientsatisfaction scores of similar providers, adjusted for differences in the severity and mix of patientillnesses. The plan can signal its intent to collaborate in these ways by referencing them in thecontract or provider manual.

Providers are frequently confused by the wide array of health plans, products, payment systems,and care management processes they encounter in the delivery of care. Most providers appreciatea health plan that can simplify this situation by consolidating multiple products into one contractand by using common payment and utilization management processes. Multiple products can beaccommodated in a single contract through the use of separate payment exhibits for differentproducts and product-specific sections of the provider manual. This simplified contractingapproach is enhanced if common payment approaches are used across products. Utilizationreview, disease management, and data reporting can also be standardized.

A major caveat on consolidated contracting must be recognized, however. Some health planshave used the single contract approach to bind providers into multiple product lines with all-or-

none participation and termination clauses. This tactic increases the leverage of the health plan infuture payment rate negotiations by bundling the patient volume of all product lines, but it mayincrease provider resistance. The health plan achieves a short-term advantage in negotiations butat the long-term cost of destabilizing provider relationships. The plan can achieve many of thesame goals by providing financial or other incentives to providers that agree to participate inmultiple products. In the long run, plans that encourage cooperation are likely to be moresuccessful than plans that use an all-or-none approach.

Endnotes

1. Bruce W. Clark, "Negotiating Successful Health Plan Contracts," Healthcare FinancialManagement (August 1995): 28.

2. Sally K. Richardson, Letters to State Medicaid Directors, 20 Feb. 1998, par. 5, online,CMS, Available: http://www.hcfa.gov/medicaid/bba2208c/htm, 20 June 1998.

3. American Association of Health Plans (AAHP), Putting Patients First, online, AAHP,Available: http://www.aahp.org/services/initiatives/patients_first/policies/Policy/htm, 12Oct. 1998.

4. "NAIC Adopts Emergency Coverage Standard," BNA's Health Plan Reporter 2, (June19,1996): 597.

AHM Network Management: The Role of Network Management in a Health Plan

Objectives

After completing this lesson you should be able to:

Explain the meaning of network management and list some of the activities that aretypically included in this function

Describe the role of a network management director, a contracting specialist, and aprovider relations representative in network management

Define profiling and explain its significance in network management Describe some training and support approaches that health plans use to improve the

performance of network management staff Explain the relationship between network management and medical management, risk

management, member services, and claims administration

Introduction

Health plans integrate the financing and delivery of healthcare within a system that seeks toensure health plan members' access to necessary services, provide high-quality care, and improvethe cost-effectiveness of care delivery. A health plan's success in managing accessibility, quality,and cost depends largely on how well the health plan manages its provider networks. This lessonexplores how health plans develop and manage provider networks. It begins with a description ofthe processes for network development, followed by a discussion of programs for ongoingnetwork management. Because primary care is such an important concept in health plans, ourdescriptions of fundamental network processes generally focus on primary care providers. Wewill address considerations for other types of providers in Network Management Considerationsfor Different Types of Providers and considerations for special populations in EstablishingNetworks for Government-Sponsored Programs.

To begin our discussion of provider networks, we will first define some of the basic terminologyrelated to networks and network management that will be used throughout this course manual. Aprovider is any healthcare professional (an individual), facility, or organization that rendersmedical care to a health plan's membership. The term practitioner is sometimes used to refer to anindividual provider who is trained and licensed or certified to deliver a specific set of healthcareservices. A provider network, also called a provider panel, is the group of healthcare providersthat a specific health plan has contracted with to deliver medical services to its members inexchange for negotiated compensation. The use of a defined network of providers is adistinguishing characteristic of health plans. The basic premise underlying the use of providernetworks is that 1) health plans direct members in need of healthcare services to providers in thenetwork, and 2) network providers, in turn, agree to follow the health plan's policies for caredelivery and to accept lower rates of reimbursement.

