AHM Network Management: Network Management in Health Plans Introduction

Pages 1-10
Network Management in Health Plans
CME for Physicians
AHM 530 Network Management in Health Plans has been planned and implemented
in accordance with the Essentials and Standards of the Accreditation Council for
Continuing Medical Education (ACCME) through the joint sponsorship of America's
Health Insurance Plans (AHIP) and the Academy for Healthcare Management.

America's Health Insurance Plans is accredited by the ACCME to provide continuing

medical education for physicians.

America's Health Insurance Plans designates this educational activity for up to 30

hours in category 1 credit towards the AMA Physician's Recognition Award. Each
physician should claim only those hours of credit that he/she actually spent in the
educational activity.

The America's Health Insurance Plans is an approved provider of Continuing

Education in Nursing by the Delaware Nurses Association. The Delaware Nurses
Association is accredited as an approver of continuing education by the American
Nurses' Credentialing Center's Commission on Accreditation.

The America's Health Insurance Plans designates this activity for up to 36 contact
hours of continuing education in nursing credits.

Academic Requirements
To receive CME for physicians/CE for nurses, a participant must

• Purchase and study from the required course materials

• Complete the CME for physicians/CE for nurses Evaluation/Request for Credits
Form
• Receive a minimum passing score of 70 on the examination

A letter or certificate of credit will be awarded to physicians/nurses/allied healthcare

professionals by the America's Health Insurance Plans after all requirements are met.

Please note, CME credit will not be offered for this course after December
31, 2005.

Disclosure of Significant Relationships with Relevant

Commercial Companies and Organizations
The America's Health Insurance Plans (AHIP) endorses the Standards of the
Accreditation Council for Continuing Medical Education which specify that sponsors of
continuing medical education activities disclose significant relationships with
commercial companies whose products or services are discussed in educational
activities.

For sponsors, significant relationships include educational and research grants,

institutional agreements for joint initiatives, or other relationships that benefit the
institution. For writers, significant relationships include receiving from a commercial
company research grants, consultancies, honoraria and travel, and other benefits, or
having a self-managed equity interest in a company.

Disclosure of a relationship is not intended to suggest or condone bias in the activity,

but is stated to provide participants with information that might be of potential
importance in their evaluation of the activity.

A significant relationship exists with the following individual and/or organization(s):

• The Academy for Healthcare Management is a Limited Liability Company

owned by AHIP, and the Blue Cross and Blue Shield Association (BCBSA).

No signifiant relationship exist with the following writers:

• Patsy Heil, LOMA

• Miriam Orsina, LOMA
• Clifford R. Waldman M.D., HealthAmerica

The Academy and Its Education Program

The Academy for Healthcare Management was established in 1997 to offer an
industry-wide educational program recognizing the unique challenges, complexities,
and opportunities associated with managed healthcare. Formed by three leading
healthcare associations, the Academy is committed to providing leading-edge
education and professional credentials that recognize healthcare professionals who
demonstrate educational excellence.

The formation of the Academy represents a partnership among two organizations,

America's Health Insurance Plans, and the Blue Cross and Blue Shield Association.
These organizations collectively represent more than 1,000 health plans caring for
more than 200 million people, and they offer decades of experience in providing
continuing education opportunities for insurance and healthcare professionals.

The Academy is based in Washington, D.C. The Academy's Office of the Registrar,
which handles the administrative aspects of the education program, is also located in
Washington, DC.

The Academy's Education Program

Course materials for the Academy for Healthcare Management's Education Program
are written at the college level and are designed for self-study. Although portions of
the program are still under development, the complete program consists of two
levels of study: an Introductory Level and an Advanced Level. Participants who
satisfactorily complete each level will attain respected professional designations
described in the following sections. The Academy plans to offer a continuing
education program to ensure that Academy graduates retain their educational and
professional status among the industry's leaders.

Introductory Level (Level 1)

Successful completion of the Introductory Level (Level 1) leads to the Professional,
Academy for Healthcare Management (PAHM) designation. The Level 1 program
is designed to benefit a broad audience at a variety of levels and consists of a single
self-study course, Healthcare Management: An Introduction (AHM 250). There are no
prerequisites for this course. The curriculum covers

• Basic concepts in the health plan industry

• Types of health plans and providers
• Major operational areas of health plans
• Legislative, regulatory, and ethical issues

Advanced Level (Level 2)

The Fellow, Academy for Healthcare Management (FAHM) designation, will be
earned upon successful completion of both the Introductory Level and the entire
Advanced Level (Level 2) curriculum. The FAHM professional designation is the
premier credential for anyone working in or with health plans.

Participants in Level 2 will be required to display comprehensive knowledge of the

following important functional areas of health plan management:

• Governance and regulation

• Network management
• Health plan finance
• Medical management

There are no prerequisites or corequisites required for Level 2 courses, and courses
can be taken in any order.

Information on Continuing Education credits for the Advanced Level courses may be
found in the Academy's Program Information Guide.

WHAT CAN THE ACADEMY FOR HEALTHCARE MANAGEMENT'S

EDUCATION PROGRAM DO FOR YOU?

The Academy for Healthcare Management's Education Program can provide you with
knowledge and skills you need to succeed in the rapidly changing and evolving
healthcare industry. The program is designed to benefit a broad audience at a
variety of levels-from administrative to executive staff-from a variety of different
organizations including health plans, indemnity insurers, provider networks,
government agencies, employers, vendors, etc. By participating in the Academy's
program, you will learn about the unique complexities associated with health plans,
and you will stay abreast of the latest trends, developments, and practices. A unique
feature of the Academy's program is its focus on cutting-edge business issues.

Your participation in the Academy's Advanced Level Courses will signify your
continued commitment to professionalism. Completing the Academy's program-
whether at the Introductory or the Advanced Level-will give you a sense of personal
accomplishment and the respect of colleagues in your organization and throughout
the industry. Not only will you add a new dimension to your career experience, you
will also distinguish yourself as a person who is knowledgeable about the
environment, products, operations, and issues of the managed healthcare industry.

Academy for Healthcare Management Headquarters:

Academy for Healthcare Management
601 Pennsylvania Ave., NW
South Building, Suite 500
Washington, DC 20004
202-955-4386

Sponsoring Associations:
America's Health Insurance Plans
Contact: Charles W. Stellar (202) 778-3201

Blue Cross and Blue Shield Association

Contact: Paul
Canchester (312) 297-5968

Acknowledgements

The development of study and examination materials for a course that covers the
broad range of topics covered by this course requires a true team effort. The wide
range of topics, as well as the frequent changes in laws and health plan practices,
necessitate the contributions of many individuals in order to ensure that the material
addresses network management practices in a balanced, accurate presentation. As
project manager, I would like to thank the many people who contributed their time,
energy, and considerable talents toward the development of this course and its study
materials.

COURSE DEVELOPMENT PANEL

Our foremost thanks go to the members of the Course Development Panel. The
Academy recruited leading experts from member organizations to help guide the
curriculum development process for this course. These experienced industry players
helped us to transform the vision for this course into concrete, practical concepts for
learning. These panel members worked both individually and as a group to shape the
course content by providing general direction, refining the course outline, answering
questions, providing information for illustrations, and helping to ensure the text's
accuracy and completeness. They gave tirelessly of their time and experience.
PROJECT STAFF
Working closely with the Course Development Panel was a highly effective team of
technical writers, editors, curriculum designers, text production experts, and other
contributors. The members of this hard-working group, which took the panel's
suggestions and, working under very tight deadlines, developed and produced the
lessons in this Course Manual.

SPECIAL REVIEWERS AND CONTRIBUTORS

Text development requires an enormous amount of information, not all of which is
readily accessible. In addition to the industry experts who served as Course
Development Panel members, we are also indebted to several other persons who
offered their time and knowledge to the development of this Course Manual.

PHYSICIAN TASK FORCE

A group of physicians with expertise in health plans guided us in identifying the
educational needs and issues of special concern to physicians so that we could
ensure the text's effectiveness as enduring material offering Continuing Medical
Education (CME).

EXAM REVIEW COMMITTEE

We would also like to thank the members of the Exam Review Committee who
offered their time and knowledge to the development of the course examinations.

CURRICULUM COMMITTEE
Special thanks go to the members of the Academy's Curriculum Committee. Each of
the Academy's three sponsoring organizations chose leading experts from member
organizations to help guide the direction and development of the curriculum for all
the Academy's courses. These industry leaders have demonstrated remarkable vision
and insight in shaping the curriculum for the health plan leaders of tomorrow.

ACADEMIC ADVISOR
We are greatly indebted to Peter R. Kongstvedt, M.D., FACP, Partner, Cap Gemini,
LLC, for serving as academic advisor to the Academy. We have benefited from his
wisdom and guidance.

REVIEWERS AND TECHNICAL ADVISORS FROM THE ACADEMY'S

SPONSORING ASSOCIATIONS
Numerous staff members from the Academy's sponsoring associations-America's
Health Insurance Plans (AHIP), and the Blue Cross and Blue Shield Association
(BCBSA), have worked diligently under very tight deadlines to provide extremely
helpful comments, technical assistance, and review.

ACADEMY FOR HEALTHCARE MANAGEMENT BOARD OF DIRECTORS

Finally on behalf of the Academy and project staff, we wish to recognize the
executives who serve on the Academy's Board of Directors. Without their vision,
wisdom, and support, this course and the Academy's program would not be possible.

AHM Network Management: The Role of Network Management in a Health Plan

Pages 1-28
Network Management in Health Plans
The Role of Network Management in a Health Plan
Introduction

Health plans integrate the financing and delivery of healthcare within a system that
seeks to ensure health plan members' access to necessary services, provide high-
quality care, and improve the 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 lesson explores how health plans
develop and manage provider networks. It begins with a description of the processes
for network development, followed by a discussion of programs for ongoing network
management. Because primary care is such an important concept in health plans,
our descriptions of fundamental network processes generally focus on primary care
providers. We will address considerations for other types of providers in Network
Management Considerations for Differnt Types of Providers and considerations for
special populations in Establishing Networks for Government-Sponsored Programs

To begin our discussion of provider networks, we will first define some of the basic
terminology related to networks and network management that will be used
throughout this course manual. A provider is any healthcare professional (an
individual), facility, or organization that renders medical care to a health plan's
membership. The term practitioner is sometimes used to refer to an individual
provider who is trained and licensed or certified to deliver a specific set of healthcare
services. A provider network, also called a provider panel, is the group of
healthcare providers that a specific health plan has contracted with to deliver medical
services to its members in exchange for negotiated compensation. The use of a
defined network of providers is a distinguishing characteristic of health plans. The
basic premise underlying the use of provider networks is that 1) health plans direct
members in need of healthcare services to providers in the network, and 2) network
providers, in turn, agree to follow the health plan's policies for care delivery 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, the health plan's development
and management of high-quality provider networks plays a critical role in the
ultimate satisfaction of members. The health plan's approach to network
management also impacts group purchasers' impressions of the health plan.
Similarly, the satisfaction of participating providers and their staff is strongly
influenced by the degree to which they understand and can easily implement the
health plan's policies and procedures, and by the receipt of accurate payment in a
timely manner. Further, effective network management contributes to the
administrative efficiency of the health plan itself.

This lesson begins with an overview of the scope of activities typically included in
network management. We then describe the organization and staffing of the network
management function, as well as the knowledge and resources that network
management personnel need to fulfill their responsibilities. This lesson also discusses
the relationship between network management 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 medical services is a complex process. Because most health plans offer
benefit plans that cover preventive, routine, urgent, and emergency healthcare, a
health plan provider network typically includes not only physicians and acute care
hospitals, but also a variety of nonphysician specialists and facilities that offer a
broad spectrum of healthcare services in various settings. Network management
may be further complicated by considerations for special populations, such as elderly
or low-income groups, or members who suffer a work-related illness or injury. In
addition, the network management function must ensure that the health plan's
provider networks comply 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. We will discuss these activities throughout the
following lessons
One important activity within the scope of the network management function is to
ensure the quality of the health plans provider networks. Credentialing is a review
process conducted by or for a health plan to determine the current clinical
competence of a provider and to ensure that the provider meets the health plan's
standards. During the credentialing process, the provider's credentials (the
documentation related to licenses, certifications, training, and other qualifications)
are obtained and verified. Then, a health plan committee made up of the provider's
professional colleagues reviews the credentials to determine whether the provider
meets the health plan's preestablished criteria for participation in the network.
Recredentialing is a health plan's periodic reexamination and verification of a
provider's qualifications to ensure that the provider still meets the health plan's
standards for network participation.

Another significant aspect of network management is establishing and maintaining

good relationships with providers and their staffs. A friendly relationship between
network management and providers may influence providers and their staffs to
become more familiar with and consistently comply with the health plan's clinical and
administrative policies. Some health plans distinguish between provider relations and
provider service activities, although the two concepts are closely related and may be
performed by the same staff. Provider relations refers to proactive measures that
the health plan takes to establish and maintain good relationships with providers.
Provider relations includes activities such as education of providers and staff about
the policies 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 network management activity that focuses on problem solving
or responding to specific requests from providers. Helping a provider expedite a
request for authorization of a procedure is an example of provider service. Other
health plans consider provider relations and provider service to be the same 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-contained entity, either as its own department or as a division of another related
area, such as medical management. Many health plans have a sub-unit within
network management, or even a separate department, for credentialing activities.
Although some health plans have staff members who focus exclusively on
credentialing activities, in other health plans, the network management staff
members share credentialing activities along with a variety of other network-related
responsibilities.

A health plan that has multiple offices within its service area may decentralize some
or all network management activities. Each health plan determines which network
activities will be centralized and which will be decentralized. A large health plan may
prefer to handle most or all network management functions through a single network
management unit based at the company's national, regional, or state headquarters.
Alternatively, the health plan may use staff based 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 other functions. For
instance, a health plan that maintains a staff within the plan's service area to recruit
and educate providers may also have a centralized provider-inquiry phone unit that
providers can call to request authorization of referrals or procedures, or to ask
questions about the plan. In another example, local staff collect credentialing or
performance information from providers and then forward the information to a
centralized data input unit, rather than maintaining records at the local level. A
centralized data unit can help ensure data integrity, which is essential for the
accuracy of credentialing files, performance reporting, and provider directories

The organizational structure of the network management function often varies

according to the size and the geographic scope of the health plan. For example,
smaller plans typically have more integration among activities and less specialization
of roles. The network management directors of small plans are more likely to be
involved in day-to-day network management activities, such as recruiting,
contracting, and providing performance feedback to providers. In small plans, the
chief executive officer or chief operating officer may have direct involvement in
managing networks, although this structure is rare. Larger health plans may have
separate network management staffs for different types of providers. For example,
the health plan may have units specifically for developing and managing pharmacy
networks, hospital networks, and ancillary service networks.
If the organization covers a multistate or multiregional service area, there may be
staff in each of several locations to handle the respective territories, with a unit at
the corporate site to cover administrative 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 one health 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, many health plans have three basic categories of
network management personnel: directors, contracting personnel, and provider
relations representatives. Figure 1A-2 depicts two possible ways in which the
network management personnel may be organized.
Network Management Staffing
Network Management Directors

The nature of network management supervision varies greatly among individual

health plans. In some 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 physician who oversees the health plan's medical
management programs. The medical director may participate 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 is not
involved on an operational level. Medical directors for health plans that have a strong
clinical orientation, especially provider-sponsored health plans, are generally very
involved with most network management processes.

In many other health plans, the vice president of healthcare services, the vice
president of networks, the director of provider relations, or a similar officer oversees
network management while the medical director focuses on clinical issues, such as
utilization management (UM) and quality management (QM) programs. Still other
health plans divide the oversight of network management activities between two or
more plan officers. For example, a health plan's medical director may be in charge of
all networks except the pharmacy network, which is overseen by the pharmacy
director. In other plans, the medical director oversees some network management
activities, such as credentialing and performance management, and a nonclinical
officer is responsible for other network-related activities, such as contracting and
provider service. Many providers prefer to have a medical director involved in at
least some network activities in the belief that a medical professional will have 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 basic health plan concepts and the laws, regulations, and accrediting
standards affecting networks. This officer not only oversees all network management
functions but also serves as a network management liaison to other members of
senior management within the health plan. The network manager communicates with
and, as needed, works with other senior managers to develop policies and address
problems that are network-related. For example, the network management director
works with managers from the claims function to develop claims submission and
processing policies that meet the needs of both the plan and its providers.

Network Management Directors

An executive-level committee at the health plan may oversee and set policies for
network management. Some health plans have executive-level committees
dedicated specifically to networks and/or credentialing. At other health plans, the
Quality Management committee is the executive-level committee that oversees
network management activities. The director of network management reports to the
applicable executive-level committee and may be a member of that committee. The
committee overseeing network management typically reports directly to the health
plan's board of directors. In addition, some health plans and the provider
organizations in their networks have formed joint committees to deal with network
issues, such as changes to credentialing criteria or programs to manage provider
performance. Committees that include representatives from both the health plan and
the provider organization may result in closer collaboration between the two parties.

Provider organizations such as IPAs and PHOs typically have their own boards of
directors and committees to address health plan activities such as networks, quality,
and utilization. When a health plan contracts with one of these provider
organizations, the director of the network management department or other senior
network management staff member can serve as a liaison between the provider
organization and the health plan. The liaison ensures regular communication, solicits
input from the providers, and follows up on the implementation of any provider
organization board or committee decisions. For instance, the network management
director can communicate UM and QM policy changes to the provider organization,
obtain information about satisfaction with the support provided by the health plan's
provider relations representatives, and relay provider suggestions about
administrative processes to the appropriate health plan department.

Contracting Specialists

In many health plans, the network management department includes personnel

whose primary responsibility is to negotiate and execute contracts. Larger health
plans further specialize this function by having some staff members handle contracts
with individual practitioners and others focus on contracting with provider
organizations and facilities. In addition to negotiating skills, the contracting staff
members need to understand provider reimbursement and other aspects of health
plan finance to be able to analyze the projected utilization and costs associated with
a proposed network of providers. The contracting personnel must coordinate
activities with the health plan's claims, information systems, and marketing
departments in order to ensure that the terms of provider contracts can be efficiently
administered by the company's systems. For example, contracting personnel should
consider the claims administration department's capability to process claims before
determining a contract's terms on the time for claims processing. The health plan's
legal department should review all contracts for compliance with applicable laws and
regulations.

Provider Relations Representatives

Provider relations representatives, also known as network management field

staff, are usually responsible 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.

The provider contract that the Canyon health plan has with Dr. Nicole Enberg
specifies that she cannot sue or file any claims against a Canyon plan member for
covered services, even if Canyon becomes insolvent or fails to meet its financial
obligations. The contract also specifies that Canyon will compensate her under a
typical discounted fee-for-service (DFFS) payment system.

During its recredentialing of Dr. Enberg, Canyon developed a report that helped the
health plan determine how well she met Canyon's standards. The report included
cumulative performance data for Dr. Enberg and encompassed all measurable
aspects of her performance. This report included such information as the number of
hospital admissions Dr. Enberg had and the number of referrals she made outside of
Canyon's provider network during a specified period. Canyon also used process
measures, structural measures, and outcomes measures to evaluate Dr. Enberg's
performance.
The report that helped Canyon determine how well Dr. Enberg met the health plan's
standards is known as:

an encounter report

an external standards report

a provider profile

an access to care report

Profiling

Profiling, also known as provider profiling, is the collection and analysis of

information about the practice patterns of individual providers. Profiling produces
information on such parameters as quality of care, outcomes, patient satisfaction,
utilization of resources, cost-effectiveness, and compliance with the plan's protocols.

Some health plans use profiling information to select network providers whose
practice patterns appear to be compatible with the goals and policies of the network.
However, profiles for network candidates are often not available unless the provider
has previously participated in one of the health plan's networks. Sources of profiling
information about applicants for the network include the health plan's records for
claims, QM, and UM; data gathered by health plan purchasers; and reports from the
providers applying for the network.

A more common use of profiling is to measure the overall performance of providers

already in the network. Profiling provides the health plan with a base of objective
measurements and identifies problems to address during provider evaluations. Data
for provider profiling of current network providers may come from a variety of
sources including claims, encounter forms, and other periodic reports submitted by
the providers. Network providers need performance feedback on 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 areas of deficiency for the provider. Typically, the medical director or
another clinical senior manager from the health plan discusses the results of the
performance analysis with the provider. For instance, the pharmacy director may
conduct performance evaluations for network pharmacists. Provider relations
representatives sometimes collect, organize, and assist with the analysis of profiling
information. In addition, provider relations representatives may help providers with
administrative problems that are hampering performance. We discuss profiling in
more detail in Ongoing Management of Provider Networks.

Credentialing

Collecting and verifying credentialing information may or may not be among the
responsibilities of provider relations representatives. Some health plans choose to
establish a separate in-house unit for the credentialing activities, or credentialing
may be managed by the quality management function. Other health plans delegate
credentialing information collection and verification to provider organizations or
credentials verification organizations (CVOs). One reason to separate credentialing
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
when selecting and recredentialing providers for the network.

Some health plans believe that provider relations representatives are a logical choice
to perform initial credentialing and periodic recredentialing because of the
representatives' knowledge of and proximity 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's facilities and practice
procedures. Since provider relations representatives already call on providers, the
health plan may find it more efficient to let the network management field staff
gather the extensive documentation required for credentialing and recredentialing.
We will discuss the credentialing of providers further in Identifying and Recruiting
Providers for a Health Plan Network.

Education of Providers

Because provider relations representatives are often a provider's main source of

information about the health plan, the representatives must be familiar with other
aspects of the plan's operations as well as with network management. Figure 1A-3
lists some of the operational areas and specific issues that representatives often
address in their education of providers and their staffs. Continuing Management of
Network Adequacy and Provider Satisfaction provides additional details on provider
and staff education.
Improving Provider Satisfaction

Because of the complexity of the relationship between a health plan and its
networks, provider relations representatives or other health plan personnel should
conduct periodic surveys of their providers and their providers' staffs. Such surveys
assess provider understanding of and satisfaction 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
accurate payment, quick turnaround time for authorizations, and efficient
methods for determining membership eligibility.
The feedback from provider surveys allows the network management department to
revise its service protocols and to facilitate changes in other operational areas as
needed. In Continuing Management of Network Adequacy and Provider Satisfaction,
we discuss provider satisfaction further.

The following statements are about the organization of network management

functions of health plans. Select the answer choice containing the correct response:
Compared to a large health plan, a small health plan typically has more
integration among its network management activities and less specialization of
roles.
It is usually more efficient to have a large health plan's provider relations
representatives located in the health plan's corporate headquarters rather than
based in regional locations that are close to the provider offices the
representatives cover.
An health plan's provider relations representatives are usually responsible for
conducting an initial orientation of providers and educating providers about
health plan developments, rather than recruiting and assisting with the
selection of new providers.
In general, a health plan that uses a centralized approach for some of its
network management activities should not use a decentralized approach for
other network management activities.

Organization of the Provider Relations Staff

The number of provider relations representatives should be sufficient to allow regular

communication with all providers in order to distribute updates from the plan and to
identify and resolve any problems. It is usually more efficient to have the field staff
based in regional locations 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 in person and visit many offices in a given day.
However, many health plans have such large panels that it is impossible for provider
relations representatives to make on-site visits to all individual practice sites. Some
health plans limit in-person visits to primary care providers.

When a health plan has provider relations representatives who work outside the
corporate location, it is essential that the network management department establish
standard policies and procedures to guide the representatives so they can serve
network providers adequately and resolve problems on a timely basis. By developing
standard service and reporting procedures for all processes, the network
management department ensures that its field representatives can provide
consistent service for its providers and identify common issues or problems that may
need 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 skill sets. 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. Senior staff within network management must have the necessary background
to interact with other departments, work with physician and hospital leaders,
understand the complexities of contracting and reimbursement, and manage the
broad range of activities associated with developing and managing provider
networks.

Regardless of their roles within the department, all network management staff share
a common need for detailed knowledge about the health plan's operations and for
support mechanisms to help them work with a variety of provider specialties and
services. A health plan that wants to improve the performance of its network
management staff may decide to provide some of the following 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 a thorough orientation on internal plan operations, particularly in the
areas of provider reimbursement, data reporting, claims submission, authorizations
and referrals, medical management 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 own employees, it is particularly
helpful if network management staff attend the relevant sessions or modules of
those orientation programs.

Forums for Information-Sharing

Network management staff should have periodic staff meetings to discuss problems
and potential solutions. Because many issues affecting the network have implications
for other operational departments, interdepartmental meetings at both senior and
operational levels can improve operations throughout a health plan. For example,
network management personnel may negotiate contracts that satisfy providers and
improve the health plan's financial position, only to find out later that the terms and
provisions of the contracts are inconsistent with standard administrative procedures.
The special intervention required to administer these nonstandard contracts may
reduce the advantages that the contracts offer. Through interdepartmental meetings,
network management personnel can learn how to construct contracts that help the
health plan achieve its business goals while still conforming to operational standards.

Technological Support

A health plan's information system typically includes a great deal of information

relevant to network management, such as data on each participating provider, fee
schedules and coding rules, claim status, utilization data, authorizations, referrals,
membership eligibility, and benefit coverage. Network management staff need online
access to such information, and field representatives should have remote access
capability, if possible.

Because network management activities involve significant telephone use, health

plans usually have 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 health plans 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 the caller instructions on
how to reach a specific department, and then directs the call to a specific unit based
on preset criteria, such as the caller's area code or another code that the caller
enters on the phone's keypad .1

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, staff members who have
previously supported specific functions or specific territories may suddenly be
required to participate in new activities. In addition, staff can better meet the
evolving needs of their 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 to participating providers. Network management staff should have
access to and make use of a variety of communications tools to ensure that
providers receive timely, complete, and accurate information. 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

network management staff has regular interaction with several other health plan
departments, including medical management, risk management, member services,
and claims administration. These other departments regularly exchange information
with network management personnel and may provide specific services related to
networks. Cooperation and communication among the various functions enhance
each department's efficiency and effectiveness.

Medical Management

Medical management, also known as care management, encompasses all of the

activities that health plans and their providers engage in to maintain or improve
quality service levels, meet budget projections for medical services, and respond to
accreditation and regulatory requirements . Medical management includes the health
2

plan's policies, processes, and activities for utilization management, quality

management, and resolution of member complaints and grievances. Medical policy
development, medical technology assessment, and formulary management are other
medical management activities.

Medical management attempts to integrate clinical services from various providers in

a way that maximizes the benefit to the plan member while avoiding excessive
utilization of healthcare resources. An important purpose of medical management is
to improve the member's overall health status over time by coordinating care across
individual episodes of care and the different providers who treat the member.

Medical Management

Many of the activities of network management are closely related to those of medical
management. For example, profiling is a means of managing provider performance
in order to ensure high-quality care. Network management and medical management
often work together to develop programs that meet the needs of both functions.
Some health plans have regional medical directors who provide support to the
provider relations staff. For example, a regional medical director may accompany a
provider relations representative on visits to providers, particularly if a provider has
repeatedly failed to comply with administrative requirements or if the provider has
questions or problems that involve clinical issues. Provider relations representatives,
in turn, support medical management directors and staff by coordinating special
projects, such as forums with 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 management 3

• 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

performance management often rely heavily on quality, utilization, and cost
information from the various medical management programs.

Risk Management

Risk Management includes all of the activities that a health plan undertakes in
order to protect the plan against financial loss associated with the delivery of
healthcare services and to protect its members against harm from medical care. The
purpose of risk management is (1) to identify and evaluate exposures (actual or
potential) to risk and (2) to prevent or at least minimize any financial 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 often implement some or all of the following measures:

• Credentialing and recredentialing conducted in accordance with applicable

federal and state 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 following activities are the responsibility of either the Nova Health Plan's risk
management department or its medical management department:

A. Protecting Nova's members against harm from medical care

B. Improving the overall health status of Nova members by coordinating care across
individual episodes of care and the different providers who treat the member
C. Protecting Nova against financial loss associated with the delivery of healthcare

D. Establishing outreach programs to encourage the use of preventive health

services by Nova's members

Of these activities, the ones that are more likely to be the responsibility of Nova's
risk management department rather than its medical management department are
activities:

A, B, and C

A, C, and D

A and C

B and D

Risk Management

The health plan must be aware of and adhere to applicable antitrust and
antidiscrimination laws to avoid this type of exposure to risk. Health plans should
also protect the confidentiality of information discovered during the credentialing
process. We will discuss legal issues for networks 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 of healthcare services exceeds the budgeted cost. One common way to
manage this risk is by transferring some of the financial risk to providers through
risk-sharing reimbursement arrangements. However, health plans are careful to
comply with applicable laws and regulations when developing reimbursement
arrangements and to avoid creating a compensation approach that might induce
providers to deny needed care to members.

Member Services

Member services is the department responsible for helping members with any
problems, handling member grievances and complaints, tracking and reporting
patterns of problems encountered, and enhancing the relationship between the
members of the plan and the plan itself . Member services also monitors overall
4

member satisfaction with providers and care. Through its processes for assessing
member satisfaction and addressing member complaints and grievances, member
services can identify trends that may indicate problems with accessibility or provider
performance. Figure 1A-4 lists some complaints and problems tracked by member
services that are of particular interest to network management personnel.

In addition to providing information about accessibility and provider performance,

member services may directly affect access to services by showing members how to
obtain care from the provider 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
department for much of the information needed to manage provider performance.
Claims administration is the process of receiving, reviewing, adjudicating, and
processing claims for either payment or denial. By examining claims, the health plan
can determine the number and type of healthcare services delivered to plan
members. This information allows the health plan to understand each provider's
practice patterns and level of compliance with the health plan's procedures for the
delivery of care, as well as to monitor the number and types of services provided by
the entire network.

Providers compensated through a capitation reimbursement arrangement do not

submit claims. Instead, capitated providers send encounter forms to supply the
health plan with information about members' healthcare visits, diagnoses, treatment,
and plans for follow-up care. The provider 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 procedures performed.
Claims Administration

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 network management staff, and how these activities relate to other
health plan operations. It is also important to recognize the impact of external forces
on a health plan's approach to network management. Environmental Considerations
for Network Management explores how legal requirements, quality standards, and
purchaser and consumer expectations all influence the way in which a health plan
develops and manages networks. In future lessons, we provide a closer look at how
a health plan accomplishes the primary network activities of planning the network,
selecting and contracting with providers, and managing provider performance.

AHM Network Management: Considerations for the Structure, Composition, and Size of the
Network

Pages 1-36

Network Management in Health Plans

Considerations for the Structure, Composition, and Size
of the Network
Introduction
After determining the market's needs and setting goals for their networks, health
plans establish strategies 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 and different products. We also review regulations, industry standards, and
other considerations for the composition and size of networks. Finally, we discuss the
health plan's options for building versus renting a network

Network Strategies for Different Types of Health Plans

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

A health plan that offers more than one type of product may choose to coordinate
provider networks through a network-within-a-network approach, that is, by
including the providers from one product's panel in the network of another panel.
The inclusion of one network within another network is sometimes called nesting,
customized networks, or sub-networks. Consider, for example, a multi-line insurance
company with a range of products that includes a managed indemnity product, a
PPO, a POS product, and an HMO. Subject to local market demand, this health plan
may progressively narrow its provider panels from the PPO to the HMO in order to
obtain incremental price concessions in exchange for patient volume or stronger
utilization control. 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 PPO network.

In another approach to creating a network within a network, the health plan could
have broad panels with essentially the same providers for every product.
Coordinating provider networks in either of these ways creates similarity among the
networks of different products. This similarity can 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 multiple networks in a timely
manner and helps control the costs of network development because the total
number 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, and HMO products.
Provider-Sponsored Health Plans
Health plans that are sponsored or owned by providers have a different set of issues
that influence provider network development. A health plan that was created by a
specific group of providers typically builds its network around this core group of
providers. The health plan must then determine whether the core group of providers
is sufficient to meet regulatory requirements and market expectations. If the
network is not adequate, the question of which additional providers to add arises.

Frequently, provider-sponsored health plans are developed in response to a real or

perceived competitive threat from another provider or provider organization.
Typically, this motivation limits further provider recruiting to non-aligned or non-
competing providers. Provider-sponsored health 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 the network
based on existing competition.

National, Regional, and Local Health Plans

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

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

Many large national accounts are headquartered in urban areas. Typically, but not
always, these urban areas have high numbers of providers, overcapacity in hospitals
and specialty care (if not primary care), and a significant level of health plan
competition. Large national companies are often familiar with the strong health plan
techniques of closed provider panels, primary care gatekeepers, deep discounts from
providers, capitation, and case management. However, if national health plans bring
a strong health plan approach to all of the employee locations of the large 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 and
rural markets, local employers in small towns may be reluctant to accept a provider
panel that excludes some local providers.

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

A national health plan with a focus on large national accounts may be successful with
a fairly standard provider network strategy across all markets. However, a health
plan that wishes to serve national, regional, and local customers with its networks
will need to modify its network composition, 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 health plan must be willing to
commit more time and resources in order to research and implement local networks.
As we will discuss in the "Build or Buy" section at the end of this lesson, the amount
of time and resources required to develop a network may make outsourcing of
network development or 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 as Minneapolis or Denver. The decision makers at headquarters may
have a bias toward health plan products that are less common in smaller cities and
rural areas. As a result, regional health plans also have to balance the needs of
regional and local customers in developing a provider network strategy. However,
regional plans typically develop from an initial market base in one or more local
markets. Therefore, regional plans tend to start with a local orientation and then
respond as necessary to the needs of larger accounts. Local health plans, by
definition, are focused on the demands and structure of their local markets. These
health plans are frequently challenged to respond to the needs of national accounts
that need local coverage in an area not served by a national health plan. Local health
plans frequently have to decide whether accommodating the provider network needs
of national or regional accounts is worth the cost if these needs are different 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
individual products within a health plan may require unique network goals and
strategies. The following sections 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
the strategies for these products are relatively simple. Provider networks for
managed indemnity products are typically very broad with few restrictions on patient
access.

Health plans with PPOs or managed indemnity as their only lines of business have
historically focused on goals for cost-effectiveness and access when developing
provider networks. The current dominant PPO model is based on very broad provider
panels where discounts are obtained on 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 not initiated outcome
measurement tools or developed collaborative process improvement relationships
with providers.

Objectives
After completing this lesson you should be able to:
 • Explain how a network-within-a-network approach can benefit a health plan
with more than 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

Managed Indemnity Products and PPOs

PPO plans with little or no beginning market share and limited name recognition may
need to start with a relatively narrow provider panel (40% or less of the available
providers) and establish exclusive or semi-exclusive arrangements with some
providers in order to obtain competitive price 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 while maintaining price
discounts. Health plans with national or regional reputations for quality care may be
able to enter a new market with broad provider panels and obtain competitive
discounts from 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 by developing provider panels that are divided into two levels based on the
type of care that is provided. 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 available providers). For the highly
specialized, typically high-cost areas such as transplants, oncology, and
neurosurgery, and for ancillary provider areas such as mental health and
chiropractic, the plan develops narrower panels (25-50% of the available providers).

HMOs
While most PPOs maintain relatively broad provider panels, HMOs are typically more
concerned with balancing consumer demand for large panels with the HMO's goals
for cost-effectiveness. In trying to achieve a satisfactory balance, many HMOs have
attempted to compare the relative efficiency 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 a PCP (usually a family practitioner, pediatrician, general internist, or
sometimes an OB-GYN) to be the primary manager of the member's care. Primary
care HMOs also require the member to begin 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 specialty physician, another
professional, or facility, the HMO usually will not reimburse the provider or the
member for the care.

Primary Care HMOs

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 provided by specialists and other healthcare professionals is one
indicator of likelihood to succeed. The current practice patterns of the physician also
offer indications of the practitioner's fit with the primary 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 on quality, utilization, and cost-effectiveness if such data is available, or
through an interview included in the physician application process. The use of either
profiling or interviewing requires a fairly intensive local effort by the health plan
during the development of the primary care network, and many health plans may be
unable to devote the resources necessary for profiling or interviewing before
selection.

The ability of the health plan to obtain local physician profiling data and to maintain
a significant local presence are key factors in determining the size of the primary
care network that can be managed effectively. While primary care HMOs usually
have strong financial incentives that apply at the individual doctor level, experience
indicates that physicians are often unable to do well under the incentive program
without monitoring and feedback from the health plan. If the HMO 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
can maintain a broader primary care network. With appropriate data about practice
patterns, the HMO medical director and HMO network management staff can issue
regular periodic performance reports to individual providers and work with them to
address variances from quality, patient satisfaction, and utilization goals.

A late entrant into a market with a high penetration of primary care HMOs and
strong financial incentives 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 to build significant market
share. On the other hand, copying competitors' strategies may be acceptable for a
regional or national HMO that needs to establish a local presence in a particular
market only because of obligations to national accounts and not because it intends to
develop the local market.
A primary care HMO that lacks access to physician profiling data on candidates for
the network may not have adequate resources to establish a strong local staff
presence. In this case, the health plan can modify its application process so that the
HMO can identify and select PCPs whose applications indicate quality, utilization, and
cost patterns that are already consistent with the HMO's goals. Some provider
organizations may be willing and able to monitor and manage the practices of their
PCPs in addition to providing reports on performance of the organization as a whole.
However, HMOs should not assume that every provider organization has the capacity
to give 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 the member to go to any doctor, healthcare professional, or facility that
is on the HMO panel without a referral from a primary care doctor. Care received
outside the HMO network is not reimbursed unless the provider obtains advance
approval from the HMO. A variation of the OA HMO is the direct access HMO. In a
direct access HMO, the member must select a PCP, but is allowed to go to any other
provider on the HMO panel without a referral from the PCP. Although the common
wisdom 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 the 1990s 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, plus incentives based on the overall cost-effectiveness of all panel providers in
a particular service area or market. Some health plans believe that cost differences
between open access and primary care HMOs are modest, while other health plans
report substantially increased costs when gatekeepers are removed.3,4 The debate
over open access versus primary care HMOs remains unresolved, but it is clear that
HMOs' network strategies will differ depending on the model chosen.

The following statements describe two types of HMOs:

• The Elm HMO requires its members to select a PCP but allows the members to
go to any other provider on its panel without a referral from the PCP.
• The Treble HMO does not require its members to select a PCP. Treble allows
its members to go to any doctor, healthcare professional, or facility that is on
its panel without a referral from a primary care doctor. However, care outside
of Treble's network is not reimbursed unless the provider obtains advance
approval from the HMO.

Both HMOs use delegation to transfer certain functions to other organizations.

Following the guidelines established by the NCQA, Elm delegated its credentialing
activities to the Newnan Group, and the agreement between Elm and Newnan lists
the responsibilities of both parties under the agreement. Treble delegated utilization
management (UM) to an IPA. The IPA then transferred the authority for case
management to the Quest Group, an organization that specializes in case
management.
Both HMOs also offer pharmacy benefits. Elm calculates its drug costs according to a
pricing system that requires establishing a purchasing profile for each pharmacy and
basing reimbursement on the profile. Treble and the Manor Pharmaceutical Group
have an arrangement that requires the use of a typical maximum allowable cost
(MAC) pricing system to calculate generic drug costs under Treble's pharmacy
program. The following statements describe generic drugs prescribed for Treble plan
members who are covered by Treble's pharmacy benefits:

• The MAC list for Drug A specifies a cost of 12 cents per tablet, but Manor pays
14 cents per tablet for this drug.
• The MAC list for Drug B specifies a cost of 7 cents per tablet, but Manor pays
5 cents per tablet for this drug.

From the following answer choices, select the response that best identifies Elm and
Treble:

Elm: open access (OA) HMO

Treble: direct access HMO
Elm: open access (OA) HMO
Treble: gatekeeper HMO
Elm: direct access HMO
Treble: open access (OA) HMO
Elm: direct access HMO
Treble: gatekeeper HMO

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 an HMO. 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 in constructing modern, attractive healthcare
facilities. Currently, the most successful staff model HMOs have been long
established and their substantial market share allows them to open a larger number
of office locations across their service area. The key challenge for a staff model HMO
entering a new market is to develop a primary care network that is broad enough to
have market appeal 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 so that its physicians already have a patient and revenue base. To
avoid high overhead expenses in the early stages of market development, staff
model HMOs usually contract with specialists and ancillary providers rather than
employing these providers. As patient volume grows, staff model HMOs add
specialists as the patient load will support them. At this point, specialists may be
hired or practices purchased by the HMO to add this capacity. Early staff model
HMOs owned hospital capacity as well. However, overcapacity in the hospital market
usually allows health plans to negotiate price discounts deep enough to make renting
hospital space more attractive than owning it. 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 a primary care
(gatekeeper) approach until the health plan has enough patient volume to justify
hiring full-time specialists and ancillary providers. When volume permits a full staff of
employed professionals, 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 to healthcare. A POS product requires members to select a PCP, and
members receive the highest benefit level if they visit this PCP first each time they
need care. Patients may self-refer to other providers, but the benefit level is lower;
that is, the coinsurance or copayment is higher. Some POS 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 when care
starts with the PCP. The middle level applies for self-referrals within the POS panel.
The third (lowest) level of benefits applies to self-referrals outside the POS panel.
Figure 2B-2 illustrates the two- and three-level approaches to POS benefits.

When contracting with providers, health plans with POS products use many of the
same strategies for contracting with PCPs as primary care HMOs. For example, PCPs
on POS panels frequently have financial incentives similar to those under primary
care HMOs. However, strategies for developing specialty, ancillary, and institutional
panels often vary depending on whether the POS has a two-level or three-level
benefit structure. In a two-level benefit structure, the patient has no incentive to
choose an in-network specialist, ancillary provider, or institution over a non-network
provider. Under a two-level benefit system, both the health plan and PCPs under
cost-based incentive plans stand to benefit if non-primary provider panels are
relatively broad. By having contractual 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 of its 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 seek
services outside the panel. A three-level POS program can use a somewhat narrower
panel because 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 the population 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. Medicare providers should be skilled at maintaining the health of elderly
patients and treating a wide variety of illnesses. For example, some Medicare
beneficiaries need treatment for chronic illnesses like mild arthritis and high blood
pressure in order to continue their activities of daily living. Other Medicare recipients
suffer from acute illnesses and require hospitalization, while yet other elderly
patients are confined to nursing facilities and need periodic care to prevent their
conditions from deteriorating further. The skill mix of professionals and the types of
case management services needed for the Medicare population are clearly much
different from the needs of a younger population.
Medicaid
Medicaid managed care plans also face unique network challenges. For example,
problems associated with pregnancy and early childhood development are major
issues for the Medicaid population. Poor diet and inadequate prenatal care frequently
result in high-risk pregnancies and low-birth-weight babies. The Medicaid provider
network must be skilled at providing patient education, wellness, and prevention
services. Medicaid providers must also conduct outreach programs to bring patients
into the healthcare system early to prevent problems and keep minor conditions
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 seek primary care as regularly as other groups do. A health plan
should emphasize the importance of relationships between PCPs and members, and
the need for routine care when developing a Medicaid network. A Medicaid network
should, if possible, include the providers with whom Medicaid recipients are most
comfortable. In some cities, Medicaid recipients are most familiar and comfortable
with the public general hospital. It is usually important to include such a facility in 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, and rapid rehabilitation of work-related injury and illness, PCPs are not
always the best starting point for a workers' compensation provider panel. Specialty
networks built around the treatment of common work-related conditions, such as low
back pain and carpal tunnel syndrome, may be the best option for achieving high-
quality, cost-effective care. For instance, a back pain network built around
orthopedists, chiropractors, and physical therapists may be better suited for treating
back pain than most PCPs. Health plans may wish to provide PCPs with protocols on
how to evaluate typical 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 may be appropriate.

Children's Health
The number of government-sponsored children's health plans has recently grown as
a result of increases in federal funding. Children's health plans typically place a
strong emphasis on early treatment and prevention. In addition to focusing on a
strong network of pediatric and family practice providers, these health plans need
programs to identify and bring in children who might not otherwise receive
healthcare. The network should include links with school nurses and neighborhood
health centers to facilitate the referrals. We discuss children's health and the
Children'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 and adequacy of provider networks. Adequacy, also known as availability,
is the extent to which a network offers the appropriate types and numbers of
providers in the appropriate geographic distribution according to the needs of the
plan's members. Most of these access and adequacy guidelines 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 their
guidelines and, perhaps, to meet the standards of relevant accrediting agencies.
Read Figure 2B-3 for a summary of federal and state regulations and guidelines
concerning health plan network access and adequacy. Figure 2B-4 contains examples
of guidelines on access and adequacy from accrediting agencies.
With regard to the laws and regulations on access and adequacy of provider
networks, it can correctly be stated that:
most access and adequacy guidelines relate to preferred provider organizations
(PPOs) or managed indemnity products
corporate practice of medicine laws require staff model HMOs to hire physicians
directly, even if the physicians do not own the HMO
any willing provider laws prevent a health plan from making exclusive or semi-
exclusive arrangements with a provider or a group of providers
the NAIC Managed Care Plan Network Adequacy Model Act requires states to
use provider-enrollee ratios as the sole measure of network adequacy
Other Laws Affecting Network Size and Structure
Several additional areas of healthcare legislation have the potential to influence the
structure and size of provider networks. Among these legislative issues are any
willing provider laws, mandated coverages, 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 the terms and conditions of the health plan's contract to participate in the plan.
Any willing provider laws prevent the plan from striking exclusive or semi-exclusive
arrangements with a provider or a group 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 recent US Supreme Court decision
regardsing the legality of AWP laws.

Figure 2B-5

In Kentucky Association of Health Plans v. Miller, the issue the Supreme Court decided is
whether 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, 2003 hearing before the court, the attorney for the Kentucky Association of
Health Plans argued that health plans need to use limited provider networks to deliver
quality health care at a reasonable cost. The state argued that the Kentucky law is a
legitimate consumer protection measure that gives consumers access to providers of their
choice.

