are you ready for ssmos?

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Are you ready for ssmos?Gregory M. KaladjianPublished online: 04 Jan 2008.

To cite this article: Gregory M. Kaladjian (1998) Are you ready for ssmos?, Journal of Children andPoverty, 4:2, 1-16, DOI: 10.1080/10796129808413950

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Are You Ready for SSMOs?

Gregory M. Kaladjian

While welfare reform altered entitlements, introduced time- limited bene$ts, and capped reimbursements for administrative costs, little was done to control service utilization by those who remain on welfare, or to realign the financial incentives and administrative infrastructure for the delivery of social services. This essay explores the advent of the Social Service Maintenance Organization and discusses the steps that social service agencies need to take to ready themselves for this altered system of service delivery. Without a thorough understanding of the way in which managed care delivery systems operate, us well as the sophisticated information systems and the financial resources necessary to assume risk, social service agencies will Jind themselves increasingly ill-equipped to meet the challenges of this new environment.

While today’s social service agency struggles with the day-to-day demands of government and philanthropic organizations, another

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2 Journal of Children and Poverty

change is taking place that will fundamentally alter the way social service agencies conduct business: the advent of the Social Service Maintenance Organization (SSMO). To survive in this new environment, not-for-profit groups will have to adapt their organizations to a managed care system of service delivery.

What are SSMOs? SSMOs are social service maintenance organizations, and they mark the next phase of the welfare reform movement. Although Congress and the President passed welfare reform, thus altering entitlements, introducing time-limited benefits, and capping reimbursement for administrative costs, little was done to control actual service utilization by those who remain on welfare or to realign the financial incentives and administrative infrastructure for the delivery of social services. The coming SSMO managed care provider system will pro- mote cost control, quality, accountability, and a focus on outcomes by forcing a realignment of the financial incentives of service delivery.

What is managed care? It is a system that attempts to balance costs, access, and quality in order to derive more eficient and effec- tive outcomes. It uses financial incentives, such as shared-risk, to promoted fiscal discipline. It attempts to squeeze waste out of systems by eliminating redundant practices and creating a monitor to ensure that overutilization of services is minimized. Managed care also tries to standardize the services offered by different providers for individuals having similar problems.

What will the SSMO look like? Generally, a managed care organization (MCO) adopts the role of overseer and financial inter- mediary, creating integrated social service delivery systems and networks. Three basic service delivery configurations are likely to evolve on a widespread basis over the next several years. The first involves the creation of government sponsored SSMOs. Under this scenario, the government agency assumes the role of MCO and contracts directly with various social service agencies using a modified risk-sharing model that adapts many of the characteristics of managed care. These might include setting benchmarks for performance,

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Are You Ready for SSMOs? 3

establishing rules, predetermining expected outcomes, and assuming oversight and monitoring responsibilities, while deriving benefits such as lower costs.

Community-based SSMOs will be the second form, created either as outgrowths of pre-existing associations, councils or bureaus, or by the expansion of large, firmly established, not-for-profit organizations. Clearly, associations and other groups of organizations will have the advantage of a network of participating members upon which to draw, or the benefit of relationships with other organizations, although these agencies may never have done business togeth- er previously. By creating spin-offs of free-standing MCOs, these partners can quickly become players in the marketplace.

In the third form, national organizations, like the American Red Cross, Salvation Army, or large community-based organizations (CBOs) may view this shift in structure as an opportunity to consoli- date services or grow and subsume smaller agencies with similar missions and philosophies as part of their networks. The creation of these umbrella groups will also be stimulated by agencies’ needs to become attentive to finances if they are to be considered serious players in a managed care environment. Many of these well-established providers will adjust by using social services to improve their health care bottom line or can create new spin-off SSMOs that provide comprehensive social services as a new business line.

SHMOs in particular will become an attractive model due to financial opportunities that arise when working with like populations that the HMO and social service organization both serve. For example, the balance sheets of many HMOs have been negatively affected by advances in medical technology and changes in the age of the patient profiles they serve, making services more expensive. As a result, the cost of providing care has increased without concomitant rate increases. If services can be provided to a frail, ill, elderly patient using social services such as home care or through enhanced adult day care in lieu of services in a hospital or sub-acute setting, then clearly it is in the best interests of the HMO to develop a health carehocial service model of service delivery. Additionally, the SHMO model may be attractive to HMO’s because social service organizations’ linkages in the community may help to identify poten- tial new enrollees to providers’ health programs.

