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Network Contract Management
Network Contract Management

Rick Krohn
A core capability of any physician organization is the ability to develop new business on behalf of its' membership, and the traditional physician network has focused on this single overriding mission to ally physicians in a loose confederation of practices for contracting purposes. In a strictly fee for service environment, this strategy has been effective in generating new contracts and preserving old ones, but it is a notoriously weak bonding agent and preserves the culture of the independent, small practitioner. As managed care exercises an ever-growing influence on the healthcare marketplace, this physician culture is increasingly out of step with the trend toward market consolidation and the demand for ongoing gains in operating efficiency. This stark truth becomes apparent as the contracting environment shifts from a pure fee for service to a mixed environment of fee for service and managed care contracting. When this occurs the demands placed upon physician practices change dramatically, in terms of the ability of physicians to compete for and manage an array of indemnity and risk based contracting arrangements. Payers seek to ratchet down reimbursement, impose demands for information and compliance with operating and clinical standards, off-load risk to providers, and proceed to create relationships with larger physician organizations. All too often, physicians have been ill prepared to accept the additional administrative and clinical burdens of these newer contracting arrangements.

Enter the physician network. It plays a leading role in organizing physicians to compete for contracts and in introducing contract management capabilities beyond the financial and technical reach of most small physician organizations. As a contracting agent, the physician led network is capable of assuming multiple roles in generating and managing contracts. First, the IPA network model can be the "messenger" of physician fee-for-service reimbursement requirements, and facilitate agreement between the payer and the network membership on the terms of the contract. [note: within the IPA and related models, for non risk contracting, the network is limited in the types of active physician representation it can provide]. Second, the network can receive and disburse network revenue for risk contracts, either in the form of fee for service or capitation. In situations where the network meets regulatory requirements of "substantial economic integration" among the members, or the network employs physicians, the network may act as a one-stop signatory and physician representative for all contract related matters. In a mixed contracting environment, the network may perform any number of these roles simultaneously. But perhaps the greatest service offered by the network is in the negotiation and administration of risk sharing arrangements.

The economics of risk contracting are forcing physicians in ever-growing numbers to become adept at conducting the business of managing care. The common physician perception of risk based contracting focuses upon the financial implications of fixed reimbursement, but this is only one of several types of risk associated with managed care contracting, including:

{ Product Risk - the ability of the physician to provide packaged services such as case rates, Ambulatory Care Group (APG), per case, or other defined group of services, at a profit, on a discounted fee basis.

{ Actuarial Risk - the ability of the physician to provide a defined set of services to a defined population for a defined period of time, at a fixed price, and at an acceptable level of cost and profit.

{ Utilization Risk - the ability of the physician to balance their personal vision of quality care with the economic demands of appropriate care and cost control.

{ Adverse Selection Risk - the danger that the members assigned to a single physician are sicker, and therefore more resource intensive, than is represented in the reimbursement rate.

{ Partner Risk - the danger that the payer or a provider risk partner is incapable of meeting their responsibilities in collaboratively managing the risk elements of the contract.

There are additional dimensions to risk management. Capitation agreements vary in terms of the age/sex composition of the members assigned, the covered services of the agreement, the terms of the agreement, including out of area care, reinsurance, co pays, substitutability, and other binding requirements of the contract. Conceptually however, there are core concepts that determine the profitability of any capitation arrangement. First and most importantly, under capitation profit is a function of cost control, not production. The goal of capitation is to achieve the most efficient possible cost structure without violating personal standards of quality care. In strictly economic terms, the profitability of a capitation contract is a function of the number of covered lives assigned to the provider, the frequency of service per member, the intensity of service per member, and the cost per unit of service.

The Network Risk Contracting Strategy

Understanding risk is just one facet of successful risk contracting. The risk contracting strategies of the physician network should reflect the overall mission and market positioning of the network. Risk contracting should serve first as a vehicle to gain access to managed care patient populations. Second, risk contracting should provide the network with market leverage in establishing strong provider alliances. Payers prefer to limit the number of provider groups they must work with and a well-managed, geographically diverse, well-capitalized and clinically efficient physician network possesses a distinct advantage in capturing volume. The physician network can use this advantage to establish relationships on favorable terms with other physician groups and networks, with acute care and ancillary providers, pharmaceuticals and other vendors. The network must craft a contracting strategy plan that is supported by these alliances, whether that strategy is to become part of a "one stop shop" network, to aggressively grow the network, to carve out specific specialty services, or to maximize control of the premium dollar.

