"Medicare Risk HMOs And AAPCC"


"Medicare Risk HMOs And AAPCC"

(Or, Money, Money, Who's Got The Money?)

If you're going to contract with a Medicare HMO and argue for higher reimbursements, it's essential that you know the financial facts.

© Copyright 1997-1998 Gil Weber, MBA

Consider the following hypothetical scenario: Your local HMO launches a slick advertising campaign designed to entice local seniors into a new Medicare Risk product. It's offered with no premium cost and only a nominal office copay. Additionally, dental, pharmacy, routine vision exams, and eyeglasses are included at no added cost. That HMO will likely take a significant portion of the Medicare population out of general circulation. Obviously you want to maintain access to them.

Fortunately you are part of a network included in a request for proposal (RFP) process and asked to submit a capitated bid for the health plan's Medicare med/surg eye care business (not including routine vision care). After excluding a few relatively infrequent but high-cost services such as orbital and ocular tumors and associated radiation oncology, your network proposes a carefully calculated rate of $8.25 per member per month (pmpm) for professional services. The plan's response is "Oh, no, we can't possibly consider that. Based on our premium income from HCFA, the appropriate number is about $4.15 pmpm." Unfortunately, you don't know fact from fib.

If the health plan has all the data then it has the upper hand. It will probably play fearful providers and networks against each other, figuring that they will accept any capitation figure the HMO claims is correct. So how can the network's physicians, optometrists, and administrators counter what seems like a low-ball offer? What information is available to level the negotiation playing field? Or is it an option simply not to participate in Medicare Risk HMOs?

Changes Are In The Works

Significant changes are in the works for Medicare. That is no surprise for any doctor whose revenues and patient volumes are intimately tied to the senior population. These changes are accelerating at such a frantic pace that every eyecare professional must pay particularly close attention lest he or she fall victim in the unfolding mad scramble.

Whether you champion or curse managed care, whether you practice in the middle of a metropolis or on the outskirts of Smalltown, USA, the writing is on the wall. By choice or with a push from Congress, seniors are moving into managed care -- into Medicare Risk HMOs. Though in the short term most seniors will still be in fee-for- service Medicare, more start-up Medicare HMOs are in our future. They will include more capitation driven by HCFA's current funding system, adjusted average per capita cost (AAPCC).

This discussion gives readers a short history of Medicare HMOs, from disappointment in the late 1980s-early 1990s to incredible growth and success in the mid-1990s. It shows why the answer to the question "Can I choose not to participate" is an emphatic "no"! And it explains HCFA's AAPCC so that those negotiating capitated agreements with Medicare Risk HMOs can understand just how many dollars HCFA gives to health plans, and how much should be but rarely is made available for eye care.

The Growth Trend Is Clear

As recently reported: (1,2,3,4)

chkbx.gif There were 241 Medicare Risk HMOs at the beginning of 1997, up from 154 at the same time in 1995 -- a 60% increase.5x5xp.gif (814 bytes)

chkbx.gif National Medicare Risk HMO enrollment increased by 27% between 1994 and 1995 (to 2.3 million) compared to a 19% increase in the previous year.

chkbx.gif Medicare Risk HMOs entice seniors to move from traditional, indemnity-based Medicare by offering otherwise non-covered benefits including routine physicals (131 plans in 1995), routine vision examinations with refractions (121 plans, up from 82 in 1994), and outpatient drugs (65 plans).5x5xp.gif (814 bytes)

chkbx.gif 1996 national enrollment in Medicare HMOs was approximately 12.7% of the eligible Medicare population. California was at 35%, Arizona 34%, Oregon 27%, and Florida 22%.

chkbx.gif At the start of 1995, 11 counties had more than 40% of their eligibles enrolled in Medicare HMOs, including Clackamas County, Oregon, with 53.15%.

