Special E-Mail Bulletin #2
January 2001
Downstream Risk: Who's Responsible?
Special E-Mail Bulletin
In the April 2000 issue of Ophthalmology Management I presented "Beware of the HMO Intermediary." In that article I discussed the increasingly problematic concern of IPAs and other groups that accept "downstream" risk from HMOs, then sub-contract with providers, and then go belly-up leaving the providers unpaid. You can read the story on my website at http://www.gilweber.com/gw_pro06.htm
Since that time the issue has generated increasing concern. Many IPAs have folded leaving providers, patients, regulators, and legislators looking for solutions. In some states such as California IPA failure has taken on almost catastrophic proportion, seriously affecting doctors' abilities to keep their doors open.
I found the following story on the Internet this morning. I think you'll find it interesting in that in confirms what I wrote about many months ago, brings you up to date on the latest action, and points to where this issue may be going in the next year or two.
This is from HealthLeaders.com, January 12, 2001 issue
Gil Weber
Groundbreaking downstream risk rules close to implementation in New York
By John Harkey, Ph.D., Chief Research Officer for HealthLeaders Inc. and Publisher, Harkey Report
The first ever New York rules regarding transfer of financial risk between insurers and providers are close to implementation, although they must go through a public comment period prior to being finalized. The rules, which apply to provider entities taking more than $250,000 in annual prepaid capitation payments, are expected for the first time to require IPAs, hospitals and other provider risk-taking entities to post a security deposit of at least 12.5% of the annual capitation revenues.
While some states have passed legislation and others have taken informal stances regarding downstream risk, the New York rules are viewed as one of the first attempts to address the issue fully and effectively and may serve as a standard for other states, several of which have stumbled on this issue in the past. This issue has gained importance nationally as IPAs and other provider entities taking risk have run into financial problems during the past 3-5 years, often leaving individual member physicians with large amounts of unpaid claims. The IPA is deemed to add value in the managed care environment with cost savings in the range of 10% or more, but is a fragile and complex structure, something like herding cats. With this kind of structure, the wrong regulatory approach can quickly lead to collapse.
Regulatory approaches that backfire: The Colorado example
In Colorado, the legislative and regulatory approach taken following the failure of an IPA in 1997 ultimately resulted in a dramatically diminished IPA presence, according to Jim Hertel, a former HMO executive who now publishes newsletters covering managed care developments in Colorado and other western states.
In 1997, the HMO lobby supported a bill that prevented IPAs and PHOs from taking on risk sharing agreements directly with employers. At about the time the bill was being debated, an IPA in Pueblo failed, leaving the participating physicians holding a large dollar volume of unpaid claims. As a result, a rider was attached to the IPA legislation requiring HMOs to make whole participating physicians when a capitated IPA fails. In essence, the HMOs were required to double-pay physicians, the first payment being through the IPA, and then, if the IPA failed financially, a second direct payment to the physicians to cover unpaid claims.
In 1998, after the legislation was signed into law, a Denver IPA failed, and the IPA physicians went to court to collect unpaid claims from the contracted HMOs. Legal proceedings on that case continue. In 1999, the state's commissioner of insurance, in order to solve the double payment problem, gave HMOs the authority to assure that IPAs were properly handling capitated funds on a sound actuarial basis. HMOs were also given the authority to take over payment activities from financially troubled IPAs.
In November 1999, PacifiCare became the first HMO to invoke the new procedure when it took over a failing IPA consortium. IPA physicians were refusing to renew their contracts, so PacifiCare encouraged the physicians to continue by promising them 50 cents on the dollar for unpaid prior claims, and introducing fee-for-service payments beginning in the new contract year. The fee-for-service payments were quite generous and helped create an environment in which physicians began to move away from risk contracts generally towards fee-for-service. (Part of the problem with the risk contracts involved the level of payment. In earlier years, capitation rates were relatively generous, but over time the medical costs greatly outstripped the payment levels, leaving even well-run IPAs vulnerable to financial problems.)
This amplified a movement already underway from other insurers, such as United Healthcare and CIGNA, which were replacing capitation with fee-for-service. During 2000, Denver quickly moved from an IPA-capitation environment to a fee-for-service environment. However, a few IPAs remain who continue to take capitation.
Currently, the Colorado insurance department is going through a rule making process similar to New York's to try to address its problems, but is proposing a 90 days reserve deposit of 25%, twice the deposit level being required in New York.
While the downstream risk rules, per se, did not destroy the risk-taking IPAs, the rules (double payment requirement and the IPA takeover provisions), in concert with specific market events including low capitation rates, led to an environment in which the HMOs were unable to pass on meaningful risk to the IPAs, and could actually reduce their risk through direct contracting.
New York hopes for different outcome
Rule making was initiated by the New York Department of Insurance early in 2000 in response in part to the 1998 financial collapse of an IPA in New Jersey.
The most important component of the proposed regulation is that it defines to whom risk can be transferred and the requirements that must be fulfilled to transfer the risk. Two key points in this regard are that the rule only relates to prepaid risk transfer, or capitation-type arrangements, and not to arrangements that involve payments after the service is delivered, such as withhold arrangements or even risk pools held by the health plan. A second key element is that entities accepting risk have to make a security deposit equal to 12.5% of the expected annual capitation amount.
According to Robert Belfort, an attorney representing the Coalition of Prepaid Health Services Plans, two burdensome provisions regarding the security deposit as defined in the first draft were addressed in the second draft. The original draft had cast a wide net, placing many kinds of provider organizations -IPAs, hospitals, physicians - under the same security deposit requirement. There were a number of interest groups arguing that there needed to be different treatment of providers who delivered care themselves versus intermediaries for providers who delivered care. Belfort points out that an IPA is really functioning like an insurance company, paying claims but not actually delivering care. Such entities need cash on hand. However, an individual provider such as a physician or hospital does not have to turn over money to somebody else, but delivers services directly. As a result of that argument, the rules were modified, so any institutional provider that delivers care directly doesn't have to make a financial deposit for those services, as long as the provider is solvent.
The other major change is that the insurance department had earlier proposed that insurers in addition to providers also set aside 12.5% of the capitated amount to be paid downstream, so there would be an additional reserve on the health plan side. Industry representatives successfully pointed out to the department that health plans already have to maintain reserves, and they end up having less risk rather than more risk under arrangements involving capitation.
While there are some remaining technical issues around stop loss insurance, the most important issue that remains from the IPA perspective involves the question of capitated IPAs that download risk even further by capitating PCPs and specialists within their network. Michael Singer, an attorney representing several IPAs, says his clients have proposed that the capitation amount on which the security deposit is required be reduced by the amount of risk downstreamed to subcapitated PCPs and specialists. That was part of the original set of comments made concerning the earlier draft, but that approach was not incorporated into the second draft. That proposal is now under consideration by the department.
Ruth Hershfeld, who is on the board of The IPA Association of America (TIPAA), says another remaining issue facing IPAs is getting adequate data from the HMO to allow the IPA to make an intelligent bid on capitated contracts. She thinks there needs to be better language in the new rules concerning the data needs of IPAs. If IPAs are given the responsibility to take the risk, and also given the needed information to both assess the risk and manage the risk, Hershfeld believes they will have a viable future.
Hershfeld also warns that if state regulators take the position that all of the risk must be born by the HMO, as they have done in Colorado, HMOs will no longer see any benefit to contracting with IPAs. If that happens, she thinks the IPA structure will die.
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