Network management includes all of the activities that a health plan conducts in order to design,assemble, monitor, and maintain a network of providers. For most health plan members,interaction with a health plan usually means interaction with physicians, hospitals, pharmacies,and other network providers. Because the majority of a member's contacts are with providers, thehealth plan's development and management of high-quality provider networks plays a critical rolein the ultimate satisfaction of members. The health plan's approach to network management alsoimpacts group purchasers' impressions of the health plan. Similarly, the satisfaction of

participating providers and their staff is strongly influenced by the degree to which theyunderstand and can easily implement the health plan's policies and procedures, and by the receiptof accurate payment in a timely manner. Further, effective network management contributes tothe administrative efficiency of the health plan itself.

This lesson begins with an overview of the scope of activities typically included in networkmanagement. We then describe the organization and staffing of the network managementfunction, as well as the knowledge and resources that network management personnel need tofulfill their responsibilities. This lesson also discusses the relationship between networkmanagement and other health plan functions, such as medical management, risk management,member services, and claims administration.

The Scope of Network Management

Arranging and maintaining member access to providers who consistently deliver quality medicalservices is a complex process. Because most health plans offer benefit plans that coverpreventive, routine, urgent, and emergency healthcare, a health plan provider network typicallyincludes not only physicians and acute care hospitals, but also a variety of non physicianspecialists and facilities that offer a broad spectrum of healthcare services in various settings.Network management may be further complicated by considerations for special populations, suchas elderly or low-income groups, or members who suffer a work-related illness or injury. Inaddition, the network management function must ensure that the health plan's provider networkscomply with applicable laws, regulations, and accrediting standards.

The scope of the network management function varies greatly from one plan to another; however,network management typically includes some or all of the activities listed in Figure 1A-1. Wewill discuss these activities throughout the following lesson

One important activity within the scope of the network management function is to ensure thequality of the health plans provider networks. Credentialing is a review process conducted by orfor a health plan to determine the current clinical competence of a provider and to ensure that theprovider meets the health plan's standards. During the credentialing process, the provider'scredentials (the documentation related to licenses, certifications, training, and otherqualifications) are obtained and verified. Then, a health plan committee made up of the provider'sprofessional colleagues reviews the credentials to determine whether the provider meets thehealth plan's pre-established criteria for participation in the network. Recredentialing is a healthplan's periodic reexamination and verification of a provider's qualifications to ensure that theprovider still meets the health plan's standards for network participation.

Another significant aspect of network management is establishing and maintaining goodrelationships with providers and their staffs. A friendly relationship between networkmanagement and providers may influence providers and their staffs to become more familiar withand consistently comply with the health plan's clinical and administrative policies. Some healthplans distinguish between provider relations and provider service activities, although the twoconcepts are closely related and may be performed by the same staff. Provider relations refers toproactive measures that the health plan takes to establish and maintain good relationships withproviders. Provider relations includes activities such as education of providers and staff about thepolicies and procedures of the health plan, and routine calls on providers to assess their

satisfaction with the health plan and check for unmet needs. Provider service is a reactive networkmanagement activity that focuses on problem solving or responding to specific requests fromproviders. Helping a provider expedite a request for authorization of a procedure is an example ofprovider service. Other health plans consider provider relations and provider service to be thesame thing and use the two terms interchangeably.

Organization of the Network Management Function

From an organizational perspective, the network management function is usually a self-containedentity, either as its own department or as a division of another related area, such as medicalmanagement. Many health plans have a sub-unit within network management, or even a separatedepartment, for credentialing activities. Although some health plans have staff members whofocus exclusively on credentialing activities, in other health plans, the network management staffmembers share credentialing activities along with a variety of other network-relatedresponsibilities.

A health plan that has multiple offices within its service area may decentralize some or allnetwork management activities. Each health plan determines which network activities will becentralized and which will be decentralized. A large health plan may prefer to handle most or allnetwork management functions through a single network management unit based at thecompany's national, regional, or state headquarters. Alternatively, the health plan may use staffbased in the plan's service area (local staff) to perform many network activities. In many cases,the health plan uses a centralized approach for some activities while decentralizing otherfunctions. For instance, a health plan that maintains a staff within the plan's service area to recruitand educate providers may also have a centralized provider-inquiry phone unit that providers cancall to request authorization of referrals or procedures, or to ask questions about the plan. Inanother example, local staff collect credentialing or performance information from providers andthen forward the information to a centralized data input unit, rather than maintaining records atthe local level. A centralized data unit can help ensure data integrity, which is essential for theaccuracy of credentialing files, performance reporting, and provider directories.