Infrastructure Requirements of Network Contract Management

Information Management

Successful risk contracting relies on the ability of the network to meet or exceed expected clinical and financial performance targets. For the risk bearing network, meeting contractual risk criteria is contingent upon relevant, timely, user friendly clinical and business information. Many stand alone physician practice billing systems are not equipped to handle the information demands of risk contracting, and the network should develop, as a core capability, managed care information services. These services should support not only the management of financial and utilization risk, but should also provide physicians with decision support, quality assurance, and "best practice" resources.

Medical Management

In addition to managing the financial risk of capitation, the network must manage the medical risk of the contract. Clinical risk is a function of standards of quality care throughout the network panel, referral patterns, access to information, physician communication, demand and disease management programs, and the sophistication of decision support tools such as protocols, guidelines, and outcomes measures. To manage utilization successfully there must be educated physi-cian leaders and members who are well informed about the quality and financial issues associated with capitation. Specifically, this involves the identification and provision of appropriate care, through the formal establishment of network protocols and procedures. In addition, there must be clinical and administrative guidelines governing referrals. These policies and procedures must not only be established; they must also be respected.

Physicians must be made aware of their clinical performance, its impact on group profitability, and the need to serve a common clinical goal. It falls within the role of the Medical Director and man-agement support systems to coordinate these activities, and to implement them effectively. Communications between physicians are vital, and when necessary, the means to enforce clinical guidelines must be established. There is often a learning curve that physicians must traverse to fully understand the relationship between individual clinical choices, quality, appropriate patient care and financial viability, and this learning should be encouraged and supported by the group through education and dialogue.

From Production to Performance

Once the contract is in force, the key to successful risk management is through the establishment of clinical and administrative efficiencies. Clinical efficiencies can be promoted through practice guidelines, clinical protocols, performance standards, outcomes measurement, and patient satisfaction surveys. There are a number of proven management tools that can be em-ployed to meet the utilization goals of risk contracting. Clinical performance can be favorably influenced by practice guidelines, clinical protocols, "best practice" standards, disease state management techniques, outcomes measurement, patient satisfaction, and peer review. Programs such as wellness, patient education, community health education, provider extenders, demand management, and case management can also serve the overall goal of appropriate utilization in the most cost effective setting.

Risk Management Skills

In addition to the clinical responsibilities transferred to providers by capitation, con-tract management skills must also be conspicuous among contract managers. Familiarity with managed care reimbursement systems, insurance plans, contract terms and accountabilities, cost analysis, and strategic planning are all relevant risk contracting skills that may not command equivalent priority in the fee for service world. Under capitation, a heightened business sophistica-tion is mandatory in controlling the financial and utilization components of risk. The tools of risk management are clinical and financial information. The business operations of the network must support clinical efficiencies, primarily through resource allocation, information access, and proce-dural compliance. Network resources, including personnel, equipment, and space must be allo-cated according to the greatest dollar value derived. This rule must govern capital spending, staff-ing, practice location, and clinical partnerships. Staffing should be driven by productivity, which means eliminating duplication and maximizing process efficiency. The essential truth of this proc-ess is that network staff should be equipped to do more with less. Capital spending should be linked to profitability and efficiency, and clinical partnerships should augment service capacities and geographic reach.

Direct Contracting

A small but growing trend among physician led networks is the transition from payer based con-tracting to direct contracting, in which the provider organization contracts directly with the health care consumer. To date, the customer has mainly been a self funded employer, but new network business models such as the Provider Service Organization ("PSO") and Provider Service Net-work ("PSN") are making it possible for physicians and their provider allies to bypass the tradi-tional insurance middleman and manage the complete array of health care delivery functions inter-nally. Briefly, the PSO allows the provider organization, subject to certain legal and regulatory criteria (notably ERISA), to act very like an HMO, without undergoing the rigorous HMO cre-dentialling and licensing processes. Conceptually, the PSO creates a linkage between the seller and purchaser of care which drastically reduces insurance overhead, places a renewed emphasis on the patient (the customer), encourages local competition among providers, and promoted the creation of buying consortiums among local health care purchasers. In theory, at least these con-cepts - patient focus, cost efficiency, provider/purchaser control all make sense, but they must be factored against the insurance aspects of risk management. The PSO is essentially an insurer, and the business of insurance is decidedly unlike the business of medicine. Before attempting to enter the realm of direct contracting, the physician led network must either defer the insurance aspect of health care management to a contracting partner (such as a self insured organization), employ the services of a Third Party Administrator (a "TPA"), or develop the in-house insurance management expertise to capably manage the financial aspects of risk contracting.