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Whatever approach or combination of approaches is ultimately adopted, it is clear that government and other funding sources will seek a model that saves the most money, preserves quality, and ensures accountability.

Why now? First, because there will be a growing need for greater levels of service as the population ages, longevity increases, and more individuals are on fixed incomes, placing even greater pressure on social service costs and the need to control them. Second, managed care has been shown to help control health care costs. Third, as health-focused managed care companies mature and satu- rate their markets, they will look for new business opportunities; social services are an attractive option. Fourth, the government is always looking for new ways to save money, especially in the area of expenditures for overhead and administration. Fifth, as the quality movement has grown, so has awareness that too much money is being spent on processes rather than outcomes. And, sixth, fiagmen- tation of service delivery and unbridled utilization of services are costly and wasteful.

There are some who would argue that attempts to resolve these issues have already been made. What are settlement houses, multi- service centers, or any of the comprehensive case management models in operation today but attempts at managed care? However, while many organizations that try to provide “one-stop shopping” do exist, rarely have these gatekeeping functions and services been coupled with a change in the financing mechanism.

To survive in this environment, social service providers will be required to modify significantly the way they do business. Survival will depend on whether the organization has built the foundation necessary to support this new paradigm. Agency building blocks must include (1) the ability to pay-to-play, (2) an understanding of the ter- minology and concepts underlying insurance or risk-based systems, (3) knowledgeable leaders and management sufficiently trained in operating a business, (4) a way to educate Boards of Directors as to this new model and the increased financial exposure related to operating in this environment, ( 5 ) re-engineered systems to ensure quality while guaranteeing price competitiveness, (6) adaptation to a new set of rules according to the changing construction of budgets and finances, (7) creation of a strategic plan that outlines an organiza-

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tion’s overall vision, mission, and goals, (8) identification of core services or the service niche that makes the organization unique in the marketplace, (9) an understanding of the client mix and profile of the population served, and, ( 10) preparedness to merge, network, andor partner with other organizations to create a comprehensive service delivery system and to share risk.

Pay-to-Play Traditionally, the HMO contracted with providers for different medical services at rates that had been leveraged down to levels less than those paid by insurers under conventional policies (and upon occa- sion even less than the Medicaid reimbursement rates). The HMO made or lost money depending upon the premiums received from the fimding source and the expenses incurred. Today, there is a shift by HMOs to contract for services on a capitated, all-inclusive rate basis. This is the model one would expect to see developed in a social service environment. In a new capitated managed care environment, risk is shifted from payers of service to those who deliver services. In other words, under this arrangement, a provider will receive funds from the SSMO based upon some negotiated rate, usually a per- member-per-month Opmpm) payment methodology, rather than a line-item budget or lump-sum grant.

Accordingly, providers will be paid a rate based upon the number of members enrolled in an organization whether the provider actually provides any services or not. Therefore, it is in an organization’s best interest to minimize and control service utilization and manage costs. To the extent that utilization exceeds projections, or the unit costs exceed the expected costs that were used to compute the providers’ rate, the provider assumes the risk. To use a simple example:

You operate a not-for-profit senior center with an enrollment of 100 seniors, providing one meal each day, twenty days per month. Your per-member-per-month reimbursement rate is $60.00. When you calculated and negotiated the rate you would receive, you made the assumption that although your enrollment was 100, only 75 of the seniors would actually avail

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themselves of services each day and that 25 would not attend due to illness or medical appointments. On $6,000 of revenue, you estimated that $1,500 ($60.00 pmpm x 25) would be available for overhead, program administrative costs, and the establishment of a reserve for contingencies. The balance of $4,500 would be available to support the expenses associated with raw food, the salary of the cook, program stafhg, and other direct costs. However, the profile of your population reflects a much healthier and younger group of seniors who like coming to the center, and therefore, average daily attendance is %YO, significantly higher than you projected. Instead of having $1,500 per month for indirect costs, the actual amount available is now only $300 per month (5 x $60 pmpm). This loss of $1,200 per month will have to be absorbed by the center.