On April 2, 2003, the US Supreme Court, in a unanimous decision, affirmed the Sixth
Circuit decision that found that Kentucky's "any willing provider' laws are saved from
ERISA preemption 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 thus be saved from ERISA preemption, it must satisfy two
requirements: 1) it must be specifically directed toward entities engaged in insurance; and
2) it must be substantially affect the risk pooling 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 provider laws are preempted by the Employment Retiree Insurance Securities
Act (ERISA). ERISA preempts state level insurance regulation relating to self-insured
employers or groups. Challenges to any willing provider laws have generally been
successful if the law has been constructed to include provider networks used by self-
insured groups. Challenges have been unsuccessful if the law did not cover self-
insured groups.

In states where any willing provider laws exist, health plans must describe the terms
and conditions in provider contracts carefully in order to manage the size of the
provider panel. For example, the health plan may include economic criteria (average
cost per case or member) as a term and condition of the contract. The plan's ability
to add terms and conditions to the contract must 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 benefit laws may require the health plan to include specific benefits in the
health plan benefit design, to include particular providers in panels, or to grant direct
access to a provider class without referrals from PCPs. Where they exist, these laws
always influence benefit design and the cost of health plan benefits. Mandated
benefit laws also affect provider panel design when they mandate the inclusion of a
class of providers necessary to perform the mandated service. Among the mandated
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 the mandates imply the need for a particular type of provider in the network,
such as behavioral healthcare professionals.

Corporate Practice of Medicine Laws

Corporate practice of medicine laws generally restrict business corporations from
practicing medicine through licensed employees or prohibit business corporations
from obtaining profits from the provision of physician professional services. Where
they exist, these laws restrict the ability of staff model HMOs to hire physicians
directly, unless physicians own the HMO. Staff model HMOs have been able to work
around corporate practice of medicine laws by forming an exclusive contract with a
group of physicians who agree to dedicate all or most of their practices to 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 as corporations makes the development of integrated provider networks
more difficult. To the extent that health plans find working with integrated provider
networks beneficial, such laws may restrict 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 the operation 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 management decisions of the physician group
through board membership, management contracts, and other provisions. These
arrangements allow effective control of the physician practice by the integrated
provider network, thus meeting some of the health plan's needs. The foundation
structure does not allow the integrated provider network to use physician service
profits to fund a redesign of hospital facilities. Yet, facility redesign may be essential
to improve efficiency. Health plans indirectly 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 are adequate in composition, size, and geographical access to serve the needs
of the current and projected members of the plan.

Determining the Composition of the Provider Network

The laws, regulations, and guidelines on access and adequacy provide some
assistance to health plans in determining an appropriate network design. Within this
context, health plans must determine the proper mix of hospitals, primary care
providers, and specialists to include in the network. The health plan must also
determine what, if any, other facilities or professionals should be included. For
example, should the network include freestanding ambulatory surgery centers in
addition to hospitals? Should it include non-traditional healthcare providers and
nurse practitioners in addition to physicians? Considerations for specific types of
providers are discussed further in Identifying and Recuiting 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. In general, a closely managed health plan, such as
an HMO, requires fewer providers than a loosely managed plan. A small health plan
typically needs more physicians per 1,000 enrollees than a large plan (one with more
than 80,000 members) because larger plans typically benefit from economies of
scale and scheduling efficiencies. The specific ratio the health plan uses depends on
the demographics and needs of the patient population and on regulatory
requirements. For example, because Medicare and Medicaid populations utilize
healthcare services to a greater extent than the general population, Medicare and
Medicaid products require more providers than an employer-sponsored plan of the
same size.5 The availability, clinical skills, and acceptability of providers among the
patient population are also considerations.

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

However, a methodology that measures available service capacity may be

inadequate for estimating the initial needs of new networks or for anticipating how a
health plan's growth will affect network needs. One problem is that this type of
methodology does not take into consideration that many of the new network's
members are already patients of the providers in the panel under another plan. In
theory, a new or growing HMO that does not have exclusive contracts with its
providers can determine the proportion of the health plan's target market (such as
Medicare beneficiaries or employer-group members) who are currently patients of
the plan's proposed provider panel. Only the members who will be new patients to
the providers in the panel add to the need for more capacity.

Estimating market share by target market is not easy and may be misleading. Health
plans frequently experience difficulty in obtaining market share data for providers
who are not currently in their networks. In addition, it is difficult to predict the
geographic distribution of new members. Finally, a new network that includes only
enough provider capacity to handle the health plan'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 of 500,000.
A network that includes no more than 100 PCPs could theoretically serve the needs
of these members, assuming that each PCP could accept 100 new patients. However,
the health plan will likely have difficulty marketing a network of 100 PCPs, given the
demands of group purchasers and consumers for broader provider panels in recent
years. As a general rule, the initial provider panel for a health plan will be larger than
the size actually required to serve the membership of the plan in the first several
years. For this reason, physician-to-enrollee ratios and formulas are more useful for
refining established panels than for establishing new provider panels.

The actual number of providers included in a provider network can be based on

staffing ratios. One true statement about staffing ratios is that, typically:
a small health plan needs fewer physicians per 1,000 than does a large plan.
a closely managed health plan requires fewer providers than does a loosely
managed plan.
physician-to-enrollee ratios can be used directly only by network-within-a-
network model HMOs.
Medicare products require fewer providers than do employer-sponsored plans
of the same size.

If, as we discussed earlier, a health plan conducts a thorough market analysis, it can
use the information based on that analysis to identify the competitive characteristics
of the market. Using those 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 can then 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 must pay to attract providers. A plan that
already has significant local market share with another product is more likely to
obtain favorable payment arrangements with providers than a plan with no local
market share. Sometimes a reputation for success in other markets will allow a plan
to obtain 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 the needed distribution of providers. Software packages that can map
provider networks against existing or prospective member bases may be useful in
meeting access regulations. These packages 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 of the overall provider panel. In general, larger PCP panel sizes attract
higher market share unless a price 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 than the size of primary care panels. Therefore health plans can
intentionally limit specialist panels to include 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 specialist panel:

• 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) to evaluate cost-effectiveness and quality, specialists and other
professionals can be selected on the basis of these indicators. Those providers
with very poor results can be eliminated from the panel, and the health plan
can improve the overall cost-effectiveness and quality of the network without
major reductions in panel size. If the health plan can provide PCPs with
information on the cost-effectiveness and quality of individual specialists, the
PCPs 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 patients frequently 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 if patient volume is directed to a narrower panel?
The value of obtaining better payment arrangements through channeling of
patient volume depends on the market's acceptance of smaller panels,
particularly in rural areas and small cities.
• Is the prestige of a particular specialist worth the cost of including him or her
on the panel?
Generally, the cost of prestige is an issue when the market requires certain
highly regarded specialty groups in any product panel.
• How strong are the clinical practice guidelines and care protocols
implemented by the health plan?
In general, if strong care protocols are implemented either through
 collaborative agreements with providers or through authorization and case
management systems, the health plan can manage larger provider panels
without causing higher costs or lower quality. Care protocols are particularly
relevant for behavioral healthcare settings where diagnosis and treatment
may be subjective.

The Tiered Network Structure

When developing its provider network, a health plan must determine how to balance
its goals for cost savings with its goals for access. In general, a product with a
narrower provider panel and more restrictions on how patients can access providers
will achieve higher cost savings than a product with a broader panel and fewer
restrictions on access. One way to address the trade-off between cost goals and
access goals while assuring high-quality care is through the use of a tiered network.
A tiered network is a provider panel that the health plan has subdivided into two or
more layers (tiers) based on provider profiles for quality, utilization, and cost-
effectiveness. The providers deemed by the health plan to be the highest quality and
most cost-effective form the preferred (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 but who 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-
effectiveness have been marginal or (2) providers whose performance data is not
available. The providers in this 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 a record of adequate performance.
The health plan periodically reviews provider performance on quality, utilization, and
cost-effectiveness, and then reclassifies providers among the tiers as necessary.
Figure 2B-6 depicts the structure of a tiered network.
Plan members determine the breadth of their own provider panels by selecting a
network that includes

• only Tier 1 providers

• Tier 1 and Tier 2 providers
• Tier 1, Tier 2, and Tier 3 providers

To encourage members to use the highest-quality and most cost-effective providers,

health plans offer financial incentives such as lower copayments and lower plan
premiums to members who choose the Tier 1 network. Figure 2B-7 shows examples
of copayments and premiums for a tiered network option.

To reward excellent results on quality, utilization, and cost-effectiveness, the health

plan typically reimburses Tier 1 providers at a higher rate of reimbursement than is
received by the providers in the other tiers.

Health plans must keep in mind that the additional choices under a tiered network
may be more confusing to some members. Health plans should monitor the ease of
use for the tiered network through its member satisfaction surveys.
The "Build or Buy" Decision
After the health plan has determined the appropriate structure, composition, and size
for its network, 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 provider network, the health plan must also decide
whether to build and manage the network directly or to outsource 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 health plans, third party administrators, and self-insured employers. These
companies "rent" their networks to customers for a per-member, per-month (PMPM)
fee or a percentage of the savings produced by provider discounts. However, most of
the rental network companies offer only PPO networks. A few offer POS networks,
but rental HMO networks are rare. Other companies custom-build provider networks
for health plans. These network outsourcing companies develop PPO, POS, and HMO
networks according to a health plan's specifications and will manage the networks if
the health plan requires it. Generally, an outsourcing company does not rent a
custom network to any other health plan.

The health plan should consider a number of factors in deciding whether to build
directly, build through 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 of the health plan's network management function, the market share goals
for the product, and the health 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 a network is likely to be cost-
effective. Renting may be a logical choice if the health plan is expecting to achieve
only small market shares in several markets over several years. Building becomes a
more attractive option if the plan has an existing customer base in the target market
or has 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 a premium of $250 per employee per month. By multiplying
the network rental cost per member by the estimated number of plan members, the
health plan can determine the overall cost of renting the 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 of building and managing the network (by using its own resources or
by outsourcing) for the same time period. In this way, the health plan determines
the most cost-effective approach. The cost analysis 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 cost of network development is paid up front before a customer base is
developed for the product, but a rental network is paid for as customers are added.
Thus, renting helps the health plan avoid high up-front costs. On the other hand,
after absorbing the up-front costs of building a network, the health plan can expect
the later costs of network maintenance to decline, while the fees for a rented
network will remain the same. However, in many cases, a health plan that rents a
network incurs additional costs associated with the rental. The firm renting the
network may require the health plan to sign a non-competitive agreement stating
that the health plan will not develop its own network in the same geographic area
during the term of the rental and, often, for six months to one year afterward. If the
health plan wants to eliminate the non-competitive agreement, the network rental
company usually requires the health plan to pay a premium for this privilege.

Assume that the national average cost per covered employee for PPO rental
networks is $3 per member per month (PMPM) and that the average monthly
healthcare premium PMPM is $300. This information indicates that, if the number of
health plan members is 10,000, then the annual network rental cost to the health
plan would be:

$30,000

$360,000
 $9,000,000

$12,000,000

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

Outsourcing a custom-built network can be a viable option if the health plan has little
experience in building provider networks. By outsourcing the development process,
the health plan can avoid the 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, thus reducing future learning curves.
Outsourcing can also be useful for an experienced network management department
that wants to build networks in more locations than internal staff can develop in the
available timeframe.

Another factor that affects the decision to build or buy is control. If networks are
outsourced or rented, 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 for creating competitive advantage or product
differentiation in the market. Providers may view the rental or outsourcing company
as the source of contact, a situation that can create confusion for both providers and
members. Providers may be more loyal to the network development company than
to the health plan. In addition, a poor relationship between the network development
company and a provider may sour the provider's impressions of the health plan that
sponsors the network. Outsourcing or renting network management causes the
health plan to rely on others to develop new, innovative relationships with the
providers. Direct contracting allows health plans to develop collaborative
relationships directly with providers, according to the evolving needs of the plan.

Glossary of Terms- Network Management in Health Plans

ABCDEFGHIJKLMNOPQRSTUVWXYZ

24-Hour Coverage
 The integration of workers' compensation coverage-both the medical and
disability components-with non-workers' comp and disability coverage. Also
known as comprehensive medical event management.

Back to TOP

A
AAC
See actual acquisition cost.
AAPCC
See Adjusted Average Per Capita Cost.
ABMS
See American Board of Medical Specialties.
Access Standards
Guidelines defined by health plans to assure that every member receives the
benefits provided by his or her health plan in a timely manner appropriate to the
member's medical condition and consistent with the reason for seeking care.
Access To Care Surveys
Surveys conducted to measure a member's ability to obtain satisfactory care on a
timely basis.
Accessibility
The extent to which a health plan member can obtain necessary medical services
in a timely manner.
Accountability
The process by which one party is required to justify its actions and policies to
another party.
Accreditation
An evaluative process in which a healthcare organization undergoes an
examination of its operational procedures to determine whether the procedures
meet designated criteria as defined by the accrediting body and to ensure that the
organization meets a specified level of quality.
Accreditation '99
A performance evaluation program in which the NCQA has incorporated select
HEDIS measures and consumer survey measures into its accreditation process.
ACD
See automated call distributor.
Actual Acquisition Cost (AAC)
The calculation of drug costs based on the initial price of a prescription drug
minus any and all discount, including volume discounts, free goods, and any other
mechanisms used to reduce price.
Actuary
An insurance professional who applies probability rules and statistics to calculate
values relevant to a health plan's operations.
Adequacy
 The extent to which a network offers the appropriate types and numbers of
providers in the appropriate geographic distribution according to the needs of the
health plan members. Also known as availability.
Adjusted Average Per Capita Cost (AAPCC)
A capitation rate used prior to the BBA that was the amount that CMS would
have expected to pay for a Medicare beneficiary who lived in a particular county,
adjusted for age, sex, institutional status, and other factors.
Advisory Commission on Consumer Protection and Quality in the Health Care
Industry
A committee consisting of 34 individuals representing consumers, business, labor,
healthcare providers, health plans, federal and state governments, and healthcare
quality experts who developed the Consumer Bill of Rights and Responsibilities.
Aggregate Stop-Loss Coverage
Stop-loss insurance that protects providers against cumulative losses from
healthcare services delivered to all of a health plan's members during a specified
time period.
Aggregate Stop-Loss Insurance
A type of stop-loss insurance that reimburses a provider for liabilities that exceed
a set total dollar (aggregate) amount.
Alternative Healthcare
Healthcare services that are not offered by traditional medical providers. Also
known as complementary healthcare.
Ambulatory Patient Categories (APCs)
A patient classification system designed to explain to the payor the amount and
type of medical resources used during an outpatient visit to a healthcare facility.
Also known as ambulatory patient groups (APGs).
Amendments
Formal contract provisions that are attached to an existing contract and that allow
binding changes to be made to the contract without having to revise or negotiate
the entire contract.
American Accreditation HealthCare Commission/URAC (the Commission/URAC)
An organization founded in 1990 to promote consistent standards in the
application of healthcare utilization procedures, broadening its scope in 1996 to
include national network accreditation standards.
American Board of Medical Specialties (ABMS)
The umbrella organization for a family of major specialty board organizations that
offer physician certification.
Ancillary APCs
A category of APCs that includes visits during which patients undergo diagnostic
tests or treatments that are not considered to be significant procedures and
therapies.
Ancillary Packaging
The inclusion of certain ancillary services under a medical or significant
procedures APC.
Ancillary Services
 An umbrella term for a variety of healthcare services that are adjunct to primary,
specialty, and inpatient facility care.
Antidisparagement Clause
A contract clause which prohibits a provider from making comments that could
weaken a patient's confidence in a health plan.
Any Willing Provider Statutes
Laws that require health plans to contract with any provider who is willing to
abide by the health plan's policies and procedures and who meets the health plan's
credentialing standards.
APCs
See Ambulatory Patient Categories.
Apparent Agency
Legal theory under which a health plan may be considered responsible for
malpractice by its network providers if "the patient reasonably relied upon actions
or the representation s of the health plan, which 'held out' the negligent provider
as its employee or agent." Also known as ostensible agency.
Assignment
A contract provision under which one party transfers some or all of its rights and
responsibilities to another individual or entity that was not a party to the original
contract.
Automated Telephone Eligibility Verification Lines
A membership verification method which allows providers to get daily updated
member eligibility information over the telephone.
Automatic Call Distributor (ACD)
An automated system that answers telephone calls with a recorded message, gives
the caller instructions on how to reach a specific department, and then directs the
call to a specific unit based on preset criteria, such as the caller's area code or
another code that the caller enters on the phone's keypad.
Average Wholesale Price (AWP)
The average price that wholesale suppliers or manufacturers charge pharmacies
for medicines. Also known as average wholesale cost (AWC).
AWP
See average wholesale price.

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B
Balanced Budget Act (BBA) of 1997
A federal law that contains provisions making extensive changes to the Medicare
and Medicaid programs, including establishment of the Medicare+Choice
program and establishment of SHMOs and PACE as state Medicaid options.
BBA
See Balanced Budget Act of 1997.
Behavioral Healthcare (BH)
 The provision of mental health and chemical dependency services.
Behavioral Measures
Performance measures that evaluate a provider's interactions with plan members.
Also known as qualitative measures.
Benchmarking
The comparison of a health plan's or provider's clinical and operational practices
or outcomes to those of other health plans or providers, with the goal of
identifying the practices that lead to the best outcomes and implementing those
practices to achieve overall quality improvement.
Board Certification
Status attained by physicians who have completed a residency in their field of
specialization and have passed a qualifying examination in that field.
Board Eligible
Status attained by physicians who have completed a residency in their field of
specialization but have not yet passed the certification examination.
Bonus Pool
A type of risk pool that pays providers over and above their 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, and/or the individual provider. Also known as
a reward pool.
Business Confidentiality Clause
A contract clause that requires providers to maintain the confidentiality of the
health plan's proprietary information, such as financial data, reimbursement
structure, and utilization and quality management programs, unless the health plan
grants written permission for the provider to release this information.

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C
Capitation
A method of paying for healthcare services on the basis of the number of patients
who are assigned to the provider and who are covered for specific services over a
specified period of time rather than on the cost or number of services that are
actually provided.
Carrier Guarantees
The contractual stipulation that a health plan agrees to pay specified financial
penalties to the purchaser if the health plan fails to deliver on certain parameters
of service.
Carve Out
A medical service that is removed from the scope of services covered by the basic
payment method and is reimbursed under a separate payment mechanism.
Case Management
A process of identifying plan members with special healthcare needs, developing
a healthcare strategy that meets those needs, and coordinating and monitoring the
 care, with the ultimate goal of achieving the optimum healthcare outcome in an
efficient and cost-effective manner.
Case Mix/Severity Adjustment
A statistical adjustment that is made for an individual provider's patient
population in order to compensate for utilization and clinical variances among
disabled and chronically ill patients.
Case Rate
A single fee that the health plan pays a provider for all services associated with an
entire course of treatment for a patient. Also called package rate.
CBR
See cost-based reimbursement.
CCP
See coordinated care plan.
CDS
See Controlled Dangerous Substances certificate.
Center Of Excellence
A healthcare institution that, because of its combination of clinical expertise,
equipment, and other resources, has the ability to provide specific medical
procedures or treatments more effectively and efficiently than other providers in
the same region.
Certified Medical Assistant (CMA)
A specially trained and certified nurse practitioner who is certified to perform
specified primary care activities and may coordinate patient care for a health plan.
Change In Law Provision
A contract provision under which health plans are allowed to change or amend
contracts without the approval of their providers as long as the modifications are
made in order to comply with new legal and regulatory requirements that impact
all health plans and providers.
Children's Health Insurance Program (CHIP)
A program established by the BBA under Title XX of the Social Security Act
which gives states latitude-and additional federal matching funds-to provide
healthcare coverage to low-income uninsured children who do not quality for
Medicaid or other health coverage.
CHAMPUS
See Civilian Health and Medical Program of the Uniformed Services.
CHIP
See Children's Health Insurance Program.
Churning
Situation in which a provider sees a plan member more often than necessary or
provides more diagnostic or therapeutic services than necessary in order to
increase revenue.
Civil Money Penalty
A monetary fine imposed against health plans that violate the regulations
governing Medicare+Choice networks.
Civilian Health and Medical Program of the Uniformed Services (CHAMPUS)
 A program of medical benefits available to inactive military personnel and
military spouses, dependents, and beneficiaries through the Military Health
Services System of the Department of Defense. See also TRICARE.
Claim
An itemized statement of healthcare services and their associated costs that a
provider submits to a health plan for reimbursement.
Claims Administration
The process of receiving, reviewing, adjudicating, and processing claims for
either payment or denial.
Clayton Act
An antitrust law that prohibits specific practices that would limit competition,
create monopolies, or otherwise restrain trade.
Clean Claim
A claim that is accurate and complete when submitted and does not require any
medical review. Also known as a complete claim.
Clinical Eye Care
The medical and surgical services rendered for treatment of eye diseases.
Closed Network
A pharmacy network in which selected pharmacies agree to supply services to
health plan members at discounted rates in exchange for guaranteed sales volume.
Closed Panel Health Plan
a health plan in which the network physicians are either employees of the health
plan or belong to a group of physicians that contract with the HMO and agree to
see no patients other than members of the health plan.
CMA
See certified medical assistant.
CMP
See competitive medical plan.
Cognitive Services
A component of the service costs for prescription drugs, including services
identified by the pharmacist as being medically necessary for the patient. Also
known as professional services.
Competitive Medical Plan (CMP)
A state-regulated prepaid health plan that meets TEFRA requirements for
Medicare contracting.
Complaint
Any problem that a plan member brings to the attention of the health plan.
Comprehensive Contract
A contractual document that includes a large amount of detail about the business
relationship between the health plan and its providers.
Concerted Refusal To Deal
An illegal business practice in which competitors jointly agree to refuse to do
business with another entity, or agree to do business only under jointly established
conditions.
Conscience Protection Exception
 The CMS regulation under which a Medicare+Choice health plan is not required
to cover or furnish a particular counseling or referral service if the health plan
objects to providing that service on moral or religious grounds.
Consolidated Medical Group
A traditional method of establishing a medical group practice, typically as a
partnership or corporation. Also known as medical group practice or clinical
model.
Consumer Bill of Rights and Responsibilities
A document developed by the Advisory Commission on Consumer Protection and
Quality in the Health Care Industry, which outlines specific rights that should be
given to consumers and responsibilities that managed care organizations should
be required to meet.
Contact Capitation
A method of paying specialists out of a fixed pool of funds that is actuarially
determined for each specialty.
Continuous Quality Improvement (CQI)
A 'structural organizational process for involving health plan personnel in
planning and executing a continuous stream of improvements in systems in order
to provide quality healthcare that meets or exceeds customer expectations."
Controlled Dangerous Substances (CDS) Certificate
A certificate issued by the state to a physician, authorizing that physician to
dispense drugs that are classified as controlled dangerous substances.
Conversion Factor
A factor that represents the dollar value of each unit of medical service, based on
the health plan's historical experience with costs. Used with a relative value scale
to determine the fee that a health plan will pay for a specific service.
Coordinated Care Plan (CCP)
A health plan that is offered by a health plan such as an HMO with or without a
POS option, a PPO, a PSO, or a managed healthcare plan offered by a religious
fraternal organization.
Cost-Based Reimbursement (CBR)
A retrospective payment methodology that reimburses providers for their
reasonable costs for services as determined according to specific cost allocation
and apportionment rules.
Cost-Shifting
The practice of representing illnesses or injuries that are not work-related or that
are not covered by group health plans as work-related in order to receive medical
benefits and reimbursement of lost wages through workers' comp.
Covered Services
All of the healthcare services available to health plan members under the benefits
provided by their health plan.
CQI
See continuous quality improvement.
Credentialing
 A review process conducted by or for a health plan to determine the current
clinical competence of a provider and to ensure that the provider meets the health
plan's standards.
Credentials Verifying Organization (CVO)
An organization that gathers and verifies information about the qualifications and
credentials of healthcare practitioners.
Creditable Coverage
Previous healthcare coverage for an individual that may be applied to reduce the
amount of time a required by a pre-existing condition clause.
Cure Provision
A contract provision that specifies a time period for a party who has breached the
contract to remedy the problem and avoid termination of the contract. Also known
as a remedy or a corrective action provision.
Customized Network
A pharmacy network that is designed to meet the needs of a specific population.

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D
DEA
See Drug Enforcement Agency certificate.
Delegate
An entity that contracts with a health plan to perform a specified function on
behalf of the health plan.
Delegation
A formal process through which a health plan transfers to another entity the
authority to conduct certain functions on behalf of the health plan.
Delegation Agreement
The contractual document that describes the delegated functions and the
responsibilities of the health plan and the delegate.
Delegator
a health plan that transfers to another entity the authority to conduct a specific
function on behalf of the health plan.
Dental Health Maintenance Organization (DHMO)
A dental plan that arranges for its members to receive dental services through a
network of providers who are typically compensated by some form of
prepayment. Also known as a dental maintenance organization (DMO).
Dental Point-Of-Service (Dental POS) Option
A dental plan that allows a plan member either to use a DHMO or to seek care
from a dentist not in the plan's network.
Dental Preferred Provider Organization (Dental PPO)
A dental plan that provides dental care to its members by offering a contracted
network of dentists who offer discounted fees to plan members.
DFFS
 See discounted fee-for-service payment system.
DHMO
See dental health maintenance organization.
Diagnosis-Related Group (DRG)
A system of classification originally developed by Medicare-but now also used by
commercial health plans-to determine payment for inpatient hospital services
based on a patient's principal diagnosis, secondary diagnosis, surgical procedures,
age, gender, and presence of complications.
Direct Access HMO
AN HMO in which the member must select a PCP but is allowed to go to any
other provider on the HMO panel without a referral from the PCP.
Direct Referral
A referral program in which PCPs can make most referrals to specialists without
obtaining prior authorization from the health plan.
Discounted Fee-For-Service (DFFS) Payment System
A payment system in which the health plan negotiates with the provider a
percentage discount from the usual FFS charges.

Disproportionate Share Hospital (DSH)

A qualified hospital that provides inpatient services to a disproportionately large
share of Medicaid patients and uninsured patients and, therefore, is at risk of
operating at a loss.
DRG
See Diagnosis-Related Group.
Drug Enforcement Agency (DEA) Certificate
A certificate issued by the Drug Enforcement Agency to a physician, authorizing
that physician to prescribe scheduled narcotics.
DSH
See disproportionate share hospital.
Dual-Eligible
Individuals who are covered by both Medicare and Medicaid. Also known as dual
eligibility.
Due Process Clause
A contract clause that defines the provider's right to appeal the health plan's
decision to terminate the provider and allows the provider to defend his or her
position.

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E
EAC
See estimated acquisition cost.
Early and Periodic Screening, Diagnosis, and Treatment (EPSDT) Program
 A Medicaid program for recipients younger than 21 that provides health
screening, vision, hearing, and dental services at intervals that meet recognized
standards of medical and dental practices and at other intervals as necessary to
determine the existence of physical or mental illnesses or conditions.
Electronic Claims Submission
A method of claims submission that allows a provider to submit claims to a health
plan through EDI.
EDI
See electronic data interchange.
Electronic Data Interchange (EDI)
The application-to-application interchange of computerized business data between
organizations using a standard data format.
Electronic Referral System
An automated referral submission process that allows providers either to fax the
referral request to the health plan or to submit it via e-mail.
Eligibility Guarantee Clause
A contract clause that protects providers who receive confirmation of a patient's
eligibility of services from the health plan. Providers are not financially
responsible for the services rendered if the patient is later found to be ineligible.
Eligibility Reports
A membership verification method that lists members who have selected or were
assigned to a specific PCP. Eligibility reports are distributed to PCPs on a regular
basis.
Employment Retirement Income Security Act (ERISA) of 1974
A federal statute designed to ensure the proper funding and administrative
management of pension and employee welfare plans.
Encounter Form
A statement from a provider that describes the nature of a healthcare visit by a
member and any services rendered during that visit.
Enhanced Capitation
A Medicaid capitation rate that increases the PMPM capitation for primary care
provided to chronically ill or disabled patients.
Enrollment Broker
A third-party entity that handles the recruitment and enrollment of Medicaid
recipients for managed care plans.
EPSDT
See Early and Periodic Screening, Diagnosis, and Treatment program
ERISA
See Employee Retirement Income Security Act of 1974.
Estimated Acquisition Cost (EAC)
The calculation of drug costs by establishing a purchasing profile for each
pharmacy in the health plan's network and basing reimbursement on the profile.
Ethics in Patient Referrals Act
A federal law which prohibits physicians from referring Medicare or Medicaid
patients to entities in which the physicians have a financial or ownership interest.
Evergreen Clause
 A contract clause under which health plan-provider contracts are automatically
renewed each year without change.
Exclusive Arrangement
A business practice which prohibits providers from participating in more than one
health plan's networks.
Exclusive Remedy Doctrine
A legal provision in many states that requires employees to accept workers' comp
benefits as their only compensation in cases of work-related injury or illness.
Exculpation Clause
A contract clause which states that a health plan's actions based on the health
plan's UM provisions do not constitute a medical opinion and are not intended to
interfere with the provider-patient relationship.
External Standards
Performance standards that are based on outside information such as published
industry-wide averages or the best practices of recognized industry leaders.

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F
Faculty Practice Plan (FPP)
A medical group that is organized around a teaching program, typically a
university hospital. health plans generally contract with the legal group
representing the FPP, rather than with individual physicians. Also known as
academic health center.
Federal Employee Health Benefits Program (FEHBP)
Federal healthcare program that offers a government-wide indemnity health plan,
employee association or union plans, and approximately 400 prepaid health plans
(mostly HMOs) to federal employees, retirees, and their dependents.
Federal Financial Participation (FFP)
The amount the federal government contributes to a state's Medicaid program.
Federal Trade Commission Act
An antitrust law that makes it illegal to engage in unfair methods of competition
and unfair or deceptive acts or practices.
Fee-For-Service (FFS) Payment System
Payment system under which the health plan reimburses the health plan member
or the provider an amount based on the actual medical services provided.
Fee Schedule
The fee determined by the payor (a health plan or the Medicaid or Medicare
programs) to be acceptable for a procedure or service, which the provider agrees
to accept as payment in full.
FEHBP
See Federal Employees Health Benefits Program.
FFP
See federal financial participation.
FFS
See fee-for-service payment system.
Financial Risk
The possibility that the actual costs of a health plan member's care will be greater
than the projected costs.
First-Dollar Coverage
Coverage in which employees cannot be required to contribute to the costs of
their own care through deductibles, coinsurance, copayments, or disability waiting
periods.
Formulary
A listing of drugs, classified by therapeutic category or disease class, that are
considered preferred therapy for a given managed care population and that are to
be used by a health plan's providers in prescribing medications.
FPP
See faculty practice plan.
Fully-Funded Health Plan
A type of group health plan under which the plan bears the financial responsibility
for all incurred covered benefits and administrative costs. Also known as a fully-
insured health plan.

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G
Gag Clause
Term applied to clauses in health plan-provider contracts that restrict providers
from discussing with their patients alternative courses of treatment that are not
covered by the health plan.
Global Capitation
A capitation payment that covers virtually all of a member's inpatient and
outpatient medical expenses, including primary and specialty care, facilities, and
some ancillary services. Also known as integrated delivery system capitation and
full-risk capitation.
GPWW
See group practice without walls.
Grievance
A formal complaint from a member or a provider that demands formal resolution
by the health plan.
Group Boycott
An illegal business practice in which competitors with significant market share
agree to exclude other existing or potential competitors.
Group Practice Without Walls (GPWW)
A legal entity that combines multiple independent physician practices under one
umbrella organization.
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H
CMS
See Centers for Medicare and Medicaid Services.
HCQIA
See Health Care Quality Improvement Act of 1986.
HCQIP
See Health Care Quality Improvement Program.
Centers for Medicare and Medicaid Services (CMS)
A division of the U.S. Department of Health and Human Services that was
established in 1977 to administer and monitor the Medicare and Medicaid
programs.
Health Care Professional Credentialing Verification Model Act
An NAIC Model Act that specifies the credentialing requirements health plans
must satisfy in order to ensure that network providers meet minimum standards of
professional qualifications.
Health Care Quality Improvement Act of 1986 (HCQIA)
Federal law that established the National Practitioner Data Bank and provides
limited antitrust immunity to healthcare entities for their credentialing and peer
review quality assurance activities.
Health Care Quality Improvement Program (HCQIP)
A CMS program that seeks to improve the quality of care provided to Medicare
beneficiaries by requiring Medicare+Choice plans to contract with an outside peer
review organization to conduct periodic quality reviews.
Health Insurance Portability and Accountability Act (HIPAA)
Federal law that increases the continuity and portability of health coverage in the
group and individual health insurance markets and also specifies that a group
health plan may not deny coverage or discriminate against individuals based on
their health status.
Health Maintenance Organization Act of 1973 (HMO Act)
A federal law designed to contain spiraling healthcare costs by encouraging the
development of HMOs.
Healthcare Quality
The degree to which healthcare services for individuals and populations increase
the likelihood of desired health outcomes and are consistent with current
professional knowledge.
High-Value Providers
Providers who are determined through provider profiling to deliver quality
medical care in a cost-effective manner.
HIPAA
See Health Insurance Portability and Accountability Act.
HMO Act
See Health Maintenance Act of 1973.
Hold-Harmless Clause
A contract clause which specifies that a provider agrees not to sue or file any
claims against a plan member for covered services, even if the health plan
becomes insolvent or fails to meet its financial obligations.
Horizontal Division Of Territories
An illegal business practice in which competitors agree to divide territories or
customers.
Hospital-Based Specialist
A specialist who practices exclusively or almost exclusively in a healthcare
center.
Hospitalist
Physician who spends at least one-quarter of his or her time in a hospital setting,
serving as the physician-of-record for patients who have been "handed-off" to
them by PCPs. Also known as an inpatient specialist.

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I
IDS
See integrated delivery system.
Incentive Payments
Payments made to pharmacists who meet specific performance goals or engage in
certain cost-management activities such as generic and therapeutic substitution or
patient education.
Indemnification Clause
A contract clause that requires the provider to reimburse a health plan for costs,
expenses, and liabilities incurred by the health plan as a result of the provider's
actions.
Independent Practice Association (IPA)
A provider organization composed of individual practitioners or small groups of
practitioners, which contracts with a health plan for the delivery of healthcare
services, often on a capitation basis. Also known as individual practice
association.
Individual Stop-Loss Coverage
A form of stop-loss insurance that protects providers from losses associated with
healthcare for an individual health plan member during a given time period. Also
known as specific stop-loss coverage.
Informed Refusal
A patient's choice to refuse treatment despite the recommendations of the provider
and the health plan, after the provider has informed the patient of the
consequences of refusing treatment.
Integrated Delivery System (IDS)
A type of health plan that is a combination of two or more health plans, group
practices, clinics, or hospitals which link the delivery, financing, and
 administrative functions of medical care. Also known as integrated healthcare
delivery system.
Integrated Disability Management
A workers' compensation program that includes guidelines regarding the expected
duration of various types of disabilities, clinical practice guidelines, return-to-
work protocols, and guidelines for reducing the number of workplace accidents.
Intermediate Sanctions
A penalty imposed against health plans that violate the regulations governing
Medicare+Choice networks, which may require the health plan to suspend its
marketing activities and refrain from enrolling any new Medicare beneficiaries
and may also provide for the suspension of payments to the health plan for
Medicare beneficiaries who do enroll.
Internal Standards
Performance standards that are developed inside the health plan and are based on
the health plan's own historic performance levels.
Introductory Paragraph
The first paragraph of a contract, which usually identifies the primary parties to
the contract and any acronyms or short names that will be used to identify the
parties in the body of the contract.
IPA
See independent practice association.

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J
JCAHO
See Joint Commission on Accreditation of Health Care Organizations.
Joint Commission on Accreditation of Health Care Organizations (JCAHO)
Hospital accreditation organization that has also developed standards for
accrediting managed care provider networks and managed care plans, psychiatric
and long-term care facilities, substance abuse programs, and home care
organizations.

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L
Last-Dollar Coverage
Coverage under which health plans may not place limits on the benefits they will
pay for a given claim.
Legend Drugs
Drugs that require a written prescription from a licensed physician.
Light Duty
 Work that is less physically demanding than the employee's original job.
Locum Tenens
A practitioner who is a temporary substitute for another practitioner-that is,
providing temporary coverage for another practitioner's responsibilities.
Low Enrollment Guarantee
A clause included in capitated contracts that requires the health plan to reimburse
the PCP on a FFS basis until a predetermined number of members have selected
the PCP.

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M
MAC
See maximum allowable cost.
Mail-Order Services
A prescription drug delivery option that allows members to order prescriptions by
mail.
Managed Behavioral Healthcare Organization (MBHO)
An organization devoted to providing behavioral healthcare services by using
managed care techniques, such as referral authorization systems, utilization
review, and clinical practice guidelines.
Managed Care Organization
As defined by Medicaid regulations, a health plan that is 1) a federally qualified
HMO that meets CMS requirements or 2) any other public or private organization
that meets federal requirements, has a comprehensive risk contract, and meets the
other requirements of the Medicaid statute.
Managed Care Plan Network Adequacy Model Act
An NAIC Model Act that defines specific adequacy and accessibility standards
that health planS must meet.
Managed Dental Care
Any dental plan that provides a benefit plan that differs from a traditional fee-for-
service plan.
Managed Vision Care Organization (MVCO)
An organization devoted to the delivery of routine eye care, including periodic
examinations and prescription of corrective lenses, or both routine eye care and
clinical eye care, by using managed care concepts such as credentialing,
authorization systems, clinical practice guidelines. utilization review, and quality
management.
Management Services Organization (MSO)
A legal entity that offers practice management and administrative support to
physicians and, in some cases, purchases physician practices.
Maximum Allowable Cost (MAC)
The maximum reimbursement a health plan will allow for a particular prescription
product. Used primarily for multisource and generic products.
Medicaid
A joint federal and state program that provides healthcare coverage to low-
income, medically needy, and disabled individuals.
Medical APCs
A category of APCs including visits during which the plan member receives
medical treatment from a healthcare professional but does not undergo a
significant procedure or therapy.
Medical Loss Ratio
An index that compares the costs of delivering health benefits with the revenues
received by the health plan.
Medical Management
All of the activities that health plans and their providers engage in to maintain or
improve quality service levels, meet budget projects for medical services, and
respond to accreditation and regulatory requirements. Also known as care
management.
Medical Management Committees
Committees established by a health plan to involve network providers in the
health plan's operations and medical management activities.
Medical Record Keeping (MRK)
The policies, procedures, and documentation standards a provider follows to
create and maintain medical records.
Medical Records Review
A systematic review of the content of individual patient records to ensure that the
records conform with accepted professional medical practice and appropriate
health management.
Medical Savings Account (MSA)
A health plan that is designed to be a "health insurance arrangement that gives
consumers a financial incentive to control their own healthcare costs by
combining a high-deductible health insurance policy with an individual savings
account."
Medically Necessary Services
Services or supplies as provided by a physician or other healthcare provider to
identify and treat a member's illness or injury which, as determined by the payor,
are (1) consistent with the symptoms of diagnosis and treatment of the member's
condition, (2) in accordance with the standards of good medical practice, (3) not
solely for the convenience of the member, member's family, physicians, or other
healthcare provider, and (4) furnished in the least intensive type of medical care
setting required by the member's condition.
Medicare
The federal healthcare program enacted in 1965 under Title XVIII of the Social
Security Act to provide healthcare coverage for persons age 65 and older, persons
eligible for a railroad pension, qualified disabled individuals, and certain other
beneficiaries.
Medicare Part A
 The part of Medicare that provides automatic coverage to eligible beneficiaries
for basic inpatient hospital care, inpatient skilled nursing facility care, hospice
care, and home healthcare.
Medicare Part B
An optional Medicare program requiring payment of a premium to provide
coverage for physician services, outpatient hospital services, home healthcare,
medical equipment, and other health services and certain supplies not covered by
Part A.
Medicare+Choice
A managed care program established by the BBA under Medicare Part C, an
extension of Medicare that allows additional types of health plans to apply for
Medicare contracts.
Member Identification (ID) Cards
A membership verification method that issues card to members containing
demographic data, along with the benefit plan and the coverage-effective date.
Member Satisfaction Surveys
Surveys of health plan members that help health plans gauge whether the care and
services they provide are being consistently delivered in a manner that lives up to
member expectations.
Member Services
The department responsible for helping members with any problems, handling
members' grievances and complaints, tracking and reporting patterns of problems
encountered, and enhancing the relationship between the members of the plan and
the plan itself.
Members
Individuals for whom a managed care organization provides healthcare services.
Also known as subscribers, enrollees, or customers.
Mental Health Parity Act of 1996 (MHPA)
A federal law that prohibits health plans which offer mental health benefits from
applying more restrictive limits on coverage for mental illness than they apply on
coverage for physical illness.
MHPA
See Mental Health Parity Act of 1996.
Most-Favored Nation Arrangement
A contractual arrangement in which the provider agrees to give a health plan its
most favorable rate at all times, even if that rate is lower than the rate negotiated
in the contract.
MRK
See medical record keeping.
MRR
See medical record review.
MSA
See medical savings account.
MSO
See management services organization.
MVCO
 See managed vision care organization.

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N
NAIC
See National Association of Insurance Commissioners.
National Association of Insurance Commissioners (NAIC)
An organization of state insurance commissioners.
National Bipartisan Commission on the Future of Medicare
A commission established by the BBA to examine the role of Medicare in
America's healthcare system and to study the current system, as well as possible
new program designs.
National Committee for Quality Assurance (NCQA)
The primary accrediting agency for most HMOs and similar health plans,
managed behavioral healthcare organizations, and credentials verifying
organizations.
National Practitioner Data Bank (NPDB)
A database maintained by the federal government that contains information on
physicians and other medical practitioners against whom medical malpractice
claims have been settled or other disciplinary actions have been taken.
NCQA
See National Committee for Quality Assurance.
Network Management
All of the activities that a health plan conducts in order to design, assemble,
monitor, and maintain a network of providers.
Newborns' and Mothers' Health Protection Act of 1996 (NMHPA)
A federal law which mandates that coverage for hospital stays for childbirth
cannot generally be less than 48 hours for normal deliveries or 96 hours for
cesarean births.
NMHPA
See Newborns' and Mothers' Health Protection Act of 1996.
No-Balance-Billing Clause
A contract clause in which providers agree to accept of the health plan's payment
as payment in full and will not bill members for anything other than contracted
copayments, coinsurance, or deductibles.
Nonsolicitation Clause
A contract clause that prohibits providers from encouraging patients to switch
from one health plan to another.
NPDB
See National Practitioner Data Bank.

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 O
OA
See open access HMOs.
Open Access (OA) HMO
An HMO that does not require the member to select a PCP, allowing the member
to go to any doctor, healthcare professional, or facility that is on the HMO panel
without a referral.
Open Contracting
A method of Medicaid contracting under which any health plan that meets the
state's performance standards and the federal Medicaid requirements and is
willing to accept Medicaid's reimbursement levels is allowed to enter into a
Medicaid contract.
Open Network
A pharmacy network that allows any pharmacy willing to accept the terms of a
provider contract to participate.
Open Panel Health Plan
a health plan in which the participating physicians or physician groups typically
operate out of their own offices and treat outside patients as well as health plan
members.
Ophthalmologist
A physician who has received special education and training to treat eye disease
and injury.
Optician
Individual who orders or makes corrective lenses according to the member's
prescription, assists the member with fame selection for eyeglasses, and fits the
glasses.
Optometrist
A healthcare provider who is specifically trained to perform eye exams, diagnose
vision problems, and prescribe corrective lenses.
ORYX
A report card system developed by JCAHO, with the goal of integrating outcomes
and other performance measurement data into JCAHO's accreditation process for
hospitals and long-term care facilities.
Ostensible Agency
See apparent agency.
Outcomes Bonus
A bonus that a workers' comp health plan network providers may receive for
achieving certain outcomes, such as a certain percentage of injured workers'
returning to work in advance of or by their predetermined target dates.
Outcomes Measurement
Performance measures that focus on the direct results of a process, such as a
patient's condition after clinical treatment.
Outcomes Research
 Research that documents the effectiveness of various treatment plans and
identifies which treatment plans produce the most desirable outcomes.
Outlier
A provider who is identified as using medical resources at a much higher or lower
rate or in a manner noticeably different than his or her peers.