  1. PPRC Update: Enrollment Growing in Medicare HMOs, Physician Payment Review Commission, Washington, DC, No. 7, December 1996.
  2. PPRC Basics: Medicare Managed Care: Plan and Beneficiary Participation, Physician Payment Review Commission, Washington, DC, No. 2, April 1997.
  3. Medicare Managed Care Program Update, Department of Health & Human Services, Operations & Oversight Team, Office of Managed Care, Health Care Financing Administration, Washington, DC, 1995.
  4. Joint Report to the Congress on Medicare Managed Care, Physician Payment Review Commission, Prospective Payment Assessment Commission, Washington, DC, 1995.
For Health Plans The Picture Was Not Always So Rosy

Today's explosive growth has not come without problems. In 1985 the federal government began an effort to establish Medicare Risk HMOs, spearheaded in the successful and dynamic California commercial managed care market (i.e., enrollees under age 65). Though there was significant early growth in the number of Medicare Risk contracts through 1987 (to 152), ultimately the effort was a failure for patients, plans, and physicians. Most HMOs dropped out during the next four years. By 1991 only 86 risk contracts remained, and HCFA pulled back from its rush towards capitation.

Health Plans Lacked Expertise

With few exceptions, in the mid to late 80s most health plans simply did not have the necessary expertise and sophisticated systems to manage health care, particularly for a senior population under capitation. Nor were utilization review (utilization management), quality assurance, and cost-efficient professional and facility resources up to the challenge. Most health plans did not have the computer software capability to effectively track and monitor services, providers, and costs.

Underfunded Programs And Little, If Any, Risk Sharing -- Two Classic Flaws

HCFA's capitation rate development formula and sometimes inadequate cap rates did not help. Premiums were somewhat overpaid in some areas and seriously underpaid in others. Many times health plans could not determine if the rates were adequate until it was too late. Further, many HMOs had no demonstrated, successful, and appropriate plan for capitating providers and putting them into the risk-sharing equation. Most providers (defined to include physicians, optometrists, ambulatory surgical centers, hospitals, clinical laboratories, diagnostic imaging centers, IPAs, etc.) were paid per claim submitted, so production-based fee-for-service reimbursements quickly drained monthly HMO capitation and plunged the plans into the red.

And in states where HMOs did have the sophistication to go at-risk on a senior population and clearly wanted to extend the marketplace, wide variations in capitation premiums did not allow it. That created huge service area holes where the HMOs deemed reimbursements inadequate to start senior programs. California was a classic example.

In the southern end of the state, Medicare HMOs were established in the Los Angeles, Orange County, and San Diego areas. In the north plans were established in and around San Francisco and Sacramento. But in the roughly 300 mile gap between LA and San Francisco, historically low fee-for-service Medicare claims resulted in unacceptably low capitation rates -- payments simply too low to motivate the healthplans to go at-risk on the seniors. The scenario repeated itself across the nation and many states with mature managed care markets had few or no Medicare Risk HMOs even though there were plenty of seniors needing care.

Finally, seniors had few reasons for joining such health plans. Not only were there fewer incentives the first time around (e.g., the current plethora of perk benefits was not offered), but also the overwhelming majority of seniors in all markets had no prior experience in, and were quite uneasy with, managed care. Expensive marketing efforts paid little in return.

What, then, has changed so that today health plans are setting up profitable Medicare Risk HMOs and attracting many seniors? And if these HMOs are so profitable, then why are so many groups and networks offered outrageous capitation contracts, sometimes below the cost of care?

HCFA Updates The Way It Funds Medicare Risk HMOs -- Big Dollars

In the early 1990s HCFA solidified the current system for setting capitation rates, the AAPCC. HCFA builds a data base of all Part A and Part B fee-for-service claims for the previous year, aggregates them by county, and creates stratified payment tables with categories including aged, disabled, institutionalized, Medicare-Medicaid, etc. The claims data are massaged (adjusted) and a number is created which theoretically represents the typical amount (average) HCFA would expect to have paid on a fee-for-service basis for each senior over a years time (per capita cost). 95% of that amount is converted into a PMPM payment.