The organizational structure of the network management function often varies according to thesize and the geographic scope of the health plan. For example, smaller plans typically have moreintegration among activities and less specialization of roles. The network management directorsof small plans are more likely to be involved in day-to-day network management activities, suchas recruiting, contracting, and providing performance feedback to providers. In small plans, thechief executive officer or chief operating officer may have direct involvement in managingnetworks, although this structure is rare. Larger health plans may have separate networkmanagement staffs for different types of providers. For example, the health plan may have unitsspecifically for developing and managing pharmacy networks, hospital networks, and ancillaryservice networks.

If the organization covers a multistate or multiregional service area, there may be staff in each ofseveral locations to handle the respective territories, with a unit at the corporate site to coveradministrative functions. In addition, large health plans often have a central contracting unit(which may or may not be part of the network management department) for tertiary institutions,hospital systems, and medical vendors (such as laboratories) whose services cut across state lines,with local staff for geographic-specific providers.

Network Management Staffing

The numbers and types of personnel who perform network management activities differ from onehealth plan to another. The specific duties performed by network management staff also vary.Although there is no standard approach to staffing the network management function, manyhealth plans have three basic categories of network management personnel: directors, contractingpersonnel, and provider relations representatives. Figure 1A-2 depicts two possible ways in whichthe network management personnel may be organized.

Network Management Directors

The nature of network management supervision varies greatly among individual health plans. Insome health plans, especially in less mature health plan markets, the medical director has the

ultimate authority over all network management activities. The medical director is a physicianwho oversees the health plan's medical management programs. The medical director mayparticipate in the day-to-day network operations, such as recruiting, contracting with, educating,and evaluating providers. In other cases, the medical director oversees network activities but isnot involved on an operational level. Medical directors for health plans that have a strong clinicalorientation, especially provider-sponsored health plans, are generally very involved with mostnetwork management processes.

In many other health plans, the vice president of healthcare services, the vice president ofnetworks, the director of provider relations, or a similar officer oversees network managementwhile the medical director focuses on clinical issues, such as utilization management (UM) andquality management (QM) programs.

Still other health plans divide the oversight of network management activities between two ormore plan officers. For example, a health plan's medical director may be in charge of all networksexcept the pharmacy network, which is overseen by the pharmacy director. In other plans, themedical director oversees some network management activities, such as credentialing andperformance management, and a nonclinical officer is responsible for other network-relatedactivities, such as contracting and provider service. Many providers prefer to have a medicaldirector involved in at least some network activities in the belief that a medical professional willhave a better understanding of provider needs than a nonclinical network manager. In any case,the health plan officer in charge of network management needs a thorough knowledge of basichealth plan concepts and the laws, regulations, and accrediting standards affecting networks. Thisofficer not only oversees all network management functions but also serves as a networkmanagement liaison to other members of senior management within the health plan. The networkmanager communicates with and, as needed, works with other senior managers to developpolicies and address problems that are network-related. For example, the network managementdirector works with managers from the claims function to develop claims submission andprocessing policies that meet the needs of both the plan and its providers.

An executive-level committee at the health plan may oversee and set policies for networkmanagement. Some health plans have executive-level committees dedicated specifically tonetworks and/or credentialing. At other health plans, the Quality Management committee is theexecutive-level committee that oversees network management activities. The director of networkmanagement reports to the applicable executive-level committee and may be a member of thatcommittee. The committee overseeing network management typically reports directly to thehealth plan's board of directors. In addition, some health plans and the provider organizations intheir networks have formed joint committees to deal with network issues, such as changes tocredentialing criteria or programs to manage provider performance. Committees that includerepresentatives from both the health plan and the provider organization may result in closercollaboration between the two parties.