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P
PACE
See Programs of All-Inclusive Care for the Elderly.
Partial Capitation
A capitation payment that includes only primary care services.
Patient Delivery
The ability and commitment of the health plan to enroll and maintain a sufficient
number of members for its network of providers to have an adequate patient base.
Patient Satisfaction Measure
Behavioral measures that evaluate everything from the friendliness of the
provider's staff to the patient's perception of how well the provider addressed a
particular medical problem.
PCCM
See primary care case manager.
Peer Review
The analysis of a clinician's care of patients, conducted by a group of that
clinician's professional colleagues.
Peer Review Organization (PRO)
An association of practicing providers who review medical services ordered by
other practitioners in the same specialty.
Per-Diem Payment
A payment system under which a health plan pays a negotiated fee to hospitals for
each inpatient day a health plan member incurs.
Performance Standards
Established levels of performance defined by plan objectives, against which a
provider's actual performance is measured.
Performance-Based Open Network
A pharmacy network in which reimbursement is based on a pharmacy's
performance on specified criteria, such as generic substitutions, formulary
compliance, and average cost of prescriptions.
Per-Patient Stop-Loss Insurance
A type of stop-loss insurance that reimburses a provider for any financial
liabilities that exceed a set per-patient amount.
Personal Assistance
Assistance with bathing, dressing, toileting, eating, and/or movement provided to
individuals who cannot perform these activities independently.
PFFS
See private fee-for-service plan.
Pharmaceutical Care
Services provided by pharmacies in conjunction with physicians, nurses, and
other healthcare providers to incorporate medications into a patient's healthcare
plan.
Pharmacy Network
A group of individual pharmacies that provide pharmacy services to the members
of a designated health plan, offering volume-buying power and providing
assistance with claims processing and reimbursement.
Pharmacy Service Administration Organization (PSAO)
An organized network of independent pharmacies created to market competitive
drug programs to health plans.
PHO
See physician-hospital organization.
PHP
See prepaid health plan.
Physician-Hospital Organization (PHO)
A joint venture between a hospital and many or all of their admitting physicians to
serve their common interests, such as contractual bargaining with other health
plans, payors, and purchasers.
Physician Incentive Plan (PIP)
Any method of compensating a physician or physician group that may directly or
indirectly have the effect of reducing or limiting the services provided to plan
enrollees.
Physician Practice Management (PPM) Company
A legal entity that purchases the assets of physician practices and provides
practice management and administrative support services to participating
providers.
PIP
See physician incentive plan.
Point-Of-Service Systems
Information management systems that provide pharmacies with comprehensive
online communication with health plans' and other providers' databases.
PPM
See physician practice management company.
Practitioner
An individual provider who is trained and licensed or certified to deliver a
specific set of healthcare services.
Prepaid Health Plan (PHP)
A health plan that accepts financial risk for a limited set of clearly defined
services.
Price Fixing
An illegal business practice in which supposed competitors agree to charge the
same fees in order to keep prices artificially high.
Primary Care
 Care that is provided directly to a health plan member without referral from
another provider. Primary care focuses on preventive care and the treatment of
routine illnesses and injuries. It is most often rendered by general practitioners,
family practitioners, internal medicine practitioners, pediatricians, and
obstetricians/gynecologists.
Primary Care Case Manager (PCCM)
An organization or individual that contracts with state's Medicaid agency to
provide primary care services, as well as administrative case management, to
Medicaid recipients.
Primary Care HMO
An HMO in which each member is required to select a PCP to be the primary
manager of the member's care. Also known as a gatekeeper HMO.
Primary Source Verification
A process through which an organization validates credentialing information by
contacting the organization that originally conferred or issued the credentialing
element to the practitioner.
Private Fee-For-Service (PFFS) Plan
A private indemnity health insurance plan that receives a premium from Medicare
to provide Medicare-covered services to a Medicare beneficiary. The PFFS plan
then provides all Medicare benefits to the covered individual and makes the
decision about the allowed amount for covered services.
PRO
See peer review organization.
Process Measures
Performance measures that evaluate the healthcare services offered by a provider
to the health plan and its members.
Professional Services Capitation
Capitation that covers all physician services.
Profiling
The collection and analysis of information about the practice patterns of
individual providers. Also known as provider profiling.
Programs of All-Inclusive Care for the Elderly (PACE)
A community-based program, involving both Medicare and Medicaid, that
provides integrated healthcare and long-term care services to frail elderly persons
who are at risk of institutionalization.
Provider
Any healthcare professional (an individual), facility, or organization that renders
medical care to a health plan's membership.
Provider Contract Negotiation
A communication process that utilizes information exchanges between a health
plan and a provider to establish an agreement for the delivery of healthcare
services to the health plan's members.
Provider Manual
A document given to providers by the health plan, containing information to
reinforce contractual provisions and to help providers meet the requirements of
the managed care contract.
Provider Network
The group of healthcare providers that a specific managed care plan has
contracted with to deliver medical services to its members in exchange for
negotiated compensation. Also known as a provider panel.
Provider Orientation
A program conducted by a health plan for new providers to communicate all
operational aspects of the health plan contract.
Provider Relations
Proactive measures that a health plan takes to establish and maintain good
relationships with providers.
Provider Relations Representatives
Network management staff members who perform a variety of network
development and maintenance activities, such as recruiting and assisting with the
selection of new providers, evaluating a provider's medical practice setup,
conducting initial orientation of the provider and staff, educating providers about
health plan developments, and rendering provider service. Also known as network
management field staff.
Provider Service
A reactive network management activity that focuses on problem-solving or
responding to specific requests from providers.
Provider-Sponsored Organization (PSO)
A managed care organization which is entered into or established by providers to
arrange for the delivery, financing, and administration of healthcare.
Prudent-Layperson Standard
The standard adopted by the NAIC in June 1996, which defines an emergency as
"a medical condition manifesting itself by acute symptoms of sufficient severity
(including severe pain) such that a prudent layperson, who possesses an average
knowledge of health and medicine, could reasonably expect the absence of
immediate medical attention to result in placing the health of the individual in
serious jeopardy, serious impairment to body functions, or serious dysfunction of
any bodily organ or part."
PSO
See provider-sponsored organization.
Purchasers
Persons or organizations that actually pay the premiums for a healthcare plan.

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Q
QAPI
See quality and performance improvement standards.
QISMC
See Quality Improvement System for Managed Care.
QM
 See quality management.
Quality
a health plan's success in providing healthcare and other services in such a way
that plan members' needs and expectations are met.
Quality Assurance And Performance Improvement (QAPI) Standards
Standards established by the BBA to measure improved outcomes of healthcare
and services and implemented under CMS's QISMC program.
Quality Improvement System for Managed Care (QISMC)
A CMS program designed to assist Medicare+Choice organizations in developing
mechanisms for measuring improved outcomes of healthcare and services.
Quality Of Life Outcomes
Therapeutic outcomes that improve the patient's physical, social, and emotional
well-being, as observed by both the healthcare team and the patient.
Quality Management (QM)
An organization-wide process of measuring and improving the quality of the
healthcare provided by a health plan. Also known as quality assurance (QA) or
quality improvement (QI).
Quantitative Measures
Performance measures that evaluate how quickly, how often, and how accurately
services are delivered.

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R
R&C
See reasonable charge.
Reasonable Charge (R&C)
A method of determining Medicare payments based on the lowest of (1) the actual
charge billed by the provider, (2) the charge the provider customarily bills
patients for the same service, or (3) the prevailing charge that most providers in
the locality bill for the same service. Also known as reasonable and customary
charge.
Recitals
The section of a contract, following the introductory paragraph, that identifies the
purpose of the agreement and further defines the parties to the agreement in legal
terms.
Recredentialing
a health plan's periodic reexamination and verification of a provider's
qualification to ensure that the provider still meets the health plan's standards for
network participation.
Refusal To Admit
A business practice in which a provider-controlled health plan limits provider
participation in its network.
Reimbursement Approach
 A pharmacy reimbursement plan in which a covered individual purchases
prescription drugs directly from a pharmacy and then is reimbursed by the health
plan.
Relative Value Scale (RVS) Payment System
A payment system that assigns a weighted unit value to the CPT code for each
medical procedure or service, based on the cost and intensity of that service. The
unit value is multiplied by a monetary conversion factor to determine payment for
the procedure or service.
Representation
A statement of facts that need not be true in all respects, but is presumed to be
true in those respects material to the provider contract.
Request For Proposal (RFP)
A process under which multiple plans bid for a purchaser's account by completing
extensive questionnaires and undergoing in-depth site visits.
Resource-Based Relative Value Scale (RBRVS)
An RVS payment system that attempts to take into account all resources that
providers use in the delivery of care, including physical or procedural, education,
mental (cognitive), and financial, when assigning a weighted unit value to each
medical procedure or service.
Respite Care
Temporary care for a disabled or ill individual that provides a break-planned or
unplanned-for the fulltime caregiver in order to reduce stress and prevent
disruption of primary caregiving.
RFP
See request for proposal.
Risk Adjustment
The statistical adjustment of outcomes measures or compensation to reflect
factors beyond the provider's control, such as a member's age, gender, severity of
illness, or multiple medical conditions. See also case mix/severity adjustment.
Risk Contract
"A contract payment methodology between CMS and a health plan (HMO or
CMP) that requires the delivery of at least all Medicare-covered services to
members in return for a capitated payment from CMS and sometimes a small
additional fee paid by the enrollee for supplemental services."
Risk Management
All of the activities that a health plan undertakes in order to protect the health plan
against financial loss associated with the delivery of healthcare services and to
protect its members against harm from medical care.
Risk Pool
A fund that is established at the beginning of a health plan-provider contract
period to cover claims for specified services.
Routine Eye Care
General eye examinations performed to test vision, prescribe corrective lenses,
and screen for eye diseases, and sometimes payment for corrective lenses.

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 S
Safety Net Providers
Providers that have historically had large Medicaid and indigent care caseloads
compared to other providers and that are willing to provide healthcare and related
services regardless of the patient's ability to pay.
Scope Of Services
A contract exhibit that details exactly which services are covered under the
capitation payment, the differences between each benefit plan, and services that
are reimbursed under another payment or require prior authorization.
Section 1115 Waivers
A category of Medicaid waiver that allows states to establish demonstration
projects in order to test new approaches to Medicaid benefits, services, eligibility,
program payments, and service delivery.
Section 1915(b) Waivers
A category of Medicaid waiver that allows states to bypass (or waive) the
Medicaid program's usual requirement of giving recipients complete freedom of
choice in selecting providers and to mandate certain categories of Medicaid
recipients to enroll in managed care plans. Also known as the freedom of choice
waiver.
Selective Contracting
A method of Medicaid contracting that requires health plans to meet minimum
performance standards outlined in a state's RFP and to bid competitively for
Medicaid contracts.
Self-Funded Health Plan
A type of group health plan under which an employer or other group sponsor,
rather than a health plan or insurance company, is financially responsible for
paying plan expenses, including claims made by plan members. Also known as a
self-insured plan.
Self-Referral
A referral program that allows members to bypass the PCP and see a specialist
without a referral under certain circumstances.
Service Approach
Pharmacy reimbursement plan under which plan members obtain prescription
drugs from participating network pharmacies by presenting proper identification
and paying a specified copayment.
Service Costs
Costs associated with dispensing prescription drugs, including ingredient costs
and profit, and operating expenses assigned specifically to the prescription
department.
Service Quality
a health plan's success in meeting the nonclinical customer service needs and
expectations of plan members.
Service Risk
 The risk assumed by the provider under a salary system that patients will demand
more services than had been anticipated when the salary schedule was designed.
Sherman Act
An antitrust law that prohibits actions that constitute unreasonable restraint of
trade or that lead to the establishment of monopolies.
SHMO
See Social Health Maintenance Organization.
Significant Procedure APCs
A category of APC in which a scheduled procedure or treatment is the main
reason for an outpatient visit.
Silent PPO
An arrangement by which an entity that negotiates discounts with providers sells
access to those discounts to other, unrelated health plans to use when paying for
services provided to the unrelated health plan's members.
Social Health Maintenance Organization (SHMO)
A type of HMO established in 1984 under a demonstration authority for the
purpose of providing coordinated healthcare, preventive services, and social
services which might prevent costly medical complications among the elderly.
Sole-Source Contracting
A specialty care network in which 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 of services to all of its members in a defined market.
Specialist
A healthcare professional who voluntarily limits his or her practice to a certain
branch of medicine related to specific services or procedures, certain age
categories of patients, specific body systems, and/or certain types of diseases.
Specialty Capitation
Payment of individual specialists or a single-specialty group on a capitation basis
to provide a specified set of specialty services to all the health plan's members.
Specialty Services
Services that lend themselves to being separated out or packaged as a separate
benefit, network, or program.
Staffing Ratios
Formulas that relate the number of PCPs in a health plan's network to the number
of enrollees in the plan and help to determine the number of PCPs that should be
included in a network.
Stop-Loss Insurance
Insurance purchased by an individual provider, a provider organization, or a
healthcare facility to protect itself against all or part of the losses that it may incur
in the process of providing healthcare services to a health plan's members under a
risk-sharing arrangement. Also known as provider excess insurance or medical
provider reinsurance.
Stop-Loss Provision
A contract provision which specifies that once the costs for a particular case have
reached a certain threshold costs beyond that point will be reimbursed under a
different payment method.
Structural Measures
Performance measures that evaluate the quality of a provider's staff, equipment,
and facilities.
Subacute Care
Comprehensive inpatient care designed for an individual who has had an acute
illness, injury, or exacerbation of a disease process but no longer requires acute
care.
Subdelegation
The process that occurs when the health plan's delegate contracts with a third
party to perform activities that were originally delegated by the health plan.
Subrogation
A health plan's contractual right to recover from a third party some portion of the
benefits paid to a member or a provider by the health plan.
Substantial Financial Risk
A concept, as defined by CMS regulations, that applies when the amount for
which a provider is at risk for referral fees is more than 25% of the maximum
anticipated total compensation that the provider could receive.

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T
Telemedicine
A communications system that utilizes technologies such as videoconferencing
and high-speed data transmission to facilitate the exchange of patient information
between providers in different locations.
Termination Clause
A contract clause that describes how and under what circumstances a health plan-
provider contractual relationship can be ended. Also known as a deselection
clause.
Termination With Cause
A contract provision that requires the health plan to give the provider the reason
for a termination action.
Termination Without Cause
A contract clause that allows either the health plan or the provider to terminate the
contract without obligation to provide a reason for the termination or to offer an
appeals process.
The Commission/URAC
See American Accreditation Health Care Commission/URAC.
Therapeutic Outcomes
Measures of a drug's effectiveness in treating disease that are achieved by
incorporating medications into patient care.
Third Party Administrator (TPA)
A company that provides administrative services to health plans or self-funded
health plans.
Third Party Prescription Program
A program in which prescription expenses are paid at least in part by someone
other than the patient.
Tiered Network
A provider panel that the health plan has subdivided into two or more layers
(tiers) based on provider profiles for quality, utilization, and cost-effectiveness.
Total Replacement Coverage
A type of employee health plan benefit in which a purchaser awards its health
coverage contract through a competitive bidding process to a single health plan,
then discontinues any non-managed care products and presents the new managed
care program to its employees as their only choice for healthcare.
TPA
See third party administrator.
TRICARE
The managed healthcare program established by the Department of Defense to
accommodate the mobile armed forces population. See also Civilian Health and
Medical Program of the Uniformed Services.

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U
UB-92
A standardized claim form required by the Uniform Billing Code of 1992, which
requires hospitals to follow specific billing and itemization procedures.
UM
See utilization management.
Unbundling
The practice of submitting separate charges for the different components of a
service, rather than one charge for the service as a whole, in order to increase the
level of reimbursement.
Unified Pharmacy Benefit
A pharmacy benefits management program that is integrated into the health plan's
total healthcare package.
Upcoding
A type of false billing in which a provider submits a code for a procedure that has
a higher level of reimbursement than the procedure that was actually performed.
URAC
See American Accreditation Health Care Commission/URAC.
Urgently Needed Services
Treatment of an unforeseen illness or injury that occurs outside of the network
area or under unusual circumstances within the network area, requiring the
services of non-participating providers.
Utilization Management (UM)
 Managing the use of medical services to ensure that a patient receives necessary,
appropriate, high-quality care in a cost-effective manner.

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V
Vicarious Liability
A legal concept under which a member who reasonably believed that a physician
(or other provider) was acting as the health plan's employee or agent while
providing negligent care may bring action against the managed care organization.

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W
WAC
See wholesale acquisition cost.
Warranty
A statement guaranteed to be true in all respects. If the statement is untrue in any
respect, the contract of which the statement is a part can be declared void.
Wholesale Acquisition Cost (WAC)
A method of calculating drug costs based on published prices charged by
wholesalers, representing what pharmacies are actually charged for prescription
drugs.
Withhold
A percentage of a provider's payments that is held pack during a given period to
offset or pay for any claims that exceed the budgeted costs for referrals or hospital
services.
Workers' Compensation
A state-mandated insurance program that provides benefits for medical expenses that are
incurred and wages that are lost by workers who suffer work-related injury or illness.
Also known as workers' comp.

AHM Network Management: Environmental Consideration for Network Management

Pages 1-43

Network Management in Health Plans

Environmental Consideration for Network Management
Introduction
In the past, employers frequently offered health plans in addition to their traditional
indemnity health insurance plans. Now in many regions of the United States, the
trend today is toward total replacement coverage, in which a purchaser awards
its health coverage contract through a competitive 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 only choice. As a result of this
more restrictive practice, health plans are subject to a variety of requirements and
expectations. Both federal and state governments are now scrutinizing the industry
more closely than ever before, primarily because a significantly large percentage of
the American public is now enrolled in some form of health plan. Purchasers want to
purchase adequate health benefits for their employees at a cost that is stable,
predictable, and as low as possible. Plan members want a wide range of covered
services and freedom to choose from a variety of providers. In order to be
successful, health plans must find a way to address all of these concerns.

In this lesson, we will discuss the legislative requirements and the purchaser,
consumer, and provider 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 an increase in the amount of legislative activity designed to establish standards
for the industry and to address real or perceived concerns. While some legislation
has been enacted specifically for health plans, courts have also held health plans
accountable to existing statutes that govern other industries. The following sections
describe the major types of federal and state legislation that affect the network
management function.

Federal Legislation

Regulation of insurance is typically left to the states. However, there has been some
disagreement about whether health plans qualify as insurance for regulatory
purposes. Insurance functions primarily as a vehicle for funding healthcare services;
managed healthcare plans, on the other hand, provide for both the funding and the
delivery of medical services. As a result, state insurance 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 interpreted existing
legislation in light of health plans' particular circumstances. In this section, we will
discuss some of this legislation.

HMO Act of 1973

The Health Maintenance Organization Act of 1973 (HMO Act) is a federal law
designed to help contain spiraling healthcare costs by encouraging the development
of HMOs. The original legislation established requirements that health plans must
meet to obtain federal qualification and, for a period of time, provided federal funds
for the establishment of HMOs. The HMO Act and subsequent amendments establish
voluntary standards for health plans seeking federal qualification and serve as a
model for state health plan statutes. There are several provisions in the HMO Act
that relate to the network management function. These provisions address the
following issues:
 • Defining the structure of network relationships through which basic health
services (other than emergency services or infrequently used services) must
be provided
• Requiring geographic accessibility and 24-hour-a-day/7-day-a-week
availability standards for participating providers
• Imposing requirements for continuing education and medical record-sharing
by network providers
• Establishing a quality assurance program that stresses health outcomes,
provides for peer review, uses systematic data collection of performance and
patient results, and includes written procedures for remedial action
• Establishing a mandated grievance resolution mechanism, including a method
for members 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 to provider recruitment, contracting, credentialing, accessibility and
availability, and quality and utilization management protocols.

Employee Retirement Income Security Act (ERISA) of

1974
The Employee Retirement Income Security Act (ERISA) of 1974 is a federal
statute designed to ensure the proper funding and administrative management of
pension and employee welfare plans. As part of its numerous provisions, ERISA
regulates employer-sponsored employee welfare 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),
most nongovernmental employer plans that include healthcare benefits for
employees (including those provided 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 is its preemption provision, which means that the terms of ERISA
generally take precedence over any state laws that regulate employee welfare
benefit plans. State laws continue to regulate the business of insurance, and apply to
employee welfare plans if the plans are insured. Self-funded plans are generally
exempt from state mandates otherwise affecting health insurance companies and
health plans. In addition, as described later in this lesson, some courts have
interpreted the ERISA preemption in a way that prevents health plans from being
held liable for malpractice by network providers, including the associated
compensatory and punitive damages associated with such liability.

One true statement about the Employee Retirement Income Security Act of 1974
(ERISA) is that:
 ERISA applies to all issuers of health insurance products, such as HMOs
pension plans and employee welfare plans are exempt from any regulation
under ERISA
ERISA requires self-funded plans to comply with all state mandates affecting
health insurance companies and health plans
the terms of ERISA generally take precedence over any state laws that
regulate employee welfare benefit plans

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 individual health insurance markets. HIPAA, which became effective
on June 1, 1997, specifies that a group health plan may not deny coverage or
discriminate against individuals based on their health status. Key provisions of
HIPAA:

• define the term "pre-existing condition" as any physical or mental condition

for which medical advice, diagnosis, care, or treatment was recommended or
received within the six-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 after enrollment (18 months for late enrollees)
• reduce the length of a health plan's pre-existing condition exclusion period for
a previously covered individual by applying the individual's creditable
coverage, which includes previous coverage under a group health plan, health
insurance policy, or benefit program provided by the federal or state
government
• provide guaranteed access to healthcare coverage for small businesses and
previously covered individuals who meet specified eligibility requirements
• guarantee the renewability of group and individual health coverage,
regardless of the health status of covered group members or individual
insureds

One provision of the Health Insurance Portability and Accountability Act (HIPAA) of
1996 is that HIPAA:
specifies that a group health plan can deny health coverage to an individual
only if the denial is based on the individual's health status
limits the exclusion period for pre-existing conditions to a maximum of six
months after a member's enrollment in the group health plan
reduces the length of a health plan's pre-existing condition exclusion period for
a previously covered individual by applying the individual's creditable coverage
mandates that group health plans provide coverage for mental health and
maternity services

Health Insurance Portability and Accountability Act (HIPAA) of

1996
Less than three months after HIPAA was enacted, Congress amended the law to
include federal requirements relating to mental health benefits and the minimum
length of stay for maternity cases. The Mental Health Parity Act (MHPA) of 1996
prohibits health plans that offer mental health benefits from applying more restrictive
limits on coverage for mental illness than they apply 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 be less than
48 hours for normal deliveries or 96 hours for cesarean births. These provisions do
not mandate coverage of mental health or maternity services; instead, they specify
certain rules that a health plan must follow if it offers such coverage. Although states
are given the opportunity to enforce the requirements of HIPAA, the federal
government will step in to regulate health plans in this area if the state fails to do so.

Both Medicare and Medicaid, as well as other governmental programs, are bound by
the HIPAA requirements. HIPAA requires the Centers for Medicare and Medicaid
Services (CMS) to set up a fraud-reporting hotline, much like the "whistle-blower"
system used by the Internal Revenue Service. The Act also provides funding to
enforce regulations against fraud and other abuses in Medicare and Medicaid. Any
fines or penalties collected are returned to the fund to be used for future
enforcement activities.

The Adobe Health Plan complies with all of the provisions of the Newborns' and
Mothers' Health Protection Act (NMHPA) of 1996. Kristen Netzger, an Adobe enrollee,
was hospitalized for a cesarean delivery. Amy Davis, also an Adobe enrollee, was
hospitalized for a normal delivery. From the following answer choices, select the
response that indicates the minimum length of time for which Adobe, under NMHPA,
most likely must provide benefits for the hospitalizations of Ms. Netzger and Ms.
Davis.
Ms. Netzger = 48 hours
Ms. Davis = 48 hours
Ms. Netzger = 72 hours
Ms. Davis = 72 hours
Ms. Netzger = 96 hours
Ms. Davis = 48 hours
Ms. Netzger = 96 hours
Ms. Davis = 72 hours

Antitrust Laws
Antitrust laws exist to ensure free competition. Three of these laws-the Sherman Act,
the Clayton Act, and the Federal Trade Commission (FTC) Act-are especially relevant
to health plans. Figure 1B-1 gives a brief description of each of these antitrust laws.
Most states have similar antitrust statutes patterned after these federal laws.

Antitrust laws divide anti-competitive business practices into two categories. One
category consists of specified business practices that are deemed illegal regardless of
the justification or benefit. Included in this category are such practices as:

• Price fixing, in which supposed competitors agree to charge the same fees in
order to keep 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 for specified services.
• Horizontal division of territories, in which competitors agree to divide
territories or customers. For example, two HMOs would be in violation of
antitrust laws if they split a large employer group by agreeing to let one HMO
market to some company employees and to let the second HMO market to
different company employees.
• Group boycotts, in which competitors with significant market share agree to
exclude other existing or potential competitors. A PHO that denies
membership to a physician solely because that physician has admitting
privileges at a competing hospital would be guilty of a group boycott.
• Tying arrangement, in which the purchase of one product or service is tied
to purchase of another product or service. For example, it is unlawful for a
provider-owned integrated delivery system (IDS) to agree to provide specialty
services to a health plan only on condition that the MCO agree to contract
with the IDS for other services.

The critical elements that make these activities antitrust violations are the
relationship between the competitors and the effect of their activities on competition.
Competitors who are functioning as 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 competitors that operate as
separate legal and economic entities are considered violations. For example, under
the definition of price fixing, competing physicians can form an IPA and, through the
IPA, can legally agree to charge a single fee rate to IPA customers. Two IPAs
competing in the same market as separate entities cannot jointly agree to set a
single fee rate.

Antitrust Laws
A second category of antitrust violations consists of business practices that are
subject to "rule of reason" standards which weigh a violation's anti-competitive effect
in terms of market share against any potential economic advantage that an entity
would gain. Activities in this category include:

• Refusal to admit providers or termination of providers. An HMO offering a

closed provider 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 one network. These arrangements, which are common among HMOs, are
generally permitted. However, they may represent a restraint of trade if the
health plan has substantial market share.

Individuals and corporations determined to be in violation of antitrust laws are

subject to severe sanctions and penalties, such as trebled civil monetary damages,
criminal liability, consent decrees, and (for individuals) imprisonment.

The following situations illustrate violations of federal antitrust laws:

Situation A Two HMOs split a large employer group by agreeing to let one HMO
market to some company employees and to let the second HMO market to different
company employees.

Situation B Members of a physician-hospital organization (PHO) that has significant

market share jointly agreed to exclude a physician from joining the PHO solely
because that physician has admitting privileges at a competing hospital.

From the following answer choices, select the response that best identifies the types
of violations illustrated by these situations:

Situation A: horizontal division of territories; Situation B: group boycott

Situation A: horizontal division of territories; Situation B: exclusive
arrangement
Situation A: exclusive arrangement; Situation B: group boycott

Situation A: exclusive arrangement; Situation B: tying arrangement

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 and subsequent amendments prohibit physicians from
referring Medicare or Medicaid patients to entities in which they have a financial or
ownership interest. These entities include (1) laboratories; (2) providers of radiology,
radiation therapy, and diagnostic services; (3) physical and 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) . Such referrals violate
1

federal anti-kickback laws, which prohibit any financial inducement for referrals of
Medicare or Medicaid patient. 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 services and their referrals to such services. From a health plan perspective,
this change has removed some incentives for potential overutilization of the services.
In addition, by removing pressure for health 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 more effectively.

Fraud and Abuse Laws

Health plans are also affected by regulations that specifically relate to fraud and
abuse by Medicare and Medicaid providers. These laws prohibit kickbacks to
practitioners intended to induce referrals of patients, the filing of false claims, and
other fraudulent billing practices. In addition, states are increasingly taking the
initiative to establish standards for special investigative units (SIUs) in the health
plan industry. These standards include mandatory reporting of suspected or proven
cases of fraud or abuse. Because of both statutory requirements and private
purchaser expectations, many health plans have developed formal processes and
procedures for identification and prosecution of provider fraud. Health plans are
working closely with state and federal law enforcement agencies to achieve these
goals.

Quality Improvement Laws

There are numerous federal and state laws governing quality assurance in health
plans. In this section, 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 Care Quality Improvement Act (HCQIA) of 1986. HCQIA established the
National Practitioner Data Bank and provides limited antitrust immunity to healthcare
entities-including HMOs-for their credentialing and peer review quality assurance
activities. Before allowing a provider to participate in a network, a health plan must
verify the provider's credentials. If those credentials are inadequate, the provider is
not offered a contract. An established network provider's performance is regularly
evaluated by his or her peers. A negative peer review can result in termination of the
provider contract. Without immunity, adverse consequences of credentialing and
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 in violation of antitrust laws, health plans must follow HCQIA
standards for due process. These standards ensure that physicians receive fair
hearings in situations involving alleged quality assurance issues by requiring that
health plans notify providers of the reasons for any adverse action and give
providers an opportunity to respond in a formal hearing. Such a hearing can be held
before a neutral arbitrator, a hearing officer, appointed by the health plan, who is
not in direct competition with the provider, or before a panel of non-competing
individuals appointed by the health plan.
Consumer Protection Laws
Federal lawmakers have proposed a number of so-called patient bill of rights
initiatives. The intent of these initiatives is to address concerns about the health plan
industry. Such proposals have 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. The intent of these initiatives is to address concerns about the health plan
industry. Such proposals have 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
under healthcare plans. However, many states have taken the initiative to adopt
their own versions of healthcare reform bills that incorporate several of the federal
recommendations. State legislators have been far more receptive than Congress to
enacting health plan bills. We will discuss some of these 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 are generally exempt from state laws governing regulation of health
insurance, including statutes pertaining to health plans. Nevertheless, health plans
must be licensed through the insurance department and/or health department in
each state in which they operate. In addition, many health plan members are
enrolled under fully insured arrangements. As a result, state regulations directly or
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 in statutory requirements considerably facilitates compliance and
administrative practices. The National Association of Insurance Commissioners
(NAIC) is an organization of state insurance regulators 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 the
Model Act. The NAIC has also adopted the Preferred Provider Arrangement (PPA)
Model Act, which requires preferred provider arrangements to ensure reasonable
access to covered network services, include cost-management mechanisms, and
establish the amount and manner of payment to preferred providers. All states have
enacted statutes regulating PPAs.

The NAIC has recently developed similar health plan accountability standards and
has offered them to the states in the form of Model Acts. These Model Acts cover
quality assessment and improvement, professional credentialing verification, network
adequacy, utilization review, and grievance procedures. Two of these Model Acts—
the Health Care Professional Credentialing Verification Model Act and the Managed
Care Network Adequacy Model Act —have a direct impact on network management.

The NAIC’s Health Care Professional Credentialing Verification Model Act

specifies the credentialing requirements health plans must satisfy in order to ensure
that network providers meet minimum standards of professional qualification. These
requirements include

• verification of the credentials of all contracted healthcare professionals in

accordance with written procedures,
• collection of a minimum set of credentialing information by either primary or
secondary verification and mandatory recredentialing every three years, and
• establishment of a process for providers to use to review and correct
credentialing information

The Managed Care Plan Network Adequacy Model Act defines specific adequacy
and accessibility standards that health plans must meet. In addition, the Model Act
requires health plans to

• hold covered persons harmless against provider collections for unreimbursed

charges or unpaid claims and guarantee continued coverage for uncompleted
treatment in the event of 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 these provisions.

As of this writing, the NAIC is also developing the Health Information Privacy Model
Act, which addresses the confidentiality of health information, and a model licensure
act, which is part of the NAIC’s Consolidated Licensure for Entities Assuming Risk
(CLEAR) initiative. The model licensure 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 deliver healthcare benefits to plan members. Although health plans typically cover
a broad range of services with limited member cost-sharing, they do not cover every
medical service. And although health plan networks typically include a variety of
practitioners, facilities, and ancillary service vendors, they do not include all types of
medical practitioners.

Consumers have lobbied their state legislatures to require coverage for some
traditionally noncovered services, such as infertility treatment, or expanded mental
health benefits, and/or inclusion 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 for purchasers, who generally take the position that such mandates
ultimately increase the cost of providing health coverage. This cost factor
discourages some employers from offering healthcare coverage altogether or
prompts them to consider self-funding to avoid state requirements.

Health plan network management and medical management staff have attempted to
reconcile the sometimes conflicting needs of consumers and purchasers by
developing criteria for recruiting and selecting nontraditional providers into their
networks and establishing guidelines regarding how 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's standards with respect to credentialing, quality, access, and cost-
effectiveness, the health plan may choose to close its panels except to providers who
join existing practices or who fulfill an unmet 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 provider statutes require that
health plans contract with any provider who is willing to abide by the health plan's
policies and procedures and who meets its credentialing requirements. Figure 1B-3
describes a recent US Supreme Court ruling regarding the legality of any willing
provider statutes.

Both the health plan industry and the business community have vigorously opposed
passage of any willing provider bills. Including an unlimited number of providers
results in fewer members per provider. From a provider perspective, such action
negates one of the reasons that providers join a network-increased patient volume.
From a health plan perspective, enactment of any willing provider laws often
jeopardizes the financial and contractual arrangements that are inherent in health
plans and that are essential to effective network management. In addition, a health
plan with a relatively large number of network providers may not be able to properly
educate its providers about utilization management, to monitor utilization patterns of
network providers, or to correct overutilization. Overutilization can contribute to
increased plan premiums and to financial losses for providers who are compensated
on a risk-sharing basis.

Health Plan Reform Bills

State legislatures have also enacted health plan reform bills which address specific
administrative practices of managed healthcare plans. These reform bills, like
consumer protection laws proposed at the federal level, affect network management.
Figure 1B-4 describes some of the proposed reforms.

Most well-run health plans already follow many of these practices. State reform bills
are designed to modify the activities of those organizations that fail to meet
appropriate standards in the way they do business.

Vicarious Liability
Under the theory of apparent or ostensible agency, a health plan may be
considered responsible for malpractice by its network providers if "the patient
reasonably relied upon actions or representations of the health plan, which 'held out'
the negligent provider as its employee or agent." In other words, if the member
4

reasonably believed that the physician (or other provider) was acting as the health
plan's employee or agent while providing negligent care, the member may have
cause to bring action against the health plan organization. This legal concept is
known as vicarious liability. Courts have been divided over whether ERISA preempts
claims of vicarious liability against health plans and there have been a number of
proposals to amend ERISA to allow compensation from health plans for lost wages,
death or disability, pain and suffering, emotional distress, 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 care in
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 reduce their exposure to vicarious liability claims. These steps include
maintaining adequate malpractice insurance, implementing risk management and
quality assurance programs for their networks, and establishing procedures to assess
the qualifications and clinical competence of participating providers. In addition,
6

health plan provider agreements should explicitly state that the practitioner or
provider is an independent contractor (a fact that should be reemphasized in
marketing and membership literature). Agreements should also avoid restrictions on
provider-member communication involving treatment decisions and allow for
arbitration or other alternative dispute resolution procedures.
7

Accreditation Standards
Accreditation is another way of ensuring that purchasers and consumers receive
quality healthcare services. A new, private industry has emerged to assess the
quality of care and service they provide. Although assessment programs generally
fall into two categories-accreditation and data 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 the measurement 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 the quality measurement organizations, both the Joint Commission on
Accreditation of Healthcare Organizations (JCAHO) and the American Accreditation
HealthCare Commission/URAC (the Commission/URAC) have developed accreditation
programs for health plans. In an effort to standardize regulation among the states,
the National Association of Insurance Commissioners (NAIC), an organization made
up of the state insurance commissioners, has developed a set of model guidelines in
a variety of operational and contractual areas. The following pages provide a brief
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
accrediting agency for most HMOs and similar health plans, managed behavioral
health organizations (MBHOs), and credentials verification organizations (CVOs). A
credentials verification organization (CVO) is an organization that gathers and
verifies information about the qualifications and credentials of healthcare
practitioners. Health plans sometimes use information from CVOs to determine which
practitioners to select and retain in the network. NCQA is well known for both its
health plan accreditation process, which began in 1990, and the Health Employer
Data and Information Set (HEDIS) report card. Although NCQA's accreditation
process and HEDIS have been largely distinct in the past, NCQA took steps to
integrate accreditation with select HEDIS measures into their Accreditation '99
program.

Accreditation '99 emphasized demonstrated results (or performance) and evaluated

the processes health plans use to achieve those results. Under Accreditation '99,
accredited health plans were rated as Excellent, Commendable, Accredited, or
Provisional. In all, Accreditation '99 included 54 accreditation standards, 11 HEDIS
effectiveness of care measures, and 10 consumer survey measures.

Although the specific details of NCQA accreditation and HEDIS requirements are
beyond the scope of this lesson, with Accreditation '99 NCQA announced the
following reporting categories for 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.

The Tuba Health Plan recently underwent an accreditation process under a program
known as Accreditation '99, which includes selected Health Employer Data and
Information Set (HEDIS) measures. Under Accreditation '99, Tuba received a rating
of Excellent. The following statement(s) can correctly be made about this quality
assessment of Tuba's operations:

A. In arriving at its rating of Excellent for Tuba, the Accreditation '99 program most
likely focused on Tuba's demonstrated results and evaluated the processes that Tuba
used to achieve those results.

B. Tuba is required to report all HEDIS results to the NAIC.

Both A and B

A only

B only

Neither A nor B

HEDIS includes a broad range of measures that use data collected through a
combination of medical chart review, information system transactions (based on
claims, eligibility, and financial data), 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
available through a computerized NCQA database called Quality Compass and can be
accessed by purchasers and consumers for use in evaluating and selecting health
plans. NCQA has also created additional programs, including the development of
standards for auditing HEDIS data to ensure 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 employer groups, as well as
state and federal regulations, have increasingly begun to require both NCQA
accreditation and HEDIS reporting for evaluation and selection of health plans.

The following statements are about accreditation of health plans:

The National Committee for Quality Assurance (NCQA) serves as the primary
accrediting agency for most health maintenance organizations (HMOs).
The Joint Commission on Accreditation of Healthcare Organizations (JCAHO)
has developed standards that can be used for the accreditation of hospitals,
but not for the accreditation of health plan provider networks or health plan
plans.
States are required to adopt the model standards developed by the National
Association of Insurance Commissioners (NAIC), an organization of state
insurance regulators that develops standards to promote uniformity in
insurance regulations.
Accreditation is an evaluative process in which a health plan undergoes an
examination of its operating procedures to determine whether the procedures
meet designated criteria as defined by the federal government or by the state
governments.

Environmental Consideration for Network Management

Joint Commission on Accreditation of Healthcare
Organizations (JCAHO)
Best known for its accreditation of hospitals, the Joint Commission on Accreditation
of Healthcare Organizations (JCAHO) has also developed standards for accrediting
health plan provider networks and health plans, psychiatric and long-term care
facilities, substance abuse programs, and home care organizations. JCAHO defines
healthcare networks as "entities that provide or provide for integrated healthcare
services to a defined population of individuals." The definition includes HMOs, PPOs,
IPAs, vertically integrated (full-service) networks, and horizontally integrated
(specialty) networks. JCAHO offers separate network accreditation tracks for 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. Health plans that complete JCAHO review receive one of
the following designations: Accreditation with Commendation, 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 as ORYX, which incorporates over 200 measures developed by
JCAHO, NCQA/HEDIS, the Foundation for Accountability (FACCT), the University of
Colorado Health Science Center, and the University of Wisconsin. The ORYX initiative
was introduced in February 1997, with the goal of integrating outcomes and other
performance measurement data into JCAHO's accreditation process for hospitals and
long-term care facilities. Each hospital and long-term care facility must select a
performance measurement system that best meets its needs, as well as at least two,
but not more than five, clinical performance indicators that are relevant to the
facility's internal performance improvement activities. The ORYX Plus program is
available for organizations that wish to measure their outcomes on a more advanced
level. ORYX Plus requires facilities to choose a minimum of 10 performance measures
from a set of 32 standard measures.

American Accreditation HealthCare Commission/URAC

(the Commission/URAC)
The Utilization Review Accreditation Commission (URAC) was founded in 1990 to
promote consistent standards in the application of utilization procedures. In 1996,
URAC broadened its scope to include national network accreditation standards and
became the American Accreditation HealthCare Commission/URAC (the
Commission/URAC). The Commission/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 Network

Accreditation Standards, which are a combination of health network accreditation
and utilization management 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's accreditation 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 only establish and document policies and procedures, they must also
communicate those policies and procedures to network providers. Incorporating such
information into the health plan's materials, provider orientations, and ongoing
provider service is an important factor in effective network management. Many of
the established evaluation measures involve assessments of provider clinical
expertise and performance, including utilization management and quality assurance
issues. It is essential, therefore, that network providers understand these
expectations and processes and that health plans recruit providers who meet the
necessary standards. Although network management staff are not usually directly
involved with the coordination of accreditation and report card preparation, the
active involvement of provider relations staff is an important factor in ensuring that
network providers satisfy both regulatory requirements and purchaser and customer
expectations.

Purchaser Expectations
The vast majority of consumers obtain health coverage through a purchaser
arrangement in which someone other than the consumer arranges for the coverage.
Some of these purchasers are private employers or business groups that purchase
healthcare coverage for their employees or group members. Other purchasers are
government agencies offering healthcare coverage through public programs such as
the Federal Employees Health Benefits Program (FEHBP), Medicare, Medicaid, and
workers' compensation. Because purchasers pay the bill for the majority of
healthcare expenditures in the United States, they play an active role in establishing
requirements and standards for health plans.

Private Purchasers
The business community has had an enormous influence on the growth of health
plans, and the expectations of employers, unions, and business coalitions have had a
direct effect on the way that 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-service plans. Today, approximately
61% of individuals covered by employer health plans are enrolled in some form of
health plan. Employers are also concerned with ensuring that their employees
8

receive quality healthcare. During the past several years, businesses have become
more sophisticated in their search for value-a combination of reasonable price and
quality of care and service. Employers look for this value in the form of limited
premium increases, formal quality and disease management programs, customer
service standards, and quality measurement reporting.

In order to avoid the administrative expenses of offering multiple carriers, many

companies use a competitive bidding process to select a single health plan to serve
all their employees (regardless of 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 for proposal (RFP). Under the RFP process, multiple plans bid for an
account by completing extensive questionnaires and undergoing in-depth site visits.
Health plans must demonstrate that they have sufficient network capacity, i.e., that
the plan has enough providers to serve all of the purchaser's employees adequately.
The purchaser also looks for the availability of preferred physicians, hospitals, and
other providers with regional, national, or world-wide reputations for specialized care
and treatment. If the purchaser is sufficiently important to the health plan, it may be
necessary for the network management staff to guarantee recruitment of specified
providers who are not already under contract. These additional providers must meet
the health plan's credentialing standards in order to be included in the network.
Recruitment of specified providers may be particularly important in a union situation,
in which the purchaser's contract with the union requires the continued availability of
specified providers or benefits. Further, more purchasers are selecting health plan
products that allow their employees to receive coverage for elective, out-of-network
care. Once the bidding and selection process is completed, purchasers frequently
formalize their requirements through carrier guarantees, whereby the selected
health plan 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 been able to influence a number of legislative initiatives, thus benefiting both
themselves and the health 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, and now offers health plan options to Medicare beneficiaries. In addition,
virtually all states now offer or even require health plans as part of their Medicaid
programs.10 Some states have enacted legislation that allows health plans in workers'
compensation programs-long considered the last bastion of unregulated, fee-for-
service medicine. Even the Department of Defense, through the Military Health
Services System's TRICARE program, has established demonstration projects
involving health plans. In the following sections we provide a brief overview of these
government-sponsored programs. The structure and benefits available under the
plans are presented in Healthcare Management: An Introduction and the laws
regulating their operations are discussed in Health Plans: Governance and
Regulation. A more detailed discussion of network 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
Employees Health Benefits Program (FEHBP), which offers a government-wide
indemnity plan, employee association or union plans, and approximately 400 prepaid
plans (mostly HMOs) to federal employees, retirees, and their dependents. One of
the factors in selecting health plans for inclusion in the FEHBP program is an
evaluation of network access and availability. Health plans are required to
demonstrate initial and ongoing capability in the appropriate service areas. Although
FEHBP does not require a standard benefit package, participating plans must include
certain core benefits, such as hospital benefits, surgical benefits, ambulatory patient
benefits, supplemental benefits, and obstetrical benefits. FEHBP also requires plans
to include coverage of substance abuse and mental health services.

Medicare
Medicare is the federal healthcare program for individuals age 65 and older, as well
as individuals of any age who are disabled or who have end-stage renal disease. The
Centers for Medicare and Medicaid Services (CMS) regulates Medicare. CMS also
establishes standards for health plans seeking to contract with the program.
Historically, health plans have participated in Medicare through either a risk contract
or a cost contract with CMS. The Balanced Budget Act of 1997 revised the
contracting process and under the new Medicare+Choice program all plans
contracting with Medicare are required to accept risk. The Medicare Modernation Act
of 2003 continued to reform Medicare, providing needed payment reforms and
benefit enhancements and changing the name of the program to Medicare
Advantage. Significantly for health plans, provider-sponsored organizations (PSOs)
can now contract directly with CMS and compete with established health plans.

Health plan network management departments must be aware of Medicare

regulations with respect to network access and availability, as well as regulatory
standards for quality assurance, utilization management, fraud and abuse, and
reporting. These regulatory requirements are discussed in more detail in Special
Consideration for Medicare Networks.

Medicaid
The Medicaid program provides health coverage to low-income, medically needy, and
disabled individuals. Although it is a joint federal and state program, Medicaid is
primarily regulated on the state level. Most states' Medicaid programs are designed
to encourage or even require recipients to enroll in approved health plans. States
have looked to health plans as a way of expanding network availability, ensuring
continuity of care, implementing quality management programs, and controlling
healthcare expenditures. Health plans with Medicaid programs must deal with a
number of network-related issues, including ensuring acceptable reimbursement to
providers, addressing provider concerns about serving the Medicaid population,
contracting with traditional Medicaid providers, working with appropriate social
service agencies to meet recipients' nonmedical needs, and overcoming the
skepticism toward health plans of many Medicaid consumer and provider advocacy
groups. Network requirements under Medicaid are discussed in more detail in Special
Considerations for Medicaid Networks.
Workers' Compensation
Workers' compensation programs are designed to cover both the medical expenses
associated with workplace injuries and the associated lost wages. Because of
escalating costs, many states are passing legislation enabling the development of
managed workers' compensation programs. In some 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

appropriate specialties, 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 for Workers' Compensation.

Military Health Services System (MHSS)

The Department of Defense has attempted to accommodate the mobile armed forces
population's need for managed healthcare services through its TRICARE program.
TRICARE, which incorporates health plans into the military's original Civilian Health
and Medical Program of the Uniformed Services (CHAMPUS), offers coverage
in Figure 1B-5.

TRICARE contracts with private health plans that provide administrative services and
additional treatment facilities. Active-duty military personnel are automatically
enrolled in the HMO option with no deductibles and reduced copayments (TRICARE
Prime). Eligible family members and dependents can enroll in eiither the HMO option
(TRICARE Prime), the PPO plan (TRICARE Extra) or an indemnity plan (TRICARE
Standard).

Issues for Network Management

Network adequacy and accessibility and provider contracting are critical issues that
affect network management in governmental healthcare programs. Another area of
concern is the question of reimbursement. Typically, governmental entities have a
formula through which they establish payments-usually capitated-to health plans.
Unlike fee-for-service arrangements, such payments do not directly reimburse health
plans for the cost of rendering medical care and meeting administrative expenses. In
many cases, especially in Medicaid and workers' compensation, the provisions of
governmental programs are sufficiently different from commercial contracts that
health plans incur extra expenses in fulfilling the additional requirements. As a
result, health plans may find it necessary to limit provider reimbursement and
network capitation. These reimbursement limitations may cause providers to
withdraw from the network, creating disruption in service to plan members. In some
instances, health plans themselves have withdrawn from participation in
governmental programs, including Medicare and 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 has increased significantly. Purchasers and members alike are attracted
to and have benefited from the many advantages that health plans provide, including
broad coverage, lower premiums, limited copayments, management of unnecessary
medical expenditures, and formal quality improvement initiatives. Even indemnity
health insurance plans have adopted some health plan techniques, and some
employers now offer their employees only one option for healthcare coverage-a
health plan.