HCFA creates new rate tables each year. As an example, consider Broward County, Florida. In 1993 the Part B component (representing physician professional services and other, non-hospital services) was $249.13. The 1995 and 1996 rates were $245.14 and $284.40 respectively. And in 1997 the rate was $281.16. The actual amount paid to a Medicare Risk HMO is adjusted per patient, based on actual enrollment demographics. So, for example, in 1996 a male in Broward County age 65-69 and institutionalized got a weighting factor of 1.60. Then the $284.40 X 1.60 resulted in a monthly Part B payment of $455.04 to any qualifying Medicare Risk HMO. Since this theoretically represented only 95% of what HCFA would have paid had the patient been on fee-for-service, the difference should have accrued to the government as savings (in this case the difference between $478.99 and $455.04, or $23.95 per month).

Obviously some counties have higher average historical claims costs than others, resulting in higher monthly payments. And payments in some counties may never support Medicare Risk HMOs. But reimbursements, on average, are now at a point where many more counties are financially attractive for an at-risk, but guaranteed 95% of fee-for-service. Today more commercial health plans look to grab a share of the business in as-yet untapped or underdeveloped markets. (See my website for a link to healthplans on the world wide web.)

HCFA Makes It Financially Attractive -- Builds In Enrollment Enticements

The guaranteed 95% of fee-for-service is very significant, for the health plans need not go through a competitive bid process with other HMOs to get a slice of the pie. As long as a plan qualifies to enroll seniors, all it must do is mount an effective marketing campaign. Then, assuming it can manage financial outlays, there is tremendous upside potential -- much greater today than during the first go-around.

Additionally, over the past decade many seniors have had reasonably successful experiences with commercial HMOs during the final years of their working careers. And they have learned how to work the system. Now many more are willing to enroll in Medicare managed care. Also, since Medicare Risk HMOs tend, on average, to attract a healthier senior population, per-patient expenditures for their health care services are lower than with the general senior population under fee-for-service, resulting in high profitability for the plans.

In fact, HCFA recognized fairly early on that no matter how much an HMO might reduce its overhead and lower the costs of health care services, the guaranteed 95% payment meant at best HCFA could only save 5% over traditional fee-for-service. In what has proven to be a controversial response, HCFA chose not to reduce payments to plans that were enjoying a financial windfall and, instead, implemented certain participation conditions on them.

For purposes of this discussion the most significant condition is that if the health plan's capitation revenues exceed expenses by more than a predetermined amount (i.e., exceed the sum of plan-specific administrative costs plus a profit margin), then the HMO is obligated to return the surplus in the form of enhanced benefits or reduced premiums. Since the health plans are not keen on giving back any money, the preferred response is to add benefits at no additional charge to attract even more enrollees. Thus more plans are adding routine physicals, pharmacy, dental, and vision care (sometimes including eye wear) to the benefits package -- services not covered by traditional Medicare. But, even if the plans are highly profitable, how can they afford to give away these benefits and pay for them without seriously impacting their own profitability?

Money, Money, Who's Got The Money?

Health plans typically take money from one provider or medical specialty program and fund other programs or benefits. They'll shift funds from a group they know can be squeezed to pay for other patient care services (e.g., the various "freebies" offered as enrollment incentives to seniors). Many health plans show no reluctance to take money from ophthalmology services, particularly when the doctors and their administrators have no information to counter with a more appropriate revenue sharing formula. Most who have negotiated with health plans feel that the med/surg rates offered are generally lower than is appropriate and necessary to support high quality care. But just how much lower those numbers usually are can be an eye-opener when one studies the AAPCC data.

Med/Surg Eyecare Capitation At $2.75 PMPM -- Who's Kidding Whom?

Nationally, typical Medicare Risk cap rates for med/surg professional services fall between about $5.00 and $7.50 PMPM. Although rates of $8 to $10 exist in some markets, certain others (particularly Florida) have truly absurd cap rates under $3.00. While those experienced in capitation maintain that such a low rate cannot possibly support quality care, deals are being signed because of desperate competition among providers and sometimes less than savory health plan management. But perhaps the most significant factor is that physicians and network administrators generally don't know how much HCFA allocates to the HMOs for med/surg eyecare services -- and thus how much negotiating room really exists within which to frame negotiations.