The problem for many not-for-profit organizations, especially community-based grassroots organizations, is that they do not have the ability to absorb risk. Often one adverse event may push not-for-profit organizations to the brink of financial insolvency, requiring "workout" agree- ments with banks or other lenders. To play in this game, providers need to be able to pay for adverse outcomes. They must have the cash reserves necessary to cushion the organization against unexpected outcomes if the pricing assumptions were incorrect or if outside variables affect oper- ational costs.'

Providers will also need to create wealth because managed care organizations and government cannot be relied upon to pay bills on a timely basis, or may dispute the amounts billed. The provider therefore becomes the banker for the managed care organization or government agency.

Any agreement executed with an MCO should include provisions for either advance payments or timely payments (such as within 30 days of bill presentation), or an organization may be at financial risk. Additionally, another consideration when drafting an agreement is the inclusion of language to create a dispute resolution process and timeta- bles for closure. Large amounts of disputed service for which an agency has already expended h d s can put that agency in a negative cash flow position very quickly.

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A New Lexicon Social service organizations will be required to understand terms and acronyms completely foreign to them, such as adverse selection, global capitation, stop-loss, risk-sharing, PPOs, and retained earn- ings. Managed care will also necessitate the creation of new functional areas such as Utilization Review, Risk Management, and Quality Assurance. A provider will not be able to negotiate with SSMOs, respond to requests for proposals (RFPs), or give oral pre- sentations without having a firm grasp of these concepts and this new dictionary of terms and acronyms as well as their impact on the organization. Fortunately, there are many publications now available to help social service organizations in this regard. A provider, however, will have the chore of discerning what is really necessary to know and what is superfluous.

The Business of Social Services The hallmark of a good managed care organization is the ability to manage costs and maximize revenue opportunities. This has never been an issue for social service organizations. Reimbursement has traditionally been predicated upon incurring expense. The government agency or philanthropic organization providing funding requires the establishment of a line-item budget. The provider is audited each year by outside accounting firms. Revenues and expenses are related; this amount of money buys these goods and/or this level of service. To the extent that organizations run a legitimate deficit, finders make them whole. If an organization runs a surplus, it returns to the funding source, as providers are not permitted to retain accruals.

Providers must now throw those notions away and move to a system in which an organization may keep accruals, in which revenues and expenses are not necessarily related, in which a provider’s revenues are predicated upon increasing business share, and expenses may rise or fall based upon decisions made by the organization. An example might be the agreement to pay for collective bargaining increases for union members. Under a line-item budget scenario, it is likely that the funding source would hold the agency harmless and

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pass through the monies under the agreement. In a managed care environment, the agency is responsible for absorbing any cost under the rate structure agreed upon, unless it has been previously agreed during the negotiations process to allow adjustments in the rate for collective bargaining increases.

Clearly these types of issues will challenge administrators as they have never been challenged before. A disproportionate share of an executive’s time will now be spent ensuring the agency’s peak efficiency. Such issues will also require executives to be savvy nego- tiators if they are to sit at the table with MCOs skilled in the art of deal-making. In situations of negotiation the social service executive is at a distinct disadvantage. While the social service executive might negotiate a few contracts with firms, the MCOs make many deals and are far more experienced at this game. In this area, the social service agencies would benefit from the assistance of outside counsel or consultants to level the playing field.

The Role of the Board of Directors Depending on the organization, Boards of Directors of voluntaries meet on some regularly scheduled, infrequent basis, likely between two and twelve times a year. During these meetings, general business matters are discussed. The agency staff puts on a “dog and pony show” for the directors, who may or may not have knowledge or a thorough understanding of financial and programmatic matters con- fronting the agency. A managed care environment may change all that, given the fiduciary responsibilities of Board members.

Financial viability is a key concern to Board members who focus on the success of the organization and who may be held per- sonally liable in the event of financial problems. Managed care places members at additional risk, as insurance policies routinely held to protect Board members do not cover this type of loss. Board members may be unwilling to assume the risk associated with a managed care pay-to-play environment and may simply resign member- ship, thus destabilizing the organization, or board members may limit any foray into this area thereby forcing merger, downsizing, or closure of the agency. Most Boards are completely unaware of the com-

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ing problems associated with managed care and their personal exposure. Accordingly, Boards of Directors will need to be educated regarding this new paradigm so that they can property discharge their responsibilities.