Provider organizations such as IPAs and PHOs typically have their own boards of directors andcommittees to address health plan activities such as networks, quality, and utilization. When ahealth plan contracts with one of these provider organizations, the director of the networkmanagement department or other senior network management staff member can serve as a liaisonbetween the provider organization and the health plan. The liaison ensures regularcommunication, solicits input from the providers, and follows up on the implementation of anyprovider organization board or committee decisions. For instance, the network managementdirector can communicate UM and QM policy changes to the provider organization, obtaininformation about satisfaction with the support provided by the health plan's provider relations

representatives, and relay provider suggestions about administrative processes to the appropriatehealth plan department.

Contracting Specialists

In many health plans, the network management department includes personnel whose primaryresponsibility is to negotiate and execute contracts. Larger health plans further specialize thisfunction by having some staff members handle contracts with individual practitioners and othersfocus on contracting with provider organizations and facilities. In addition to negotiating skills,the contracting staff members need to understand provider reimbursement and other aspects ofhealth plan finance to be able to analyze the projected utilization and costs associated with aproposed network of providers. The contracting personnel must coordinate activities with thehealth plan's claims, information systems, and marketing departments in order to ensure that theterms of provider contracts can be efficiently administered by the company's systems. Forexample, contracting personnel should consider the claims administration department's capabilityto process claims before determining a contract's terms on the time for claims processing. Thehealth plan's legal department should review all contracts for compliance with applicable lawsand regulations

Provider Relations Representatives

Provider relations representatives, also known as network management field staff, are usuallyresponsible for

recruiting and assisting with the selection of new providers evaluating a provider's medical practice set-up conducting initial orientation of the provider and staff educating providers about health plan developments rendering provider service

In some health plans, provider relations representatives also participate in profiling.

Profiling

Profiling, also known as provider profiling, is the collection and analysis of information about thepractice patterns of individual providers. Profiling produces information on such parameters asquality of care, outcomes, patient satisfaction, utilization of resources, cost-effectiveness, andcompliance with the plan's protocols.

Some health plans use profiling information to select network providers whose practice patternsappear to be compatible with the goals and policies of the network. However, profiles for networkcandidates are often not available unless the provider has previously participated in one of thehealth plan's networks. Sources of profiling information about applicants for the network includethe health plan's records for claims, QM, and UM; data gathered by health plan purchasers; andreports from the providers applying for the network.

A more common use of profiling is to measure the overall performance of providers already inthe network. Profiling provides the health plan with a base of objective measurements andidentifies problems to address during provider evaluations. Data for provider profiling of currentnetwork providers may come from a variety of sources including claims, encounter forms, and

other periodic reports submitted by the providers. Network providers need performance feedbackon a regular basis in order to assess their performance relative to the standards of the health plan,national standards, and the performance of their peers. Performance feedback also identifies areasof deficiency for the provider. Typically, the medical director or another clinical senior managerfrom the health plan discusses the results of the performance analysis with the provider. Forinstance, the pharmacy director may conduct performance evaluations for network pharmacists.Provider relations representatives sometimes collect, organize, and assist with the analysis ofprofiling information. In addition, provider relations representatives may help providers withadministrative problems that are hampering performance. We discuss profiling in more detail inOngoing Management of Provider Networks.

Credentialing

Collecting and verifying credentialing information may or may not be among the responsibilitiesof provider relations representatives. Some health plans choose to establish a separate in-houseunit for the credentialing activities, or credentialing may be managed by the quality managementfunction. Other health plans delegate credentialing information collection and verification toprovider organizations or credentials verification organizations (CVOs). One reason to separatecredentialing from recruiting and provider relations activities is to set up a "checks and balances"system for the network. Separate credentialing helps a health plan ensure objectivity whenselecting and recredentialing providers for the network.

Some health plans believe that provider relations representatives are a logical choice to performinitial credentialing and periodic recredentialing because of the representatives' knowledge of andproximity to area providers. Verification of credentials can often be performed via telephone,mail, or fax. A health plan staff member usually makes a site visit to assess the provider'sfacilities and practice procedures. Since provider relations representatives already call onproviders, the health plan may find it more efficient to let the network management field staffgather the extensive documentation required for credentialing and recredentialing. We willdiscuss the credentialing of providers further in Identifying and Recruiting Providers for a HealthPlan Network.