The growing sophistication of the public toward medical care in general has led
consumers to become more interested and involved in healthcare coverage issues,
including access to data related to quality and satisfaction, better service and
convenience, and a greater say in healthcare treatment 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 enhance patient-provider communication and require external appeal
mechanisms for denied services and mandatory turnaround times for medical review
decisions. Consumers increasingly expect their health plans to cover new
technologies or last-resort treatments, even if the services are considered
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 and hospitals--that they know and trust. For major
employer accounts, health plans may ask members which providers they would like
to have in the network or analyze data to determine what provider usage patterns
already exist. With that information, the plan can then attempt to target their
network recruiting efforts toward those providers.
In the case of other types of accounts (particularly in Medicare, Medicaid, and other
governmental programs), health plans try to recruit providers who offer services that
are best suited to meet the healthcare needs of those populations. For example, if a
state's Medicaid enrollees 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 existing number
to accommodate members' needs.

The health plan must verify the credentials of all network applicants before admitting
them to the panel. Only under special circumstances can a health plan accept a
provider that does meet its credentialing standards. This issue is more fully
discussed in Collecting and Verifying Data for Credentialaling Purposes.

Open Access
A combination of member initiatives, state legislation, and reevaluation by health
plans of the effectiveness of current referral programs has caused a growing number
of health plans to remove many of the referral requirements. More health plans allow
members to go to nonparticipating as well as participating specialists, permit female
members to access obstetrician/gynecologists directly without a PCP referral, and
authorize some types of specialists to serve as PCPs for members with serious or
chronic conditions.

These changes have a number of implications for network management. While

allowing members more 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 a complete record of the care his or her
patients receive. Open access also makes it more difficult for a risk-bearing network
to manage utilization and to operate successfully under a capitation arrangement. In
such open-access products, it becomes even more important that the health plan's
information system supports timely and accurate reporting, including provider
profiling and the capability to identify specific areas or providers requiring review.

In the case of other types of accounts (particularly in Medicare, Medicaid, and other
governmental programs), health plans try to recruit providers who offer services that
are best suited to meet the healthcare needs of those populations. For example, if a
state's Medicaid enrollees currently receive care from providers who are not already
part of a managed care network, health plans may recruot those traditional Mediciad
providers as a part of their marketing strategy. Similarly, becasue 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 existing number
to accomodate members' needs.

The health plan must verify the credentials of all network applicants before admitting
them to the panel. Only under special circumstances can a health plan accept a
provider that does not meet its credentialing standards. This issue will be more fully
discussed in Collecting and Verifying Data for Credentialing Purposes.

Alternative Healthcare
To adapt to consumers' increased use of non-traditional therapies, health plans have
begun to include alternative healthcare approaches, such as chiropractic,
naturopathy, homeopathy, and acupuncture, in their benefit plans. In some cases,
statutory requirements on the state level have mandated that health plans include
providers of alternative therapies as part of their networks. In other instances,
health plans have recognized the growing popularity of these services and have
chosen to provide coverage of alternative healthcare-usually as a rider-as a way of
differentiating themselves from competitors in the marketplace.

While health plans have the experience and literature to establish credentialing
standards, medical necessity criteria, and performance parameters for conventional
healthcare, they often lack the expertise to do the same for alternative healthcare.
In order to arrange access to alternative healthcare services, health plans frequently
seek advice from professional associations and alternative medicine practitioners.

Environmental Changes in Store for Health Plan

The ongoing debate in the federal and state legislatures virtually ensures further
changes in the external environment for health plans. Health plans must be prepared
to meet increasing levels of review and regulation and to manage their networks
accordingly.

AHM Network Management: Analysis of Market and Health Plan Needs

Pages 1-29

Network Management in Health Plans

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
maturity affect network strategies
• Explain how a health plan can use a competitive analysis to determine the
size of the network
• Describe some differences between network needs for large employers versus
needs for small employers
• Describe some of the challenges that health plans face when developing
networks in rural areas
• List several different areas for which a health plan should establish goals
before beginning to develop or revise a provider network

Introduction
To ensure that its members receive appropriate, high-quality care in a cost-effective
manner, each health plan tailors its networks according to the characteristics of the
consumers, purchasers, providers, and competitors in a particular market. Other
considerations for planning the network are the health plan's own goals for quality,
accessibility, cost savings, health plan-provider relationships, 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 periodically
reevaluate its target markets and objectives, then modify its network strategies
accordingly to remain competitive in the rapidly changing healthcare industry.

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

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

Market Maturity
Even though the use of health plans is growing in virtually every area of the United
States, health plan 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, while Alaska 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 To determine
appropriate strategies for a particular market, a health plan should assess the
current level of market share for health plans and how the market share is changing.
The level of health plan penetration in the market is often an indicator of how
knowledgeable providers and consumers are about health plans, how receptive
providers and consumers will be to health plan programs, and the level of
competition among health plans in the area. Health plan market maturity may also
provide some indication of which products are most appropriate for a particular
region. For instance, consumers and purchasers in a market with relatively little
health plan market share are likely to be more receptive to loosely managed plans,
such as PPOs, than to HMOs.

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

Mature markets will have providers who understand how health plans function, and
the providers will be organized to interact with health plans. For example, the first
three factors in Figure 2A-2 relate to the formation of provider organizations, which
are alliances among physicians or between 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 group practice without walls
(GPWW), a consolidated medical group, and a physician-hospital organization (PHO).
(These provider organizations are described in Healthcare Management: An
Introduction.) The presence of provider organizations may have a profound influence
on contracting strategies and the size and composition of the provider network.
Members of these provider organizations may be unwilling or unable to contract on
an independent basis. Individual providers may also have formal or informal
commitments to refer only to other providers in the same organization. In many
cases, health plans construct their provider networks around existing IPAs, PHOs, or
multi-specialty groups.

Factors that are likely to indicate increased health plan market maturity include:
increased consolidation among health plans.

increased rate of growth in health plan premium levels.

a reduction in the market penetration of HMO and point-of-service (POS)
products.
a reduction in the frequency of performance-based reimbursement of
providers.

Market Maturity
From the health plan's perspective, contracting with provider organizations has both
positive and negative aspects. On the positive side, integrated organizations of
hospitals, physicians, and other providers are more likely to have established
systems of communication that allow for better coordination of care and quality
improvement across providers. Wellness, disease management, and case
management programs are potentially more effective when implemented by a team
of providers who are used to working together and who understand the role of each
provider in the healthcare delivery system. In addition, provider organizations are
often willing and able to manage 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 can individual providers.

On the negative side, the presence of provider organizations can reduce the number
of choices that health plans have in a market. For instance, the Minneapolis provider
community has now consolidated into three major provider organizations. Health
plans operating in Minneapolis must choose from the three organizations for provider
contracting. Employer purchasing coalitions in Minneapolis have attempted to
"unbundle" these organizations in order to reestablish the range of choice they
prefer. In addition to limiting health plan choices, the integration of providers into
networks also limits the ability of health plans to match resources with the needs of
patients. The plan 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 may carry 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 a health plan's ability to obtain favorable or even competitive
reimbursement arrangements. This is particularly true in smaller markets with
limited competition among provider organizations. In some cases, provider
organizations have higher average service costs than might be expected due to the
expense of developing and maintaining the organization. Finally, integrated provider
organizations that span urban and rural areas may reduce competition among
referral centers for the patients coming from rural communities, as we will discuss in
the section on urban and rural markets.

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, hospital beds, pharmacies, and other ancillary services. When
evaluating a provider's location for accessibility, a health plan considers the distance
between the provider's location and members, as well as geographical barriers, such
as mountains and road patterns, that may affect access. For each type of provider,
the health plan also examines typical patterns of utilization and average costs for
selected services. In most cases, physician data is reported by specialty, or at least
divided into PCP and specialist categories. Because inpatient care is typically more
costly than the same services delivered on an outpatient basis, a health plan gives
special attention to the ratio of inpatient to outpatient utilization.

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

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

In addition to determining the number, types, locations, and utilization patterns of

providers, the health plan needs to understand the existing referral patterns or other
relationships in the provider community. Even in markets without provider
organizations, most PCPs have established relationships with particular specialists
and ancillary care providers. The PCPs may be reluctant to refer members to
unfamiliar providers, even if those providers happen to be in the same health plan
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 the different hospitals in the area. Health plans often lack the time or
resources necessary to thoroughly investigate referral patterns, so the extent of
research into referral patterns varies among health plans.

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

• What are the provider panel sizes, premium levels, and cost-containment
strategies of the health 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 health plans with provider panel size, premium prices, and other
competitive factors, the health plan can understand 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 many PCPs, specialists, facilities, and ancillary providers to include in the
network in order to meet members' 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
development in several important ways. The health plan must consider the level of
growth or decline in the economy, 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,
workers attracted by employment opportunities. The addition of many young people
lowers the average age 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 labor market, companies
tend to increase employee benefit levels as employers compete with each other for
workers. Broader ranges of benefits often mean that health plans will need to
increase the number and types of providers in the network. A growing economy
often signals growth in the medical community as well, with expanded hospital
facilities, higher-level diagnostic and procedure 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 be older 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. Other employer strategies designed
to address rising costs include increasing employee contributions for health plan
coverage, especially for traditional indemnity programs.

Depending on the current supply of providers, a declining economy can either

stimulate or stifle competition for health plan contracts among providers. In a
market with a large supply of physicians, for example, physicians may be more
willing to negotiate with health plan programs to avoid losing patients in a declining
economy. On the other hand, a declining economy often discourages new physicians
from entering that market. The current supply of physicians may resist price
negotiations in the knowledge that health plans have no alternative providers to
include in the network.

Size of Employers
The composition of the local economy also influences the provider contracting
process. For example, the sizes of the businesses in the market affect the types of
health programs that will be purchased. In general, larger companies (those with
more than 1,000 employees) have adopted health 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 been slower to contract
with health plans. The decision makers in small companies typically have less
knowledge of health plan products. Small companies often lack the administrative or
financial capability to offer multiple health options.

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

Size of Employers
A market dominated by larger employers has a different contracting complexion.
Although fewer firms of all sizes are offering employees a choice of health plans,
choices among healthcare benefit plans are still more common in larger firms. In
markets where employees have health plan choices, products with relatively small
panels may have better growth opportunities. While the general trend in consumer
preferences is toward larger provider panels, some consumers are comfortable
staying within a limited provider network and will choose a narrow panel plan if it is
less expensive. Employee choice among different health plans allows health plans to
reach this niche 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 by large employers need to ensure the quality of their networks by
including quality and member satisfaction 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 negotiate employee benefit packages with unions. Frequently, union negotiations
for healthcare benefits emphasize preserving the worker's choice among providers.
High-wage professionals such as lawyers, accountants, and physicians generally
prefer high levels of benefits and unrestricted access to any provider. Service
industries such as restaurants, hotels, and laundries typically favor low-cost,
minimal-benefit healthcare plans, if health benefits are offered at all. Health plans
selling to the service industry often develop narrow panels and manage access
closely in order to control costs.

The type of industry in a market also affects the composition of a network.

Manufacturing and heavy industry jobs have more back injuries, while carpal tunnel
injuries are more common in computer-oriented businesses. The differences in the
types of injury seen most often influence the mix 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,
and suburban 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 of consumers and providers also vary according to the
type of community involved. Health plans must 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-
population rural areas where the number and types of providers are limited. In
general, when provider supplies are limited, providers are not likely to offer
discounts to health plans in exchange for directed patient volume. Further, when
there is a small supply of providers, the consumer demand for broader provider
panels usually outweighs the value of any additional discounts that the health plan
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
provide complete healthcare services for its members. If the number of PCPs is low
in relation to the area population, 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 a health plan may need to arrange for
after-hours services from local urgent care centers or hospital emergency
departments.

Towns with a population of 30,000 or less are likely to have only one hospital or no
hospital at all. In smaller towns, the population typically has a large proportion of
Medicare beneficiaries due to the migration of younger people to urban areas. As a
result, small-town hospitals are usually heavily dependent on Medicare revenue and
may receive county or city tax support. Such hospitals 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 less tend to be older than the average physician population. As a result,
many family and general practitioners in rural areas are not board-certified, so a
health plan may need to modify its credentialing criteria.

A small supply of PCPs can make it difficult for a health plan to fulfill its obligation to
provide complete healthcare services for its members. If the number of PCPs is low
in relation to the area population, 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 a health plan may need to arrange for
after-hours services from local urgent care centers or hospital emergency
departments.
Towns with a population of 30,000 or less are likely to have only one hospital or no
hospital at all. In smaller towns, the population typically has a large proportion of
Medicare beneficiaries due to the migration of younger people to urban areas. As a
result, small-town hospitals are usually heavily dependent on Medicare revenue and
may receive county or city tax support. Such hospitals 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 less tend to be older than the average physician population. As a result,
many family and general practitioners in rural areas are not board-certified, so a
health plan may need to modify its credentialing criteria.

Physicians in rural towns generally function as solo practitioners or in small groups.

Specialty services are frequently provided by a single small group of doctors in a
particular specialty or by physicians from larger cities who periodically travel to the
smaller towns. Few effectively organized PHOs or IPAs exist in rural areas, and rural
physicians often lack familiarity with capitation or other risk-sharing arrangements.
As a result, rural practitioners often have difficulty managing financial risk. In
addition, the health plan may not immediately be able to direct enough 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 for risk-sharing. Physicians in rural areas, particularly PCPs, generally
charge lower fees than physicians in urban areas, so rural physicians tend to resist
price discounts. Both hospitals and physicians in rural areas have fewer resources
and less organizational structure for the development of quality improvement
activities. Therefore, health plans should be more involved in developing and
implementing quality improvement initiatives for their rural provider networks.

Creating a competitive advantage through provider contracting in a rural

environment is challenging. Since a rural area may have only a single provider for
certain services (one pediatrician, for example), all the health plans competing in this
market share the same resources for 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
negotiating leverage.

Consumers in rural areas often travel to another community for healthcare. Many
rural residents obtain 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 for care perceived to be better than local
services. Even though a health plan may be able to negotiate better prices for
primary care in a larger town, asking consumers to travel 20 miles for services
similar to those available in the consumers' own communities is generally not an
effective strategy. Federal access requirements for federally qualified HMOs and
Medicare health plans limit this practice as well. In addition, rural employers
generally feel a community obligation to offer health benefits programs that include
the local hospital and physicians.

Since a significant proportion of healthcare dollars is spent for specialty care received
outside the rural community, the greatest opportunity to create competition in rural
areas is among the specialty care providers in other nearby communities. Frequently,
rural doctors have their choice among several larger medical centers when they
make patient referrals. If rural doctors have enough information to choose efficiently,
competition among the larger medical centers can be encouraged. Health plans can
facilitate this competition by providing information about referral hospitals to the
rural PCPs and by negotiating discounts with the nearby specialists and larger
medical centers. Health plans should monitor the market for development of urban-
rural integrated provider organizations that funnel the majority of rural patient
referrals to a single urban center. The development of urban-rural provider networks
may minimize opportunities for the health plan to reduce costs and improve quality
through selective contracting. Another option that health plans may consider when
designing networks for rural areas is telemedicine. Insight 2A-1 provides describes
telemedicine and how it may be used to enhance rural provider networks.
Small Cities
Small cities (for the purposes of this course, cities with populations under 500,000)
share some of the characteristics of rural areas. Employers in a city with two
hospitals may be reluctant to purchase a health plan that includes just one of the
hospitals because consumer loyalty may be split between the two facilities. Another
frequently cited concern is that channeling patient volume 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, selective
contracting is still more difficult in small cities than in urban areas. Consumers are
more likely to be aware of the 3 cardiology groups in a city of 250,000 than they
would be aware of all 20 cardiology groups in a larger city. A health plan may
successfully market a network made up of one-half of the specialists in a large city,
while it will encounter market resistance to the same ratio in a small city. However,
the health plan's ability to negotiate prices and transfer financial risk to physicians,
hospitals, and other providers increases significantly in cities with populations above
150,000.

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

As health plans grow and consolidate, they must serve the needs of larger segments
of the population. Having a larger membership inevitably puts pressure on health
plans to broaden primary care networks. The pressure for larger panels, in turn,
places greater emphasis on health plan methods for working with providers to
achieve the desired cost, quality, and satisfaction goals. Geographic access to
providers also reemerges as a significant factor in urban areas. While nearly every
provider is within 30 miles or 30 minutes of most consumers in a city of less than
300,000, this is certainly not true in larger urban areas.

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

Hospital contracting is also easier in large urban areas. Overcapacity of inpatient

hospital resources exists in nearly every size market. However, cultural and political
factors affect the ability of health plans to use this overcapacity to their advantage
when contracting with hospitals in rural and small city markets. In urban centers, the
combination of overcapacity and the large number of healthcare facilities allows
health plans to readily negotiate discounted prices and, in some cases, risk-sharing
arrangements with hospitals. In a market with 50 hospitals, a health plan can
promote as a broad panel a network that includes two-thirds of the hospitals. In a
market with three hospitals, a two-hospital network may be inadequate for many
purchasers. When planning to negotiate with hospitals, health plans must keep in
mind that some states have regulations that mandate hospital reimbursement rates.

The health plan's freedom to negotiate rates does not remove market pressure to
include a highly prominent hospital, health system, or provider organization in the
network. Many employers and consumers 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 growing consolidation of provider
organizations can limit a health plan's ability to develop broad-based hospital
networks. In a community in which the healthcare provider market has consolidated
into two or three large provider organizations, a health plan that wants to have the
majority of area hospitals on its provider panel needs to contract with every provider
organization. The health plan may have to make price concessions to secure
contracts with all three groups since the health plan cannot 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 of the urban area. In a mid-sized urban area such as Kansas City, healthcare
providers in the surrounding suburbs and providers in the city itself are viewed as
one system by consumers and employers. Frequently, suburban providers can
deliver primary and secondary care, but tertiary providers in the core city are
necessary to round out the network. In contrast, larger urban markets like Chicago
have suburban areas with medical complexes that rival those in the inner city for
scope and complexity of services.

It is possible to have a suburban medical network that is sufficient to serve the

needs of suburban residents without including the inner-city providers on the panel.
Large employers may see the urban area as a unified whole if they have work
locations and employees living across the metropolitan area, but they may be willing
to offer a health plan with a suburban-based network as one of several employee
choices. Smaller employers often view the healthcare market in more localized terms
and may choose a suburban plan as the only healthcare benefit option. When a
health plan creates a suburban-based network, the dynamics of contracting are
similar to those in small cities.

Consumer Demographics
The primary demographic factors that a health plan considers when developing
network strategies are 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
determining the number of providers on the panel. The size of the network must be
sufficient to meet members' healthcare needs, while providers' geographic locations
must be reasonably convenient to 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, or high out-of-pocket maximums. In other words, they need a
health plan that provides fairly rich benefits for nondiscretionary services at a low
premium cost. While all consumers share some of the same concerns about
healthcare, low-income consumers are more sensitive to the financial consequences
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
with providers to meet the goals listed above. Effective working relationships
between the health plan and its providers are critical in order to serve low-income
populations well. The size of the plan's network will be influenced by the plan's ability
to provide performance feedback to providers and to maintain local contact with
providers. Not surprisingly, low-income consumers want a broad choice 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 for
health plans delivering Medicaid managed care products. In the Medicaid segment,
however, the pressure to control consumer out-of-pocket costs is replaced by
pressure from strained state government budgets.

The specific healthcare needs of consumers also vary with income. Several studies
have demonstrated 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, and partially due to the stress of low-income
life. In any case, low-income populations are more likely to 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 delivery system.
Income Levels
Finally, low-income populations also tend to have lower education levels. Rules and
procedures on 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 to care rather than achieve the intended goals
with this population.

As income levels rise, financial concerns are not eliminated, but other issues assume
a more prominent 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 prestigious institutions and specialists in provider panels becomes
more important as income increases. The mix of services offered may change as
well. Higher-income consumers may be willing to pay for sports medicine services
and wellness activities that do not have an apparent short-term financial benefit.
Higher-income consumers, like low-income consumers, dislike restrictions on
provider choices and bureaucratic procedures. However, high-income consumers
have the economic power to voice these preferences through purchase decisions.
Broad provider networks that include highly 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 significant higher-income
population.

Age and Gender Mix

The age and gender mix of the population affects the development of provider
networks in several 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, home healthcare,
skilled nursing care, and vision care.

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

Because their healthcare needs are increasing, middle-aged consumers are usually
very conscious of 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 health plans have been recently introduced
to a market, older workers may be less inclined to switch to unfamiliar POS and HMO
products. In mature health plan markets, older workers may have had a decade of
experience with health plans and may be as receptive as younger workers. Even with
health plan experience, older workers are typically more sensitive than younger
workers to the choice of providers included in the panel, since the older workers are
more likely to have an ongoing relationship with one or more providers. Comfort and
familiarity with health plans vary by age in the Medicare population. The "younger
elderly" (under 70 years of age) are more likely to have had contact with health
plans in their work lives, while the "older elderly" are less likely to 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 for males. Therefore, a population with a high proportion of females
requires more providers than a membership that is predominately male or a
membership with an equal distribution of males and females. 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 by consumers. Some ethnic influences are obvious. A provider
network with Spanish-speaking providers 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 language challenges for health plans
throughout the United States. Aside from language barriers that hinder
understanding 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 recent immigrant. The comfort issue sometimes applies in reverse
as well. Many multigeneration Americans are uncomfortable receiving care from
foreign medical graduates because of language barriers (including accents), a lack of
cultural affinity, or prejudice. Health plans must be cognizant of ethnic, racial, and
religious issues in network development, and must work with providers to
accommodate and increase the comfort levels of patients.

Sometimes ethnic, racial, and religious differences extend beyond language or simple
comfort levels. Different cultures and religions often encompass alternative views of
disease and healing processes. For example, some religious sects resist the use of
certain treatments, such as blood transfusions. Some ethnic groups believe in
traditional treatments that are not recognized by medical science. In order to serve
these populations, providers need to be sensitive to and accommodate, 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 should
acknowledge that providers will not be obligated to perform procedures that violate
their religious beliefs. For example, Catholic physicians and hospitals do not perform
abortions or sterilizations.

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

Setting Goals for the Provider Network

After analyzing the market and identifying opportunities for developing a provider
network, the health plan chooses the goals for its network. These goals can be highly
specific if the health plan is focused on a specific healthcare market, or they can be
more general if the development effort is expected to cover a variety of markets and
market conditions. Network goals are usually established 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 to have
2. Types of service capabilities, facilities, and equipment the health plan
wants in the network
3. Standards of care and protocols the health plan expects network
providers to follow
4. Measurable outcomes the health plan expects the network to produce
5. 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 providers who 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 of providers, and low health plan penetration
(characteristics of some rural markets), cost-savings goals should be
lower than for a market with above-average costs, an oversupply of
providers, and some level of health plan competition.
2. The strength of the current health plan competitors in the market and
the level of cost savings that these health plans are achieving. Most
state insurance departments require periodic filings of financial
information that can give a health plan some indicators for the
competitive environment and economics. Trade publications also
contain some utilization and price benchmarks for the health plan
industry. Anecdotal information from local employers and providers
can also be a valuable source of information about utilization levels
and costs under competitors' plans.
3. The cost-effectiveness of the health plan's own existing networks.
Using the results achieved by its current networks, the health plan can
set goals for any networks 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
management control over its network providers or allows them more
autonomy. Goals for relationships with providers also influence the nature of
incentive programs included in provider contracts.
• Patient satisfaction with network providers.
Patient satisfaction is usually measured with surveys that ask plan members
how they feel about their interactions with their providers.

AHM Network Management: Delegation of Network Management Activities

Pages 1-28

Network Management in Health Plans

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) for demonstrating appropriate oversight of
credentialing delegation

Introduction
In Analysis of Market and Health Plan Needs and Considerations for the Structure,
Composition and Size of the Network, we described how health plans analyze
potential markets, set goals for their 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 to providers or other
organizations.

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

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

Delegation is not restricted to network management activities. Functions such as

utilization management (UM), member services, medical records review, quality
management (QM), and claims administration are examples of other activities that
the health plan may delegate. The list of potential delegates includes hospitals and
other facilities, provider organizations, credentials verification organizations (CVOs),
case management companies, claims administrators, management service
organizations (MSOs), and utilization review organizations (UROs). With so many
delegation options available, health plans face an ongoing challenge to select
qualified delegates 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 which activities, if any, a health plan decides to delegate.
Accrediting agencies hold the health plan accountable for the delegated activities,
regardless of the agreement for delegation. Therefore, a high level of review and
monitoring is required for delegation.

Authority and Accountability

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

Whether the applicable accrediting agency is the Commission/URAC, NCQA, or

JCAHO, the issue 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 to another party. When a health plan delegates
authority for a function, it transfers the power to conduct 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 specified parameters, the
health plan retains the responsibility for making sure that the delegate performs the
function in accordance with the health plan's standards and those of JCAHO, NCQA,
or the Commission/URAC. If the delegate's performance fails to meet these
standards, the health plan is responsible for developing a plan of corrective action to
remedy the deficiencies. The health plan is also accountable for ensuring
coordination and continuity between the delegated functions and the functions that
are conducted by the health plan.

Both the Commission/URAC and NCQA have standards for the written agreement
between the health plan and the delegated entity. All three accrediting agencies
require documentation proving that the health plan is conducting appropriate
oversight of the delegated function. Such oversight typically includes regular reports
from the delegate to the health plan, and formal site visits and audits 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 the
delegator health plan adheres to NCQA standards, the requirements for oversight of
delegated functions are significantly less stringent. Although NCQA still requires an
appropriate written agreement between the health plan and the delegate, the health
plan is not obliged to make a formal, 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 a Commission/URAC-certified CVO or
utilization management organization, the Commission/URAC does not require the
health plan to perform annual oversight reviews of elements already certified for that
delegate.

The primary resource for NCQA guidelines on delegation is the most current version
of Surveyor Guidelines for Accreditation of Managed Care Organizations. The
Commission/URAC's standards on delegated functions and information about
complying with these standards are explained in the Commission/URAC's
Interpretive Guides of Standards for health UM, health networks, and network
practitioner credentialing. JCAHO addresses delegation in its manual of standards for
healthcare networks. We address these agencies' standards for delegated network
management functions later in this lesson. Standards for the delegation of QM and
UM activities will 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
National Association of Insurance Commissioners (NAIC) HMO Model Act stipulates
that an HMO's written 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. For example, in
Alabama credentialing activities may be delegated only to entities that have been
approved by the state for this purpose. Because state laws on delegation vary, a
health plan monitors the requirements of each state in which the health plan
operates and adjusts its delegation programs accordingly.

Oversight of delegation is also important to the health plan from a liability point of
view. Because the 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 and the health plan may both be
liable if the credentialing process for the provider was not conducted according to
legal and regulatory standards.2

The delegation of functions may also be subject to regulation from other

organizations. Health plans that serve a Medicare population are subject to
delegation guidelines established by the Centers for Medicare and Medicaid Services
(CMS). The CMS requirements for delegation oversight are similar to those of NCQA
and the Commission/URAC. In essence, delegated functions are held to the same
CMS standards as the functions actually performed by the health plan, and the
health plan will be held accountable for any deficiencies in the performance of the
delegate. The details of CMS's specifications for delegation are included in the
regulations for Medicare health plans.

Types of Delegated Activities

A health plan can delegate almost any function that it chooses, assuming that it can
find an appropriate vendor to perform the function. The Commission/URAC and
JCAHO place no restrictions on the types of functions that can be delegated, and
NCQA allows health plans to delegate authority for almost all functions. One
important NCQA limitation on delegation is that the health plan itself must conduct
all delegation oversight functions rather than delegating the responsibility for
oversight to another entity.3 Figure 2C-1 lists all the standards for which NCQA does
not allow the delegation of functions.
Credentialing and UM activities are the most frequently delegated functions. Member
services and medical records review functions are also commonly delegated.
Depending on the particular health plan and the situation, the delegation agreement
may or may not include all activities for a particular function. For example, one
health plan may delegate all of the activities necessary to gather and verify
credentialing information to a CVO, while another health plan contracts with the CVO
only for primary source verification and conducts the rest of the credentialing
activities within the plan. Other individual activities that are sometimes delegated
include credentialing site visits, 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 medical records review activities are made between the health plan and provider
organizations such as physician groups, independent practice associations (IPAs),
hospitals, or MBHOs. When the delegate is a provider organization, the delegation
arrangement often includes two or more major functions. For instance, a health plan
might delegate to a network hospital the credentialing of hospital practitioners, as
well as the UM and medical records review functions for services provided by the
hospital. Many health plans also contract with CVOs for one or more aspects of their
credentialing function or with UROs for utilization activities. While the delegation
agreement between a health plan and a provider applies only to the healthcare
services of that particular provider, CVOs and UROs can assume responsibility for a
function across many or all providers in the network. Delegation is less common for
quality management (QM) and preventive health services, possibly due to the more
complex processes required for these activities.5 Quality management activities must
be performed across a broad population. If network providers are widely dispersed or
not affiliated with a provider organization, the health plan 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 function according to the health plan's standards, and the health plan's
philosophy about delegation. The health plan might choose to delegate because it
does not wish to dedicate internal resources to perform 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 handle the
demands of a particular function.

If another organization already has the necessary systems and personnel in place to
perform an activity, the health plan may find it more efficient in terms of time and
money to delegate to that entity. For example, when a health plan is in the process
of establishing its systems for a new benefit plan, contracting with provider
organizations for medical records review services may be much faster than building
the capability for the medical records review function within the health plan.

Some health plans find delegation to be a particularly useful option for services that
are utilized by a relatively small number of members or specialty services that
require a different knowledge base, such as behavioral healthcare or chiropractic
care. For example, many health plans that contract with an MBHO for behavioral
healthcare services also choose to delegate quality-related activities for behavioral
healthcare to the MBHO. These health plans believe that the MBHO's expertise 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.

The following statements are about the delegation of network management activities
from a health plan to another party. Three of the statements are true and one
statement is false. Select the answer choice containing the FALSE statement:
The NCQA requires a health plan to conduct all delegation oversight functions
rather than delegating the responsibility for oversight to another entity.
Credentialing and UM activities are the most frequently delegated functions,
whereas delegation is less common for quality management (QM) and
preventive health services.
One reason that a health plan may choose to delegate a function is because
the health plan's staff seeks external expertise for the delegated activity.
When the health plan delegates authority for a function, it transfers the power
to conduct the function on a day-to-day basis, as well as the ultimate
 accountability for the function.

Why Delegate?
Delegation often occurs because the network's providers request the responsibility
for certain activities. Hospitals and provider organizations that accept financial risk
for the delivery of healthcare services may even require the delegation of functions
such as credentialing or UM as a condition for contracting with the health plan.
However, the delegation of functions to providers can also occur without the transfer
of financial risk, and the transfer of financial risk does not in and of itself equal
delegation. If the provider already has satisfactory systems for an activity in place
and the health plan does not, the health plan may simply find it more practical for
the provider 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 that have been previously delegated.

The oversight of delegated functions is typically a complex, time-consuming process

for a health plan, especially if the health plan delegates several different functions or
delegates a function to more than one entity. In some cases, health plans find it
easier to perform the function within the health plan than to conduct the oversight
process. These organizations typically delegate few functions or delegate no
functions at all.6 In addition, when a health plan delegates a function, it relinquishes
some control over the delegated function. A health plan that is uncomfortable with
diminished control is unlikely to delegate.

The Delegation Oversight Program

In order to comply with accrediting, regulatory, and legal requirements, and to
decrease the health plan's legal risk associated with delegation, health plans usually
establish a formal program for oversight of delegated functions. This program
outlines the health plan's processes for evaluating proposed delegation
arrangements, reviewing the performance of delegates, and providing delegates with
corrective action plans as needed. By instituting a formal program for delegation
oversight, 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 are performed at or above the standards of the health plan and the
applicable accrediting and regulatory agencies. Another objective for the delegation
oversight program is to ensure equal and 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 health plans, the existing committee responsible for a specific function
directs the delegation oversight program. For instance, delegation oversight of
primary source verification is assigned to the credentialing committee or to the QM
committee, if there is no dedicated committee for credentialing. The UM Committee
is likely to oversee the delegation of demand management or case management.

Other health plans have a standing multidisciplinary committee that is dedicated to

supervising all delegation processes. This delegation oversight committee typically
reports to the health plan's QM committee. The composition of a multidisciplinary
delegation oversight committee varies according to the type of activities that the
health plan delegates. Delegation oversight committee membership often includes
the health plan's medical director or another medical management officer, as well as
department directors from UM, QM, network management, credentialing, compliance
and accreditation, marketing, member services, and claims. The delegation oversight
committee may also include a representative from the delegated entity, although
such representation is not standard practice. The inclusion of the delegate's
representative enhances communication 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 the criteria for selecting delegates. Selection criteria vary among plans,
but the typical minimum requirements 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

denying proposed delegations, based on evaluations of the candidates' capabilities.
This committee also reviews and approves the processes for measuring delegates'
performance.

Depending on the extent to which the health plan delegates functions, a health plan
may have one or more staff members whose sole job is to administer delegated
activities. In health plans where delegation plays only a small role, personnel from
the department that would otherwise perform the 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 staff members plus a manager who coordinates the oversight of delegated
functions. The staff members review evaluation results, write reports, and make
recommendations about potential delegates to the committee overseeing the
delegation.

The Delegation Oversight Process

Health plans that delegate functions typically use a structured oversight process to
ensure a logical, consistent approach to the selection and monitoring of delegates.
The delegation oversight process generally includes the following steps:

1. Proposal for delegation

2. Evaluation of the candidate for delegation
3. Decision by the committee responsible for delegation oversight
4. A written document describing the delegation arrangement
5. 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 forms to document the other steps in the delegation process. For example,
the health plan may standardize the application for delegation, the form to record
the assessment of candidates for delegation, and reporting forms for delegated
activities. Besides making the documentation process easier, the use of standard
forms also promotes consistency and objectivity in the evaluation and monitoring of
delegates. Some health plans use documentation forms adapted from sources such
as the NCQA Surveyor Guidelines and NCQA Data Collection Tool. Health plans may
also create and distribute to its delegates a policy and procedure manual for the
delegated function.
In some cases, the health plan initiates the delegation process by inviting potential
delegates to submit written proposals describing their services and how those
services can meet the needs of the health plan. The health plan then evaluates the
proposals and selects the candidate most qualified to perform the function.

More often, however, the candidate for delegation approaches the health plan to
express interest in contracting for delegated activities. Credentials verification
organizations, utilization review organizations, and companies that specialize in
demand management, disease management, and case management typically have
marketing programs that emphasize their capabilities. Provider groups desiring
delegation frequently introduce the subject of delegated activities during contract
negotiations with the health plan.

After both parties have indicated their interest in delegation, the health plan then
forwards a written proposal for delegation to the candidate. The written proposal
generally consists of a letter of intent, an application, and, perhaps, a draft of the
delegation agreement. Ideally, all of these preliminary documents contain precise
language describing the activities to be delegated and the time period for which the
delegation agreement will be effective. The use of broad terms such as "key activities
for utilization management" or the omission of specific dates can create confusion
about the true nature of the delegation. For example, the health plan and the
potential delegate may interpret differently which activities are included in
"credentialing," "member services," or "quality management." In addition, the
activities viewed as most important by the health plan may seem only incidental to
the delegation candidate. Terminology must be clearly explained so that both
organizations understand the exact nature of the proposed delegation arrangement.
Clarity is especially critical when delegating functions to network providers who may
be less aware of the health plan's expectations than a CVO, URO, or other
organization specifically dedicated to performing delegated functions.

Proposal for Delegation

The letter of intent outlines the delegation oversight process. It also establishes a
mutual agreement about the confidentiality of patient information and the policies
and procedures of the health plan and the potential delegate. However, a letter of
intent is not a contract and does not create 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 as the 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 the candidate's
policies, procedures, and qualifications. If the potential delegate is a provider
organization, the application may request information about the types and numbers
of providers included in the organization. When the health plan receives the
completed application and the requested supporting documentation, the health plan
can begin to evaluate the candidate.

The Enterprise Health Plan has indicated an interest in delegating its medical records
review activities to the Teal Group and has forwarded a typical letter of intent to
Teal. One true statement about this letter of intent is that it:
is a contract that creates a legally binding relationship between Enterprise and
Teal
cannot include a confidentiality clause

serves as a delegation agreement between Enterprise and Teal

outlines the delegation oversight process

Evaluation of the Candidate
The main purpose of the evaluation is to determine if the candidate can perform the
delegated function 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 own policies 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 the delegated 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 and to gain additional information about the quality of the candidate's
performance. The delegation evaluator 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's reporting structure for the delegated function. The delegation evaluator
examines these documents for indications that the potential delegate's highest level
of authority is appropriately involved in the governance of the delegated function.
For example, does the candidate's UM committee review the policies, programs, and
performance for UM at least annually? Does this committee regularly receive reports
about UM operations?8 In addition, the candidate should have a QM committee and
other committees to oversee the delegated function. If the health plan plans to
delegate UM or QM, the candidate's organizational structure should include
committees for ongoing peer review and individual case review.

The candidate's human, technological, and financial resources are other indicators of
its ability to meet the health plan's requirements. By observing the delegated
function on site, the evaluator can determine if the personnel responsible for the
function are competent and well-trained and if the support systems for the function
are adequate. In particular, can the candidate's information system 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
into the 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 processes allow it to perform the delegated function effectively and in
accordance with applicable laws and regulations. The outcomes described in these
reports and records are generally a reflection of the candidate's level of expertise
with the delegated function. In addition, the evaluator determines if the candidate
plans to subdelegate any of the delegated activities and if so, how the candidate
plans to manage the subdelegation. We will discuss subdelegation in more detail
later in this lesson.

Decision by the Delegation Oversight Committee

The manager of delegated services or other personnel in charge of candidate
evaluation presents a written summary of the evaluation results and
recommendations for action to the health plan committee overseeing the delegation.
The committee reviews this information and either approves, denies, or pends the
delegation.

If the candidate meets the health plan's standards for the delegated function, the
health plan sends its findings and a written document that describes the delegation
arrangement to the candidate for approval. If the candidate's capabilities are
inadequate to perform the specified function, the health plan sends a denial of the
delegation along with an explanation of the candidate's deficiencies. The rejected
candidate may reapply for delegated activities after a specified period of time,
usually six months. At this time, the candidate provides documentation that past
deficiencies have been remedied.

In cases where the candidate does not fully meet the health plan's standards but
does not have significant deficiencies, the health plan may send the candidate a
letter outlining recommended changes, expected completion dates for the changes,
and a date for a repeat site visit. The candidate'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 meets some, but not all, of
the health plan's requirements for a particular function. In a shared delegation
situation, the health plan contracts with the delegate for selected activities and
retains responsibility for the activities that the delegate cannot perform.

The Delegation Agreement

A delegation agreement is the contractual document that describes the delegated
functions and the responsibilities of the health plan and the delegate. The delegation
agreement may be in the form of a contract (the form generally preferred by health
plans), a letter, or some other written instrument. For a delegation arrangement with
a provider organization, the delegation agreement may be included in the contract
for the delivery of healthcare services or it may be a separate document. Some
health plans prefer to keep the delegation agreement separate to allow for
termination or modification of the delegation arrangement without affecting the
contract for healthcare services.

Like the letter of intent and the application for delegation, the delegation agreement
should be as specific as possible. An agreement that lists the individual services to
be delegated and then defines the components of these services reduces the chance
for misinterpretation. When a health plan 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 the responsibilities
retained by the health plan and the responsibilities transferred to the delegate. In
addition, listing the responsibilities of both parties in the agreement establishes a
tone of collaboration.

Although the delegate is responsible for performing the function according to

established standards, 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 the need arises. In order for the delegate to meet the
health plan's requirements, the standards for conducting the activity and the
methods of measuring performance should be clearly stated in the delegation
agreement. Other specific elements typically included in the delegation agreement
are the required format for reports from the delegate, the schedule for submitting
reports, and the dates on which the delegation begins and ends. The agreement may
also name the individuals from both organizations who serve as the primary contact
persons for the delegation arrangement.9 In some cases, the agreement includes a
provision requiring the delegate to cooperate with market conduct studies performed
by regulatory agencies and key purchasers.

Delegation agreements usually specify contingencies for potential problems

associated with the delegated function. One type of contingency clause allows the
health plan or the delegate to terminate the agreement under certain circumstances,
that is, with cause. For example, if a delegate with poor performance fails to
implement corrective action as directed by the health plan, the health plan may end
the arrangement with appropriate written notice. In other agreements, either party
may end the delegation arrangement without cause after giving adequate written
notice to the other party.

Continuing Oversight
Diligent oversight of a delegation arrangement is just as important to ensuring
quality care as the initial selection process. Unless the delegate is accredited or
certified by the same accrediting agency as the delegating health plan, the health
plan must regularly audit the delegate to ensure that the delegate is following the
health plan's guidelines for the function. Some health plans perform periodic audits
even if the delegate is accredited or certified by the health plan's accrediting agency
in order to ensure satisfactory performance of the delegated function. During an
audit, a representative from the health plan revisits the delegate at least annually to
observe operations, check documentation, and attend committee meetings related to
the delegated function. The purpose of the audit is to assess the delegate's
continued capability to perform the delegated function in a way that meets the
standards of the health plan and the applicable accrediting and regulatory bodies.

The health plan' s delegation oversight committee reviews the findings from the
repeat visits along with the delegate's formal reports on operations. After the
oversight committee compares the delegate's results and processes to the goals and
standards established in the delegation agreement, the health plan sends its
comments and any indicated corrective action plans back to the delegate. If the
health plan has a delegation oversight manager, this person often acts as a liaison
between the oversight committee and the delegate during the oversight process to
facilitate communication and help correct any performance deficiencies.

If the delegated function is QM or member services, one important report that the
delegate regularly submits to the health plan is an account of adverse events and
consumer complaints regarding 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 overall assessment of quality.10
The frequency of a delegate's reports to the health plan typically coincide with the
health plan's own reporting schedule. For example, assume that a health plan has
delegated its utilization management function. If the health plan's UM committee
meets monthly, the delegate handling UM will schedule monthly UM reviews and
prepare reports in time for the UM committee meeting. As a general rule, the
broader the scope of activities delegated, the more frequently the delegate is
required to submit reports. Similarly, the reporting requirement tends to be greater
if a larger number of members are affected by the delegated activities. The health
plan may also increase 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 keep records of site visit results and other information relating to the delegation.
Some health plans have a policy of documenting all verbal and written contact
between the health plan and the delegate.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 third entity to perform activities that were originally
delegated by the health plan. For example, a health plan may delegate utilization
management to an IPA that, in turn, transfers the authority for case management to
an organization that specializes in that activity. The case management company
becomes the subdelegate, and its performance is subject to the same standards as
the original delegate. Either the health plan or the delegate may conduct the
oversight of the subdelegate. Once again, however, the health plan is ultimately
accountable for the performance of the subdelegate.12 The delegation agreement
between the health plan and the delegate should clearly define any limitations that
the health plan places on subdelegation. For example, the agreement may forbid the
delegate to subdelegate activities without informing the health plan and obtaining
the health plan's express written approval prior to subdelegation, or it may specify
certain activities that may not be subdelegated.

The process for subdelegation follows the same steps as the original delegation: an
evaluation of the subdelegate's structures, processes, and outcomes to ensure that
they meet health plan standards; a delegation agreement that describes the
arrangement in detail; and an ongoing program of regular reports on activities,
results, and problems. Many health plans inquire about the delegate's plans for
subdelegation on the original application. Figure 2C-4 lists typical questions 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 to conduct its own initial and continuing oversight of the
subdelegation rather than leaving this responsibility solely to the delegate.
The Delegation of Network Management Activities
As previously noted, the delegation of provider credentialing and recredentialing
activities is a common practice for health plans. Some health plans also delegate all
or part of the performance management function to providers or to organizations
that focus on quality measurement and improvement. The delegation of credentialing
or performance management activities follows the basic delegation oversight
processes described above. The next sections provide further details about 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 of experienced, licensed, and well-trained providers who can deliver the
required healthcare services. Efficient credentialing helps a health plan establish a
network, offer a new product, or enter a new market as quickly as possible. Many
health plans have found that credentialing can be done faster and less expensively
by delegating some or all of the information-gathering and verification activities. A
local CVO or provider organization may know the local provider market better 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, data verification, and selection decisions, to their providers.14 Most health
plans, however, especially those using CVOs, delegate certain information-gathering
aspects of credentialing but retain the authority to accept or reject individual
providers. Applications, primary source verification, and site visits are some of the
components that a health plan may delegate while reserving the right to make the
final selection. The delegation of primary source verification and site visits may
reduce or even eliminate duplication of effort in regions where most providers
contract with multiple health plans. In fact, medical associations in some geographic
areas encourage health plans to use a central source for primary source verification.
In addition to reducing the administrative burden on providers, the centralization of
primary source verification may reduce the time required for a health 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 still responsible 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 process includes appropriate information
about the quality of practitioner performance.

Although JCAHO does not specifically address the delegation of credentialing, both
NCQA and the Commission/URAC have guidelines for credentialing delegation. In
many respects, the credentialing delegation standards of the Commission/URAC and
NCQA are similar. Both sets of standards require the delegator to demonstrate
appropriate oversight of the delegated activity through a thorough evaluation of the
candidate for delegation, a written delegation agreement that specifically describes
the responsibilities of the delegator and the delegate, and an ongoing program for
performance monitoring and correction of any deficiencies.

In addition, both agencies specify that the health plan retains the right to make the
final decision to accept or reject a proposed provider. When establishing a program
to oversee delegated credentialing activities, health plans generally follow NCQA or
the Commission/URAC guidelines.

Because the health plan may be liable for any adverse events that result from
credentialing errors committed by the delegate, many health plans include one or
more provisions in the delegation agreement to protect the health plan against
losses related to credentialing mistakes. Under one type of provision, the delegate
must reimburse the health plan for any losses that the health plan incurs as a result
of negligence in the credentialing process. Another type of liability protection
provision 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 additional insured party.16 We will discuss specific standards for
delegated credentialing in Collecting and Verifying Data for Credentialing Purposes.