Re-E n gi n ee r in g The systems in place today will not work effectively in a managed care environment because they were not designed to provide the degree of detail or types of information that will be required. Additionally, much of the desired data and information required may not now even be collected given the low level of business sophistica- tion of many not-for-profit organizations.

Does the typical social service agency have a thorough understanding of the profile of the clients using its services and how that profile is changing over time? Does the typical social service agency understand utilization patterns? Does the typical social service agency know the cost per visit per client by service category and how much revenue it receives to support that visit? How does the typical social service agency measure the performance of its operation against its competitors? How does the typical social service organization assess whether it is delivering a quality service? What standards are being applied to make these determinations? How does the typical service agency measure how accessible its services are to the client population it serves? For many organizations these questions may not be answerable. The organizations grew by virtue of particular funding availability (rather than by some planned process) with systems ill-equipped to provide any information that would allow them to “drill down” to the true costs, or assist them in determining their overall performance. Many were encouraged to be inefficient, using staffing models presented by funding agencies on a line-item basis, which discouraged innovation and creativity. However, if an organization intends to survive, it will need to re-examine these systems and how it conducts business.

Social service organizations will need to ensure that their fiscal house is in order and that they understand their costs down to the penny. How will an organization possibly negotiate any contracts or

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bid for work that may be available if it has no understanding of the bottom-line rate that it can accept? This requirement may force social service organizations to build new financial information and accounting systems, create a Chief Financial Officer position in the organization, or greater reliance on outside accounting fums.

Agencies will also need to fully grasp all the dimensions of their programs and services. As the social service paradigm shifts, there will be an effort to learn fiom the negative aspects of the managed care experience in the health care industry. The most serious issues in that arena have been the denial of access to treatment or the delaying of treatment, and the overall compromising of the quality of services to increase productivity and thereby profits. Accordingly, social service agencies will need to redesign their systems to enable them to have access to the types of programmatic information they will need to ensure the quality and timeliness of service delivery, and to demonstrate compliance with newly imposed accountability standards.

Along these lines, providers will find another fundamental reason to re-engineer the way business is conducted in a system designed to pit organizations against one another when bidding for contracts, where payment for desired outcomes takes precedence, and where these factors, rather than other intangibles such as reputation or demonstrated experience dictate award, judgements must be outcome focused and cost-driven. Accordingly, providers must recognize the fundamental principle that inefficient processes are more expensive to operate than efficient processes.

Finally, every job title, job description, and functional area will need to be re-examined to determine its contribution to overall success in this new environment. The MSW of the future may not be a Master of Social Work helping a homeless client find a shelter in which to reside, but rather a Manager of Social Wellness, charged with prevent- ing homelessness. Functional areas will need to be redefrned to encom- pass new tasks, such as utilization review which tracks who, when, and how services are used to control costs.

In 1998, these projections of future changes may seem like wild speculation; by 2005, they will have become important elements in a reconfigured service delivery system.

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Line-Item Budgets and Categorical Grants The line-item budget is recognized by many as an artifact of the past. It does not encourage innovation. It does not encourage economy. It does not reward outstanding performance. It is not outcome-focused. It only serves to perpetuate the status quo.

Government agencies have traditionally relied upon this budget format because it simplifies the task of monitoring contracts. Government agencies have also provided fimding on a categorical grant basis, resulting in programs that mirrored funding availability: form followed funding. This practice has contributed to the “stovepipe” nature of many organizations and the lack of coordina- tion when one client fell into many categories of need. The provision for more flexibility to states under the welfare reform legislation should signal a shift in policy to allow hnds to be more fungible in the future.

Managed care aligns the incentives to reward creativity, estab- lishes flexibility to allow better response to a dynamic environment and circumstances, and fundamentally shifts the riskibenefit relation- ship. It also provides for the recognition that in today’s world of work, jobs are less clearly defined. People may work in teams, which are focused on outcomes, requiring a different and varied skill set. By moving away from the line-item budget, organizations can focus more broadly on what needs to be accomplished, rather than who accomplishes it and how.