Education of Providers

Because provider relations representatives are often a provider's main source of information aboutthe health plan, the representatives must be familiar with other aspects of the plan's operations aswell as with network management. Figure 1A-3 lists some of the operational areas and specificissues that representatives often address in their education of providers and their staffs.Continuing Management of Network Adequacy and Provider Satisfaction provides additionaldetails on provider and staff education.

Improving Provider Satisfaction

Because of the complexity of the relationship between a health plan and its networks, providerrelations representatives or other health plan personnel should conduct periodic surveys of theirproviders and their providers' staffs. Such surveys assess provider understanding of andsatisfaction with

the policies and procedures with which providers must comply, communication and service from the health plan, and

the extent to which the organization upholds its obligations for timely and accuratepayment, quick turnaround time for authorizations, and efficient methods for determiningmembership eligibility.

The feedback from provider surveys allows the network management department to revise itsservice protocols and to facilitate changes in other operational areas as needed. In ContinuingManagement of Network Adequacy and Provider Satisfaction, we discuss provider satisfactionfurther.

Organization of the Provider Relations Staff

The number of provider relations representatives should be sufficient to allow regularcommunication with all providers in order to distribute updates from the plan and to identify andresolve any problems. It is usually more efficient to have the field staff based in regionallocations that are close to the offices they cover, rather than in the health plan's corporate

headquarters. Regional locations make it possible for a representative to call on providers inperson and visit many offices in a given day. However, many health plans have such large panelsthat it is impossible for provider relations representatives to make on-site visits to all individualpractice sites. Some health plans limit in-person visits to primary care providers.

When a health plan has provider relations representatives who work outside the corporatelocation, it is essential that the network management department establish standard policies andprocedures to guide the representatives so they can serve network providers adequately andresolve problems on a timely basis. By developing standard service and reporting procedures forall processes, the network management department ensures that its field representatives canprovide consistent service for its providers and identify common issues or problems that mayneed to be addressed at the corporate level.

Support and Training for Network Management Staff

The network management function encompasses a variety of activities that require different skillsets. For example, staff who recruit providers benefit from having

sales training and experience, outgoing personalities, strong written and oral communication skills, an aptitude for managing details, and a knowledge of the health plan's policies and procedures.

Personnel in charge of service or provider education require strong customer service skills. Seniorstaff within network management must have the necessary background to interact with otherdepartments, work with physician and hospital leaders, understand the complexities ofcontracting and reimbursement, and manage the broad range of activities associated withdeveloping and managing provider networks.

Regardless of their roles within the department, all network management staff share a commonneed for detailed knowledge about the health plan's operations and for support mechanisms tohelp them work with a variety of provider specialties and services. A health plan that wants toimprove the performance of its network management staff may decide to provide some of thefollowing types of support and training:

Education about internal plan operations Forums for sharing information within the department and within the health plan Information systems support Cross-training in the different network management activities Communications support

The following screens describe each of these training and support approaches.

Education About Internal Plan Operations

In order to serve participating providers effectively, network management staff should receive athorough orientation on internal plan operations, particularly in the areas of providerreimbursement, data reporting, claims submission, authorizations and referrals, medicalmanagement protocols, and benefit coverage for the different products that the health plan offers.

Because the departments that handle these functions usually have in-depth training for their ownemployees, it is particularly helpful if network management staff attend the relevant sessions ormodules of those orientation programs.

Forums for Information-Sharing

Network management staff should have periodic staff meetings to discuss problems and potentialsolutions. Because many issues affecting the network have implications for other operationaldepartments, interdepartmental meetings at both senior and operational levels can improveoperations throughout a health plan. For example, network management personnel may negotiatecontracts that satisfy providers and improve the health plan's financial position, only to find outlater that the terms and provisions of the contracts are inconsistent with standard administrativeprocedures. The special intervention required to administer these nonstandard contracts mayreduce the advantages that the contracts offer. Through interdepartmental meetings, networkmanagement personnel can learn how to construct contracts that help the health plan achieve itsbusiness goals while still conforming to operational standards.