Delegation of Provider Performance Management

While health plans sometimes delegate provider performance management to
provider organizations, health plans rarely delegate this function to other parties.
None of the accrediting agencies specifically address the delegation of provider
performance management activities in their standards. Health plans that are
accredited by JCAHO can apply that agency's general standards for delegation to
provider performance management. The JCAHO standards require health 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 make key decisions, and (5) ensure that the delegate complies
with applicable JCAHO standards for the function.17
The delegation of provider performance management falls under the
Commission/URAC's standards that deal with the delegation of medical management.
These standards require the health plan to assume accountability for delegated
activities through proper oversight of the delegate'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 the Commission/URAC's
standards for confidentiality of member health information.18

Health plans that seek NCQA accreditation typically follow that agency's standards
for the delegation of quality improvement (QI) activities when delegating provider
performance management. The main requirements for appropriate oversight of QI
delegation are similar to those 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 of the delegate's
performance.

AHM Network Management: Identifying and Recruiting Providers for a Health Plan Network
Pages 1-10

Network Management in Health Plans

Identifying Recruiting Providers for a Health Plan
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 the structure, size, and composition of its provider network and to the
ways it can delegate network management activities. Once a health plan has
established a strategy, it must assemble the providers who will make up the
network. We begin this lesson with a discussion of how a health plan defines the
types and number of providers it needs in its network. We then present some of the
methods a health plan can use to identify and recruit the most appropriate providers
for its network.

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 health plan will offer. In most cases, the network includes primary care
providers, specialists, healthcare facilities 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 preventive functions 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 vary on the types of services
that NPs and PAs can provide independently, that is, without consulting a physician
about a particular case. For instance, the state of New York gives NPs unrestricted
privileges to diagnose and treat patients, write prescriptions, and admit patients to a
hospital.1 By using NPs and PAs as a supplementary source of primary care, health
plans may be able to provide many healthcare services more cost-effectively.

The coordination of care for inpatients has been a concern of both hospitals and
health plans for some time, especially for complex cases involving several different
medical specialties. In many cases, 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 who have complex or multiple
problems. As a result, inpatient care is not always optimal, and inpatient stays may
be longer and more costly than necessary.

Network Management in Health Plans

Identifying Recruiting Providers for a Health Plan
Network
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 preventive functions 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 vary on the types of services
that NPs and PAs can provide independently, that is, without consulting a physician
about a particular case. For instance, the state of New York gives NPs unrestricted
privileges to diagnose and treat patients, write prescriptions, and admit patients to a
hospital.1 By using NPs and PAs as a supplementary source of primary care, health
plans may be able to provide many healthcare services more cost-effectively.

The coordination of care for inpatients has been a concern of both hospitals and
health plans for some time, especially for complex cases involving several different
medical specialties. In many cases, 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 who have complex or multiple
problems. As a result, inpatient care is not always optimal, and inpatient stays may
be longer and more costly than necessary.

Dr. Robert Logan, an internist, spends the majority of his time in a hospital setting
where he serves as the physician-of-record for health plan patients who have been
'handed off' to him by PCPs. Dr. Logan's primary function is to coordinate diagnostic
and treatment activities for these patients in order to ensure that they receive
appropriate care while in the hospital. After discharge, a patient returns to the care
of the original PCP. In this role, Dr. Logan functions as:
a disease manager

an ancillary services provider

 a tiered network manager

a hospitalist

Primary Care Providers

In their efforts to improve the quality and cost-effectiveness of care for inpatients,
some health plans have begun to include hospitalists in their provider networks.
Hospitalists, also known as inpatient specialists, are physicians who spend at least
one quarter of their time in a hospital setting where they serve as the physicians-of-
record for patients that have been "handed off" to them by PCPs.4 The hospitalist's
main function is to coordinate diagnostic and treatment activities to ensure that the
patient receives appropriate care while in the hospital. The patient returns to the
original PCP after discharge. A hospitalist system can improve the quality and
efficiency of inpatient 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 typically have a great deal of experience in the inpatient setting and are
familiar with the most common diseases and injuries that lead to hospitalization.
Some hospitalists practice exclusively in hospital settings on behalf of health plans,
the hospital, or provider organizations, and do not maintain outpatient practices.

The positive aspects of the hospitalist role seem clear. Health plans should carefully
examine this concept, however, before endorsing it. By focusing on inpatient care
alone, the hospitalist role goes against the concept of disease management. Disease
management calls for coordinated intervention at the earliest appropriate stage of
the patient's disease or diseases. The hospitalist provides coordinated intervention,
but only after hospitalization. Health plans may achieve better results by arranging
the transfer of care for complex, multi-diagnosis cases from PCPs to specialists or to
internal medicine physicians with relevant subspecialties. For example, a diabetic
patient experiencing complications could be transferred to an endocrinologist or
internist with a subspecialty in endocrinology for both primary and secondary care.
Such a specialist can then coordinate care both inside and outside the hospital. There
may still be a benefit to having hospitalists on staff at hospitals to coordinate care
when the attending specialist or internist cannot be available, but, in general,
complex cases require a team leader both inside and outside the hospital.

Specialists
A specialist is a healthcare professional who voluntarily limits practice to a certain
branch of medicine related to specific services or procedures, certain age categories
of patients, specific body systems, and certain types of diseases. A specialist is
usually a physician, but the term also applies to other healthcare providers who have
had special education and training in a specific field.5

Ideally, the health plan will have every specialist category represented in its provider
panel with appropriate geographic distribution. Even if the health plan cannot obtain
its preferred financial arrangements with a particular specialty, a contract that at
least assures the provider's participation in utilization management and includes a
no-balance-billing provision is superior to no contract at all. Health plans in rural
markets may be unable to contract with certain types of specialists because the
specialty is absent from the service area. In geographic areas where the health plan
encounters a shortage of PCPs, the health plan may consider contracting with some
specialists for primary care services provided to patients with chronic conditions. For
example, a cardiologist may be willing to assume primary care responsibilities for
patients whose main complaint is congestive heart failure.

Healthcare Facilities
With the exception of small cities and rural markets, most markets have an
oversupply of facilities of all types (hospital, subacute, skilled nursing, ambulatory
surgery and other ambulatory diagnostic and treatment centers). Due to this general
overcapacity, health plans can usually assemble a large facility network that matches
the physician network in terms of geographic distribution and physician admitting
privileges. Large facility panels are possible because hospitals and other facilities in
an overcapacity market will grant favorable price arrangements in order to avoid
losing patients. When one hospital grants a larger price concession in exchange for
additional patient volume directed to it, competitor hospitals are likely to cut prices
further to preserve their own patient volume. For this reason, narrow institutional
panels are not generally necessary. In addition, since hospitals are more visible in a
community than individual physician groups, it is more likely for the market to
demand the inclusion of a particular prestige hospital.

Ancillary Service Providers

In addition to contracting with PCPs, specialists, and healthcare facilities, health
plans also include ancillary service providers in the network. Ancillary services is
an umbrella term for a variety 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 and therapeutic 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 and include 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 a pharmacist at some point in time.

Pharmacies

The number of pharmacies needed in a health plan network depends on how the
health plan intends to use pharmacists. For the routine filling of prescriptions, the
health plan should contract with all pharmacies that are willing to contract for
competitive rates for ingredient cost and dispensing 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 billion per year, due to
poor patient compliance, drug reactions and interactions, and inappropriate
prescribing.6 Health plans can decrease the incidence of inappropriate drug use by
encouraging a partnership between physicians and pharmacists for planning and
implementing drug therapies. If the health plan wishes to expand the role of
pharmacists in this way, the health plan may have to depend on a smaller network of
pharmacies because of the limited number of pharmacists who are 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 to deliver the medical services covered under the health plan's benefit
package to plan members while 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 an evaluation of member and
purchaser needs and provider characteristics. The following sections discuss
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 of the plan's service area. A plan covering a localized population or operating
in a small, rural area may need to contract with only one hospital. On the other
hand, a plan whose members are geographically dispersed across a large
metropolitan area will need to contract with multiple hospitals.

When evaluating which hospitals to recruit for its network, a health plan considers
the following attributes of potential candidates:

• Accessibility to plan members

• Costs
• Types and quality of services offered
• Reputation
• Level of participation in health plans
• Accreditation status

A health plan must consider a hospital's location relative to the defined service area and
to competing hospitals. In some cases, the plan must also consider such factors as the
availability of public transportation between members' homes or workplaces and area
hospitals.

The hospital's costs and use of resources should be compatible with the health plan's
standards and competitive with other hospitals in the service area

The hospital's facilities and services must be both adequate and appropriate for the plan's
membership. A plan that covers large numbers of young families will benefit from having
network hospitals that offer obstetrical and pediatric services. A network hospital that
serves Medicare beneficiaries should offer adequate geriatric services.

Because consumers and purchasers often equate reputation with quality, it is important
for health plans to recruit hospitals that are well known and well respected within the
service area.

A hospital that is part of an integrated delivery system (IDS) is likely to be a valuable

resource for a new plan because of its ability to deliver comprehensive services and
accept financial risk. Hospitals that have contractual agreements with health plans
through ownership or joint venture arrangements or that actively support health plan
initiatives are also prime candidates for network participation.

A health plan can obtain a formal assessment of a hospital's qualifications by reviewing

its accreditation status and information about performance and services. For example, the
ORYX report card system developed by JCAHO provides integrated data about hospital
outcomes and performance. The American Hospital Association (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)
primary care providers (PCPs), (2) specialists, and (3) ancillary services providers.
The number of practitioners the health plan will need in its network from each of
these groups depends on whether the plan is a closed panel health plan, such as a
group or staff model HMO, or an open panel health plan, and on specific staffing
requirements. Most plans also adjust the number of providers according to the needs
of the particular market, the scope of services offered by PCPs and specialists, and
the health plan's network management philosophy.

Both open panel and closed panel plans have the same goal: finding the most
suitable practitioners for their networks. Obviously, health plans seek providers with
appropriate clinical competence. Health plans also want to identify and recruit
providers with proven ability to deliver high-quality, cost-effective care. In addition,
some health plans prefer to recruit providers who already understand health plan
concepts such as authorization systems, utilization review, and quality 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 the network. 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 in its network can give
the plan a competitive advantage in bidding for a group contract. Because the plan
must also sell itself to potential plan members, recommendations from consumers
are also considered, and even encouraged. In fact, most plans have a mechanism for
allowing new enrollees to nominate providers for inclusion in the network. Once core
providers are recruited, they also become a source of recommendations for
additional providers. Recommendations thus help 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 methods vary according to the type of health plan (open panel or closed
panel), the nature of the provider community, and the preferences of the health
plan. However, the following basic recruiting techniques may be applicable in various
recruiting situations:7

• Word of mouth
• Direct mail
• Contact with practitioners in training programs
• Advertisements
• Professional recruiting agencies

Health plan personnel and current network providers often interact professionally and
socially with non-participating community providers. Positive word of mouth from other
clinicians about the benefits and opportunities associated with network participation is
often very effective in influencing community providers to consider contracting with a
health plan.

Some health plans have found that mailing letters or brochures directly to prospective
candidates can be a very effective method of recruiting providers. Such mailings often
include descriptions of the health plan, the market served, the number of members, the
services covered, and the providers already in the network. Health plans obtain lists for
direct mailings from sources such as local, state, regional, or national medical societies;
competitors' provider directories; state departments that oversee provider licensing;
databases from other health plan products or employers who contract with the health
plan; and even telephone yellow pages.

Health plans may recruit practitioners who are still in training by sending recruiting
information to practitioner training programs, such as physician residency programs.
However, many training programs do not allow on-site recruiting.

Advertisements in national and state professional journals reach a wide audience and are
another common approach to recruiting practitioners. Some newspapers also carry
recruiting advertisements for health plans. Overall, newspaper advertisements have been
less productive than other recruiting methods.

Recruiting agencies perform labor-intensive tasks such as making the initial contact with
providers and screening out undesirable candidates. However, such agencies typically
charge substantial fees. A health plan considering the use of a recruiting agency should
examine the agency's track record for the average length of time required to recruit
candidates, the percentage of successful placements of recruited candidates, and the
average length of time that selected providers remain with the network.

Selecting Providers
Whether a health plan develops an open panel network or a closed panel network,
whether the organization decides to buy or to build its network, and whether a
potential provider is identified by the plan or requests to join the plan, the health
plan must examine each provider's qualifications. 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 cost management
standards helps ensure that the provider can meet the needs of both the plan and its
members.

Selection of individual practitioners is based on an evaluation of personal and

professional information collected during the application process. Although
application forms vary according to the plan and the type of provider being recruited,
most applications include detailed questions about the applicant's practice, education
and training, hospital and/or practice affiliations, practice specialty, work history,
professional licenses and certifications, insurance coverage, liability claim 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 health plan's credentialing process. This process is described in more detail in
Collecting and Verifying Data for Credentialing Purposes. Practitioners and other
providers who satisfy the health plan's credentialing 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 groups when developing their networks. Both approaches to assembling a
network (contracting with individual practitioners or contracting with provider
groups) have potential benefits and drawbacks.

Contracting with Individuals

Because most physicians practice independently or in small groups, contracting with
individual practitioners 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 each potential network participant based on that individual's merits and
abilities to meet the needs of the health plan and its members. When a health plan
has a one-on-one relationship with an individual practitioner, negotiating,
contracting, and ongoing interaction with the provider are typically uncomplicated.
Further, if an individual practitioner leaves the network, the disruption to 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. In addition, maintaining relationships with individual practitioners requires a
heavy investment of time 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
their networks around existing provider groups and organizations, such as physician-
hospital organizations (PHOs), multispecialty groups, individual (independent)
practice associations (IPAs), or integrated delivery systems (IDSs). In some
markets, health plans also contract with faculty practice plans.

Contracting with provider organizations is typically a more efficient, cost-effective

way to develop and maintain a network than is contracting with individual
practitioners. Each contract with an organization adds a number of practitioners to
the network. Organization such as IPAs and IDSs often bring a large number of
providers to a health plan. When a health plan contracts with a multispecialty group,
both PCPs and specialists are added to the network. Including multispecialty groups
in a network also facilitates the continuation of existing referral patterns from 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 contact each individual about issues related to the delivery of care to plan
members, ongoing network management activities are more streamlined under
group contracts than under contracts with individuals. The health plan may also
benefit if the provider organization already has medical management programs and
processes in place. For example, large organizations may already have programs for
and be familiar with utilization management and financial risk-sharing.

Contracting with a provider organization also has some potential disadvantages. A

health plan typically must accept all of the providers in an organization for the
network. This is true even if the organization includes more specialists than the
health plan needs to meet the needs of its member 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 when contracting with an IPA,
IDS, faculty practice plan, or other organization than when contracting with
individual providers.10

Another disadvantage is that the complexity of the contracting process typically

increases with the 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 other contract terms. Because multiple providers are
covered under a single contract, termination of the contract, by either the health
plan or the provider organization, can create a significant gap in the provider
network.
In addition to the general advantages and disadvantages described above for
contracting with provider organizations, some types of provider organizations
present additional issues that a health plan should consider.

Individual Practice Associations

An individual practice association (IPA), also known as an independent practice
association, is a legal entity that contracts with individual providers (typically
physicians) and with health plans on behalf of the providers. If the IPA's goals
related to care delivery, such as high-quality services and cost-effectiveness, are
similar to those of the health plan, then the IPA's physicians are likely to be suitable
for the health plan's network. If the goals of the IPA and the health plan are not
aligned, the performance of some of the physicians in the IPA may be less than
optimal according to the standards of the health plan.

The proportion of local physicians who belong to a particular IPA is another important
consideration for a health plan. Because an IPA typically contracts on behalf of a
large number of physicians, one IPA might control a significant part of the healthcare
delivery system in a service area and thus have a very strong position for negotiating
health plan contract terms. Further, if a health plan attempts to establish an
exclusive contract with an IPA that represents a significant proportion of the
physicians in a market, the health plan might be at risk of violating antitrust
regulations.

Integrated Delivery Systems

Integrated delivery systems carry many of the same potential benefits as IPAs. One
important advantage of contracting with an IDS is the large number of providers and
wide scope of services added to a health plan's network. Contracting with an IDS
allows a health plan to assemble a network (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 market that 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 that is 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 with individual physicians.13

FPPs provide a broad range of both routine and highly specialized healthcare
services. In many markets, FPPs are the only source of tertiary care, such as organ
and blood product transplant services. A health plan that contracts with an FPP can
often obtain discounted compensation agreements to reduce the health plan's
financial liability for the services that plan members receive from the FPP. In
addition, a contract with an FPP may bring prestige to the health plan because
services provided at academic health centers are typically perceived as high quality.

The Argyle Health Plan has contracted to obtain the services of the providers in the
Column Medical Group, a faculty practice plan (FPP). The following statement(s) can
correctly be made about this contract:

A. Column most likely contracted with the legal group representing the FPP rather
than with the individual physicians within the FPP.

B. Column most likely will provide only highly specialized care to Argyle's plan
members.

Both A and B

A only

B only

Neither A nor B

However, FPPs typically present several potential drawbacks for a health plan's
network. Because FPPs teach medical students and perform clinical research as well
as deliver patient care, they tend to focus on specialists' services and frequently do
not achieve optimal cost-effectiveness of care. Health plan control over utilization of
medical resources by FPPs is limited, and actual utilization by these organizations is
often higher than average because much of the routine care for patients is delivered
by medical students, interns, and residents. These physicians-in-training have
limited experience to help them determine which medical interventions will yield the
desired outcomes in the most cost-effective manner. As a result, they tend to use
more resources and 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 specialty clinics. In many instances, no individual physician is accountable for
coordination of care among the specialties. This type of delivery system does not
facilitate and may even impede case management for complicated cases.16 Such
fragmentation of services has the potential to result in the duplication, delay, or
omission of services, and possibly, to reduce the overall quality and increase the
costs of care.

AHM Network Management: Collecting and Verifying Data for Credentialing Purposes

Pages 1 to 49

Network Management in Health Plans

Collecting and Verifying Data for Credentialing Purposes
Introduction
After a health plan has identified and recruited a potential network provider, it must
verify that the provider meets the health plan's standards. Collecting and verifying
provider information is a crucial risk management strategy for a health plan. It is
also a critical element in obtaining accreditation. According to the NCQA, "health
plans have a greater responsibility to implement a rigorous process to select and
evaluate practitioners than other health care organizations because they assume
responsibility for managing the health care of their members. Choosing the
practitioners who will work well in the delivery system is part of this responsibility."1
By credentialing its providers, the health plan assures that it is offering a standard of
care that is consistent with the organization's goals.

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

The Credentialing Process

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

Credentialing begins during recruiting and, ideally, should be completed prior to

finalizing a contract with a provider. If credentialing has not been completed before
the provider and the health plan are ready to sign the contract, the contract must
include a provision stating that the final 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
application form to the health plan. Application forms vary according to the type of
health plan recruiting providers; however, most application forms ask prospective
providers detailed questions about their professional background, training, and
experience. Application forms also request demographic information about the
applicant and information about the applicant's liability claim history. The information
provided on the application form serves as the initial documentation of the
applicant's qualification for participation in the network.

The collection and verification of credentialing information can be time-consuming for

both health plan and provider-especially for a provider who participates in a number
of health plans and must fill out a different application form for each plan. In
response to this issue, some states now mandate acceptance of a state-approved
application by all plans. The use of a standard form for basic information enables a
provider to maintain one application that can be updated and submitted to any
health plan operating in the state. Depending on the state, a health plan may be
allowed to append a form with additional questions or agreements to the state-
approved application.

In other states, a number of local medical societies, hospitals, and health plans have
agreed to use common application forms to simplify the credentialing process for
providers. America's Health insurance Plans (AHIP) has assisted in this effort by
developing a standardized physician application 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 network requirements in addition to
the basic information on the standard form.
Verification
The next step in the credentialing process involves verifying the accuracy of
information included in the application. A health plan can conduct this step itself
through its credentialing or quality management 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 a CVO depends on the
type of organization, the size of the network, and the amount of control over the
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 tend to have much larger networks, credentials verification is
correspondingly more complex and time-consuming and requires the expertise of
CVOs or other credentialing organizations. We will discuss 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 all questions are answered completely and that the application is signed,
to a thorough investigation of the applicant's background and employment history.
Some of the information on the application is subject to primary verification, which
involves viewing original documents to confirm that they are genuine and accurate.

Primary source verification is typically required for

Depending on the health plan's credentialing policies and procedures, verification

may also include an interview with the applicant to clarify and validate information, a
visit to the potential provider's office or facility, and a review of the provider's
medical records.

 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
Office Evaluation
Many health plans that contract directly with individual practitioners include an on-
site evaluation of the practitioner's office in the credentialing process. An office
evaluation helps a health plan determine whether a medical practice can provide plan
members with high-quality services and adequate access to care. During an office
evaluation, a provider relations representative (or other appropriately qualified
health plan staff member) can assess quantitative factors, such as hours of operation
and the number of appointments available within one day, two days, a week, or
several weeks, as well as qualitative factors, such as the cleanliness, comfort, and
general appearance of the facility.3 The health plan staff member gathers information
about access and appointment availability 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 new patients to its own standards for access. For example, can a member
with an acute medical problem see the practitioner within 24 hours? How long will a
new patient have to wait for an appointment for a routine health maintenance visit?
What evening and/or weekend hours does the practice offer? Does the practice have
the capacity to accept the required minimum number of new patients?4

The provider representative also assesses the safety, cleanliness, and overall
appearance of the entire office or facility. Treatment areas should be comfortable
and adequately equipped to deliver routine care and deal with any urgent situations
or emergencies that might arise. For example, does the office or facility have the
necessary equipment to deliver emergency care for a patient who experiences
cardiac arrest? Administrative staff areas should be well organized and set up in a
manner that facilitates the protection of patients' confidential medical information. In
addition, 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 also checks for any barriers that may impede handicapped access into
the office and, in some locations, adequate patient parking.
Review of Medical Records
Health plans typically conduct two types of record reviews: an evaluation of the
provider's medical 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 and maintain medical records. It does not
cover the content of specific patient records. Health plans usually perform MRK
evaluations during credentialing, but not during recredentialing. NCQA requires 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 records to ensure that the records conform to accepted, professional medical
practices and appropriate health management standards. MRR also provides the
health plan with insight into the quality of the care delivered by a provider. Medical
directors or health plan quality management nurses typically perform MRR.
Maintaining confidentiality of the information reviewed is key because of the
sensitive nature of patients' health information. During MRR for prospective network
providers, the protection of patients' identities and medical information is absolutely
essential because health plans have no legal right to access confidential medical
records.5 Because reviewing the records of patients who are not members of the
contracting plan raises concern over the confidentiality of patient information, health
plans typically conduct MRR only for recredentialing established network providers.

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

Health plans typically conduct two types of reviews of a provider's medical records:
an evaluation of the provider's medical record keeping (MRK) practices and a medical
record review (MRR). One true statement about these types of reviews is that:
an MRK covers the content of specific patient records of a provider.
the NCQA requires an examination of MRK with all of a health plan's office
evaluations.
an MRR includes a review of the policies, procedures, and documentation
standards the provider follows to create and maintain medical records.
the NCQA requires MRR for both credentialing and recredentialing of providers
in a health plan's network.

Board Certification
The American Board of Medical Specialties (ABMS) is the umbrella organization
for a family of major board organizations that offer physician certification.
Organizations included under the ABMS umbrella cover most medical specialties.
Many health plans consider board certification a benchmark for selection of qualified
physicians and most health plans require network physicians to be board certified, or
at least board eligible. Board certification is a status attained by physicians who
have completed a residency in their field of specialization and have passed a
qualifying examination in that field. A physician is board eligible when he or she
has completed the 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 examination within a specified period of time,
typically five years, after completing their residency.

A number of other independent organizations also offer certification, usually in non-

traditional specializations 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 family organizations.
The Ventnor Health Plan requires the physicians in its provider network to be board
certified. Ventnor has received requests to become a part of the network from the
following specialists:
 Cheryl Stovall, who is currently in the process of completing a residency in her
field of specialization.
 Thomas Kalil, who has completed a residency in his field of specialization and has
passed a qualifying examination in that field within two years of completing his
residency.
 Roger Todd, who has completed a residency in his field of specialization but has
not passed a qualifying examination in that field.

Ventnor's requirement of board certification is met by:

Cheryl Stovall, Thomas Kalil, and Roger Todd.

Thomas Kalil and Roger Todd only.

Thomas Kalil only.

none of these individuals.

Federation of State Medical Boards

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

National Practitioner Data Bank (NPDB)

As you recall from Environmental Considerations for Network Management, the
National Practitioner Data Bank (NPDB) is a database maintained by the federal
government that contains information on physicians and other medical practitioners
against whom medical malpractice claims have been settled or other disciplinary
actions have been taken. It was established to identify and discipline medical
practitioners who act unprofessionally and to restrict their ability to move from state
to state without disclosure or discovery of damaging or incompetent performance.
Most of the information included in the NPDB relates to licensed physicians and
dentists. However, information about other practitioners who are licensed, certified,
or registered by a state to provide healthcare services is also included. Reporting
entities are responsible for determining 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 or dental practices, group practices, nursing homes,
rehabilitation centers, hospices, renal dialysis centers, and freestanding ambulatory
care and surgical service centers, can also contribute information to or request
information from the NPDB if they meet NPDB eligibility requirements. NPDB
eligibility is based on two criteria. First, the organization must provide healthcare
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 to meet eligibility standards.

Reportable actions against practitioners fall into two categories: medical malpractice
payments and actions that adversely affect clinical privileges. Medical malpractice
payments must involve an exchange of money and must result from a written
complaint or claim based on a practitioner's provision of or failure to provide
healthcare services. Healthcare entities must report malpractice payments regardless
of whether the complaint or claim was settled in or out of court or through
arbitration. Reports regarding clinical privileges must be based on a practitioner's
professional competence or on conduct that adversely affects the health or welfare of
a patient. Healthcare entities 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)
As part of the credentialing process, many health plans use the National Practitioner
Data Bank (NPDB) to learn information about prospective members of a provider
network. One true statement about the NPDB is that:
it is maintained by the individual states
it primarily includes information about any censures, reprimands, or
admonishments against any physicians who are licensed to practice medicine in
the United States
the information in the NPDB is available to the general public
it was established to identify and discipline medical practitioners who act
unprofessionally
NPDB also specifies the entities that are eligible to request information from the data
bank and the conditions under which requests are allowed. Figure 3B-2 provides an
overview of the request process. In general, the same entities that report
information to the NPDB are eligible to request information. There are exceptions,
however. For example, a plaintiff in a malpractice action against a hospital or the
plaintiff’s attorneys are allowed to request information from the NPDB if the hospital
named in the action fails to do so. Practitioners are also allowed to request
information about themselves. Medical malpractice insurers, who are required to
report adverse information to the NPDB, are not allowed to request information.
Information is also not available to the general public.

Entities that meet NPDB eligibility requirements are allowed to request the following
information about 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. Designed as a complement to the NPDB, the Healthcare
Integrity and Protection Data Bank (HIPDB) is a national healthcare fraud and abuse
data collection program for reporting and disclosing certain final adverse actions
taken against healthcare providers, suppliers, or practitioners. (The phrase
"healthcare providers, suppliers, or practitioners" refers to any licensed or certified
healthcare professionals, such as physicians, dentists, nurses, physical therapists,
and so on.) The HIPDB collects these types of information about these healthcare
professionals.
However, settlements in which no findings or admissions of liability have been made
must not be reported to the HIPDB.

Health plans and certain federal and state government agencies (e.g., agencies that
license or certify healthcare providers or agencies that administer or provide
payment for healthcare) are required to report all final adverse actions taken against
healthcare providers, suppliers, or practitioners since August 21, 1996. A health plan
that fails to report required information on adverse actions is subject to monetary
penalties of up to $25,000 for each adverse action not reported. The Secretary of
Health and Human Services (HHS) publishes the names of government agencies that
do not report information as required.8
 Healthcare delivery-related civil judgments in state or federal court, except those
judgments 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,
licensing boards, 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
information must 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 a healthcare professional's past actions may be warranted. HIPDB
information is not intended to serve as the sole basis for a determination. Rather,
health plans, government agencies, and other information 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
evaluate how well a candidate's practice patterns meet the organization's standards.
Although provider profiling is more commonly used for evaluating the performance of
established network providers, this type of comparison can give the health plan a
picture of how well a potential provider meets the health plan's standards. A number
of software programs are available to perform provider profiling, when the
appropriate data are available. We will discuss provider profiling in more detail in
Managing Provider Performance.

Granting Privileges
After the health plan completes its investigation and verifies the applicant's
credentials, it either hires and/or contracts with and grants privileges to the provider,
or denies privileges. Any provider who receives an adverse recommendation must be
granted the right to a hearing according to due process requirements.

All providers entering a network are required to undergo the full credentialing
process. In addition, participating providers must undergo recredentialing on a
regular basis. During recredentialing, the health plan or CVO reviews current,
updated application information as well as performance reports and peer reviews.
The applicant's education and prior work history are not usually reviewed during
recredentialing.

Credentialing Issues in Health Plans

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

Documentation
When the health plan determines the credentials required of the practitioner to safely
provide appropriate and quality care to the patients, these credentials need to be
documented in one of three 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 and procedures regarding credentialing. The responsibility for performing the
reviews may be delegated by the governing body to a committee or peer review
group. The reviewing process needs to be documented in the form of committee
minutes.

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

A software program can be invaluable to assist with documentation of the credentialing

process and data. A number of commercial software programs for practitioner profiling
or credentialing are available. In addition, commercial insurance companies or consulting
companies may provide the software to their clients. If there is in-house computer
expertise, a program can be customized on 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 used to document the steps taken in the
credentialing process. Having a report on each practitioner greatly facilitates the review
work of a credentialing committee.
Credentialing Standards
As consumers continue to demand even higher standards of quality in health care,
more purchasers are requiring that health plans secure accreditation from recognized
organizations. Quality improvement and credentialing go hand in hand. Credentialing
is the most objective way to verify that providers and facilities meet minimum levels
of competency and quality. As part of the quality management system, credentialing
criteria are defined to help identify highly competent providers. These standards
need to be considered when developing and implementing the credentialing process
within the health plan.

National Committee for Quality Assurance

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

Joint Commission on Accreditation of Healthcare

Organizations
If the health plan is accredited or is considering accreditation by the Joint
Commission on Accreditation of Healthcare Organizations, the guidelines outlined in
the Accreditation Manual for Healthcare Networks need to be incorporated.13 Specific
credentialing criteria are identified in the 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
HealthCare Commission/URAC (the Commission/ URAC). Also, a growing list of major
corporations require that 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 in the setting of a staff model (employed) or an integrated practice model
(contracted). The broad categories 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 addition to assessment of the items noted on the checklist that appears later
in this chapter, the application should also be evaluated for completeness. Are all
questions answered fully, and is the application signed? Are the requested copies of
supplemental information provided? One recent study indicated that 24 percent of
physicians claiming to be board certified were not. It has been estimated that 60
percent of the applications require follow-up. Therefore, the application form should
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, such as a hospital where the physician may be on staff. The health plan
may be held liable for failing to carefully select health care providers or, by
neglecting to review their performance, failing to ensure quality care.14

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

• Verify diplomas for both basic and graduate educational programs. Be aware
of problems with 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, with specific 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
professional regulations where the applicant is licensed. Be alert for
practitioners who have moved frequently 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 the primary admitting facility.
• Request the actual DEA or CDS certificate to view for primary verification;
then maintain a copy for the file.
• Follow up on any gaps in employment or staff appointment.If the application
does not ask for all appointments or employment, the applicant could
legitimately omit a reference where 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.

Review of Application and Applicant

The applicant should be thoroughly investigated, and all data should be validated.
This procedure should follow the policies and procedures for this review process.
Often, a credentialing committee reviews the application and all information
received. Depending on the policies and procedures 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. All applicants should be
interviewed according to the same guidelines. A recommendation for hiring or
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 a hearing when an appointment or reappointment of privileges is denied.15
The act requires the physician to be notified of the proposed review action, the
reasons for the proposed action, the fact that he or she has the right to request a
hearing, the time limit within which to request such a hearing, and a summary of the
rights during the hearing. If the physician does not request a hearing, 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 the hearing at least 30 days before the scheduled date of the hearing
and given a list of witnesses expected to testify on behalf of the professional review
body. The act further describes how this specific type of hearing should be
conducted.

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, prior to the applicant providing patient care services. The
initial appointment should be for a provisional period, usually six months or one
year. The provisional period allows the health plan to evaluate clinical performance,
communication skills with patients and staff, adherence to practice standards, and
peer review of the documentation in the medical record. Privileges should be revised
as necessary at the end of the provisional period, and full privileges granted, if
appropriate.

Temporary Privileges
While it is not recommended as a routine practice, the health plan may have policies
and procedures 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 care provider has a specialized skill and that provider becomes ill
or disabled. In order to meet the health care needs of the patient population, a
qualified practitioner may be given temporary privileges to provide this service while
his or her credentials are being reviewed. The temporary privileges should be
granted for a specific period of time, and the parameters of the temporary
appointment should be indicated.

Professional Performance
As part of the periodic recertification or reappointment of providers, the NCQA
requires an organization to conduct periodic performance appraisals.16 The
performance review should include 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 review
documentation, office practices, and clinical practices for conformity with the health
plan’s standards. Feedback is given to the health care provider regarding strengths,
and suggestions for improvement are made.
Reappointment
Policies and procedures should define a process for reappointment, recredentialing,
or recertification on a regular basis, either annually or every two years. This should
be an ongoing process of collecting data on such aspects as license renewal,
additional education completed, and changes in hospital privileges. At the specific
time designated for reviewing the credentials, the practitioner needs to show
continued competence and eligibility for employment or contract renewal. 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 then reviewed by the credentialing committee. A meeting
between the committee and the practitioner may occur to clarify and validate data. A
recommendation is made to the chief executive officer or governing board on any
changes to the privileges, based on the review of data. Documentation of the process
should be performed. The practitioner is informed of the status of the reappointment
and any changes made, in writing.
Liability Issues
The credentialing and privileging process involves some liability issues. The process
exposes the health plan to risks associated with compliance with the Americans with
Disabilities Act, as well as 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, with regard to job application procedures, hiring, advancement, training,
compensation, or discharge or terms, conditions, and privileges of employment. 17
While it is clear that discrimination is prohibited against any qualified employed
physician or health care provider with a disability, this act 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 is
dependent on staff privileges or that the ability to attract and retain patients is
dependent on staff privileges, 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

a conditional offer has been made, an examination may be done, prior to
granting specific staff 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 her health and safety or the health and safety of others.

Confidentiality
Through a desire to seek and verify as much data on a practitioner as possible, there
is a concern about violation of confidentiality, in both written and oral forms. All
documentation must be handled in a responsible manner, with the utmost care.
Exposure of sensitive information in meeting minutes, letters, and other documents
can be protected under peer review. Members of the credentialing committee should
be educated about ways they can become a contributing factor in a libel and slander
action.

Vicarious Liability
Vicarious liability holds that a health plan is responsible for the acts of
practitioners if they are employees under the health plan’s control or if the health
plan creates the appearance to the patient that the health care provider is an
employee and the patient relies on this impression to his or her detriment.19
Historically, health care facilities were able to avoid liability for acts of nonemployed
medical staff members. This avoidance was due to theories related to charitable
immunity and independent contractors. These legal theories have been eroded by
the courts over the past 25 years. A health plan today may be held liable not only for
failing to carefully select health care providers, but also for failure to continue to
review their performance after selection, in order to ensure quality care. For this
reason, the policies and procedures for how the health plan meets these
responsibilities need to be clearly defined. The credentialing process becomes a
critical means for selecting qualified practitioners and for granting privileges based
on education, experience, and skills, both initially and on an ongoing basis. When the
quality and peer review activities indicate a performance problem or the inability of a
practitioner to exercise professional judgment and decision making, corrective action
must be taken by the health plan. The corrective action may be additional training,
education, or proctoring. The directive for corrective action should be based on
objective findings, with a statement of the specific objectives to be accomplished,
who will monitor the action, and criteria for evaluating improvement.

Violation of Due Process

Within the policies, procedures, bylaws, or contracts, there should be documentation
of all phases of the credentialing process, specific time frames within which each step
occurs, and procedures for a fair hearing in the event of adverse decisions or
recommendations. When privileges are denied to a new applicant or current
practitioner, he or she must be able to discover the basis for the denial and have the
opportunity to contest it. The decisions made by the credentialing committee should
be based on objective criteria, rather than subjective data. There should also be
objective documentation in the minutes of the reviews and decisions made by the
credentialing committee.
Negligent Credentialing
With respect to granting privileges to a practitioner for certain high-tech procedures,
the health plan could be held liable for negligent credentialing of privileges if they
were granted to a practitioner who was not adequately trained or experienced to
operate a particular piece of diagnostic or therapeutic equipment. The patients trust
that trained, competent practitioners will provide their care and conduct procedures.
A well-designed and documented credentialing process will assist in granting
privileges only to those qualified and will provide evidence for the decisions made.

As new medical procedures and technologies are developed, they bring with them
new risks. In order to minimize these risks, the credentials needed by practitioners
to perform new procedures should be carefully determined. Prior to granting
privileges, the practitioners’ credentials need to be 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 in evaluating providers for the purpose of granting or renewing staff
appointments. Sources of information 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 in relation to DRG and
severity of the patient’s condition. Consideration may be given to correlation of
patient outcomes with cost or charge data. The critical pathways for clinical practice
may further 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 the terms and process used, the data may serve an educational and
peer review purpose or may be a means of selecting practitioners who will provide
the most cost-effective care. If the primary consideration is to select cost-effective
health care providers, there needs to be a sensitivity to violation of antitrust laws.
Credentialing Checklist for the Risk Manager
Addressing the hazards and liabilities of credentialing becomes a key function in
managing the risks 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
Managed Care Organizations, the Joint Commission standards, Medicare
conditions of participation, and court decisions.
• Review policies, procedures, bylaws, and contracts to ensure that all
credentialing criteria are clearly stated.
• Review application forms for compliance with standards, and local, state, and
federal regulations.
• Review credentialing policies and procedures of other hospitals, facilities, and
external credentialing services whose credentialing decisions are used instead
of an internal process.
• Review protocols for investigating and verifying an applicant’s credentials. Do
these protocols minimize the risk of inadequately screening and verifying the
credentials of practitioners?
• Observe the methods by which these protocols are applied in reviewing
individual applicants. Are protocols applied equally to all applicants whether
they are well known or not?
• Evaluate the organizational structure of the credentialing process. Are checks
in place to minimize 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 staff membership or have had privileges restricted are afforded a fair
hearing in accordance with federal and state laws and standards.
• Require all practitioners to report claims, disciplinary proceedings, or adverse
actions taken 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 the NPDB is appropriately used in credentialing and privileging
determinations.
• Establish rapport with practitioners to facilitate open communication,
education, and resourcefulness regarding risk management issues.

Credentialing Non-Physicians
As you have seen in this lesson, health plans have access to a great deal of
credentialing information about physicians and dentists who participate in health plan
networks. Fewer credentialing elements are available for credentialing non-physician
practitioners, such as dental assistants, nurse practitioners, physical therapists,
speech therapists, or optometrists. Even fewer elements are available for
credentialing non-traditional or alternative healthcare providers. For example,
although the NPDB requires medical malpractice insurers to file reports of payments
resulting from claims against non-physician practitioners, reports from other sources
are optional. In addition, licensing requirements vary from state to state and from
specialization to specialization, making uniform practice standards difficult to
establish. Tracking practitioner performance across states is also difficult.
Without uniform credentialing standards for non-physician practitioners, health plans
must establish policies for determining which practitioners will be credentialed and
how they will be evaluated. In some cases, it is possible for health plans to modify
traditional credentialing processes. 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 registered practitioner. In other cases, particularly
those dealing with alternative healthcare providers, it may be 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
sometimes delegate data collection and verification to a third party. The amount of
delegation depends largely on the qualifications of the particular delegate. In all
cases, the authority to grant or deny privileges remains with the health plan.

Standards for Delegating Data Collection and

Verification
Both NCQA and the Commission/URAC have established guidelines for delegating
credentialing activities. 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 of responsibilities for both the health plan and the delegate.21 The
health plan typically agrees to assume the following responsibilities.
Responsibilities

• Reviewing the delegate’s credentialing policies and procedures for compliance

with the health 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, and permitting access only to authorized parties
• Sharing with the delegate any UM, QM, member satisfaction, and member
complaint information that relates to the delegated credentialing or recredentialing
activities
 • Retaining the right to approve, reject, suspend, or terminate any individual
provider or healthcare 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 delegated
credentialing and recredentialing activities in accordance with these policies and
procedures
• 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, or other 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 by various state laws and accreditation requirements. For example, both
NCQA and the Commission/URAC require health plans to maintain oversight
programs for all delegated activities and to accept ultimate accountability for all
services performed by the delegate. Health plans that serve Medicare and Medicaid
beneficiaries are subject to CMS requirements. Within these limits, however, the
health plan is free to choose the vendor it considers most appropriate for the specific
credentialing task.

Hospitals and Medical Facilities

Hospitals and other medical facilities are required to credential their medical staffs in
order to obtain JCAHO accreditation. health plans contracting with these facilities
typically delegate all or part of the credentialing of medical staff to the facilities’
administration as part of the terms of the 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 in credentialing
mental health practitioners.

Physician Organization Certification (POC) Program

The NCQA has established a Physician Organization Certification (POC) program to
certify medical groups and independent practice associations for delegation of certain
NCQA standards, including data collection and verification for credentialing and
recredentialing. The POC process evaluates a physician organization’s ability to meet
specific categories of NCQA standards and its capacity to accept delegated
responsibilities. A health plan considering a certified physician organization for
inclusion in the health plan’s network can delegate the activities which the physician
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 their requirements for performing certain activities of
the credentialing function. A health plan that delegates designated credentialing
activities to an NCQA- or Commission/ URAC-certified CVO is 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 certified to 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 a credentialing 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

typically know 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 using technology to streamline the
credentialing process.
A health plan that delegates designated credentialing activities to an NCQA-centered
or a Commission/URAC-centered credentials verification organization (CVO) is
exempt from the due-diligence oversight requirements specified in the NCQA
credentialing standards for all verification services for which the CVO has been
certified:
 True

False

Conclusion
Whatever method a health plan uses to credential potential providers, it is
imperative for the organization to ensure that network providers will give quality
medical care to the health plan’s members. When the health plan has selected a
provider that meets the standards for inclusion in its network, the negotiation
process can begin, with the goal of establishing a contract between the health plan
and provider.

AHM Network Management: The Provider Contract

Pages 1 to 19

Network Management in Health Plans

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 had participating provider contracts, most health insurance companies
did not have contracts with providers until the 1980s. The use of contracts increased
with the development of preferred provider organizations (PPOs), when health plans
sought price discounts from providers in return for encouraging patients to go to
contracted (or preferred) providers. Health plans learned that contracts that define
business relationships with providers have a number of advantages over less formal
business relationships. Currently, PPOs, health maintenance organizations (HMOs),
and point-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 many cases, the parties to a provider contract are a
health plan and a single provider, such as a physician, pharmacy, or a hospital, a
growing number of contracts are now made between a health plan and an organized
group of providers, such as a multi-specialty physician group, an integrated delivery
system (IDS), a physician-hospital organization (PHO), an independent practice
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 an organized group of healthcare professionals or institutions.

In this lesson, we will discuss the business goals of modern provider contracts, the
typical styles and 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 a provider contract.

Purpose of Contracting
The primary purpose of a provider contract is to describe and document the intended
business relationship between the health plan and a provider. Important elements of
this business relationship include the various responsibilities of both parties and the
method of payment for services rendered. In addition, the contract either spells out
the processes to be used in conducting business or includes them by a reference to
manuals or exhibits that describe the rules and processes of the business
relationship in greater detail. For example, contracts sometimes include by reference
policy and procedure manuals for UM and QM programs and exhibits that contain the
details of the payment arrangement.

The contract also gives the parties an opportunity to specify the tone and objectives
of the relationship. 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 substantial independent 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 in conjunction with its provider partners) the quality, accessibility, and
cost goals it wants to accomplish, the strategies it expects to use, and the type of
relationship it wishes to establish with its 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 the provider contract:

1. Parties to the contract

This element is not as simple as it may sound. In many instances, more than one party
exists on the payor side of the equation. Some health plans provide services to self-
insured employers or groups that have fiduciary responsibilities under provider
contracts. For example, a self-insured employer may be the party ultimately
responsible for payment, not the health plan. In addition, the health plan may wish 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 is party
to a contract may be an association of independently practicing providers. In this
case, not only the provider organization itself but each of its affiliated providers may
be parties to the contract.
 2. Services provided

The contract should give the health plan positive assurances that the provider agrees to
deliver specific services to members of the health plan and that the provider has all the
legal and regulatory authority or certifications required for delivering the services. In the
case of provider organizations that cover multiple independent providers, assurances that
the individual providers are bound to this agreement should be present.

3. Payment terms

The health plan wants to reach agreement with providers on the prices to be paid to
providers for their services, and it wants a commitment that providers will accept these
amounts as payment in full (except for copayments and deductibles). In addition,
payment terms frequently describe incentive programs and financial risk-sharing, such as
capitation and fee withholds. Finally, contracts need to address how payment 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 to follow the rules and the
procedures of the health plan, particularly with regard to billing for services,
credentialing, utilization review, and quality-assurance activities. Providers want
assurances from the health plan concerning service expectations, such as the
timeliness of payment and the availability of accurate information on the eligibility of
members and the benefits for which they are eligible. In some cases, one or both sides
also want to know that the other party carries adequate liability insurance.