Government agencies issuing RFPs will first calculate their cur- rent spending rates for services. The RFP will then be designed to reduce the reimbursement by five to fifteen percent by moving to the more flexible managed care model of service delivery. It becomes a win-win situation for government if rates can be leveraged down: savings can be achieved up front at the time of the award, and government can be insulated from any run-away costs as the SSMO/provider absorbs the risk (the exception being government- sponsored SSMOs). The only risk to government is the political fall- out associated with “windfall profits” should the SSMO/provider retain too much money under the agreement. Accordingly, contracts generally include re-openers or gainsharing clauses of some type.

It is critical under a new budget schema that social service orga-

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nizations understand how they are spending money so that they are able to compete in the marketplace. SSMOs will seek to disallow reimbursement if upon audit they disagree with the utilization fig- ures, or if the services provided were not of the quality required under the contract. Accordingly, the per-member-per-month fee that is negotiated may not be what an organization is ultimately paid, a little advertised fact of life for many health care providers.

Agencies must also insulate themselves from unanticipated contingencies. It is important to recognize and understand the concept of “stop-loss.” Obviously, few organizations are of the size that they can afford to be self-insured or assume unlimited risk. The concept of “stop-loss” requires the provider to assume risk up to some limit at which time the funding source agrees to participate at 100% or on some graduated basis. Again, an organization’s ultimate ability to be able to broker “stop-loss” terms with funding sources will be depen- dent upon its overall financial condition and ability to expose itself financially to risk.

Strategic Direction An old Native American adage states that “if you don’t know where you’re going, it doesn’t make any difference which path you take.” How will any organization survive this environment if it cannot define the role it expects to play and where it will be in the fbture? Will an organization outsource services? Add services? Change geo- graphical areas being serviced? Modify the scope of services and change the client base? These are just a few of the questions providers might ask. However, the hardest questions may be related to funding and fimding diversification. If an organization has been relying heavily on government support and the level of government funding remains fixed or erodes, then hard decisions will need to be made as to the compliment of services to be delivered. If the Board of Directors has not articulated the direction in which it sees the organization moving, then clearly an agency is doomed to fail since it cannot sustain a system where it provides “womb to tomb” services and is all things to all people when rates are being leveraged down by SSMOs.

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Many organizations talk about “core services,” i.e. central services they perform well. However, in a managed care environment, these services may not be enough, especially if other organizations provide the same services at a lower price. To bolster leverage and negotiating posture, an organization may need to find a niche in the marketplace. Clearly, it is helpful if an organization provides services that no one else in the community performs; even in a managed care environment, monopolies do well. The rates an organization can bid and negotiate will improve greatly as the laws of supply and demand prevail. Another element to remember is that an agency should offer services that the SSMO needs, wants, and is willing to pay for. The worst scenario is one in which an organization offers a service that is needed but for which no one is willing to pay, and thus is unable to contract real business.

Finding the Right Partner Much as in life, finding the right partner is generally critical to long- term success. If an organization is a small not-for-profit, developing partnerships to spread risk may be a way of insulating the organization against disaster. The insurance industry does this by increasing the size of the risk pool of people covered. A good example of this practice can be seen when an individual purchases life insurance. A person may be able to get coverage without a physical examination if he or she is part of a large company’s plan. If the person applies for similar coverage as an individual separate from a company, the likelihood is that he or she will probably be required to get a physical and ultimately either may not be provided coverage or will receive coverage at a much higher premium.

Additionally, to be able to provide the comprehensive coverage for individuals that SSMOs may be seeking, an organization will have to either form or join a network, a common occurrence today in the health care industry. Accordingly, it makes sense to form partnerships when creating a service delivery network, if the partner does not already provide those services, in order to acquire both the exper- tise and infrastructure on an expedited basis to respond to the dynamic environment in which the agency will exist.

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Finally, as a means of reducing costs, a social service organization may wish to outsource or insource back office services with a partner. Administrative functions such as human resources, payroll, and purchasing can ofien be consolidated to achieve economies of scale and save dollars. Whether involved in a joint venture with one partner or several partners, it is important for agencies to begin building relationships now, so that partnering organizations have the necessary time to build trust and feel confident in their reliance on one another.