Technological Support

A health plan's information system typically includes a great deal of information relevant tonetwork management, such as data on each participating provider, fee schedules and coding rules,claim status, utilization data, authorizations, referrals, membership eligibility, and benefitcoverage. Network management staff need online access to such information, and fieldrepresentatives should have remote access capability, if possible.

Because network management activities involve significant telephone use, health plans usuallyhave sophisticated phone systems to track such service statistics as call volume, timing of calls,average time that callers spend on hold, call length, and call abandonment rates. Many healthplans include automatic call distributors in their phone systems. An automatic call distributor(ACD) is an automated system that answers telephone calls with a recorded message, gives thecaller instructions on how to reach a specific department, and then directs the call to a specificunit based on preset criteria, such as the caller's area code or another code that the caller enters onthe phone's keypad1.

Cross-training

Given the dynamic nature of the health plan industry, health plans should be proactive in cross-training network management staff, both from a functional and a geographical perspective.Events such as contracts with new purchasers, or enlargement of the health plan's service area,can create the need to expand networks in a relatively short period of time. As a result, staffmembers who have previously supported specific functions or specific territories may suddenlybe required to participate in new activities. In addition, staff can better meet the evolving needs oftheir health plan when they understand a broad range of related functional areas, such as

provider appeals and grievance processes, reimbursement and claims processes, utilization and quality management programs, and programs for initial and ongoing member education.

Communications Support

Provider relations representatives must communicate a considerable amount of information toparticipating providers. Network management staff should have access to and make use of avariety of communications tools to ensure that providers receive timely, complete, and accurateinformation. These communications tools include quick reference summary sheets, newsletters,training seminars, mass mailing systems, and, wherever possible, online technology.

The Relationship Between Network Management and Other Health Plan Functions

In the course of conducting network development and management activities, the networkmanagement staff has regular interaction with several other health plan departments, includingmedical management, risk management, member services, and claims administration. These otherdepartments regularly exchange information with network management personnel and mayprovide specific services related to networks. Cooperation and communication among the variousfunctions enhance each department's efficiency and effectiveness.

Medical Management

Medical management, also known as care management, encompasses all of the activities thathealth plans and their providers engage in to maintain or improve quality service levels, meetbudget projections for medical services, and respond to accreditation and regulatoryrequirements2. Medical management includes the health plan's policies, processes, and activitiesfor utilization management, quality management, and resolution of member complaints andgrievances. Medical policy development, medical technology assessment, and formularymanagement are other medical management activities.

Medical management attempts to integrate clinical services from various providers in a way thatmaximizes the benefit to the plan member while avoiding excessive utilization of healthcareresources. An important purpose of medical management is to improve the member's overallhealth status over time by coordinating care across individual episodes of care and the differentproviders who treat the member.

Many of the activities of network management are closely related to those of medicalmanagement. For example, profiling is a means of managing provider performance in order toensure high-quality care. Network management and medical management often work together todevelop programs that meet the needs of both functions. Some health plans have regional medicaldirectors who provide support to the provider relations staff. For example, a regional medicaldirector may accompany a provider relations representative on visits to providers, particularly if aprovider has repeatedly failed to comply with administrative requirements or if the provider hasquestions or problems that involve clinical issues. Provider relations representatives, in turn,support medical management directors and staff by coordinating special projects, such as forumswith practitioners to introduce new QM programs.

Other specific medical management activities that also involve network management are

health risk appraisals to identify members at risk for a particular illness or injury outreach programs to encourage the use of preventive health services demand management and disease management programs clinical practice guideline development and implementation

outcomes management3 utilization review and authorization systems for referrals and procedures credentialing of providers case management

A health plan's processes for provider selection, reimbursement arrangements, and performancemanagement often rely heavily on quality, utilization, and cost information from the variousmedical management programs.

Risk Management

Risk Management includes all of the activities that a health plan undertakes in order to protect theplan against financial loss associated with the delivery of healthcare services and to protect itsmembers against harm from medical care. The purpose of risk management is (1) to identify andevaluate exposures (actual or potential) to risk and (2) to prevent or at least minimize anyfinancial loss or harm to a member that may result from such exposure.