Success Factor of Risk Contracting

The three critical elements of successful risk management are care management, information, and incentives. Risk-contracting physicians must be able to adapt to the care management standards and techniques of capitation; must be empowered to make decisions with timely, accurate, and comprehensive clinical information; and must be given incentives to observe the principles of capi-tation contracting. Put simply, capitation demands that the correct provider, in the correct set-ting, at the correct time provide care in the correct intensity.

The alignment of financial incentives under capitation is central to successful contract manage-ment. Internal compensation arrangements among physicians that reward production (namely fee-for-service or unit-based compensation) violate a basic precept of capitation: cost efficiency. All parties to the contract must be given the right reason to be productive: that is, to contribute to the cost and quality goals of the entire patient population. These goals are achieved by compensating providers on performance related to the population assigned to their care, rather than on individ-ual episodes of care.

The risk contracting physician network will undoubtedly be faced with contract management chal-lenges specific to the local market, whether those challenges are external ( payer or demographic induced) or internal (political and cultural issues). Capitation comes in many colors and no single formula fits every contracting situation. For instance, risk contracting for commercial lives is not the same as risk contracting for Medicare lives, and capitation of specialty carve out services is not the same as contracting for professional services. Bearing these distinguishing characteristics in mind, it can be said that there are prerequisites of successful risk contracting that are true in every risk contracting environment.

Understand (and limit) Risk - this is far more than conducting a thumbnail evaluation of the capitation rate. Financial risk, actuarial risk, utilization risk, adverse selection risk and partner risk all combine to form the complete dimension of contractual risk being assumed by the network. Establish risk corridors, obtain stop loss and reinsurance, and limit clinical exposure by carving out or sub - capitating high-risk procedures.

Really Understand the Contract - no amount of contract management can reverse the effects of a bad deal. Understand the accountabilities, covered services, terms and responsibilities conferred upon the network by the provisions of the contract, and be sure those demands can be met. Re-member that the contract is negotiable, and the network must have the resources to assure a meet-ing of equals at the negotiating table.

The Capitation Rate is Everything - the network must conduct an analysis of its' true costs of doing business, and make sure that those costs are adequately reflected in the capitation, including an acceptable margin of profit. The means to continually validate the capitation in light of patient panel contingency factors such as age/sex, acuity, and community ratings should also be established.

Develop Risk Management Infrastructure - either through vendor relationships or built inter-nally, the technical resources must be in place to manage the financial and clinical aspects of the contract, on a continuing basis. Information services, cost and clinical efficiency are the corner-stones of network operations in a risk environment.

Create Medical Management Tools and Techniques - support the creation of a common clini-cal practice style and the network's image of quality by providing comparative performance data, protocols, guidelines, outcomes measures, and other decision support tolls. Provide a forum for physician communication and establish shared data warehouse capabilities to allow physicians to self manage their performance.

Be Innovative and Cost Conscious - Use extenders, introduce demand and disease management programs, educate providers about alternative treatment modalities, empower patients to take more responsibility for their health, promote wellness and self care, reengineer practice opera-tions, consolidate vendor relationships, and constantly search for ways to achieve operating efficiencies.

Make Quality a Defining Characteristic of the Network - achieve a reputation for quality through selective recruitment, credentialling, peer performance reporting, and ongoing physician education. Introduce quality assurance programs and monitor through patient satisfaction. Make purchasers demand inclusion of your network in their contracts, and make payers contract collec-tively with the network to gain access to those doctors.

Be customer focused - remember who the ultimate consumer is, and the expectation of the health care purchaser. Quality, access, and cost are the key drivers of patient satisfaction, and the net-work must meet these three criteria in executing its broad strategies as well as conducting daily operations.
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Richard Krohn is a member and contributor of HealthBond. View his expert page on HealthBond.

Richard Krohn is President of HealthSense. Krohn is a widely-published managed care expert as well as a dynamic speaker providing in-depth, practical and timely information on topics such as managed care contracting, strategic positioning for provider organizations, building new provider alliances, reengineering practice operations, developing market driven products, and creating equitable physician compensation plans.

November 2, 2000

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