Next Steps Every social service organization should conduct an overall review of its strategic direction and how it fits into the larger picture. Will the organization become part of an SSMO? If so, in what capacity? Will the organization be a lead umbrella agency, part of a community consortium, or simply contract directly with a Corporate SSMO/SHMO or Government SSMO?

Social service organizations must begin to recognize that they cannot be all things to all people. Hard choices will have to be made to determine what services they will provide, what services they will out-source, how their services fit into the marketplace and meet the level of need, and whether the organization can effectively compete on a price and quality basis for market share.

Organizations must also engage in an aggressive campaign to create reserves. If an organization hopes to successfully compete in a managed care environment, it must be able to absorb risk. The more risk an organization is willing to accept, the greater the likelihood that it will be able to offer a more attractive price with more compet- itive terms to MCOs.

Most social service organizations do not have a grasp of true costs and service utilization patterns. In a managed care environment this can be fatal. New programmatic and financial systems will need to be created so that each organization can “drill down” to its costs, enabling it to understand what services can be offered at what price. This information will also allow an organization to identify problem areas where costs are outliers and/or may be appropriate for re-engi-

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neering. Finally, of key import is the need for an organization to educate

its leadership and staff on this paradigm shift. Organizations must embrace a learning philosophy and understand how fundamental eco- nomics will be to their ultimate success or failure. Many smaller organizations will not survive this turbulent environment because they do not have the financial wherewithal to absorb risk or compete effectively with larger, better funded, more well-established organizations. They will not have the resources necessary to perform the systems upgrades, train staff, or to engage outside experts to guide them through this minefield. Although many of these are solid grass roots agencies who deliver outstanding services; however, those qualities will not be enough to sustain their business share.

Conclusion There are those who will read this article and dismiss it, believing that managed care will never come to social services; advocates and others will surely lobby aggressively and passionately to stop it. Many of the hospital CEOs who once drove the health care system likely felt the same way. Today, roughly 68 million Americans are enrolled in managed care and MCOs have clearly been instrumental in shifting the way that medicine is now practiced, emphasizing community- rather than hospital-based care.

Much like the voluntaries in the health industry, the social service industry has been the domain of charitable organizations receiv- ing 501(c)(3) status. However, as we move towards a managed care environment, there is no reason to believe that for-profit corporations will not see an opportunity to make money in this area if they can alter the paradigm that exists today. Given the amount of government funding to non-profit organizations-the U.S. Office of Management and Budget reported nearly $600 billion in 1996, excluding Medicaid and Medicare and adjusting the figure for inflation4 is highly unlikely that this area will be long left unaffected by for-profits.

Welfare reform provided more flexibility to the states in the administration of their programs, opened the door to allow for-profits into the child care arena, and capped reimbursement for administrative costs associated with these programs. These steps have all

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moved the welfare system in a new direction. If organizations, whether for-profit or not-for-profit, can demonstrate that programmatic growth costs can be controlled, administrative costs reduced, and the quality of services maintained or even enhanced through less fragmentation and duplication without denying or delaying access to care, then there is every reason to believe that managed care will become a reality in the social service industry in the not-too-distant fuhue.

Any system shift that holds the promise of millions of dollars in savings or cost-avoidance cannot be ignored for very long. As the paradigm shifts to a managed care model of service delivery, organizations tied to the past rather than the future will find themselves increasingly out of step with the times and condemned to becoming the first dinosaurs of the twenty-first century.

Notes 1. Limited protections are negotiated with MCOs for providers to insulate themselves from catastrophic loss through the negotiation of stop-loss provisions in the contract. In a government-sponsored SSMO model, the government may be prepared to assume a greater share of the risk, understanding that when working with not-for-profit groups, these organizations do not have the resources available to absorb losses. The concept of stop-loss protection is discussed later in this article.

References Dacso, S., and Dacso, C. 1997. Managed Care Answer Book, 2nd

Dye, R. and McGuire, T. “Sorting Out State Expenditure Pressures.”

Frinton, S. “Good Will Hunting.” Empire State Report (May 1998):

Kongstvedt, P. 1995. Essentials of Managed Health Care. Maryland:

ed., New York: Panel Publishers.

National Tax Journal, 45 (1992) no. 3~315-329.

55-56.

Aspen Publishers, Inc.

Fall 1998

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are you ready for ssmos?

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