5. Business processes

While a health plan often places detailed information about business processes in a
provider manual rather than in the contract itself, many contracts at least outline the
processes. The processes that are likely to be described in the contract include the
following:

• Procedures for claims submission, processing, and payment

• Reimbursement processes
• Procedures for authorization of services and referrals
• Procedures for verification of membership and determination of applicable
benefits
• Agreements to exchange information and to the right to access and audit plan
members' medical records
• Grievance processes and an agreement to indemnify the health plan from claims
due to the negligence of providers and vice versa
• The term of the contract and the amendment and termination processes
In each of these areas, the contract can set the tone of the health plan-provider
relationship. For example, the health plan may specify that the provider must comply
with the utilization review procedures of the plan, or the plan and the provider may
agree to work together to establish practice 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 maintain liability insurance
itself. If the plan retains the right to cancel the contract immediately if the provider
loses a license or certification, the provider may also be given the right to cancel if
the plan loses any required accreditations or licenses.

Within each of the business relationship areas listed above, there are many detailed
issues that can be addressed in the body of the contract itself or in a provider
manual or exhibit that is made a part of the contract by reference. Most provider
contracts can be categorized into two different types: comprehensive contracts and
brief contracts. The primary difference between the two is the amount of information
included in the contract document itself. The majority of provider contracts 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 about the business relationship between the health plan and the provider.
The purpose of including so much detail is to furnish the parties to the contract with
a single document that both can refer to when dealing with the intricate details of
contract issues. However, even comprehensive contracts frequently include payment
information in exhibits attached to the contract, and additional payment and
administrative details are included in the provider manual which becomes a part of
the contract by reference.

A comprehensive contract typically starts by defining the parties to the contract and
the scope of the agreement. Next, the contract usually provides definitions of key
terms. Following the definitions section, comes the representations and warrantees
section in which the parties affirm that they meet the legal and regulatory
requirements to perform the duties of the contract. The responsibilities of each party
are then discussed in detail. While actual payment rates are usually contained in
exhibits so that they can be updated or changed easily, comprehensive contracts
include detailed information about how the provider is to bill for services, who the
provider can collect payment from, and how multiple sources of payment will be
coordinated. Comprehensive contracts include additional information regarding
record-keeping, confidentiality, audit rights, insurance coverage, the contract term,
termination provisions, and many other legal and business issues.

Introductory Paragraph
Typically, a contract between a health plan and a provider or provider group will
begin with an introductory paragraph. This paragraph, which may or may not
include the date of the agreement, will usually identify the primary parties to the
contract and any acronyms or short names that will be used to identify the parties in
the body of the contract. A sample introductory paragraph is given in Figure 4A-1.
Recitals
The introductory paragraph is generally followed by a section called the recitals that
identifies the purpose of the agreement. For example, this section may state that the
health plan wishes to secure the services of the provider, and the provider wishes to
make those services available. In addition, the recitals may identify the products to
be covered by the agreement. The contract may be limited to a single product line,
such as a Medicare HMO product, or it may cover multiple product lines. Typically,
the recitals further define the parties to the agreement in legal terms (for example,
"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
connection between the primary and secondary parties may be identified.
The provider contract that Dr. Laura Cartier has with the Sailboat Health Plan
includes a section known as the recitals. Dr. Cartier's contract includes the following
statements:

1. A statement that identifies the purpose of the contract

2. A statement that defines in legal terms the parties to the contract
3. A statement that identifies the Sailboat products to be covered by the
contract

Of these statements, the ones that are likely to be included in the recitals section of
Dr. Cartier's contract are statements:

A, B, and C

A and B only

A and C only

B and C only

Definitions
The recitals are usually followed by definitions of key terms to be used in the
contract. These are terms that have very specific meanings within the contract that
may vary from common or everyday definitions. The terms included for definition
vary widely from contract to contract, but most 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 not widely understood
by the general public, or (3) it is critical in defining the business relationship among
the parties.

The next several sections discuss some of the most typically defined terms. Other
terms frequently defined in provider contracts are listed in Figure 4A-2.

Agreement or Contract
Since most contracts include references to exhibits and manuals, the definition of the
contract should include the exhibits and manuals as parts of the contract.

Customer
The definition of customer states who is a customer and which words in the contract
are used to identify customers, such as client, covered group, member, and covered
person. Since health plans frequently work with an array of group purchasers,
members of groups, and individual purchasers of healthcare coverage, it is important
to define these types of customers. Self-insured groups may need to be separately
defined for several reasons. A self-insured group-not the health plan-is the fiduciary
for the employee benefit plan and is ultimately responsible for payment to the
provider. In addition, risk-sharing and incentive arrangements with providers may
not be the same 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 other health plans, or is renting the provider network to other organizations,
these intermediary purchasers need to be defined. Some contracts refer to these
other payor organizations as affiliate payors.
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 of programs (HMO, PPO, Medicare, Medicaid) covered by the
contract. In addition, the plan may wish 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 equipment necessary to perform all
the types of diagnostic and therapeutic procedures covered under the benefit plan.

Complete Claims
Many health plans define a complete claim (also called a clean claim) as a claim
that contains all the information necessary for processing by the health plan. This
definition allows the plan to agree to certain time frames for routine claims
processing without giving up the right to pursue necessary information for claims
that are incomplete or inaccurate. Based on the standard times for 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
because health plans are contractually obligated to pay only for services they
determine to be medically necessary. In addition, the concept of medical necessity is
the foundation of UM and QM activities. Here is the description of medically
necessary services used by many health plans in their contracts.

Because decisions related to medical necessity can be the cause of conflict between
providers and health plans, contracts should attempt to define medically necessary
services as clearly as possible. Determinations regarding medical necessity should be
based on accepted medical standards and UM guidelines developed by nationally
recognized organizations. It should be noted in the contract that the criteria used to
make utilization decisions are available to physicians upon request.

Some health plans have started to define medically necessary services as care that
allows the covered person to make reasonable progress in treatment. Definitions of
this type are designed to allow 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 a person with a chronic disease making
reasonable progress? One health plan company suggests that a patient with a stable
chronic condition would be considered to be making reasonable progress. On the
other hand, could a health plan stop paying for the care of an unstable diabetic on
the grounds that reasonable progress is not being made? It may be better for health
plans to describe in a provider manual certain limited situations where payment for
ongoing care may be curtailed 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 identify

and 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 a retrospective review of emergency claims, which
based its conclusions on the final diagnosis instead of the member's symptoms at the
time of the emergency visit, these health plans could deny claims for unnecessary
emergency room visits. This practice has come under increasing scrutiny by
regulatory and accrediting bodies.

In June 1996, the National Association of Insurance Commissioners (NAIC) adopted

a standard for health plan coverage of emergency services based on the prudent
layperson standard, which defines emergencies as "a medical condition
manifesting itself by acute symptoms of sufficient severity (including severe pain)
such that a prudent layperson, who possesses an average knowledge of health and
medicine, could reasonably expect the absence of immediate medical attention to
result in placing the health of the individual in serious jeopardy, serious impairment
to body functions, or serious dysfunction of any bodily organ or part."

Consistent with the prudent layperson standard, a large number of health plans have
pledged to pay for emergency department screening and stabilization of conditions
that reasonably appear to constitute an emergency, based on the patient's
symptoms at the time of the visit for emergency care.3

The prudent layperson definition is also applicable if a health plan member seeks
emergency care from a noncontracted provider, believing that the delay required to
access care from a contracted provider might worsen the emergency.4 The challenge
for health plans in defining emergency services is to accommodate the legitimate
concerns of members without allowing uncontrolled use of expensive emergency
services.

In 1996, the NAIC adopted a standard for health plan coverage of emergency
services. This standard is based on a concept known as the:
due process standard

subrogation standard

corrective action standard

prudent layperson standard

Utilization Management, Quality Management, and Risk

Management
Most provider contracts define utilization management and quality management, list
the activities included in these programs, and describe the responsibilities of the
provider and the health plan with respect to UM and QM. Some plans also define risk
management and the parties' roles in controlling risk. Usually these definitions and
descriptions are not controversial. Health plans often reference policy manuals or
exhibits for detailed descriptions of UM, QM, and risk management activities. If a
health plan plans to rent its network to other payors or to delegate utilization or
quality functions, the plan should make it clear to providers whether other
organizations are involved in UM or QM.
Representations and Warranties
Following the definitions, many comprehensive provider contracts include a
representations and warranties section. A warranty is a statement guaranteed to be
true in all respects, and if the statement is untrue in any respect, the contract of
which the statement is a part can be declared void. Unlike a warranty, a
representation is a statement of facts that need not be true in all respects, 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, the provider 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 primary contracting entity,
this section often assures the health plan that the provider organization has the
authority 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, the responsibilities of each party to the contract. These responsibilities can be
divided into provider responsibilities, health plan responsibilities, and mutual
obligations. The next few sections provide a brief overview of these topics, and
Responibilities of Health Plans and Providers Under Provider Contracts discusses
responsibilities in depth.

Provider Responsibilities
The provider responsibilities under the contract may be grouped into one section or
they may be distributed over several sections. However, comprehensive provider
contracts have a number of common elements relative to provider responsibilities.
The topics covered under provider responsibilities include these issues.

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 identifying areas in which health plans often make commitments to their
providers.

Mutual Obligations
Besides the responsibilities that each party to the contract owes to the other, there
are certain responsibilities or obligations required of both parties. The main areas of
mutual obligation are here.

 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

 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

 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 health plan and its providers. However, many other provisions are used to
describe the expected performance 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.

The provider contract that Dr. Ted Dionne has with the Optimal Health Plan includes
an arrangement that requires Dr. Dionne to notify Optimal if he contracts with
another health plan at a rate that is lower than the rate offered to Optimal. Dr.
Dionne must also offer this lower rate to Optimal. This information indicates that the
provider contract includes a:
 most-favored-nation arrangement

warranty arrangement

locum tenens arrangement

nesting arrangement

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 that contains much of the information in the
comprehensive contract, as well as additional detailed operational information.
Because the provider manual is part of the contract, health plans using brief
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 the provider manual, including the sections on responsibilities and obligations,
definitions, payment, information exchange, record keeping, confidentiality, auditing,
insurance and liability, marketing provisions, term and termination, and dispute
resolution. One advantage to using a brief contract supplemented by a provider
manual is the ease with which the health plan can make changes affecting all
providers or a certain subset of providers. Rather than having to amend each
individual provider contract to reflect a modification, the health plan can issue a
revision to the provider manual, or a new manual if the changes are substantial, to
those providers affected by the change.

A key factor in determining whether a section can be moved to the provider manual
will be whether the health plan is willing to negotiate contract terms with an entire
class of providers. If the terms of the agreement vary from provider to provider
within a class of providers, then less of the contract can be moved to the manual. In
general, the health plan may prefer to have more in the manual and less in the
contract because the manual can usually be amended unilaterally by the health plan
as long as advance notice is given. On the other hand, providers are less likely to be
comfortable giving the health plan this increased power. Areas that probably need to
remain in the body of a brief contract include the following:

• Parties to the contract, including a definition of subcontractors or other

parties that can benefit from the contract, such as organizations that rent the
provider network
• Warranties and representations of the legal status of all parties to perform the
obligations of 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 from one contract to another or because they relate to specific legal issues
rather than operational or business issues.

Strategies for Contracting

Earlier in this lesson we mentioned that the tone and structure of the contract
represent an opportunity 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. In addition, as the early tools of health plans,
such as utilization review and case management, reach their 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
successful implementation of disease and outcome management programs.

It is important to remember that long-term relationships are not established by

merely offering a three-year contract instead of a one-year contract. Long-term
relationships are established through the development of collaborative processes and
through reciprocal obligations. One of the key complaints that providers have with
the contracting process is the "one-way street" attitude expressed 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, the health plan should similarly maintain its licenses and accreditation. If
the health plan wants providers 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 accuracy of its eligibility information, it
should share the risk of bad debts with providers. If the providers incur financial
penalties for late billing, the health plan should incur financial penalties for late
payments.

In addition to such reciprocal covenants, the plan should work with providers to
develop practice patterns and protocols for care, disease management programs,
and outcome measurement processes. Grievance processes should include providers
who are not employees or paid consultants of the plan. Providers can be consulted
on the design of products, benefits, and incentive programs. The plan can provide
data comparing the costs, quality, and patient satisfaction scores of similar
providers, adjusted for differences in the severity and mix of patient illnesses. The
plan can signal its intent to collaborate in these ways by referencing them in the
contract 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 appreciate a health plan that can simplify this situation by
consolidating multiple products into one contract and by using common payment and
utilization management processes. Multiple products can be accommodated in a
single contract through the use of separate payment exhibits for different products
and product-specific sections of the provider manual. This simplified contracting
approach is enhanced if common payment approaches are used across products.
Utilization review, disease management, and data reporting can also be
standardized.

A major caveat on consolidated contracting must be recognized, however. Some

health plans have 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 in future payment rate negotiations by
bundling the patient volume of all product lines, but it may increase provider
resistance. The health plan achieves a short-term advantage in negotiations but at
the long-term cost of destabilizing provider relationships. The plan can achieve many
of the same goals by providing financial or other incentives to providers that agree to
participate in multiple products. In the long run, plans that encourage cooperation
are likely to be more successful than plans that use an all-or-none approach.

AHM Network Management: The Negotiation Process for

Provider Contracting

Pages 1 to 26

Network Management in Health Plans

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 benefits plan, and in most areas of the United States,
providers increasingly rely on health plans for access to 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
agreeable terms. As a result, negotiation skills have become an important asset for
health plans and many providers.

The degree of health plan-provider negotiation that takes place varies according to
the contracting situation. The negotiation process for health plans and hospitals or
health plans and large provider organizations is generally quite extensive. However,
health plans usually do not negotiate with individual practitioners and small
provider groups. Instead, these providers typically receive a standard contract from
a health plan and have the opportunity to choose to participate or not participate in
the network, based on their evaluation of the contract's terms. Health plans are
more likely to negotiate with individual practitioners and small provider groups
located in geographic areas with an undersupply of providers.

This lesson discusses the fundamental elements of provider contract negotiation.

First, we provide an overview of the role of negotiation in provider contracting. We
then describe the steps in the negotiation 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 negotiation between health plans and
physicians, especially primary care physicians (PCPs). Differences in the negotiation
process for other types of providers will be noted in Network Management
Considerations for Different Types of Providers.

The Role of Negotiation in Health Plan Contracting

Provider contract negotiation is a communication process that utilizes information
exchanges between a health plan and a provider to establish an agreement for the
delivery of healthcare services 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 of healthcare services and acceptable reimbursement arrangements.
However, the health plan and the provider often have different points of view about
the meaning of favorable terms and acceptable reimbursement. For example,
providers usually desire a reimbursement arrangement that 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

future relationships. The interpersonal relationships developed during the negotiation
process are important to effective implementation of the contract and to problem
solving during the term of the contract. The health plan has an additional goal of
developing a provider panel that meets the plan's needs for access and adequacy,
while the provider typically wants to maintain or increase patient volume.1

The give-and-take exchanges between a health plan and a provider involve key
business and medical 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 some areas in order to receive favorable terms in other areas. For instance, the
health plan may agree to limit the total number of providers in the network and
guarantee a certain volume of patients to a provider in exchange for the provider's
acceptance of a lower reimbursement rate.

Health plans and providers have varying degrees of knowledge and expertise in
negotiating contracts. A common perception is that health plans always have the
advantage because they are more knowledgeable and sophisticated about the
negotiating process. Another widely held belief is that most providers accept
standard contract terms and health plan reimbursement arrangements without
question in order to establish relationships with health plans and to maintain their
patient bases. 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, especially healthcare institutions and provider
organizations, have recognized the importance of negotiating health plan contracts
and have devoted the resources necessary to develop an effective approach to
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 financial aspects. The intensity and length of the negotiations
depend in part upon the volume and scope of services covered under the agreement.
For example, health plan contract negotiations with an integrated delivery system
(IDS) or a hospital are usually lengthier and more complex than negotiations with a
single-specialty provider organization.

Many provider contracts automatically renew at the end of the specified contract
period unless one of the parties notifies the other in writing of its desire to
renegotiate terms or terminate the relationship. If a contract is not automatically
renewable, the health plan and the provider renegotiate contracts annually or at the
end of the specified contract term. Even when both parties find the initial agreement
satisfactory, changing circumstances may necessitate amending the contract or even
developing a new contract. Any of these changes may result in significant
modification of the provider contract.

The process for renegotiation is similar to that for the initial negotiation of the
contract, although renegotiation usually requires less time and effort, depending on
the number and type of issues to be 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

Network Management in Health Plans

The Negotiation Process for Provider Contracting
Preparing for Negotiation
Contract negotiators often feel that the bargaining phase of the process is the most
difficult, but the rigors of bargaining can be greatly reduced through adequate
preparation. Thorough preparation is often the key to successful negotiation, while
lack of preparation is frequently identified as the reason for failure. Figure 4B-1 lists
the activities that health plans and providers should conduct to prepare for contract
negotiation
Assembling the Negotiation Team
When health plans negotiate with independent practitioners and small groups of
providers who are 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 the negotiation. However, because of the complexity
of the issues involved in provider contracting, health plans, providers organizations,
and healthcare facilities often assemble teams of skilled personnel who work
together to negotiate agreements. Negotiation teams vary in size and composition
based on the volume and nature of the services covered by the contract, the
expected difficulty of reaching an agreement, and the perceived importance of
securing the agreement. In many instances, the size and composition of the health
plan's team mirrors that of the provider's team.

The various team members have different levels of authority to make contracting
decisions. Some members of the negotiation team provide information and other
support for the team and do not participate in or even attend bargaining sessions.
The role of the health plan's medical director varies greatly. As you will recall from
The Role of Network Providers Management in a Health Plan, in some health plans,
the medical director has no involvement in network management. In other health
plans, the medical director oversees the network management function and may
participate in provider contracting, especially if the health plan has a strong desire to
contract with a particular provider. The next sections list the major functions that are
often represented on health plan and provider negotiation teams and describe the
role of each representative in the negotiation process.
Team Leader
Each team has a leader who assumes overall responsibility for the negotiation
process. The role of the 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 typically manages the flow of information to
and from team members. Effective negotiation team leaders often 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 chief executive officer (CEO), chief financial officer (CFO), or chief operating
officer (COO) of the organization. On the health plan side, a provider relations
coordinator, contracting specialist, or director of network development often fills the
leadership role, although the CEO or COO may lead negotiations with a large
provider organization.

Financial Manager
The financial manager's primary role is to guide the negotiation of financial aspects
of the contract. The financial manager analyzes all contract provisions that involve
monetary values, such as reimbursement arrangements, liability insurance clauses,
and claims submission and payment. 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 of finance or accounting
usually assumes the financial manager role. In smaller provider organizations or
medical groups, the office manager provides assistance with financial negotiating.

Legal Counsel

Both health plans and providers frequently include an attorney on their negotiating
teams or at least consult with an attorney. Ideally, an attorney who offers advice
about provider contracting is knowledgeable about health plans and has previous
experience with the negotiation process. The attorney's role is to evaluate the
wording of specific clauses in the agreement to ensure that the client'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
a contracted 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
information in order to negotiate effectively. Negotiating teams rely on data provided
by their organization's information systems (IS) manager to help them assess the
opportunities, risks, benefits, and drawbacks presented by a proposed agreement. IS
managers typically provide an analysis of a contract'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 of the contract's financial provisions. An actuary is an insurance
professional who applies probability rules and statistics to calculate values relevant
to a health plan's operations. Actuaries have the training to design provider
reimbursement arrangements and estimate costs and revenues under a given
contract.

Health Plan Consultants

Either party may enlist health plan consultants to assist with preparation and
bargaining. An experienced health plan consultant understands industry-specific
factors, such as current reimbursement rates, health plan contract models, and UM
policies. In addition, a local consultant often 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
evaluate information about their own organizations, the other party to the contract,
and local market conditions. A team with extensive knowledge about the other party
is in a better position to assess the other side's strengths, weaknesses, position in
the market, and relative negotiating power. As a general rule, the organization with
the most to lose by not securing the agreement has less negotiating power and is
more willing to compromise. For example, if providers are in short supply in a
geographic area, the health plan will probably need to offer more generous
reimbursement and looser controls on UM to ensure that it can assemble a network
adequate to meet member needs. If a health plan's membership is very large,
providers may need to make more 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. Internal analysis 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 effectively negotiate reimbursement. A health plan
must determine the capabilities of its claims department before 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 the provider'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 the provider capabilities and characteristics that are relevant to contract
negotiation.
Information About the Provider
A health plan may not have access to detailed information about quality and
utilization for a particular provider unless the provider has previously participated in
one of the health plan's networks. If the provider has participated with the health
plan in another network, the health plan can review claims, encounter forms,
performance management assessments, and member satisfaction reports for the
provider.

For providers who are new to the health plan, the health plan can learn a great deal
by examining the application that the provider submitted. Health plans also check
with purchasers and prospective purchasers for information about candidates for the
network. Another way to gain information is to ask the provider directly for further
details on the scope of services offered, QM program, UM program, and other
capabilities. Providers are often willing and able to provide useful information to
health plans with whom they wish to contract. Accrediting agencies are another
source of information about healthcare facilities and provider organizations that have
sought accreditation or certification.

Information About the Health Plan

A provider contemplating a health plan contract seeks information about the health
plan and its operations. 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 should investigate the health plan's information systems capability. Adequate
data from the health plan on UM, QM, costs, and other performance measures are
critical for the successful management of risk by providers. Figure 4B-3 describes
specific questions that may yield useful information for the provider or for a health
plan evaluating its own operations.

The health plan usually sends the provider an application, a list of credentialing
requirements, and a copy of the proposed contract, which will offer some information
about the health plan. The contract may or may not include the proposed
reimbursement schedule.2 The provider may also request a copy of the health plan's
policy and procedures manual for more details about UM and QM programs.

Providers may also check these sources for additional information about the health
plan.
Local Market Conditions
For further information to aid in provider contract negotiation, the health plan and
the provider also 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 needs for 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 the contract and willingness to negotiate.

Developing Negotiating Objectives

Based on the information gathered, the health plan and the provider set negotiating
objectives to identify the specific outcomes desired. Each objective typically defines a
negotiating range to indicate how much the health plan or provider is willing to
compromise on a particular point. The negotiating range often specifies the best
possible outcome that could be achieved, the most likely outcome, 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 initial offer (asking) position and a final offer (bottom-line) position. For
example, suppose that the health plan per diem reimbursement (overall daily rate)
for an acute care hospital in a geographic area ranges from $700 to $1,500 per day.
A hospital that expects to receive $1,100 per day might establish its negotiating
range between $1,500 (initial offer position) and $1,000 (final offer position). If the
health plan expects to pay $1,100 per day, it may set a negotiating range between
an initial offer position of $700 per day and a final offer position of $1,200. The
health plan and the provider generally try to keep their initial and final offer positions
secret, although each may attempt to estimate the other's final offer. It is common
practice to make an initial offer that is lower or higher than actual expectations;
however, the parties should not waste valuable negotiating time with offers that are
completely unrealistic.

Health plans and providers also set objectives for issues other than financial
provisions. Figure 4B-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 and determine which points they are willing to negotiate. Some provisions
or characteristics of the provider 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 its position. When time permits, the team members may role-play the
presentation under various scenarios. The team attempts to anticipate the other
party's response to the presentation and develops contingency positions for each
possible response from the other party. When practicing presentations, the team
members critique their own positions in order to identify and correct weaknesses or
omissions. The presentation should highlight the value that the provider or health
plan brings to the agreement. For example, the provider's presentation may
emphasize its scope of services 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 also demonstrate 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 leaves issues open for discussion. A negative relationship is likely to develop if
either party feels coerced by perceived threats.
A negotiating team may prepare a written outline of its positions and proposals for
distribution at the 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 reimbursement because the reimbursement arrangement
should reflect the services to be reimbursed and the way in which those services are
to be delivered.

The parties also organize the other information that they will need for bargaining.
Both teams usually 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 also consider negotiating style options. Much has been written about
negotiation styles and a detailed discussion of this topic is beyond the scope of this
course. In general, the ideal negotiation style for provider contracting is a
collaborative approach, with both sides focused on reaching mutually agreeable
terms. In reality, however, health plans and providers adjust their negotiation styles
to suit 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 future relations 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 in its own surroundings has a distinct advantage in terms of
comfort level and ready access to additional data and support. To level the playing
field, health plans and providers commonly hold negotiations in a neutral location or
rotate meetings between each other's locations. In the case of solo or small group
practices where individual practitioners negotiate their own contracts, health plans
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
preparation beforehand. In many cases, the health plan, the provider, or both are
eager to establish the contractual relationship, but the parties should resist the
temptation to rush into a contract without a 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
bargaining requires 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-face meetings, 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, especially if the proposed contract covers a broad scope of
services. Although the course of negotiations is not predictable, many health plans
and providers find that establishing a time frame for completing 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 issues discussed and the outcome of the discussion. The written record of
the meeting serves as reference for the team as it plans strategies and tactics for
subsequent meetings. Each meeting record 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 and follow-up contacts.

The Initial Bargaining Meeting

In many cases, the negotiating teams meet in person for the initial meeting. The
main purpose of the first meeting is to set the stage for detailed discussion of the
issues. The initial meeting between the provider and the health plan is also an
opportunity for the teams to establish personal relationships that will facilitate both
the negotiation process and the subsequent administration of the contract.

Although some meetings are less structured, the first meeting often follows a written
agenda. The two parties sometimes collaborate to prepare the agenda. An agenda
developed under a collaborative approach is more likely to reflect the objectives and
priorities of both sides and to establish a feeling of cooperation. The agenda lists the
topics to be discussed and the time allotted to 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
background information, 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 adjust their negotiating plans accordingly. Attorneys for each of the
parties review the contract in light of the initial meeting and create alternative
provisions or language to address specific issues. At follow-up meetings, or through
other contacts, the teams make additional proposals and counterproposals and
discuss areas of disagreement.

Ideally, the health plan and the provider ultimately reach agreement on each issue
so that the contract can be formalized within the projected time frame. In reality,
however, negotiations sometimes reach an impasse when neither party is willing to
compromise further to reach agreement. When negotiations stall, the parties
sometimes choose to postpone further talks to allow each side to reassess its
position. After a period of time, negotiations resume if the parties believe they can
resolve the disagreements. If neither team is willing to alter its stance, then
negotiations cease.

Negotiations are often delayed while the parties exchange and evaluate data. In
some cases, the negotiation process must readdress already negotiated issues when
a decision on one section of the 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 to ensure that the document includes the agreed-upon terms, and submit
any final wording changes for the contract. It is essential for both sides to have a
clear understanding of the contract's provisions and the procedures for dealing with
questions and problems that may arise after the contract becomes effective.
The teams also finalize the procedures necessary to implement the contract. For
example, the parties 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 opportunity for the parties to build their
relationship as the teams designate contact persons and establish procedures 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 that of the negotiating team leaders. Once executed, the
contract becomes a part of the health plan's official provider file.

AHM Network Management: Responsibilities of Health Plans

and Providers Under Provider Contracts

Pages 1 to 51

Network Management in Health Plans

Responsibilities of Health Plans and Providers Under
Provider Contracts
Objectives
After completing this lesson you should be able to:

• Describe a low enrollment guarantee clause and explain how health plans
use low enrollment guarantee clauses in capitated contracts
• Explain two situations in which health plans modify existing provider
contracts and two methods of modification
• Describe the issues about physician/patient communication that may be of
concern to providers
• List several reasons why a contract with a primary care provider should
describe the scope 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 included in 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 providers and payors prepare for contract
negotiations. This lesson examines in detail the contract provisions that explain the
responsibilities of each party in the contract, pointing out areas that are often
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 the health plan's members and to identify which party is
responsible for delivering those services
 • document procedures and processes designed to reduce the possibility of
confusion or disagreements 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's responsibilities. It then goes on to describe the providers' contractual
responsibilities and concludes by describing the areas in which the health plan and its
providers have mutual responsibilities.

The Health Plan's Contractual Responsibilities

In the broadest sense, the health plan is responsible for giving providers a
contractual framework for delivering healthcare services and for being paid for those
services. This framework includes the administrative and operational support
providers need to effectively implement the terms of a health plan contract. Typical
health plan support includes the following activities:

• Ensuring that providers have a sufficient patient volume by using various

marketing strategies to attract plan members
• Fulfilling administrative service commitments, especially the processing and
payment of claims 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 names and 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. Of course, the provider's name, specialty,
address, and telephone numbers will be listed in the health plan's provider directory.
The plan usually grants providers the right to post approved signs indicating the
providers' participation with the health plan. Generally, aside from these specific
uses, neither party is allowed to use the name or trademarks of the other party in
any other way without the approval of the other party. Other uses can be negotiated
as part of the contract or can be negotiated later. One purpose of this limitation is to
maintain confidentiality and to prohibit the use of such information after the contract
is terminated. Figure 5A-1 shows an example of a contract clause that describes the
allowable use of names.

Announcing its participation in a particular health plan may offer a greater patient
base to the provider. In return, a well-known and respected provider's inclusion in
the health plan's provider directory is likely to draw new purchasers or members to
the health plan. A provider who can substantially contribute to the health plan's
growth may seek to negotiate a higher rate of reimbursement.
The provider and the health plan will also want to come to an agreement regarding
the provider's ability to comply with the health plan's marketing strategy. For
example, a health plan's marketing may generate a large demand for routine
physicals among members by advocating annual comprehensive physical
examinations or may promise members extended hours of access to providers.
These strategies may have an impact on the provider's operations, and it makes
sense 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 the ability of the health plan to deliver patients to the provider. Health
plan contract provisions related to patient delivery refer to the ability and
commitment of the health plan to enroll and maintain a sufficient number of
members for providers to have an adequate patient base. Patient delivery is one of
the most significant factors a health plan considers when determining whether
provider services should be reimbursed on a capitated or a fee-for-service (FFS)
basis. Larger patient bases help to dilute the risk of capitation and make this
payment method more appealing to providers.

Low Enrollment Guarantees

Without the promise of an adequate number of members, PCPs may not have the
financial incentive to contract with a health plan. To reduce concerns regarding the
number of members assigned to PCPs, health plans often include a low enrollment
guarantee clause in capitated contracts. This clause requires the health plan to
reimburse the PCP on an FFS basis until a predetermined number of members, such
as 100, have selected the PCP. When the number of members reaches the
enrollment threshold, the PCP's reimbursement changes to a capitated arrangement.
A low enrollment guarantee can help to ease a provider into capitation, although at
greater risk to the health plan.

Once an enrollment threshold has been established, some health plans use the low
enrollment guarantee on an ongoing basis to determine PCP reimbursement when
the provider's patient load fluctuates. For example, if the threshold is set at 250
members and the PCP's assigned membership falls below that level during the
contractual relationship, the reimbursement method reverts 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, PCPs may be able to negotiate a per member per month (PMPM) dollar
amount higher than the normal capitation rate. The higher rate helps protect the
provider against financial loss during the period when health plan enrollment is low.
Unless otherwise specified, capitation rates will remain at the higher level, regardless
of the number of members who select the PCP, until the contract is renegotiated.
Low enrollment guarantees usually do not apply under reimbursement arrangements
other than capitation.

The provider contract that Dr. Nick Mancini has with the Utopia Health Plan includes
a clause that requires Utopia to reimburse Dr. Mancini on a fee-for-service (FFS)
basis until 100 Utopia members have selected him as their primary care provider
(PCP). At that time, Utopia will begin reimbursing him under a capitated
arrangement. This clause in Dr. Mancini's provider contract is known as:
an antidisparagement clause

a low-enrollment guarantee clause

a retroactive enrollment changes clause

an eligibility guarantee clause

Physician Practice Size

The health plan may contractually establish a minimum number of members that
each PCP must accept before the PCP can close his or her practice to new health plan
members. If the contract also has a low enrollment guarantee clause, the minimum
enrollment should at least equal the low enrollment guarantee threshold so providers
cannot close their practices at levels just below the threshold in order to continue
receiving FFS reimbursement. However, the health plan and the provider must
negotiate these terms realistically based on the total capacity of the provider's
practice.

When PCPs determine that their practices have reached maximum patient capacity,
and they have accepted at least the minimum number of health plan members
established in the contract, they may close their practice to new members. Some
health plans require that, if a provider closes its practice 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 health
plan advance notice (90 days, for example) when they close (or reopen) their
practice to new members so that health plans have time to provide the most current
information to members regarding provider availability. Even when a provider's
practice is closed to new health plan members, 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 the health plan's administrative service responsibilities. The most common
commitment made by the health plan is for the timely payment of claims. Typically,
the health plan agrees to pay any complete claim within 30 days of submission. In
fact, many state insurance departments mandate that health plans pay or send
notification of nonpayment on a certain percentage of claims within a specified
number of days (usually 30 days). Both the provider and the health plan should be
aware of any state requirements for timely payment of claims. Claims that are not
complete and that require additional information, such as medical records or
coordination of benefits information, are not subject to strict application of the timely
payment of claims clause. The contract 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-insured employers), 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
are paid 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 to provide funds to the health plan for payment to providers for
services rendered to the employer group's members, most plans disavow any
responsibility to the provider. While many providers recognize the practical necessity
of working with self-insured employers, providers are beginning to demand a health
plan's assurance, by way of a clause in the health plan-provider contract, that a
process 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
professional credentials and their privileges (such as admitting privileges and specific
procedure privileges for network hospitals). As we discussed in Collecting and
Verifying Data for Credentialing Purposes, the health plan verifies a provider's
professional qualifications through the credentialing process and reconfirms and
updates this information during periodic recredentialing. The credentialing standards
typically are non-negotiable; however, the parties may negotiate the issue of who
will perform the credentialing process. The health plan may delegate this activity to a
provider organization or to a third party, such as a CVO. However, it is important
that both the health plan and the provider have trust and confidence in the quality
and accuracy of the delegate's credentialing processes.

In turn, the provider expects the health plan to commit to maintaining the
appropriate operating licenses and accreditation. Adding this reciprocal commitment
to the contract helps reassure the plan's providers that the agreement is one of
mutual commitment and not a set of unilateral demands 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 that it
will maintain accreditation from NCQA or the Commission/URAC, many network
providers will understand the type of credentialing and information-reporting
requirements the plan will place on network providers.

Reports and Information Required of the Health Plan

Particularly in contracts that involve risk-sharing or capitation payment systems,
providers rely on reports from the health plan to assist them in managing their own
costs and quality. It is in the best interests of the health plan, then, to provide
regular data reports to providers. Such reports help each party meet contractual
obligations, identify potential problems, and meet state or federal reporting
requirements. A health plan that commits to these reports in the contract is likely to
earn more confidence from potential provider partners. Reports and information
typically furnished 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 to keep up with the industry, as well as changing state and federal laws.
Contract modifications are required 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 are formal contract
provisions that are attached to an existing contract and allow binding changes to be
made without having to revise or renegotiate the entire contract. For example, an
amendment to 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
and expectations for contract amendments and modifications. The provision usually
requires contract modifications or amendments to be sent to providers by certified
mail. Typical contract language permits the health plan to amend an existing
contract as long as the provider is given advance notice (such as 30 days before the
amendment becomes effective). This delay in implementation allows providers
advance notice of a change and gives them the opportunity to terminate the contract
before the change becomes effective. 3 If there is no response from the provider
during the lead time, the amendment becomes effective. If the provider objects to
the change, the provider may negotiate for the change provision to allow the original
contract terms to remain in effect until the end of the contract.

one situation, however, providers do not have the opportunity to approve or respond
to changes. Under the change in law provision, which many contracts contain,
health plans are allowed to change or amend contracts without the approval of their
providers as long as the modifications are made in order to comply with new legal
and regulatory requirements that impact all health plans and providers. For example,
a state regulatory agency may impose standards for member’s access to provider
services, such as a maximum time frame (perhaps 30 days) within which a member
should be able to obtain an appointment for a routine physical examination.

The contract often cites revision of the provider manual as an avenue for advising
providers of changes in operational and administrative procedures and guidelines. If
the provider manual is to be used in this way, the contract should contain language
that specifically addresses the provider’s right to object to changes that are not
mandated by law, regulatory, or purchaser requirements. If the provider is
contractually bound by changes noted in a provider manual, the contract should
contain wording that guarantees the provider advance notice of changes and the
right to terminate the contract without cause if the changes are unacceptable. We
will discuss contract termination provisions later in this lesson. Advance notice also
gives the provider time to comply with the changes. Figure 5A-3 presents an
example of an amendment provision.

Many provider contracts are automatically renewed through an evergreen clause,

which allows the terms of the contract to renew unchanged each year. If providers
desire changes to the contract, they must be aware of the renewal date and notify
the health plan of their intent to renegotiate the contract within the time
contractually specified.6
The provider contract that Dr. Lorena Chau has with the Fiesta Health Plan includes
an evergreen clause. The purpose of this clause is to:
allow Fiesta to change or amend the contract without Dr. Chau's approval as
long as the modifications are made in order to comply with new legal and
regulatory requirements
prohibit Dr. Chau from encouraging her patients to switch from Fiesta to
another health plan
allow the terms of the contract to renew unchanged each year
assure that Dr. Chau provides Fiesta members with healthcare services in a
timely manner appropriate to the member's medical condition

The Provider's Contract Responsibilities

Prior to signing a contract with a health plan, it is the provider's responsibility to
review all contract provisions and to negotiate any changes that seem appropriate.
Over the next several pages, this lesson will describe the major responsibilities that
providers are expected to accept under most contracts.

Agreement to Provide Services

The essential purpose of any health plan-provider contract is to reach an agreement
that the provider 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 of information regarding the eligibility of the
member as indicated by a member ID card or some other certification of eligibility.
In addition, the provider is typically required to deliver services to the health plan's
members with the same quality, timeliness, duration, and scope as the provider
would deliver to other patients. The provider is also prohibited from discriminating
against members on the basis of age, sex, religion, or national origin. Other
antidiscrimination provisions may cover physical disability, political beliefs, or health
status. The contract may also require 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 the level or scope of services they provide without notice to or consent from
the health plan. For example, under such a provision, a provider that has offered a
specific surgical procedure that is covered by the health plan can later choose to stop
performing that procedure if the provider determines that it can no longer offer that
service on a cost-effective basis.
One true statement about the responsibilities of providers under typical provider
contracts is that most provider contracts:
include a clause which states that providers must maintain open
communications with patients regarding appropriate treatment plans, unless
the services are not covered by the member's health plan
hold that the responsibility of the provider to deliver services is usually subject
to the provider's receipt of information regarding the eligibility of the member
contain a gag clause or a gag rule
include a clause that explicitly places the responsibility for medical care on the
health plan rather than on the provider of medical services

Responsibility for Medical Care

Many health plans now include in their contracts statements that explicitly place
responsibility for medical care on the providers rather than on the health plan.
Usually such statements indicate that the provider must make all final decisions
regarding the delivery of care and that the provider is encouraged to discuss with the
patient all treatment alternatives, including treatments not covered by the plan.
Before actually rendering a non-covered service, the provider must document in
writing that the member is aware that the service is not covered by the health plan.
Some provider contracts also explicitly allow participating providers to discuss health
plan payment arrangements with patients who are covered by the plan. Providers
who are concerned about any perceived restrictions on their relationships with
patients may insist upon negotiating specific contract language that will avoid
misunderstandings.
Provider-Patient Communication
Some contracts contain provisions relating to provider communications with plan
members. The term gag clause or gag rule has been used to refer to any statement
in a health plan-provider contract that could be interpreted as preventing a provider
from discussing alternative treatment options with patients. As we mentioned earlier,
health plans should make sure that nothing in plan policies or provider contracts can
be interpreted as prohibiting providers from discussing all treatment options with
their patients.

Most health plans have placed in their contracts a clause which clearly states that
providers must maintain open communications with patients regarding appropriate
treatment plans, even if the services are not covered by the member's health plan.

There are several provisions related to the business aspects of health plans that may
be presumed to limit physician-patient communication, depending on who is
interpreting the contract. Some of the business-related provisions that may be so
misinterpreted include the following.

However, all parties to a contract generally agree that a true gag clause would
prohibit providers from speaking candidly to patients about treatment options and
alternatives available, whether or not the services are covered by the member's
health plan. In actuality, a detailed analysis completed in August 1997 at the request
of Congress included a review of 1,150 contracts from 622 HMOs. None of these
contracts included wording that expressly prevented open communication about
treatment options between provider and patient. Sixty percent of the contracts
contained antidisparagement, nonsolicitation, or business confidentiality clauses; of
those contracts, 67% included language that promotes physician-patient
communication. 10

 Antidisparagement clauses, which prohibit a provider from making comments that

could weaken a patient's confidence in a health plan. This type of provision is meant to
protect a health plan's business interests and require that a provider who is dissatisfied
complain to the health plan rather than the patient. 7
 Nonsolicitation clauses, which prohibit providers from encouraging patients to
switch from one health plan to another. 8
 Business confidentiality clauses, which require providers to maintain the
confidentiality of the health plan's proprietary information, such as financial data,
reimbursement structure, and utilization and quality management programs, unless the
health plan grants written permission for the provider to release this information. 9

America's Heath Insurance Plans (AHIP), a trade association representing health

plans, requires AHIP member health plans to provide certain information to members
who request it. This information includes

• a summary description of how participating physicians are paid, including

financial incentives
• in the event of a dispute about coverage-the procedures and medically based
criteria a health plan uses to determine whether experimental treatments and
technologies should become covered services

The Centers for Medicare and Medicaid Services (CMS) mandated that health plans
providing coverage to Medicaid and Medicare beneficiaries could not include in their
provider contracts any language 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 clause that allows open communication between the provider and patient
regarding treatment options and does not prohibit the provider from discussing
medically necessary and appropriate care with the 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 business confidentiality
clauses.12
Covered Services
The term covered services refers to all of the healthcare services available to
health plan members under the benefits provided by their health plan. To assure that
contracted providers have a clear understanding of their obligations to provide
specific covered services, the health plan should detail in the contract all the
applicable covered healthcare services for each provider type. When a provider's
contract applies to more than one benefit plan, an attachment or exhibit to the
contract should define covered services according to each benefit plan.

Covered services defined in the health plan contract are usually related to the
reimbursement methods agreed upon with the physician or other provider. The
covered services are identified as capitated services or services to be reimbursed
under another payment method, such as discounted fee-for-service (DFFS).

Contractually covered benefits that are excluded from the provider's responsibility
should be clearly listed in the contract. For example, benefits that are excluded from
a PCP's responsibilities include out-of-area treatment, procedures that are more
appropriately performed by a surgeon or other specialist, and ambulance service.13

PCP Scope of Services

Primary care providers who contract with a health plan under capitated payment
arrangements should receive a detailed scope of services listing as an exhibit in the
contract. The scope of services provision details exactly which services are
covered under the capitation payment, differences between each benefit plan, and
services that are reimbursed under another payment method or that require prior
authorization. Generally, all services included in the scope of services are covered by
a PCP's monthly capitation payment and may be provided as medically necessary
and without authorization to the health plan's members within the constraints of
their benefit 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 a formulary 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 the provider's responsibility, usually based on specialty. For example,
internists who are contracted as PCPs may specify that they do not see patients
under the age of 17, or an orthopedic surgeon may exclude podiatry services, back
problems, bone tumors, and revision of joint replacements. Identification of service
capabilities and limitations can prevent disputes over the performance of those
services in the future.14
In some cases, a health plan limits the scope of services for its providers by
contracting with other providers for specific services, such as laboratory or radiology
services. Providers who have the facilities and capability to handle the services that
have been removed from the list of required services may wish to negotiate with the
health plan to perform and be reimbursed for these services.15
Benefits with Special Limitations
Some benefits are limited to a specific number of visits, treatments, or supplies
during each benefit year. For example, a plan may cover one routine Pap smear a
year for adult females, or behavioral health benefits may cover a maximum of 30
days at an inpatient chemical dependency facility during the benefit year.

To assure that a provider does not unknowingly deliver services in excess of the
allowed number of 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 procedures in place that allow the
physician to verify if a member's benefits for a specific type of service have been
exhausted. The contract must also state who bears financial responsibility for
services that 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
procedures contained in a provider manual. This manual will include detailed billing
instructions, such as the type of claim form to be used, the coding system to be used
to describe services, and the documentation required to support a claim. Prior
authorization requirements, methods for verifying 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's request to provide nonemergency outpatient and inpatient services. This
review examines the medical necessity and appropriateness of proposed services and
determines if the services are covered. The authorization program (along with other
required procedures) is generally described in detail in the health plan's provider
manual and any other documents that explain the health plan's UM program.

To assure that providers are contractually obligated to follow the requirements of the
authorization and referral programs, the contract includes provisions that explain the
responsibilities of both the health plan and provider under such programs. Most
health plans apply these authorization and referral conditions.

 Contracted PCPs must make referrals only to specialty providers that are contracted
with the 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 is
consistent with specific diagnoses. (The diagnoses and services are generally included in
the health plan's provider manual or as an attachment to the contract.) A dollar limit is
placed on services that can be provided without preauthorization (for example, radiology
services up to $300).
 PCPs must obtain prior authorization (preauthorization) for all referrals that do not
meet these requirements.
Prior Authorization Requirements and Referrals
The contract must clearly document the steps involved in the referral authorization
process and the responsibilities of each party. Figure 5A-4 lists the elements that
must be included in the contract.

Contracts include a provision to advise the contracted specialists about procedures to

obtain authorization to render services outside the scope of the original referral from
the PCP. For example, a PCP might refer a patient to an orthopedist for treatment of
a fracture, with a specified follow-up period based on the diagnosis. If complications
arise during the patient's treatment or recovery, the orthopedist may need to
request authorization for extension of the treatment period or for additional
procedures. Some health plans may require that the specialist's request be
submitted to the PCP; others request that the specialist contact the health plan's UM
department for authorization of additional services. In all instances, the contract
should require the specialist to provide consultation reports to the PCP for services
rendered. This requirement supports coordination of care between the PCP and any
involved specialists regarding the patient's current medical condition.

Prior Authorization Requirements and Referrals

Providers are more likely to comply with referral guidelines when they are clearly and
simply spelled out in the contract or in the appropriate supplementary materials,
such as a provider manual. If possible, the health plan should try to make these
guidelines available in a format that is convenient for the provider. For example,
Henry Ford Hospital in Detroit, Michigan, makes referral guidelines available in this
variety of formats.
In response to recent legislation and questions of liability arising from utilization
review programs and authorization requirements, health plans now routinely include
an exculpation clause which states that a plan's actions based on its UM provisions
(such as denying payment for a certain procedure) do not constitute a medical
opinion and are not intended to interfere with the provider-patient relationship. This
clause is intended to place the ultimate responsibility for a patient's medical care on
the provider.