And The Secret Number for 1996/1997 Is: 6.93%

According to information supplied to the American Academy of Ophthalmology's Federal Affairs Office in 1996, roughly 6.93% of the Part B payments were attributable to professional services for med/surg eyecare. This meant approximately 6.93% of the money paid each month to a Medicare Risk HMO should be going to the providers for patient care (after the plan takes something for itself, of course). So let's look at an example to see just how far "should be" is from reality.

We'll use Broward County, Florida's 1996 Part B AAPCC as our example ($284.40 per month). Assume a flat, standardized payment and no weighting factors which would change the age/sex or other adjustments from the standard 1.00. Let's also assume the plan slices off a hefty but not uncommon 20% ($56.88) for its own risk-free profit and administration. Then:

  • $284.40 - $56. = $227.52 pmpm remaining for all Part B services.
  • $227.52 X 6.93% = $15.77 pmpm for med/surg eyecare Part B professional services.

Now even allowing for the fact that discounting is still expected in return for an exclusive capitated arrangement, and, further, that utilization and cost in a managed care setting should be less than under fee-for-service, what happens to the difference between the approximated allocation of $15.77 and the roughly $3.00 pmpm that many Florida networks are actually expected to accept as full risk payment?

The difference probably goes to the plan's bottom line, with the portion deemed "surplus" used to fund other health care services, possibly including non-ophthalmic services. A portion is most certainly funding a very expensive, but free to the patient, routine vision exam (and, perhaps, eyeglasses benefit). Nationally, average cap rates for a Medicare vision exam and eyeglasses program are around $5.50 pmpm (with $20 to $30 copayments), and payors simply won't absorb full costs of that magnitude. So these routine visioncare marketing enticements may actually be funded from the pocketbooks of those providing med/surg eyecare services. And, if those perk vision benefits are contracted out on an exclusive basis to a network that excludes the med/surg providers, then it's a classic case of rubbing salt into the wounds.

The Broward County example which results in roughly $15.77 pmpm as the target allocation for med/surg eyecare should not be used as a holy grail. That rate is higher than national averages. At the same time, win-win managed care agreements seem the rare exception in South Florida. The $3.00 capitation rates offered there are well outside national norms so South Florida probably represents the worst case scenario.

Leveling The Playing Field (If Only Just A Bit)

While Congress has stated it has long-term plans to adjust the AAPCC rate development methodology and remove some of its inequities, waiting for Congress to force the issue seems to be an unproductive tactic. And while new variants including Medicare Risk HMOs with PPO and POS (point of service) options could soon become faster-growing segments of the senior market, particularly in regions not yet ready for the rigors of Medicare capitation, waiting for those may result in lost opportunity. At the moment, health plans have no incentive to change, particularly given Medicare's inability to adequately adjust risk for different populations. This results in significant cherry picking of the healthiest seniors.

Given all that, what is a fair med/surg eyecare capitation rate? Since every practice, group, or network's cost structure is different and every contract includes a different set of covered services, there is no simple answer. Some have very successful Medicare Risk cap contracts paying roughly $6.50 pmpm for comprehensive eyecare. Others with a higher percentage of sub-specialty surgery would find that rate unacceptable. If med/surg capitation rates are ever to reflect an appropriate portion of the AAPCC historical data, then providers and administrators must help level the playing field through increased awareness and tougher negotiating. Without boycotting or committing other antitrust violations, which must be avoided at all costs, what can you do?

Four Steps To Survival And Success

First: Know the AAPCC for your county and for any surrounding counties from which the local health plans draw their Medicare memberships. HCFA's capitation payments, already reflecting the 95% adjustment, are available from its website http://www.hcfa.gov If you go into capitation negotiations knowing roughly how much money the HMOs have been paid by HCFA for med/surg eyecare services, you can estimate how much should be left once the plan shaves off its share. (*Please see 1998 Update and Caution, below.)

Even if the plan takes an unconscionable 30%, there should still be plenty left in the kitty. Once the health plan manager knows that you know, his or her leverage is somewhat lessened. The HMO may still try to propose ridiculously low rates, but your position is stronger armed with information held previously only by the plan. At least you'll be better positioned to know when the deal is flawed from the start.