In some situations, health plans may be held liable for negligent care rendered by plan providers.In order to ensure healthcare quality and reduce the risk of negligent care, health plans oftenimplement some or all of the following measures:

Credentialing and recredentialing conducted in accordance with applicable federal andstate regulations, accrediting agency guidelines, and court decisions

Performance management programs that include quality indicators Compliance with state and federal laws and regulatory requirements for accessibility,

adequate numbers and types of providers, and contract provisions

Another type of legal risk for health plans is the possibility of lawsuits from providers who

are not allowed to join a network, have their privileges restricted by a health plan, or are dismissed from the network.

The health plan must be aware of and adhere to applicable antitrust and antidiscrimination laws toavoid this type of exposure to risk. Health plans should also protect the confidentiality ofinformation discovered during the credentialing process. We will discuss legal issues fornetworks further in Environmental Considerations for Network Management.

Health plans must also manage the risk of financial loss that may result if the actual total cost ofhealthcare services exceeds the budgeted cost. One common way to manage this risk is bytransferring some of the financial risk to providers through risk-sharing reimbursementarrangements. However, health plans are careful to comply with applicable laws and regulationswhen developing reimbursement arrangements and to avoid creating a compensation approachthat might induce providers to deny needed care to members.

Member ServicesMember services is the department responsible for helping members with any problems, handlingmember grievances and complaints, tracking and reporting patterns of problems encountered, and

enhancing the relationship between the members of the plan and the plan itself4. Memberservices also monitors overall member satisfaction with providers and care. Through its processesfor assessing member satisfaction and addressing member complaints and grievances, memberservices can identify trends that may indicate problems with accessibility or providerperformance. Figure 1A-4 lists some complaints and problems tracked by member services thatare of particular interest to network management personnel.

In addition to providing information about accessibility and provider performance, memberservices may directly affect access to services by showing members how to obtain care from theprovider network. Such member education typically explains

the concept of a provider network the meaning and scope of covered services the role of a primary care physician (PCP) the way in which a member may select a PCP or change to a different PCP the health plan's system for authorizing referrals, procedures, and hospital care

Claims Administration

The network management function relies on the health plan's claims administration departmentfor much of the information needed to manage provider performance. Claims administration isthe process of receiving, reviewing, adjudicating, and processing claims for either payment ordenial. By examining claims, the health plan can determine the number and type of healthcareservices delivered to plan members. This information allows the health plan to understand eachprovider's practice patterns and level of compliance with the health plan's procedures for thedelivery of care, as well as to monitor the number and types of services provided by the entirenetwork.

Providers compensated through a capitation reimbursement arrangement do not submit claims.Instead, capitated providers send encounter forms to supply the health plan with informationabout members' healthcare visits, diagnoses, treatment, and plans for follow-up care. Theprovider relations staff can facilitate the processing of claims and encounter form information by

helping providers stay up-to-date on the codes that they use to indicate diagnoses and proceduresperformed.

At this point, you should have a basic understanding of the network management function,including the staffing of this function, the activities that are typically conducted by the networkmanagement staff, and how these activities relate to other health plan operations. It is alsoimportant to recognize the impact of external forces on a health plan's approach to networkmanagement. Environmental Considerations for Network Management explores how legalrequirements, quality standards, and purchaser and consumer expectations all influence the wayin which a health plan develops and manages networks. In future lessons, we provide a closerlook at how a health plan accomplishes the primary network activities of planning the network,selecting and contracting with providers, and managing provider performance.

Endnotes

1. Kenneth Huggins, Dani L. Long, and Caroline W. Sundberg, Customer Service inInsurance: Principles and Practices (Atlanta: LOMA, 1997), 234-235.

2. Mary Sadjak and Zachary B. Gerbarg, " Medical Management Overview," from MedicalManagement Signature Series by Health Plan Resources, Inc., par. 2, online, Available:http://www.mcres.com/mcrmm01.htm. 11 November 1997.

3. Ibid., par. 4.4. Peter R. Kongstvedt, " Member Services and Consumer Affairs," in Essentials of

Managed Healthcare, 2nd ed., ed. Peter R. Kongstvedt (Gaithersburg, MD: AspenPublishers, Inc., 1997), 378.