The American Medical Association (AMA) has adopted guidelines which state that
physicians are obligated to treat the patient to the best of their ability. Furthermore,
if a health plan does not permit referral to a noncontracting specialist or facility, and
if the physician believes that the patient's condition requires such services, the
physician must inform the patient of the health plan's policy. This information allows
the patient to decide whether to accept the outside referral at 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's prohibition of outside referrals.

 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 looseleaf binder for
quick review.17

The provider contracts that the Indigo Health Plan has with its providers include a
clause which states that Indigo's denial of payment for a certain medical procedure
does not constitute a medical opinion and is not intended to interfere with the
provider-patient relationship. This information indicates that Indigo's provider
contracts include:
a business confidentiality clause.

a scope of services clause.

an informed refusal clause.

an exculpation clause.

Access
Access standards are guidelines defined by health plans to assure that every
member receives the benefits provided by his or her health plan in a timely manner
appropriate to the member's medical condition and consistent with the reason for
seeking care. For example, a health plan might specify that a member wishing to see
his or her PCP for a routine preventive health exam should be able to schedule an
appointment within 30 days. These standards may also be mandated by state
regulator or purchaser requirements.

To ensure that providers comply with a health plan's access standards, contracts
include a provision 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
health examination, urgent care)
• access to urgent or emergency care during and after hours

Covering Physicians
Contracted physicians routinely make arrangements with covering physicians to meet
the obligation 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 usually rotate 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 and emergency services 24
hours per day, 7 days per week. The health plan contract should include a provision
that details the requirements for a contracted physician's use of covering physicians.
A typical 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, accept payment from the contracted physician, and not bill
members for services rendered? 19
• Is the contracted physician required to indemnify the health plan for any
professional liability issues that may occur as a result of a patient's treatment
by a noncontracted covering physician?20

These provisions may also apply to PCPs located in rural areas, when the PCP does
not have hospital admitting privileges and must refer a patient requiring
hospitalization to a physician who does not contract with the health plan.

Emergency Procedures
There are three issues regarding emergency treatment that must be addressed in
the health plan contract: (1) the definition of an emergency, (2) the preauthorization
requirements for emergency treatment, and (3) the physician's responsibility in
emergency situations.

As we discussed in The Provider Contract, the industry philosophy regarding

emergency treatment 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 accepted and is now used by many health plans.
Between 1993 and 1998, 20 states and the District of Columbia have adopted
emergency care regulations that reflect the prudent layperson criteria, and the
Balanced Budget Act of 1997 incorporated the prudent layperson standard for
emergency care in Medicare and Medicaid health plans.21 AHIP's Code of Conduct
states that "health plans have pledged to pay for emergency care if a patient has a
medical condition that a reasonable person would believe requires immediate
medical attention."22
In emergency situations PCPs and the health plans are bound by these contractual
responsibilities.

Many health plans have followed the lead of the Balanced Budget Act and AHIP's
Code of Conduct 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 then require further authorization for additional
treatment.

 When the patient's condition permits, a PCP must be available by phone to determine
the best 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 as
medically required and always within the same day.
 If the PCP instructs a patient to seek emergency care in- or out-of-network, the plan is
responsible for payment of the medical screening exam and other medically necessary
emergency services without regard to whether the patient meets the prudent layperson
standard.23

Participation in Utilization Management Programs

As a condition of participating in the health plan network, providers are required to
accept and abide by the health plan's UM program. As a partner with the health plan
in the delivery of healthcare to members, a provider's cooperation is fundamental to
implementing UM programs that ensure quality care and cost-effective treatment.

Utilization management programs usually include preauthorization and concurrent

and retrospective review of services to assure that members receive appropriate
services for medically necessary care. UM programs also extend to the areas of
discharge planning and case management. In addition to stipulating compliance with
the UM program, the health plan contract documents 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 a contract provision specifically outlining the participation requirement. Typically,
the health plan contract provision describes the participation requirement briefly and
then cites an attachment to the contract that describes the UM program in detail. In
other instances, the provider manual is referenced 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

involve prospective, concurrent, and retrospective reviews of services
rendered
• coordinating care with specialty providers so the UM program can review the
medical necessity and appropriateness of inpatient and outpatient services to
determine coverage
 • complying with a review process that includes provider or member
reconsideration requests and appeals of health plan decisions

Providers may negotiate to include in the contract a provision that a peer reviewer
must review any case in which the health plan denies a service for medical necessity.
This provision may also specify that the peer reviewer will be available to discuss
with the provider any denials made by the health plan.

Changes to the UM program should be documented in an amendment to the contract

or an update to the UM program description. Health plans frequently, but not always,
agree to notify providers of 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 of intensive healthcare cost-containment efforts and increasingly
competitive pressures in the healthcare 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 credentialing providers and resolving member or provider complaints
and grievances
• develop and implement remedies to problems with access, quality of care,
utilization, and administrative problems
• meet regulatory and accreditation agency requirements and standards

To ensure the successful implementation of a QM program, health plans require the

support and cooperation of their contracted providers. Health plan contracts include
a general provision that obligates the provider to participate in the health plan's QM
program. In addition, the provider is required 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 patient refuses treatment despite the recommendations of the provider and
the health plan. If the provider has informed the patient of the consequences of
refusing treatment, the patient's choice is termed an informed refusal. If such a
provision is included in the contract, the requirements for documenting informed
refusal should be specified.

The health plan, in turn, is required to maintain ongoing communications with

providers regarding QM activities, findings, and resulting program changes. The
health plan's basic expectations for provider participation in the QM program are
outlined in the contract. In fact, the health plan should seek the participation of
network providers in the QM program in order to achieve commitment and buy-in to
the program. Some federal and state programs impose requirements for provider
compliance with QM programs. The QM program description is included 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, so providers have a responsibility to submit reports and information to
their health plans. The types of 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
processes established by the health plan. Health plans that are accredited by NCQA
and the Commission/URAC are required to maintain control over the credentialing
process. Other licensing and accrediting bodies (such as CMS and state insurance
departments) have similar requirements. However, as we discussed in Delegation of
Network Management Activities and Collecting and Verifying Data for Credentialing
Purposes, the health plan may delegate credentialing activities to its provider
networks, integrated delivery systems, or credentialing verification organizations
(CVOs) if the health plan maintains adequate oversight and audit rights for this
process. The health plan must define in this section who will be responsible for
credentialing and what information will be required from providers who perform
credentialing activities.

Health plan contracts should require providers to maintain the credentials and
privileges (such as hospital admitting or specific procedure privileges) that were
required for initial participation in the provider network.

Patient Grievance and Complaint Processes

The health plan wants to know if members are unhappy with their healthcare or the
administration of the health plan. Therefore, contracts usually require providers to
notify the plan of complaints from members and to participate in complaint
resolution processes. Some types of complaints should be reported as they occur;
others may be studied on a long-term basis. For example, 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 in the
waiting room. On the other hand, any complaint about the healthcare given by the
provider should be reported immediately.

Mutual Obligations
While the health plan and its providers each have different responsibilities under the
provider contract, some commitments are the responsibility of both parties. In this
section, we discuss some of the most important mutual obligations under the
provider contract, including the responsibility 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
members seeking medical care. While providers must initiate the verification process,
the health plan must have established mechanisms to verify the member's eligibility
for covered services. A description of the provider's responsibility in the eligibility
verification process should be included in the contract along with verification
methods. The financial responsibility for services provided to ineligible patients
should also be defined in the contract.

Providers commonly use these sources to verify eligibility.

Another eligibility verification method that is growing in popularity allows providers

to access a health plan's Internet website to verify member eligibility. We will discuss
this method in Continuing Management of Network Adequacy and Provider
Satisfaction.

Most health plan contracts require PCPs to verify eligibility by reviewing the member
ID card and eligibility report. If eligibility cannot be verified through these methods,
the PCP may be instructed 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 on the date services are rendered. This procedure is especially important
for services that were previously authorized but not actually provided on the day of
authorization.

 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 are
distributed to PCPs on a regular basis, usually monthly, via paper or electronic means.
 Member identification (ID) cards that include demographic data, along with the
benefit plan and the coverage-effective date.
 Automated telephone eligibility verification lines which allow providers to get daily
updated member eligibility information over the telephone.

 The health plan's member services representatives who have access to the most
current member eligibility data as well as to other information related to benefits and
administrative issues.

Financial Responsibility Issues

Occasionally, providers render services unknowingly to an ineligible patient and then
become financially liable for the error because the capitation for that patient has
already been deducted from the health plan’s payment to the provider. Figure 5A-6
describes 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 failed to report changes in member status to the health plan in a timely
manner. In Situation 2, the provider was unable to verify eligibility despite pursuing
all of the proper procedures for verification. To avoid potential disputes that arise
from situations such as these, the health plan contract should define financial
responsibility for services provided to ineligible patients.

Some health plans use an eligibility guarantee clause in the contract to protect
providers who receive confirmation of a patient’s eligibility for services from the
health plan. Providers are not financially responsible for the services rendered if the
patient is later found to be ineligible. The health plan may also include a clause in
the purchaser’s contract relating to retroactive enrollment changes. Such a clause
typically places a time requirement on a purchaser’s reporting of changes in a
member’s eligibility status. Such a clause insulates both the provider and the health
plan from financial responsibility.

Providers can also stipulate a time limit for retroactive capitation deductions, such as
60 days. If the health plan does reverse capitation payments, it may agree to
reimburse physicians for any services 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 and how the members will be differentiated. This information
is particularly important in situations where 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
benefit plans, such as an HMO, a PPO, and a POS option, within each product line.
This profusion of plans can create a challenging situation for a provider who is
unaware of the variables in covered services, 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 can result in a member
not receiving services that are covered or being asked to pay an incorrect copayment
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 should include an exhibit that summarizes all benefit plans by product line.
Some states require separate and different contracts for each product line. More
detailed benefit plan information is usually included 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 payment exhibit that is part of the contract. By using an exhibit, the health plan
can adjust payment over time without changing the entire contract.

The detailed process of coding and submitting a claim for payment is generally
described in the provider manual. The main body of a comprehensive contract
typically defines the following key elements of the billing and payment process.

 No-balance-billing clause. It is important for health plans to assure plan members

that they 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 health plan's
payment as payment in full and will not bill members for anything other than contracted
copayments, coinsurance, and deductibles. This commitment is made in the no-balance-
billing clause of the provider contract. In return for acceptance of the health plan's
payment as payment in full, providers receive a guarantee that the health plan will pay
them directly.
 Payment for services not covered. While the obvious focus of a provider contract is
the business relationship for covered services, the health plan must also address issues
related to services that are not covered under the contract. The plan usually allows
providers to collect payment from the member for services that are explicitly excluded
from the benefit plan. For example, most cosmetic surgery is excluded from coverage by
most health plan contracts. If a member elects to have cosmetic surgery, a contracting
provider may bill the patient directly for this service. The situation is less clear for
services that are not specifically excluded but that the health plan judges to be not
medically necessary or for care that is delivered outside the referral rules of the health
plan. Most commonly, the health plan allows contracting providers to bill patients for
services considered not medically necessary if the provider notifies the patient in advance
that the service will not be covered by the health plan. Some plans allow a specialist who
did not receive the necessary referrals or prior authorizations to bill for care 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
that HMO provider contracts bind providers to deliver care even if the health plan is
insolvent or goes out of business. This provider requirement is usually limited to the
duration of the group or member contract with the plan. In addition, a state insurance
department will usually intervene in health plan insolvency to identify another health plan
that is willing to assume responsibility for the customer contracts. However, virtually all
HMO contracts bind providers to continue to provide services even if the health plan
cannot pay for them.
 Insolvency of self-insured groups. Until recently, most health plan contracts were
silent on this issue. However, health plans have recently begun to clarify their fiduciary
responsibility for paying the claims of self-insured groups. Some health plan contracts
now 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 claims
related to these groups only if the group provides funds to the health plan to allow for
payment. If the group fails to provide funds, the plan will not pay the claims, and the
provider may pursue the member for payment. In turn, some providers are beginning to
require higher payments from self-funded plans than from fully funded plans or to
demand assurances on the credit-worthiness of these purchasers.

The provider contract that Dr. Bijay Patel has with the Arbor Health Plan includes a
no-balance-billing clause. The purpose of this clause is to:
prohibit Dr. Patel from collecting payments from Arbor plan members for
medical services that he provided them, even if the services are explicitly
excluded from the benefit plan
allow Dr. Patel to bill patients for services only if the services are considered to
be medically necessary
establish the guidelines used to determine if Arbor is the primary payor of
benefits in a situation in which an Arbor plan member is covered by more than
one health plan
require Dr. Patel to accept Arbor's payment as payment in full for medical
services that he provides to Arbor plan members

Claims Filing Procedures

While detailed claim filing procedures are usually described in the provider manual, a
comprehensive contract includes some billing process requirements. The contract
may specify the acceptable 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 be submitted within 60 or 90 days of the last
date of service for a particular patient encounter. A few plans accept claims filed
within one year of the last date of service. Health plans generally do not pay claims
submitted outside these time limits. If claim-filing time limits are not addressed in
the health plan-provider contract, the health plan may find itself subject to legal
action if it declines to pay late claims.

The health plan may also specify requirements for the electronic filing of claims. The
federal Health Insurance Portability and Accountability Act (HIPAA) has mandated
electronic filing of claims, but the time frames for implementing this requirement are
uncertain.

Finally, the plan should specify the procedures for recouping claims paid in error.
Typically, the plan 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 more than one payment source is involved. Where two or more health plans
are involved, coordination of benefits rules determine which health plan is primary
and which is secondary. Provider contracts typically require providers to submit
information to the health plan regarding other coverage a patient may have. Provider
contracts may also restrict how much a provider can collect from the plan if the plan
is secondary. Usually, contracts limit secondary collections to an amount, when
considered together with the payment of the primary health plan, that would not
exceed 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 the benefits paid to a member by the health plan. For example, if a third
party is responsible for injuries to a plan member, the health plan may file a claim
for the resulting healthcare costs against the third party. If a plan member receives
payment for healthcare costs as a result of a legal action against a third party, the
health plan1 may be entitled to recover from the member all or part of the benefits
the plan paid to the member for the related illness or injury. When the provider is
aware of a court settlement that includes payments for medical expenses, the
contract typically requires the provider to cooperate with the plan in subrogation
efforts. Subrogation will reduce plan payments to account for the settlement
amounts assigned to medical expenses.

Network Management in Health Plans

Responsibilities of Health Plans and Providers Under
Provider Contracts
Records, Confidentiality, and Audit Rights
Provider contracts normally include provisions that require providers to keep legible
and complete records of care rendered to patients treated under the health plan
agreement. Such provisions also give the health plan access to these records so it
can audit providers' business operations and complete UM or QM activities, such as
medical-record compliance reviews, clinical studies, complaint or grievance
resolution, authorization of services, or determinations of medical necessity. At the
same time, however, federal and state laws safeguard the confidentiality of patient
records, particularly for mental health and chemical dependency services, and
provider contracts usually acknowledge the requirements of law with regard to
patient record confidentiality. The health plan may pledge to comply with these laws
and require its providers to comply as well.

To assure that health plans and their providers comply with state and federally
mandated programs, such as Medicare or Medicaid, state and federal regulatory
agencies also require access to medical records. Figure 5A-7 describes typical
medical record access stipulations.
Records, Confidentiality, and Audit Rights
As part of a member's enrollment, health plans generally obtain member consent to
access and review medical records. The member signs the authorization while
completing the necessary enrollment forms. Members also authorize providers to
access their medical records for purposes of rendering treatment by completing the
history and release forms during the first visit to a provider 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 and requires that providers maintain the medical records of the health plan's
member in a confidential manner, in accordance with health plan requirements and
applicable state and federal laws, and prohibits the unauthorized disclosure of
medical records or related patient information. This clause is often incorporated with
the contractual provision which allows access to medical records.

Finally, the health plan often requires providers to keep the contents of the provider
contract confidential. Similarly, when the plan sends reports to providers comparing
the performance of the individual provider to other similar providers, the plan may
require that the comparison data be kept confidential. On the other hand, the plan
frequently reserves the right to reveal some provider-specific data to current and
prospective customers or their representatives, such as insurance brokers. Such
information is used as part of the plan's strategy for marketing its products and its
network of providers.
Liability Insurance and Indemnification Requirements
The health plan wants to know that providers have adequate malpractice and general
liability insurance. The plan usually requires this coverage to protect the plan against
being included in lawsuits that members bring against providers. Contracts should
specify the amounts of insurance required for individual judgments and aggregate
amounts for multiple judgments. If the provider party is an organization or
aggregation of practitioners, the insurance amounts should be specified both at the
provider organization level and at the individual practitioner level. The plan should
require a notice of claims made against the provider if the claims are related to the
health plan or its members.

Health plans typically require providers to sign agreements with indemnification or

hold-harmless clauses. 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 plan member for covered
services, even if the health plan becomes insolvent or fails to meet its financial
obligations.

The provider contract that the Canyon health plan has with Dr. Nicole Enberg
specifies that she cannot sue or file any claims against a Canyon plan member for
covered services, even if Canyon becomes insolvent or fails to meet its financial
obligations. The contract also specifies that Canyon will compensate her under a
typical discounted fee-for-service (DFFS) payment system.

During its recredentialing of Dr. Enberg, Canyon developed a report that helped the
health plan determine how well she met Canyon's standards. The report included
cumulative performance data for Dr. Enberg and encompassed all measurable
aspects of her performance. This report included such information as the number of
hospital admissions Dr. Enberg had and the number of referrals she made outside of
Canyon's provider network during a specified period. Canyon also used process
measures, structural measures, and outcomes measures to evaluate Dr. Enberg's
performance.

The clause which specifies that Dr. Enberg cannot sue or file any claims against a
Canyon plan member for covered services is known as:

a termination with cause clause

a hold-harmless clause

an indemnification clause

a corrective action clause

Contract Term and Termination

Every provider contract must specify the term (or length) of the contract, as well as
the renewal and termination processes. The most common term for provider
contracts is one year with an automatic renewal unless the contract is terminated by
either party. Payment terms are usually negotiated annually. Health plans have
recently begun to request longer contract terms (up to three years) in order to offer
their customers more stability in benefits, network access, and pricing.

A termination clause (also referred to as a deselection clause) describes how and

under what circumstances 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 primary characteristics of each type.Not all contracts
include all three types of termination clauses. This section will describe each type of
termination clause and the circumstances under which each is used. The section will
also describe the due process which is afforded to providers who are terminated for
cause. The upcoming discussion focuses primarily on the manner in which health
plans may terminate their contractual relationship with their providers (specifically
physicians), since these terminations represent the majority of such actions.
However, providers have equal rights to terminate their contracts with health plans.
Both parties to the contract have the right to terminate the agreement either at
renewal or prior to the end of the contract term, provided advance 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 contract without any obligation to provide a reason for the termination
or to offer an appeals process. The decision to terminate the contract can be made at
any time during the course of the contract or upon contract renewal. There is no
hearing or appeal process, and regulatory and accreditation agencies do not require
a report regarding the termination.

When a health plan terminates a provider's contract without cause, the termination
decision should be careful to state that the decision is based on nonclinical criteria.
For instance, the health plan may say that its network contains "more practitioners
than necessary to serve member's needs" or that the terminated provider "lacks
appropriate credentials." Increasingly, termination without cause provisions are
under attack from providers and medical associations because of the unfavorable
perception such terminations create. Although most terminations without cause have
more to do with economics and business operations than with provider competence,
there is a perception that most provider terminations are related to quality or
utilization issues. Without a clear explanation of the reasons for the termination, a
provider may be unable to combat the perception 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 365 days. Both long and short notice periods have advantages and
disadvantages. Longer periods allow more time for renegotiation and give the health
plan more time to create alternatives for meeting member needs. On the other hand,
long termination periods do not allow the plan to make 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 a reason for the termination action. Termination with cause gives each party
the right to end the contract if either party breaches the terms of the contract. The
acceptable grounds for termination with 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 terminate contracts based on its
"sole judgment of what is in the best medical interest of members." These types 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 with cause.

Contracts containing the termination with cause provision usually include a cure
provision. A cure 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 contract to remedy the problem and avoid termination
of the contract. The cure period is useful in circumstances where the problem can be
objectively measured and remedied, such as failure to make timely payments, failure
to provide required services, or noncompliance with stated billing procedures. In
addition, contracts that contain an opportunity to cure breaches of the contract
usually 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 situations include

• provider practices that pose a clear danger to members, such as failure to

maintain adequate 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
contract because the plan's members are placed at risk.
Due Process
Due process is an important provision of the health plan contract, particularly if
immediate termination with cause is contractually allowed. The due process clause,
which defines the provider's right to appeal the health plan's termination decision
and to defend its position, should be included in all contracts that allow termination
with cause. The contract or other supporting documentation to the contract should
clearly outline the due process procedures that will be followed if a provider decides
to appeal a termination decision.

Many states have recently enacted or are considering enacting legislation governing
contract terminations and due process. In general, these new laws stipulate that
health plans must list in writing 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 of provider contract terminations.
Some of the state legislation has gone so far as to prohibit health plans from
terminating physicians to avoid jeopardizing the physician-patient advocacy
relationship.28

Providers argue that termination from a health plan's network, whether with or
without cause, can create severe financial hardship for a provider if a significant
portion of his or her patient base is covered by the health plan. For this reason,
providers may seek to include a contract provision that 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 an action plan for reassigning members to new providers. The
reassignment method must assure that treatment plans in progress are not
disrupted and that each member's overall care is transitioned in a seamless manner
that avoids gaps or inconsistencies in care.

Provider contracts should clearly state the responsibilities of both the provider and
health plan to avoid disrupting care. The health plan protects its interests by
stipulating that the physician is responsible for rendering services to members until
the treatment plans are complete or until the health plan has made reasonable and
medically appropriate provision for the transfer of patients to a new physician. The
contract also includes the prescribed period of time for the transition, as well as how
the provider will be reimbursed during the post-termination period.29

AHM Network Management: Compensation Arrangements

Between Health Plans and Providers

Pg 1 to 45

Network Management in Health Plans

Compensation Arrangements Between health plans and
Providers
Objectives
After completing this lesson you should be able to:

• Explain how a health plan transfers financial risk to providers through

reimbursement arrangements
 • Describe the primary advantages and disadvantages of fee-for-service,
salary, and capitation 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
compensation arrangements between a health plan and a provider are an important
consideration for both parties. In many cases, these arrangements go far beyond
merely paying for services rendered. A health plan's approach to provider
compensation can also influence the utilization of healthcare resources by providers
and the cost-effectiveness of the care that they deliver.

In Healthcare Management: An Introduction, we introduced the basic provider

payment programs used by health plans. Now, in this lesson, we provide more
information on compensation arrangements and describe the advantages and
disadvantages of the various methods. We also discuss financial incentive programs,
as well as ways providers and health plans may negotiate methods of protection
against financial loss. To conclude this lesson, we discuss factors that influence how
a health plan chooses to compensate the providers in its network.

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

Types of Provider Compensation

Although many approaches to provider compensation already exist, numerous
variations on these basic approaches are constantly evolving in response to changing
conditions in the health plan industry. However, compensation arrangements are
usually based on one of the following three payment methods:

• Fee-for-service
• Salary
• Capitation

Many compensation agreements also include some type of incentive program that
affects the total financial compensation for a provider.
Health plans frequently negotiate compensation arrangements that transfer some or
all of the financial risk associated with delivering healthcare services to network
providers. Financial risk in the healthcare industry is the possibility that the actual
costs of a plan member's care will be greater than the projected costs. Providers who
share financial risk stand to gain or lose income based on the volume and nature of
the healthcare services they deliver, so risk-sharing encourages a health plan's
providers to consider cost-effectiveness when choosing among care options for plan
members. We will discuss the role of financial risk for each reimbursement approach
and for incentive programs.

Fee-for-Service Payment Systems

In a fee-for-service (FFS) payment system, the health plan reimburses the
health plan member or the provider an amount based on the actual medical services
delivered. An FFS system is a retrospective payment system, or one that pays after
the service has been provided. FFS payment is the method that has traditionally
been used to compensate healthcare providers for their services, 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 FFS systems because the level of reimbursement is directly related to the
volume and intensity of services delivered. That is, the provider can expect to be
reimbursed each time a plan member receives services, and the amount of
reimbursement depends on the amount of time and other resources used to deliver
the services. For example, a physician who spends an hour with a patient and uses
expensive equipment and supplies to perform tests or treatments typically receives
more compensation than a provider who talks to a patient for fifteen minutes and
performs no diagnostic or therapeutic procedures.

In many cases, total healthcare costs under an FFS system are relatively high. The
connection between the volume of services and income does not provide any
incentive for providers to supply only those services that are medically necessary.
Excessive medical services result in higher total healthcare costs and, in many cases,
do not offer any additional benefit to the plan member. Further, a system that
rewards providers for each service rendered does not directly encourage 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 provider sees a plan member more often than necessary or provides more
diagnostic or therapeutic services than necessary in order to increase revenue. For
example, a provider might direct a member to schedule monthly visits for cholesterol
check-ups when quarterly visits would suffice. Plan members typically lack the
knowledge to detect churning and tend to do what their providers tell them to do.

To prevent churning, health plans often include a contractual requirement that

providers use an authorization 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 helps the health plan to monitor and manage
provider utilization. The contract usually states that the health plan is not required to
pay for services that were not authorized by the health plan. A health plan contract
may also include a requirement that providers participate in periodic utilization
reviews. The contract should provide financial incentives to both reward a provider's
appropriate utilization of services and penalize excessive utilization and
underutilization. Peer review is sometimes an effective way to encourage more
appropriate utilization of medical resources. In fact, providers may negotiate to
assure that the contract specifies that their utilization patterns will be evaluated by
another medical professional.

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

Improper Coding Under FFS

FFS payment methods are also subject to the misuse of coding systems. Except
under unusual circumstances, providers under FFS arrangements submit charges for
services using codes, such as the American Medical Association's Current Procedural
Terminology (CPT) code system. A code system provides a uniform method of
communicating about the services and procedures performed. 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 a higher level of
reimbursement than the procedure actually performed. For example, a provider
might submit the code for a comprehensive office visit, when the services provided
actually represent an intermediate level of service. Unbundling is submitting
separate charges for the different components of a service rather than one charge
for the service as a whole in order to increase the level of reimbursement. For
example, a surgeon might unbundle his fee for removing a gallbladder by submitting
three separate charges for the preoperative physical examination, the surgical
procedure, and postoperative care, which should all be included in the code for the
surgical procedure itself.

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

Because cost management is a primary goal of network management, health plans

rarely pay full FFS charges to providers. In most cases, providers are willing to
accept less than full FFS in order to gain access to the health plan's members. In
addition, many providers prefer receiving the fees paid directly by a health plan-even
if they are lower-over billing and trying to collect full charges from patients who are
not under health plans. The most common types of FFS reimbursement currently
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 a set fee based on the type or amount of care delivered, such as case rates and per
diem payments

Dr. Leona Koenig removed the appendix of a plan member of the Helium Health Plan.
In order to increase the level of reimbursement that she would receive from Helium,
Dr. Koenig submitted to the health plan separate charges for the preoperative
physical examination, the surgical procedure, and postoperative care. All of these
charges should have been included in the code for the surgical procedure itself. Dr.
Koenig's submission is a misuse of the coding system used by health plans and is an
example of:
upcoding

a wrap-around

churning

unbundling

Discounted Fee-for-Service
A discounted fee-for-service (DFFS) payment system is a payment system in
which the health plan negotiates with the provider a percentage discount from the
usual FFS charges. Discounted fee-for-service (DFFS) payment systems were one of
the first methods developed by health plans to manage the costs of provider
reimbursement. The discount is a typically a specified percentage that is applied to
fees traditionally paid under a FFS system. The base fees may be derived from one
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 fee schedule. Most providers and payors can adapt their claim systems to
administer DFFS because there is a direct correlation between payment and the
service rendered. The health plan calculates the discount based on whichever
amount is lower-the billed charge or the DFFS.1 For example, if the provider charges
$100 for a procedure, but the discounted FFS is $90 (90% of the provider's usual
fee), the health plan will base its payment on the DFFS, which is lower than the
provider's billed charge. Conversely, if the provider charges only $80 for the
procedure, the provider will receive 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 fees than 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 simply raise 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 greater number of services. DFFS is attractive to providers because the
majority of financial risk remains with the health plan and minimal risk is transferred
to the provider. Providers' contractual commitment to participate in utilization
management and quality management is vital to assuring that they are treating
members appropriately.

DFFS discounts for specific services or procedures may be calculated on a sliding

scale based on the volume of services the provider performs. For example, an
obstetrician's DFFS percentage might be 10% for performing 0 to 5 deliveries in a
month, but rise to 15% for 6 or more deliveries in a month. The sliding scale offers
some protection to the provider that has a low volume of services 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 a transitional reimbursement method as providers and
health plans establish relationships and health plan penetration increases.

The provider contract that the Canyon Health Plan has with Dr. Nicole Enberg
specifies that she cannot sue or file any claims against a Canyon plan member for
covered services, even if Canyon becomes insolvent or fails to meet its financial
obligations. The contract also specifies that Canyon will compensate her under a
typical discounted fee-for-service (DFFS) payment system.

During its recredentialing of Dr. Enberg, Canyon developed a report that helped the
health plan determine how well she met Canyon's standards. The report included
cumulative performance data for Dr. Enberg and encompassed all measurable
aspects of her performance. This report included such information as the number of
hospital admissions Dr. Enberg had and the number of referrals she made outside of
Canyon's provider network during a specified period. Canyon also used process
measures, structural measures, and outcomes measures to evaluate Dr. Enberg's
performance.

The following information applies to two procedures that Dr. Enberg provided to Canyon
plan members:

Dr. Enberg's Charge FFS for This Procedure

Procedure A $150 $160
Procedure B $120 $110

Under the DFFS system, the amount that Dr. Enberg is entitled to receive from
Canyon is

$150 for Procedure A and $110 for Procedure B

 $150 for Procedure A and $120 for Procedure B

$160 for Procedure A and $110 for Procedure B

$160 for Procedure A and $120 for Procedure B

Some health plans include a controversial element known as silent PPOs in their
overall strategy for managing DFFS payment. A silent PPO is an arrangement in
which an entity that negotiates discounts with providers sells access to those
discounts to other, unrelated health plans to use when paying for services provided
to the unrelated health plan's members. Silent PPOs are also called 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
either do not have a specified provider panel or offer coverage for out-of-network
services as a means to reduce the cost of provider services.

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

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 arrangements with various health plans. Discount brokers
typically purchase lists of contracted providers and their reimbursement rates
from area PPOs.
5. The discount broker finds that Provider C has a contract with PPO D (the silent
PPO in this situation) for a 20% discount off standard charges, and informs Health
Plan B of this arrangement.
6. Health Plan B applies the 20% discount to the $1,000 claim and remits the
resulting $800 to Provider C, along with an explanation of benefits (EOB) that
cites Provider C's arrangement with PPO D. Unless Provider C rechecks Patient
A's records for verification of health plan coverage, Provider C will not realize
that Patient A was not a member of PPO 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 the discounted fee.

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

Fee Schedule System

A fee schedule is the fee determined by the payor (a health plan or the Medicaid or
Medicare programs) to be acceptable for a procedure or service, which the provider
agrees to accept as payment 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 the payment for each service is
the same for all providers in the network. Thus, providers cannot manipulate the cost
for a service included on a fee schedule. However, they may still be tempted to
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 which are described below.

Relative Value Scale Payment Systems

A relative value scale (RVS) payment system is a system that assigns a
weighted unit value to the CPT 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 plan will 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 and may be updated periodically to reflect growth in actual expenses. Services
requiring greater resources are assigned a higher number of units and, therefore, are
awarded higher fees. For example, assume that a health plan has a conversion factor
of $10 per unit. A service that is assigned a unit value of 10.0 will be reimbursed at
$100 (10.0 units x $10 = $100), while a service 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 values for procedural services, such as surgeries or diagnostic tests, have
generally been higher than the unit values for cognitive services, such as office visits
or research on medical conditions. Because many of the services provided by PCPs
are cognitive, PCPs typically have not fared well financially under a straight RVS
system. In order to address the imbalance between payments for procedural and
cognitive services, many health plans use the Resource-Based Relative Value Scale
(RBRVS).

Relative Value Scale Payment Systems

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

Originally developed by the Centers for Medicare and Medicaid Services (CMS) for
Medicare use, RBRVS offers these advantages.4
 RBRVS relates each listed service across the entire spectrum of specialties that may
perform 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.

However, because RBRVS was developed around the needs of the senior population,
this system does not include weighted unit values for all types of procedures, such as
childhood immunizations. Further, RBRVS does not include any codes for anesthesia.
Some health plans use the McGraw-Hill unit value scale to supplement RBRVS or in
place of RBRVS. The McGraw-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 anesthesia procedures from the RVS system
published by the American Society of Anesthesiologists.5

Another method that health plans may use to compensate PCPs at a more realistic
level is to establish separate conversion factors for different types of services, such
as primary care, surgical services, and nonsurgical services. The primary care
conversion factor may take into consideration 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 value scale that will be used in calculating payments to providers. The health
plan should also give the provider information regarding the source of the conversion
factor, as well as the method for updating the conversion factor. While most unit
values for procedures typically are not subject to negotiation, 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 a significant amount of financial risk to the provider, because
reimbursement is still made for each service and the providers can increase their
reimbursement by performing a greater number of services.

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

A case rate system transfers risk to the provider for the intensity of services
delivered. The provider 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 rates offer providers the incentive to take
an active role in managing cost and utilization. Providers can increase their net
income from a case rate by improving the efficiency of treatment and maintaining
quality of care. If the provider is able to treat a patient at a cost that is less than the
case rate, the provider will increase the income generated by the case. Providers
that have accurate accounting systems that allow them to identify fixed costs may
use this information to negotiate case rates. Providers may also seek to negotiate
higher case rates for member populations, such as the elderly, that have higher
levels of disease and disability, thereby increasing the complexity of case
management.

Health plans must consider a number of critical issues in negotiating case rates.
First, case rates do not provide the opportunity for payors to benefit from the
provider's cost savings. The provider will receive the same payment for the case,
regardless of the costs the provider incurs for treating the patient. Therefore, the
health plan must take care in developing each case rate, as described 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 the rates is complex. A case rate should reflect how difficult and
time-consuming a course of treatment 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
complications that arise because of a patient's multiple medical problems. Given this
information, the health plan can calculate weighted payments for each possible
service, and then add the service payments to obtain a case rate.6 When a health
plan pays providers case rates, the contract should state 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-
Related Groups (DRGs). The Diagnosis-Related Group (DRG) system, also called
the Diagnostic-Related Group system classifies hospital patients into groups
according to a variety of factors such as primary and secondary diagnoses, surgery
and other procedures, complications, age, and gender. The DRG payment is based
on the average expected use of hospital resources for a specific DRG in a given
geographical area. The hospital receives a fixed payment for each patient, regardless
of the actual length or cost of the hospital stay. Some health plans use the DRG
system to compensate hospitals, however, because DRGs were developed primarily
to reimburse healthcare services for the senior population, DRG rates and diagnoses
may not be appropriate for all populations. DRGs are discussed further in further
lessons.
A case rate system eliminates problems with unbundling and upcoding, because the
package rate covers all components of the treatment. Health plans often monitor the
quality of care delivered under 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 been necessary at all. Utilization management programs are a necessary
adjunct to a case rate system to ensure that providers are treating only the cases for
which medical intervention is indicated.

The following statements are about fee-for-service (FFS) payment systems. Select
the answer choice containing the correct statement:
A discounted fee-for-service (DFFS) system is usually easier for a health plan
to administer than is a fee schedule system.
A case rate payment system offers providers an incentive to take an active role
in managing cost and utilization.
One reason that health plans use a relative value scale (RVS) payment system
is that RVS values for cognitive services have traditionally been higher than the
values for procedural services.
One reason that health plans use a resource-based relative value scale
(RBRVS) is that this system includes weighted unit values for all types of
procedures.

Per Diem Payment Systems

Health plans often pay hospitals and other healthcare facilities for inpatient care on a
per diem payment system, under which a health plan pays a specific negotiated
fee to a hospital for each inpatient day. Because the hospital receives a set fee per
day regardless of the actual services delivered, a per diem system places the
healthcare facility at risk for controlling utilization and costs 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
compensation systems is that the salary system changes a provider's status from an
independent contractor to an employee of the health plan that pays the salary. The
salary system, which offers advantages for both providers and health plans, is used
most often by staff model HMOs.

Paying salaries to providers simplifies a health plan's administration of

reimbursement. Receiving a salary also relieves the administrative burden on the
provider, who no longer has to submit claims or bill patients to receive payment.
Salaried providers are required, however, to submit information about patient
treatment for the health plan's utilization and quality management programs. A
salary system simultaneously stabilizes expenses for the health plan and income for
the provider. Further, salaries eliminate much of the financial incentive that
providers might have to perform unnecessary services under a FFS payment
agreement.

One important disadvantage to a straight salary system is that this type of

reimbursement does not reward providers who work efficiently and effectively nor
penalize providers who have excessive utilization. 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 consider individual
performance. For salaried providers, incentive plans often measure hours worked
and hours on call as well as patient satisfaction. However, the addition of incentives
makes the salary system 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 the risk that operational costs, including salaries, may exceed
revenues. Further, the salary system itself creates a high fixed cost. Even if plan
premiums or membership levels are lower than anticipated, 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 held that the control a company has over the actions of its
employees is greater than the control a company has over the actions of
independent contractors. As a result, a health plan that employs providers 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 that patients will demand more services than had been anticipated when
the salary schedule was designed. Therefore, if member demand for services is
greater than originally expected under the salary arrangement, providers must spend
the extra time and effort necessary to deliver the required services without receiving
additional compensation. Unlike financial risk, service risk does not affect the level of
compensation to a provider.

The salary plus any benefits paid to a particular provider should approximate the
income of local providers of the same specialty who are compensated under one of
the FFS arrangements. The total value of the benefit package usually equals 20% to
30% of the salary. The benefits that accompany a provider salary are usually
comprehensive, but the specific components vary from one reimbursement
arrangement to another and may be subject to negotiation between the health plan
and the provider. Figure 5B-1 shows the elements commonly offered in benefits
packages for salaried providers.
Capitation
Unlike FFS reimbursement arrangements, capitation is a prospective payment
system, and the amount of the compensation is independent of the actual volume
and cost of the services provided. 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 plan members' health status and
decrease the need for more intensive medical services in the future. In addition, the
use of capitation allows the health plan to transfer a greater proportion of risk to
providers than does the use of FFS or salary systems.

A capitated provider who delivers quality care in a cost-effective manner can benefit
from the system. However, providers may be at risk for loss if they have as patients
plan members with serious illnesses or injuries, especially if the provider's member
base is limited. While a provider with a large number of plan members receives
enough per member per month (PMPM) payments for relatively healthy members to
cover a few expensive cases, a provider with fewer plan members could suffer
financial loss from one catastrophic case. Later sections in this lesson discuss
strategies for reducing providers' exposure to such risks.
One difference between a fee-for-service (FFS) reimbursement arrangement and
capitation is that the FFS arrangement:
is a prospective payment system, whereas capitation is a retrospective
payment system
has a potential to induce providers to underutilize medical resources, whereas
capitation does not have this potential disadvantage
bases the amount of reimbursement on the actual medical services delivered,
whereas reimbursement under capitation is independent of the actual volume
and cost of services provided
is most often used by health plans to reimburse healthcare facilities, whereas
capitation is most often used by health plans to reimburse specialty care
providers

Capitation
In most cases, capitation is easier and less expensive for a health plan to administer
than an FFS system since there are no claims to process or adjudicate. Because the
capitation payment rate remains consistent from month to month, the only variable
is the number of members covered for a particular provider. A standard PMPM
payment generally makes the health plan's expenses more 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 services delivered, capitation has the potential to induce
providers to underutilize medical resources, that is, to delay or deny medically
indicated treatment. Second, providers may also be tempted to influence members
who require a great deal of time or costly treatments to switch to another provider,
thereby reducing the original provider's utilization and costs. Fortunately, such
patterns of practice are rare, and health plans make efforts to educate and work with
providers to prevent this type of situation.

Because capitation eliminates the need for claims, a health plan must establish
another method to collect data on patients and services rendered. Health plans
typically require capitated providers to 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 of reports the
provider must submit.

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

Partial capitation is a capitation payment that includes only primary care services. Partial
capitation is the most common type of capitation. It is used by many independent practice
association (IPA) model HMOs to pay their primary care providers, thus it is also known
as PCP capitation. A typical PCP capitation arrangement covers office visits, minor
procedures performed in the office, provider visits to hospitalized members, supplies, and
care management. Such capitation usually excludes radiology, laboratory testing of blood
or other specimens, immunizations, and drugs,9 which may be reimbursed under a
separate payment plan. Figure 5B-2 depicts PMPM payment under a partial 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 the
services included in the rate across all PCPs in the network. Many health plans adjust the
basic rate according to the age and sex distribution within a particular provider's
population. Some health plans, however, have flexible capitation agreements that
consider the capabilities of individual providers. For example, a health plan that does not
typically include radiology under capitation may authorize PCPs with radiology
equipment 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 between
the health plan and the provider. Generally, capitation "works" for PCPs when the
provider's panel size approaches 100 members.12

• specialty capitation

Specialty capitation pays individual specialists or a single-specialty group on a

capitation basis to provide a specified set of specialty services to all the plan's
members. The most commonly capitated specialties are cardiology, orthopedics,
radiology, and eye care. Expensive procedures are often excluded from the capitation
and are reimbursed on some type of FFS basis. Specialty capitation is less common
than PCP capitation because the number of patients seeing any one specialist is often
too low to adequately spread the risk of catastrophic cases. For specialty capitation to
be a reasonable financial option, a commercial health plan should offer a member
base of between 15,000 and 25,000.13 We discuss capitation of specialists further in
further lessons.

• professional services capitation

Professional services capitation is capitation that covers all physician services.

Professional services capitation can be accomplished in one of 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 services related to a
patient's care. Under the second model, the health plan pays a PCP organization a
capitation amount that covers all physician services. In addition to providing primary
care, the PCP provider organization arranges for and compensates all specialty care
services delivered to the PCP organization's members. Some PCP organizations may
object to bearing full risk for specialty care services that are not under the
organization's control and may negotiate for a method of reimbursement that will
share risk with the health plan.

• global capitation

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

Provider organizations that accept professional services capitation or global capitation

typically negotiate for capitation rates that compensate them adequately for the additional
risk they are assuming. Both the health plan and the provider organization must
determine if the provider organization'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 use financial incentive programs. Although cost savings is a major focus
for incentives, a health plan typically considers more than financial outcomes when
deciding how to structure incentive programs. Health plans often rely on incentive
plans to promote desired behaviors such as regular provision of preventive
healthcare services, compliance with UM programs, or participation on the health
plan's medical management committees. In many cases, a portion of a provider's
income 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 the financial goals of providers with the health plan's ultimate goal of
delivering high-quality care in the most cost-effective manner. Figure 5B-3 shows an
example of a health plan's incentive plan to encourage PCPs to provide full service to
members.
Partial capitation is one common approach to capitation. One typical characteristic of
partial capitation is that it:
includes only primary care services

covers such services as immunizations and laboratory tests

can be used only if the provider's panel size is less than 50 providers

covers such services as cardiology and orthopedics

Financial Incentive Programs

The performance measures included in incentive programs vary greatly depending on
the health plan's priorities, the type of provider, and the plan's previous experience
with incentive programs as a means of modifying provider behavior. Some measures
that health plans often use as bases for 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. Figure 5B-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 performance factors to be included in
the incentive plan.
A health plan's approach to incentives may reward the provider for achieving the
desired results or may punish the provider if the desired results are not achieved.
Withholds and risk pools are two 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 offset or pay for any claims that exceed the budgeted costs for referral or
hospital services. At the end of the period, any unused funds are paid to the
providers. A withhold places providers at risk of losing a portion of their base income
if their actual utilization and costs exceed the health plan's projections. Under a
typical withhold arrangement, the health plan holds back 10% to 20% of the
negotiated payment.14 If providers keep costs within the budgeted amount, the
health plan usually distributes the entire amount of money in the withhold to them.
The health plan retains part of the financial risk because the health plan is typically
responsible for making up any deficit if cost overruns exceed the amount of money in
the withhold.

Withholds should be thoroughly explained to providers in order to have the desired

effect. Some providers view a withhold as nothing but an additional discount to the
health plan and do not try to improve their utilization and cost management, thus
ignoring the incentive offered by the program. Although withhold arrangements are
typically not complex, the process of setting up the withhold system and monitoring
actual costs requires some extra effort and resources from the health plan. The
contract between the health plan and the provider should clearly describe any
withhold 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

Under the compensation arrangement that the Falcon Health Plan has with some of
its providers, Falcon holds back 10% of the negotiated payments to these providers
in order to offset or pay for any claims that exceed the budgeted costs for referral or
hospital services. If the providers keep costs within the budgeted amount, Falcon
distributes to them the entire amount of money held back. This way of motivating
providers to control costs while providing high-quality, appropriate care is known as
a:
risk pool arrangement

withhold arrangement

cost-shifting arrangement

bonus pool arrangement

Risk Pools
A risk pool is a fund that is established at the beginning of a contract period to
cover claims for specified services, such as specialty care. Any claims approved for
payment are paid out of the appropriate risk pool. At the end of the period, the
health plan may use remaining funds in one pool to cover overruns in another pool.
After all pools are reconciled, the health plan distributes any remainder to the
providers who funded the pools. The health plan may retain a portion of the surplus.
If there is a deficit after reconciliation, the providers or the health plan or the two
parties together make up the difference, depending on the terms of the incentive
arrangement. The funding of the pools, services covered by a pool, and the
distribution of surplus and deficits vary among health plans and specific products.
The contract should describe the details of the risk pool arrangements.