(Note: Those most successful in capitation say that the real financial upside comes to networks that understand how to use arbitrage -- profiting from the margin left over after utilization and costs have been appropriately reduced from the plan's previous experience. You can't save the plan money and still work the arbitrage unless you know something about the plan's revenues, costs, and past experience.)

Second: Know your costs to provide services. Every capitation calculation is based on your costs, not on charges or collections. Your cost is the break-even point below which you cannot bid without losing money -- the amount necessary to keep the doors open. If you calculate that it will cost your office or group or network $6.25 pmpm to provide a certain set of services and the HMO offers you $5.89, that amount won't even cover your overhead. Either you must lower your costs well below $5.89, or you must find a way to significantly lower utilization without withholding care. (For simplicity in this discussion we're ignoring that your costs must also include margins for contract administration and profit. Those must be factored on top of raw costs.)

At least you'll know up-front that the offer doesn't make sense, and you should be able to argue logically for higher cap rates. If the plan still says no, then you know what kind of company you're dealing with and can make an appropriate business decision.

Third: If you can't get solid historical data to maximize the arbitrage, an alternative is to establish a risk window, sometimes called a risk corridor or risk band. This contractual strategy is explained in detail in my monograph, Managed Care Negotiations, (pp. 28-30) available from the American Academy of Ophthalmology's Customer Service Department. Briefly, providers agree to use data or other measurements suggested by the HMO, but with a contractual stipulation that if utilization or pmpm costs fall outside a pre-negotiated shared risk range, then there is a retroactive reconciliation based on the resulting financial realities. If properly presented and structured, many plans will agree to this shared risk tactic since it neither unduly penalizes nor rewards, and collectively brings both parties to a middle-ground relationship. Unfortunately, it does limit the profitability resulting from a network's successful cost and utilization management.

Fourth: When push comes to shove you can say no. If the offer does not make sense and the health plan management demonstrates it really doesn't care, why lose money just to win the contract? By accepting outrageous cap rates and ridiculous terms, your colleagues and you benchmark the community and perpetuate the leverage advantage plans have over providers. You must be prepared to walk away from the negotiating table and accept the fact that no contract is better than a bad contract. If you lose money per capitated patient you can't make it up on volume.

Again, this does not mean boycotts or price-fixing or anything else that might violate antitrust laws. It just means hard-nosed negotiations and a willingness to lay your cards on the table, to show the plan that you have solid figures and won't be forced into a no-win situation. And it takes a commitment from each provider, group, and network to not perpetuate the problem through fear or coercion. Providers have power if only they understand how to use it.

For updated information on Medicare Risk contracting and AAPCC please read the premier issue of my new managed care newsletter, Surviving Managed Care© available on my webpage.

•1998 Update And Caution!

Note that the 1998 AAPCC rates show significant increases to Part B payments -- roughly 25% on average across the nation. But don't make the mistake of thinking that this means significantly more money is available in 1998 for capitated eyecare. Rather, the increases in Part B were due in great part to HCFA's reallocation of monies from Part A to Part B. Among the most significant moves was Home Health Services.

In fact, if one were to adjust the 1998 increases to account for the dollars shifted from Part A, the net rise in Part B is actually a little under 3% nationally, and some counties actually had negative change. Thus, if you took the previously stated 6.93% and applied it to "inflated" 1998 Part B rates, the result would be wrong. So be very careful when reviewing 1997 and 1998 numbers. Don't compare apples and oranges.

At the moment it's very difficult to get a grip on what percentage of the redefined 1998 Part B can be attributed to eyecare services. My contact at PPRC used Congressional Budget Office estimates and told me approximately 3.66% for 1998. Figures from HCFA via the AAO indicate approximately 4.4%. Be careful.

Gil Weber is a nationally recognized author, lecturer and practice management consultant to practitioners and the managed care and ophthalmic industries, and has served as Director of Managed Care for the American Academy of Ophthalmology.

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