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 laboratory services, radiology, and pharmacy. Some health plans set
up risk pools that focus on more specific types of care, such as cardiology or
pharmacy, according to projected utilization of those services15 Capitation
arrangements often include one or more risk pools. Figures 5B-6 and 5B-7 illustrate
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 plans include 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-network services through standard risk pools for
the reason that out-of-network referrals are sometimes necessary, and neither the
health plan nor its providers have any control over the charges of the non-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 large subset of that panel, the performance of individual practitioners is not
highlighted. HMOs and POS options that base incentives on aggregate performance
may encounter problems with practitioners 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 group of providers. In
essence, the poor performers obtain a "free ride" based on the efforts of other
providers. A situation in which poor performance receives the same rewards as good
performance appears inequitable and can create dissension among providers and
dissatisfaction with the health plan.

Because of the potential for "free riders," provider selection for health plans with
group-based incentives should focus on selecting providers with practice patterns
that match the health plan's goals. The health plan can explore practice patterns
during the application process with specific questions about utilization, quality
management, and average costs of services. However, this approach 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 in one of the health plan's other networks.

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

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

One way for the health plan to reduce the size of performance pools is to contract
with provider organizations, such as IPAs, PHOs, or group practices, and base the
incentive on the organization's performance. While the HMO or POS may find it
difficult to influence individual performance through an incentive plan based on an
entire service area, the health plan can influence 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 most care, even in open
access HMOs. If they need further care, members generally follow the
recommendation of their PCP. Patients with chronic conditions generally see the
same providers on a routine basis. If providers are organized into a PHO, multi-
specialty group, or IPA, many patients are likely to stay within that provider
organization for all care. If an HMO or POS has sufficient data on the frequency of
member use of the provider group or organization, the health plan can statistically
assign members to the separate organizations.
Financial incentives to improve costs, quality, access, and satisfaction can then be
built around the 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 be great enough to compensate for random fluctuation in the incidence of
costly cases. A pool of 10 to 20 providers allows for effective peer review and
coaching of inefficient providers to improve their performance. Peer review works
best among providers who already have established working relationships, so the
health plan should consider existing provider affiliations when setting up risk pools.17

Because risk pools allow the health plan to share risk and reward with providers,
they can function as a negative incentive, a positive incentive, or both. An incentive
arrangement that puts providers at risk for both gain or loss along with the health
plan can create a greater sense of collaboration 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 above their 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 of loss for the provider. Bonus pools are funded by savings generated from
actual costs compared to the health plan's projected costs for a specified set of
services.18 For example, a health plan that capitates PCPs may have a bonus pool for
hospital funds. If the actual amounts that the health plan pays for hospital services
are less than the projected amounts, the difference becomes the bonus pool. A
hospital bonus pool is usually split between the health plan and PCPs. The health
plan receives a portion of the bonus because it is at risk for excessive hospital
claims, and the PCPs are entitled to a portion because their efficient management of
hospital costs makes the funds available for the bonus. The amounts paid out from a
bonus pool may be equal across all providers or linked to individual performance.

Bonus pools based on savings realized by the plan as a whole are somewhat easier
to administer than 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 individual provider's control, such as membership
growth. Thus, plan-wide bonus pools may offer a less powerful incentive to providers
than do pools based on individual practitioner or provider group performance.

Methods of Limiting Provider Risk

Even providers who practice efficiently and comply with health plan utilization
standards sometimes exceed the health plan's capitated payments. For example, a
region may experience a high incidence of influenza with symptoms so severe that
many plan members need hospitalization. A PCP may be responsible for the care of a
plan member who develops cardiomyopathy and needs a heart transplant. There are
many other situations in which providers can incur unexpectedly high costs that are
beyond their control. To protect providers against business losses, many health plan-
provider contracts include provisions to help providers manage financial risk. The
most common methods of managing provider risk are carve-outs, stop-loss
provisions, reinsurance, and risk adjustment.

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

Health plans sometimes use disease-specific carve-outs in which the services for
high-cost diseases such as AIDS or procedures such as organ transplants are
delivered by providers who specialize in the appropriate services, thus protecting the
normally capitated providers from unexpected service costs. A disease-specific
carve-out usually requires the plan member to obtain the service from a given
provider, who may be capitated under a separate agreement or may be paid 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 that require 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 the scope of PCP services. This type of
arrangement is known as a specialty services carve-out, and we 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 a capitation arrangement. With a specific-service carve-out, the capitated
provider still provides the carved-out service, but receives additional reimbursement
on a case rate or DFFS basis. For instance, health plans often carve out
immunizations from PCP capitation. Health plans find it advantageous to exclude
immunizations from capitation for several reasons. First, immunizations are a service
that health plans want PCPs to perform routinely. Immunizations are a component of
the Health Plan Employer Data and Information Set (HEDIS), which is an important
measure of quality for many health plans. In addition, paying DFFS for
immunizations ensures that not only will PCPs be diligent about performing
immunizations, but they will also promptly submit the information for payment.
Finally, immunization drugs and supplies can cost between $30 and $40 per 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 diems often negotiate a stop-loss provision in their contracts. A stop-loss
provision specifies that once the costs for a particular case have reached a certain
threshold, costs beyond that point will be reimbursed under a different payment
method, such as DFFS. For example, a hospital that accepts case rates may find that
costs quickly exceed reimbursement for a patient with severe cardiovascular disease
who requires an extended intensive care unit stay, blood products, multiple
antibiotics, and sophisticated cardiac support devices. A stop-loss provision is not the
same as stop-loss insurance, which we describe next in this lesson. A contractual
stop-loss provision transfers risk back to the health plan after the provider has
incurred a specific level of cost overrun.

Stop-loss insurance is insurance purchased by an individual provider, a provider

organization, or a healthcare facility to protect itself against all or part of the losses
that it may incur in the process of 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 from losses associated with healthcare for an individual member during a
given time period (usually one year) is individual stop-loss coverage, which is
often called specific stop-loss coverage or per-patient stop-loss coverage. Stop-loss
insurance against cumulative losses from healthcare services delivered to all plan
members during a specified time period is aggregate stop-loss coverage. Each
stop-loss insurance program typically covers one particular type of care such as
professional services or hospital services, so providers may need multiple stop-loss
insurance agreements to protect against loss.22

Under individual stop-loss coverage, the provider group or facility assumes sole
responsibility for all medical costs up to a specified dollar amount, known as the
attachment point. The provider and the stop-loss insurer share costs in excess of the
attachment point, up to a specified maximum amount. The portion of costs that the
provider pays in excess of the attachment point is the coinsurance. 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-loss
coverage works, suppose that a provider group purchases individual stop-loss
coverage for primary and specialty care services with a $5,000 attachment point and
10% coinsurance. If the accrued cost for the primary and specialty care treatment of
a patient is $8,000, the provider group assumes responsibility for the first $5,000
(the attachment point) plus 10% of the remaining $3,000 (the coinsurance) for a
total of $5,300. The insurer would reimburse the provider group for the remaining
$2,700.23

If a provider purchases aggregate stop-loss coverage for certain services, the insurer
is responsible 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 of the total projected costs for the provider for a certain
period, usually one year. Suppose that a provider group with 5,000 plan members
purchases aggregate stop-loss coverage for its hospital risk pool with a threshold of
115% of projected costs and a 10% coinsurance provision. The provider group funds
a hospital risk pool at $40 PMPM. The estimated risk pool (projected costs for
hospital care) for the year would total $2,400,000 ($40 x 5,000 members x 12
months). The stop-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 the provider 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 obtain stop-loss insurance from the health plan may pay for the
insurance by direct premium payments or by deductions from their monthly
capitation payments. Due to state regulations on the sale of insurance, some
agreements between health plans and providers for stop-loss insurance call the
arrangement "capitation protection" or "income guarantee programs." Other
providers purchase stop-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 single stop-loss insurance policy from a
commercial company to cover all their risk-sharing arrangements than to make
separate stop-loss insurance arrangements with each contracted health plan.
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 through PMPM payments to cover any excess costs.

A provider group purchased from an insurer individual stop-loss coverage for primary
and specialty care services with an $8,000 attachment point and 10% coinsurance. If
the group's accrued cost for the primary and specialty care treatment of one patient
is $10,000, then the amount that the insurer would be responsible for reimbursing
the provider group for these costs is:
$200

$1,000

$1,800

$9,000

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 provider organization that accepts a significant amount of risk (either
global risk or professional services risk) and then has several catastrophic cases
could incur crippling losses unless the provider organization has obtained stop-loss
insurance to absorb part of the loss. Generally, if a provider accepts 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
all professional and hospital services. If one of the group's patients delivers triplets
prematurely, the resulting hospital and specialty care costs could escalate rapidly.
The group is likely to experience a 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 wise to 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 patient population or of a particular patient. The characteristics that
influence the payment adjustment include 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 individual provider’s patient population in order to compensate for utilization and
clinical variances created by the factors listed above. Case-mix/severity adjustment,
also known as risk adjustment, affects compensation rates, perforance
measurement, or both.

When rates are adjusted, providers typically receive a higher PMPM rate for members
under the age of two years or over the age of 50. Adjusted rates are higher for
females than males at most ages. In addition, national and regional plans may adjust
their basic capitation rates to reflect geographical practice differences that influence
utilization and healthcare costs. Health plans may also adjust payment rates and
standards for performance measurement if the provider specializes in high-cost
medical conditions. Some providers, such as regional referral centers or providers
who have a reputation for excellence in a specific field, attract a disproportionate
number of patients requiring high-cost treatments.
Selecting Reimbursement Arrangements
No single approach to provider reimbursement is best for every situation. Health
plans typically modify reimbursement arrangements to meet their own specific needs
and often combine basic payment methods with incentives in several different ways.
A variety of factors influence a health plan'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, health plans must also avoid compensation methods or incentives that
lead to underutilization. Medicare and Medicaid programs and some states regulate
provider compensation in order to reduce the risk that a provider may deny
medically necessary care in order to cut costs. These regulations and laws prohibit
health plans from offering providers financial inducements to limit medically
necessary services for an individual plan member. In addition, Medicare, Medicaid,
and some states require health plans to disclose information about physician
incentive arrangements to the appropriate 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. Some states view provider organizations that accept financial risk for
the delivery of healthcare services as insurance companies and regulate them
accordingly. When determining if a provider organization is functioning as an
insurance company, state insurance regulators consider several factors. Among the
most important factors are the level of risk that the provider organization accepts
and the extent to which the provider organization is at risk for the cost of care
beyond its own scope of services.26

In order to ensure that payment and incentive plans motivate appropriate, efficient
use of resources rather than the rationing of services, many health plans incorporate
QM performance measures into their reimbursement arrangements. These QM
components often address both service quality and healthcare quality. Another way
that health plans discourage underutilization is by limiting the amount of payment
placed at risk through withholds and bonuses to a certain percentage of the
provider's base compensation.

Type of Provider
A health plan often uses a variety of reimbursement arrangements to meet the
needs of the different types of providers in a network. For example, a health plan
may capitate PCPs, pay specialists DFFS, pay hospitals on a per diem basis, and use
case rates for some ancillary services. The health plan may also tailor the
reimbursement approach to suit individual provider organizations and hospitals.

Most health plans and provider organizations compensate PCPs through some form
of capitation or FFS, often in conjunction with withholds, risk pools, or both. Network
model and group model HMOs sometimes capitate PCPs for all professional services,
while PPOs almost always pay PCPs on a DFFS, fee schedule, or case rate basis. Staff
model HMOs typically pay PCPs on a salary or salary-plus-bonus basis. A salary
system is best suited to a health plan with a limited number of practice settings. In
general, having a few centralized locations for care promotes scheduling and
operating efficiencies as well as more effective management of utilization. Health
plans 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 is growing in some specialty fields. Specialty capitation is usually more
appropriate for large groups of 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, but per diem rates are most common. A further lesson addresses specific
concerns for reimbursing healthcare facilities.

Ancillary service providers typically receive some form of FFS payment, although the
use of capitation for ancillary care is growing. Capitation is often appropriate for low-
cost ancillary services that members frequently use, such as laboratory analysis of
blood samples. One characteristic of ancillary services that has important contractual
and financial implications for a health plan is that most patients gain access to
ancillary services through a referral from a primary or 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 ancillary services
judiciously.

Level of Health Plan Market Maturity

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

Capitation is more prevalent in markets in which providers have already formed their
own organizations. These providers are usually more knowledgeable about and
receptive to health plan concepts. They are also more likely to have the necessary
information systems and skills to monitor 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 its providers 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 to accept financial risk in a reimbursement system if they are adequately
rewarded for doing so. If providers perceive that the payment approach is fair, they
are more likely to put forth their best efforts for the health plan's members and to
renew their contracts with the health plan. Retaining good providers improves the
continuity of care for members and saves the health plan the costs of recruiting new
providers.27 Finally, the reimbursement system must be simple enough for the
average provider to understand in order to avoid any misunderstandings that could
disrupt the relationship between the health plan and its providers.
AHM Network Management: Strategies for the Specialist
Component of the Provider Network

Pg 1 to 24

Network Management in Health Plans

Strategies for the Specialist Component of the Provider
Network
Objectives
After completing this lesson you should be able to:

• Describe some of the challenges health plans face when contracting with
hospital-based specialists
• Describe the different reimbursement options that health plans typically use
for specialists
• Discuss some common problems that health plans encounter when using
capitation for specialty care

In previous lessons, we discussed the roles of specialists in a health plan provider

network and described the basic processes that health plans use to select and
contract with specialists. You will recall that specialists are healthcare professionals
who have additional training in specialized fields and practice only a certain branch
of medicine. To distinguish them from primary care providers (PCPs), specialists are
sometimes referred to as specialty care providers (SCPs.)

In this lesson, we address specific concerns for developing the specialist component
of the network, including the challenges of contracting with providers who work in
the healthcare facility-based specialties of radiology, anesthesiology, emergency
medicine, and pathology. We then 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 of arrangement often depends on the organization of the provider
community. In more mature health plan markets, specialists are often affiliated with
provider organizations such as multi-specialty independent practice associations
(IPAs), physician-hospital organizations (PHOs), integrated delivery systems (IDSs),
or multi-specialty group practices. By contracting with one of these entities, the
health plan gains access to specialists as well as to primary care providers and, in
the case 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 of providers. Health plans also use direct contracting to supplement their
other specialty care arrangements with provider organizations. For example, if a
multi-specialty group that otherwise meets the health plan's requirements does not
include any dermatologists, the health plan may contract directly with a dermatology
group to provide access to dermatology services. Health plans that contract directly
with specialists typically select and contract with these practitioners after developing
their primary care physician (PCP) and hospital networks. Health plans often attempt
to form specialist panels that are compatible with the previously established PCP
referral patterns and hospital access privileges. However, in order to stay within
budget requirements for network development and to assemble the specialist panel
in a timely manner, health plans often find 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 faculty practice plans (FPPs) from teaching hospitals. Health plans may also
contract with specialists based 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 a hospital-based specialist, even though some practitioners in this
category actually practice at surgical centers, imaging centers, or other ambulatory
care centers instead of a hospital. The medical specialties that have traditionally
been hospital-based are radiology, anesthesia, emergency medicine, and pathology.
These practitioners typically have a contractual arrangement with 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 of the contract between the health plan and the
facility. Sometimes these contracts specifically include 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 separately with them
in order to ensure member access to their services.

Like many academic practitioners, some hospital-based specialists prefer managed

care contracts that 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 specialized knowledge, 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 health plan’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 with an 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,
health plans use a variety of methods to reimburse providers for the services they
deliver to plan members. These reimbursement methods can be divided into the
following three broad categories:

• Fee-for-service (FFS) reimbursement systems pay providers for the actual

medical services they deliver.
• Salary reimbursement systems offer providers a guaranteed income that is
not tied to utilization. All risk remains with the health plan.
• Capitation reimbursement systems offer providers a specified amount per
member per month regardless of the actual volume and cost of services
delivered. Providers assume part or all of the risk associated with providing
services.

In the following screens, we will describe how these methods are used to reimburse
specialist services.

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. The specific distribution of payment methods is shown in
Figure 6A-1. Of those plans that used FFS methods to reimburse specialists, 43.3%
indicated that they used FFS methods to reimburse all specialists.3
FFS systems may encourage providers to see a large number of patients and provide
an incentive for providers to perform difficult or unpleasant procedures. Because
charges are based on standardized diagnostic and procedure codes, FFS systems
also allow health plans to track and evaluate the services providers actually deliver
to plan members. However, FFS reimbursement offers very little incentive for
providers to manage utilization and cost.

To overcome the drawbacks of straight FFS reimbursement, health plans have

implemented a number 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. For example, assume that the UCR charge for a
particular procedure is $100. Under a 20% discount arrangement, a specialist who
submits a claim for $100 for that procedure would receive $80 from the health plan.
Under a volume-based system, the specialist might receive $90 per procedure for 0
to 10 procedures performed during a specific period, $80 per procedure for 11 to 20
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 procedural codes, and that value is multiplied by a conversion factor to arrive at a
payment amount. The higher the value of the service is, the higher the
reimbursement. Separate conversion factors may be used for different types of
services, such as surgical and nonsurgical services, to account for differences 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 of
a commonly used relative value scale.

Fee Schedules
Under a fee schedule system, the health plan and specialists negotiate a maximum
fee for each service based on procedural codes. The specialist must accept the fee as
payment in full, even if the specialist’s charge exceeds the established fee. If a
specialist’s charge is less than the established 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
associated with a course of treatment. Under a standard case rate system, the health
plan establishes a flat fee for all professional services associated with a particular
treatment. The payment amount is the same each time the treatment is performed
regardless of the intensity of the actual services delivered. For example, a health
plan that establishes a case rate for delivery of a baby would pay the 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 charges for multiple services and multiple episodes of care into a single pre-
established payment. If the health plan in our previous example used a global fee for
maternity services, it would make a single payment to the OB/GYN and that payment
would cover all prenatal, delivery, and postnatal services. For treatments that
require professional and institutional services, such as surgical procedures and
inpatient care, health plans may combine all of the hospital and physician’s charges
for a course of care into a single preestablished payment. A single fee established 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 to episodes of care, they shift the risk for the intensity of services to the
provider. Case rates also reduce the incidence of coding abuses such as upcoding
and unbundling.

The following statement(s) can correctly be made about contracting and

reimbursement of specialty care physicians (SCPs):
A. Typically, a health plan should attempt to control utilization of SCPs before
attempting to place these providers under a capitation arrangement.

B. Forms of specialty physician reimbursement used by health plans include a

retainer and a bundled case rate.

Both A and B

A only

B only

Neither A nor B

Salary Systems
Salary systems, which change the status of providers from independent contractors
to health plan employees, are used most often in staff model HMOs, plans that use
hospitalists to coordinate inpatient care, and certain multispecialty physician groups
to stabilize plan administrative expenses and provider income. Salary systems can
also be used to guarantee access to services for a defined block of time. For
example, a health plan might contract with specialists on a salary basis to provide
emergency department coverage or to provide on-call coverage outside of regular
network hours.4 Most often, salaries are paid to specialists on a monthly basis and
cover all services 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 a specialist each month to ensure access to specialist services. Health plans
typically evaluate the actual services delivered by retained specialists periodically
and reconcile payment accordingly. A retainer arrangement offers the specialist a
steady income, but allows for adjustments based on utilization.5

Capitation Systems
Health plans have not been able to establish specialty capitation on the same scale
as capitation for primary care providers because the patient base needed to support
specialty capitation is much larger than the patient base needed to support primary
care capitation. Under standard capitation systems, providers are paid a flat rate per
member per month (PMPM) for all services delivered to plan 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 a provider to each plan member is multiplied by the average FFS
charges for those services and the total 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 even though the average cost of primary care services may be low, the
capitation rate is usually fairly substantial. For example, suppose patients utilize PCP
services an average of three times per year at an average cost of $48. The PMPM
capitation payment the PCP would receive each month for each plan member would
be $12.00 [(3 × $48) ÷ 12]. A PCP serving 2,000 plan members would receive
$24,000 in reimbursement each month.

The costs of specialist services are typically higher than the costs of primary care
services, but the range of services provided by specialists is narrower and the
utilization rates for those services are typically much lower than those for primary
care. As a result, the capitation rate for specialists is often significantly lower than
that for PCPs. For example, average utilization of cardiology services 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]. The
cardiologist would have to be capitated for approximately 20,000 patients to receive
an amount comparable to the amount received by the PCP.

In determining the PMPM rate for specialist services, it is essential for the health plan
to accurately project utilization rates. If projected utilization is higher than actual
utilization, the health plan may contract at a capitation rate that is unnecessarily
high. If projected utilization is too 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 these providers under a capitation
arrangement.

Case mix/severity creates a second obstacle to establishing capitation

reimbursement systems for specialists. Because a PCP’s patient base consists of a
large number of healthy patients, the risk of 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 these patients
require costly care or services in a given period, the capitated specialist could
operate at a loss.

Health plans have addressed these obstacles by developing alternatives to standard

specialty capitation. One of these alternatives is to use contact capitation to
reimburse specialists. Another alternative 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 is actuarially determined for each specialty on the basis of expected
utilization and costs of services for that discipline.6 Unlike standard capitation, which
pays the specialist a fixed rate each month regardless of the services actually
delivered, contact capitation goes into effect only after a plan member has an
encounter with the specialist. Payments to the specialist continue each month until
the 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 points based on the number of new referrals (contacts) made to the
specialist by PCPs. Some health plans categorize referrals by the difficulty of the case
or according to some other criteria, and award different levels of points to the
different categories. For instance, a health plan may categorize referrals as
“uncomplicated” or “complicated,” and award more points for complicated referrals.
At the end of a given period, based on the total number of points accumulated, the
pool of 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 of calculations. As an example, suppose that a health plan with 10,000
members contracts with dermatologists on a contact capitation basis. The health
plan’s actuaries have determined that the appropriate PMPM capitation for
dermatology services is $1. The health plan plans to distribute the fund once each
quarter based on the point totals accumulated by each physician. For each new
uncomplicated referral, a provider receives 1 point. If the referral is classified as
complicated, the provider receives 1.5 points. During the first quarter, the plan’s
PCPs make 300 referrals to dermatologists, and 60 of these referrals are
complicated. Figure 6A-2 shows the steps to calculate the value of each referral point
and the payment for a dermatologist who received 50 referrals including 7
complicated cases.8
Contact capitation allows the health plan to compensate providers based on actual
episodes of care without having to pay on a FFS basis. In addition, contact capitation
tends to reward specialists 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 that practitioner.

Contact capitation may be an appropriate option when projected utilization of a

specialty care field is low. Under standard capitation approaches, a smaller patient
base increases the likelihood that a specialist will experience a disproportionately
high incidence of catastrophic cases that are not adequately compensated by the
PMPM capitation amount. A health plan might use contact capitation 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 have
difficulty 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 submit encounter forms for visits with plan members. Otherwise, the plan
will not receive the data it needs for UM and QM.

The Foxfire Health Plan, which has 20,000 members, contracts with dermatologists
on a contact capitation basis. The contact capitation arrangement has the following
features:

• Foxfire distributes the money in the contact capitation fund once each quarter
and the distribution is based on the point totals accumulated by each
dermatologist.
• Foxfire's per member per month (PMPM) capitation for dermatology services
is $1.
• The dermatologist receives 1 point for each new referral that is not classified
as a complicated referral and 1.5 points for each new referral that is classified
as complicated.

During the first quarter, Foxfire's PCPs made 450 referrals to dermatologists and 100
of these referrals were classified as complicated. One dermatologist, Dr. Shareef
Rashad, received 42 of these referrals; 6 of his referrals were classified as
complicated. Statements that can correctly be made about Foxfire's contact
capitation arrangement include:

that the value of each referral point for the first quarter was $120
that the value of Foxfire's contact capitation fund for dermatologists for the
first quarter was $20,000
that the payment that Foxfire owed Dr. Rashad for the first quarter was $6,120

all of the above

Group Capitation
As an alternative to contracting with individual specialists, health plans can contract
with specialist organizations. Many of these contracts are established on a capitation
basis. Under capitated contracts with specialist organizations, the health plan
typically capitates the organization for all contracted services. The specialty
organization or vendor is then responsible for making payments to individual
specialists. Although payments to providers come out of the fixed amount paid by
the health plan, the group can pay providers on a FFS, salary, or capitation basis.
The specialist organization can also use blended reimbursement methods to pay
individual specialists. For example, the organization might capitate a specialist for
core services and pay for additional services on a FFS basis. The specific
reimbursement method used by various specialist organizations depends on state
insurance regulations.

Specialist organizations can be structured in a variety of ways. The most common

specialist organizations 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. In other cases, specialist organizations offer additional administrative and
medical management support, including claims processing, provider reimbursement,
provider credentialing, quality management, and utilization management.

A health plan’s ability to capitate a specialist organization successfully depends on

the characteristics of the organization. Specialist organizations that focus on care
management and have their own utilization and quality management programs in
place are typically better prepared to manage financial risk-sharing under capitation
than are organizations that function mainly as negotiating and contracting
mechanisms for providers. When contracting on a capitation basis, specialist groups
with less emphasis on medical management may need to rely on financial incentives,
at least temporarily, to support quality of care, patient satisfaction, utilization, or
productivity goals. Organizations that lack internal systems for utilization
management may have to delay capitation contracts until such systems are
established.

Specialty Medical Groups

Specialty medical groups consolidate physicians’ practices into a single parent
organization. The organization owns all tangible and intangible assets, employs the
physicians, and operates the group practice. Specialty medical groups can be
organized as single specialty groups or multispecialty groups. A single specialty
group consists of specialists who practice in a single medical field, such as
neurosurgery, cardiology, or oncology, or who perform a specific type of clinical
service, such as radiology or anesthesiology. A multispecialty group includes
specialists from 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, especially multispecialty groups that include both PCPs and specialists. PCPs
in multispecialty medical groups typically refer members to specialists in the same
group. As a result, specialists have access to a large and fairly stable patient
population. Capitation also works well for single specialty groups that are large
enough to cover the health plan’s entire service area or a specified geographical
section of the service area.

Specialty IPAs
A specialty IPA is an association of individual specialists formed to facilitate
contracting with health plans and other purchasers. The organization provides
administrative support to members, but physicians in the association maintain
individual practices and facilities. A health plan contracts with the IPA for specified
services and then reimburses the IPA for those services. The IPA contracts with
individual physicians to provide contracted services and is responsible for
reimbursing individual specialists. The IPA thus serves as an intermediary between
the health plan and individual physicians.

Health plans commonly pay IPAs an established capitated fee for all contracted
services. Such a system shifts the financial risk of providing specialist services to the
IPA. The IPA may or may not transfer the risk to individual association members,
depending on the type of reimbursement method the IPA uses.

Specialty Carve-Outs
Health plans and employers frequently contract with external organizations for highly
specialized healthcare services such as behavioral healthcare, vision care, and dental
care. These contract arrangements are referred to as specialty carve-outs.
Increasing numbers of health plans are also establishing carve-out arrangements
with other specialty groups, such as cancer centers and ambulatory surgical centers,
and with ancillary services providers, such as laboratories and pharmacies.

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 of clinical and administrative services. Disease management
companies typically have staffs of healthcare professionals who specialize in
particular common medical conditions. Under many carve-out arrangements, the
disease management company is responsible for providing specialty care to all of a
plan’s members who have a particular medical condition, sometimes on a capitated
basis.

Specialty Network
Management Agreements

Under a specialty network management agreement, a health plan contracts with a

single specialist or a single institution or organization, such as a faculty practice plan,
to manage all services associated with a particular specialty. An individual contractor
is referred to as a specialty network manager and an institutional contractor is
referred to as a specialty network management company. The specialty network
manager or network management company typically receives a capitated amount for
providing a full range of services to plan members. The specialty network manager
or network management company subcontracts with other specialists to provide any
services 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

Specialty Network
Benefits of Group Capitation

Establishing a capitation arrangement with a specialty provider organization has

advantages for both health plans and specialists. For example, group capitation can
reduce the amount of financial risk that must be assumed by any of the parties
responsible for the delivery of specialist services. Capitated group contracts allow
health plans to shift financial risk to the specialist organization, thereby reducing
their overall healthcare costs. The specialist organization can then transfer some or
all of this risk to individual specialists depending on the reimbursement methods it
uses. Specialists paid on a FFS or salary basis assume very little, if any, risk.
Specialists paid on a capitated basis assume some risk, but that risk is typically lower
than the risk under individual capitation contracts because the group’s payments to
individual practitioners are usually based on only those services the specialist
actually delivers rather than on the full range of services available.

Group capitation can also reduce the impact of case mix/severity. As you recall from
our earlier discussion, case mix/ severity is a major obstacle to establishing
capitation arrangements with individual specialists. Group capitation reduces this
obstacle by distributing revenues to specialists according to the costs their patients
are expected to incur. Specialists whose patients require a greater number of more
costly services are generally allocated a greater portion of total revenues.

Benefits of Group Capitation

Another potential benefit of group capitation is a reduction in administrative costs.

For health plans, group capitation reduces the need to negotiate individual provider
contracts and administer multiple reimbursement agreements. Providers also benefit.
Although the specialist organization might contract with a number of different health
plans, member specialists contract only with the organization and receive
reimbursement from only one source. The specialist organization often provides
additional administrative support, such as claims processing and credentialing, as
well.

Finally, group capitation can improve quality of care. In many of the specialist
organizations described in this lesson, provider reimbursement is only one function
performed by the organization. Organizations that have established medical
management programs can also encourage physicians to modify their practice
patterns to focus on efforts, such as preventive care, that result in highquality, cost-
effective care.

Further Considerations for Capitating Specialty Care

Health plans often view capitation as an attractive reimbursement option for
specialty care disciplines with variable and unpredictable utilization, such as cancer
treatment, or for care that is expensive due to the nature of the services provided.10
However, a health plan may have difficulty capitating a particular specialty if the
scope of services provided varies from one practitioner to another.11 For example,
within the field of cardiology, some physicians do not perform invasive procedures.
An invasive procedure involves entry into the patient’s body by way of an incision or
insertion of a medical instrument. 12 Many patients with heart disease require
invasive diagnostic and therapeutic procedures such as cardiac catheterization and
angioplasty. When a patient is in need of one of these tests or treatments, a
noninvasive cardiologist must refer the member to another cardiologist who does
perform invasive procedures. Unless the noninvasive cardiologist and the invasive
cardiologist both belong to the same provider organization, and that organization has
a policy for allocating fees among practitioners who treat the same patients, the
health plan may be obligated to reimburse both practitioners for cardiology services,
even if the noninvasive cardiologist is capitated.

Specialty capitation is also difficult to implement for specialties that involve highly
specialized services, such as bone marrow transplants and pediatric neurosurgery.
The overall incidence of the medical conditions requiring such specialized care is
typically very low and many health plans are unable to offer a large enough patient
population to support capitation. For these specialties, reimbursement is likely to
remain on a modified FFS basis.

In addition, some specialists resist case rates, capitation, and other reimbursement
options that are not directly based on the amount and nature of the services
provided, in the belief that these payment methods will greatly decrease their
income. The health plan may be able to overcome specialists’ fears about lower
reimbursement through a payment plan that guarantees a certain level of patient
volume or provides additional compensation for achieving utilization and quality
goals.13

Another important consideration for specialty capitation is the need for sophisticated
information management systems. These factors must be considered by health plans
and provider organizations.

To address these issues, health plans and provider organizations are likely to need
more advanced technologies, 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, and external reporting by
provider organizations.14

AHM Network Management: Strategies for Contracting with

Hospitals and Subacute Care Facilities

Pg 1 to 22

Network Management in Health Plans

Strategies for Contracting with Hospitals and Subacute
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 their provider networks. Many health plans also contract with other types
of healthcare facilities, including subacute care facilities, rehabilitation centers, and
skilled nursing facilities (SNFs), so that plan members can receive care in the setting
that is most appropriate to their needs. Because hospitals 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 and outpatient services, including the use of centers of excellence in a
provider network. We also describe considerations for contracting for emergency
care. In the second part of the lesson, we explore the need for subacute care
providers in the network, and discuss options for reimbursing subacute 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 as contracting with practitioners: first, the selection of providers according to
the needs of the health plan’s members; second, negotiation; and third,
formalization of the contract between the plan and the provider. The time required to
complete the selection, negotiation, and contracting with hospitals may be longer
than with practitioners because of the volume and scope of services typically
provided by hospitals.

In a previous lesson, we described some general criteria that a health plan considers
when selecting hospitals for its provider network. You will recall the following primary
considerations for hospital selection:

• Location and accessibility to the health plan’s members.

How far is the hospital from members’ homes and workplaces (in miles and in
driving time)? Are there any geographic barriers or other factors that might limit
accessibility?

• Types and quality of services offered.

How do the types of services offered by the hospital compare to the services covered
by the benefit plan? Does the hospital’s record for quality services meet the standards
of the health plan and its accrediting body?
 • Accreditation status according to the Joint Commission on
Accreditation of Healthcare Organizations (JCAHO) or other
nationally recognized accrediting body.

What is the hospital’s current accreditation status? What quality problems were
identified during the hospital’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 and costs 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 and purchasers 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 to perform procedures at the hospital? Does the hospital have
arrangements with another facility for the 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? In addition, if the
health plan has or is contemplating Medicare, Medicaid, or workers’ compensation
products, the health plan examines the hospital’s capabilities to serve these
populations.

In order to ensure that its members have access to appropriate, high-quality

acute care services, a health 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 clinical expertise, equipment, and other resources, has the ability to provide
specific medical procedures or treatments more effectively and efficiently than other
providers in the same region.1 A center of excellence typically focuses on complex,
costly procedures and conditions such as organ transplants, bone marrow
transplants, open heart surgery, cancer, neurological diseases and injuries, trauma,
and high-risk obstetrical cases. The center of excellence may be located within a
hospital 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 of the health plan.

The perceived value of a center of excellence is based on the relationship

between the center’s clinical 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, better outcomes occur when a
 provider treats a large volume of patients who have the specific condition. For
example, in a study conducted for the Office of Technology Assessment,
researchers validated the volume-outcomes relationship for a variety of
procedures, including appendectomies, cardiac catheterization, hysterectomy,
coronary artery bypass graft surgery, and total hip replacements, as well as for
medical diagnoses including acute myocardial infarction and newborn diseases. 2
One explanation for the improved outcomes is that increased experience with a
medical problem results in superior knowledge and skills for a facility’s clinical
staff. In addition, a provider that regularly treats a certain condition is more likely
to have appropriate equipment available. For instance, a center of excellence for
neurological conditions is more likely to have sophisticated lasers for brain
surgery, such as a gamma knife, than are other facilities.

When a health plan contracts with a center of excellence for the evaluation and
treatment of a selected condition, the health plan usually refers all plan members
who suffer from that problem to the center of excellence. The health plan may offer
richer benefits to members who use the preferred center rather than another
provider.3

Before selecting a center of excellence, the health plan evaluates the center for
evidence of outstanding quality of care and efficient utilization of resources for
the given procedures or conditions. The center of excellence makes available to
the health plan documentation of its quality, utilization, and research activities,
and representatives from the health plan visit the center to further assess its
facilities, equipment, and staff. When evaluating quality and utilization, the
health plan should consider these questions.

 Does the center of excellence have the appropriate equipment on hand and an
adequate number of welltrained, experienced clinical staff members?
 How many procedures have been performed or how many patients have been treated
in the past year, and over the past several years?
 What is the center’s track record for successful treatment of the condition? How does
this record 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
costs of other providers with similar quality of care?
 Will the center work with a member’s PCP to coordinate care before and after
treatment at the center of excellence?
 Does the center seek to advance knowledge and improve treatment processes for the
disease?
 How accessible is the center’s location to plan members? If the center is not in the
health plan’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
members do not require admission to an acute care unit?
 What accommodations does the center offer for family members who accompany the
patient to the center?
The health plan also checks healthcare industry report cards for information about
the center’s performance. Because members’ needs vary greatly according to their
medical conditions, each health plan establishes standards for its centers of
excellence according to the particular medical focus of the center. For example,
Figure 6B-1 lists some quality requirements for a center of excellence that performs
heart transplants.

The services of a center of excellence may be included in a health plan’s contractual

arrangement with a hospital, or the health plan may contract directly with the center
of excellence. Contracts with centers of excellence are typically renewed annually,
often on an automatic basis, assuming that the center continues to meet the plan’s
quality standards. The payment methods for centers of excellence vary among health
plans. The reimbursement approaches include case rates such as global fees and
diagnosisrelated groups (DRGs), per diem payment, and discounted fee-for-service
(DFFS) payment.5

Negotiations Between the Health Plan and the Hospital

After the health plan identifies a hospital as an appropriate addition to its network,
the health plan and 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 the benefits and drawbacks of the proposed affiliation. In addition to
comparing quality and utilization policies and procedures, the health plan and the
hospital consider the financial effects of the contractual relationship.
The factors that influence the financial impact of the contract include the hospital’s
capacity to provide inpatient and outpatient services, as well as the costs and current
level of usage of these services. Both parties also estimate the volume of plan
members (inpatient and outpatient) and the resulting revenue the health plan can
shift to or away from the facility. The health plan and the hospital can then develop
proposals for reimbursement arrangements.6

In less mature health plan markets, where hospitals are still operating at high
profit margins, a health plan may be able to negotiate significant discounts on
charges, especially if the hospital has unused service capacity. The health plan’s
negotiating position is even stronger if the plan can deliver a significant number
of new patients to the hospital. A new health plan, especially a small one that
cannot immediately deliver large numbers of new patients, will probably receive
less favorable terms from hospitals. If the market is more mature in terms of
managed care, hospitals have 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 reimbursement arrangement, such
as per diems, case rates, or capitation.7 The following section provides further
details 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 the plan’s members. health plans often use different approaches to
reimburse a hospital for inpatient and 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 a straight FFS basis. As contracting for inpatient services became more
competitive, health plans began 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 to accept 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 on charges or a sliding scale discount. Under a straight discount on charges
arrangement, a hospital receives the same percentage payment for all charges.
Under a sliding scale discount on charges arrangement, 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 a specified
maximum. Straight discount on charges arrangements and sliding scale discounts
are most commonly used in markets with low health plan penetration. They are only
infrequently used in mature health plan markets.

DFFS payments have the advantage of being easy to calculate. Discounts,

however, do not always result in cost savings. For example, unless the contract
specifically limits cost increases, hospitals can increase reimbursement by simply
increasing their charges. In addition, reductions in inpatient costs are often offset
by increasing costs for outpatient services. Discounts also do not discourage
overutilization.

Case Rates
Like case rates for physicians, case rates for hospitals establish a fixed fee for all
services associated with a course of treatment. The case rates used to reimburse
hospitals, however, are typically based on diagnosis codes, such as diagnosisrelated
groups (DRGs), rather than on procedure codes. As you recall from Compensation
Arrangements Between Health Plans and Providers, DRG systems classify patients
into groups on the basis of such factors as primary and secondary diagnoses, surgery
and other procedures, complications, age, and gender. Payment is based on the
average expected use of hospital resources for a specific DRG in a specific
geographical area. Case rates can be limited to hospital inpatient services or they
can be bundled to 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 or length 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 of admissions. As a
result, case rate systems can put hospitals at odds with physicians whose
reimbursement 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
services associated with a course of treatment. The case rates used to reimburse
hospitals, however, are typically based on diagnosis codes, such as diagnosisrelated
groups (DRGs), rather than on procedure codes. As you recall from Compensation
Arrangements Between Health Plans and Providers, DRG systems classify patients
into groups on the basis of such factors as primary and secondary diagnoses, surgery
and other procedures, complications, age, and gender. Payment is based on the
average expected use of hospital resources for a specific DRG in a specific
geographical area. Case rates can be limited to hospital inpatient services or they
can be bundled to 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 or length 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 of admissions. As a
result, case rate systems can put hospitals at odds with physicians whose
reimbursement 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 hospital day, regardless of the number and costs of services delivered. The
hospital benefits if actual costs are less than the negotiated fee. If actual costs are
higher than the negotiated fee, the hospital must absorb the loss.

Stratified Per Diem Payments

A stratified per diem payment system pays different fees for different types of
services. For example, 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 plan member hospitalized for a heart attack
spends one day in the hospital’s intensive care unit and two days in a medical-
surgical unit, the hospital would receive one intensive care per diem and two
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 incur for subsequent days. For example, the first day of a surgical case
might include costs for preoperative testing, operating room supplies and equipment,
and surgical team fees. Subsequent days might include only nurses’ fees, supplies,
and room and board. A differential per diem payment system, or “front-loaded”
per diem payment system, accounts for differences in daily utilization by paying one
rate for the first hospital day and a lower rate for subsequent days. For example,
instead of receiving a straight $800 per diem payment, a hospital might receive
$1,000 for 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 bed days for a given period. The health plan first establishes a scale
of per diem payments. As with other sliding scale methods, the per diem rate
decreases as the number of bed days increases. For example, 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 the
expected number of bed days that members will use during the year and uses the
corresponding scaled per diem rate to make periodic payments to the hospital. At
the end of the year, or at specified intervals (e.g., monthly, quarterly), the health
plan calculates the actual number of member 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 to encourage utilization management. Stratified, differential, and
scaled per diems also allow the health plan to more accurately allocate funds for
inpatient care. However, none of these payment systems provides hospitals with
 an incentive to reduce the number of hospital admissions or the length of stay for
inpatient care.

Capitation
Under capitation arrangements, hospitals receive a pre-established amount per
member per month for providing inpatient services to plan members. Payments may
be adjusted to account for age and gender differences in the member population, but
they do not vary according to actual utilization or total volume of services. All
capitation arrangements require the contracting hospital to assume financial risk for
providing inpatient services. The amount of risk the hospital must 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 assume all financial risk for
providing contracted services. The hospital is also at full risk for services delivered by
subcontracted providers. If no risk pool has been established or the funds in the risk
pool are not sufficient to cover the costs of subcontracted services, the hospital 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 typically places a capitated amount

for inpatient services in a risk pool and then reimburses the hospital 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 to hospitals and subcontractors
can be made on a per diem basis or any other basis. Any funds remaining in the pool after
all payments have been made are shared by the hospital and 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, the
hospital can receive additional reimbursement if utilization is lower than expected, but it
does not have to pay money back to the health plan if utilization exceeds the expected
level.

• Partial-risk Capitation

A partial-risk capitation arrangement requires a hospital to share both upside and

downside risks. In other words, if the costs for inpatient services are lower than
expected, the hospital shares the risk pool surplus with the health plan. If costs are
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
the hospital 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 risk associated 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
costeffectiveness of patient care.

Reimbursement for Outpatient Care

Health plans use many of the same methods to reimburse hospitals for outpatient
services that they use to reimburse inpatient services. For example, many health
plans negotiate DFFS payments or some type of package pricing, such as case rates,
for specific treatments. These methods can be used alone or in combination with
other methods. As an alternative, some plans base 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 of medical resources used during an outpatient visit to a
healthcare facility. The patients in a specific ambulatory payment classification have
similar clinical characteristics and resource usage patterns.8 That is, the patients in
an APC have similar diagnoses and undergo similar tests and treatments. Under the
Balanced Budget Act (BBA) of 1997, health plans will be required to use a
prospective payment system for outpatient services delivered by healthcare facilities
to Medicare beneficiaries. The Centers for Medicare and Medicaid Services (CMS)
funded the development of 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
the appropriate 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 resource use. The assigned weight multiplied by a specific
facility’s payment rate is the basis for the level of payment that is due the facility.11 A
discussion of how Medicare and other payors determine average expected resource
use for specific categories and calculate facility rates is beyond the scope of this
course.

There are, however, significant differences between DRGs and APCs. One of the most
obvious differences is that DRGs were designed as a payment system for inpatient
services, while APCs are for care delivered in outpatient settings. In addition, the
primary variable for DRG classification is the patient’s diagnosis, and the DRG
classification applies to an entire hospital stay for the patient. For APCs, the critical
variable is the procedure or other treatment that is performed during a single visit.
The DRG system assigns each patient to a single DRG classification for a hospital
stay, but the APC system allows for the assignment of multiple APCs for 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’ Current Procedural Terminology (CPT-4) codes. The ICD-9-CM and
CPT-4 codes used for APCs are taken from the UB-92 hospital claim form.12

Although ambulatory payment classifications (APCs) bear some resemblance to

diagnosis-related groups (DRGs), there are significant differences between APCs and
DRGs. One of these differences is that APCs:
typically allow for the assignment of multiple classifications for an outpatient
visit
always apply to a patient's entire hospital stay

typically serve as a payment system for inpatient services

typically include reimbursements for professional fees

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 which the services were delivered, and no separate payment will be made.
Packaged services include operating 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 excludes certain rural hospitals from the OPPS. Several services will be excluded
from OPPS and paid under another prospective method. Medicare will pay for
laboratory, ambulance, speech pathology, physical therapy, and occupational
therapy services, durable medical equipment, and prosthetics and orthotics
according to a fee schedule. Also, Medicare has established a composite rate 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
healthcare costs, the reimbursement arrangements between a health plan and a
hospital typically have a significant impact on the financial success of both parties. In
many cases, health plans and hospitals prefer to contract for at least two years in
order to lock in a reimbursement rate for a longer period of time and to control the
costs associated with creating new, different contractual agreements.

Insight 6B-1 discusses issues that health plans and hospitals may consider when
contemplating long-term provider contracts. Although this insight focuses on HMO-
hospital contracts, this information may also apply to other types of health plans that
contract with hospitals on a capitation basis. In this insight, the medical loss ratio
refers to an index that compares the costs of delivering health benefits with the
revenues received by the plan. The medical loss ratio is calculated by dividing total
medical expenses by total revenue. 13 For example, if a health plan’s total medical
expenses for a certain time period are $450,000 and total revenues for the same
period 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 managing member access to emergency care and provider payment for
emergency services is often challenging for health plans. Plan members often visit
emergency departments for care that would be more appropriately delivered in
another setting. In some cases, members seek care from an emergency department
rather than contacting their primary care provider (PCP) because they do not know
the severity of the medical condition and fear that the problem may be more serious
than it actually is. Other instances of unnecessary emergency department use occur
when a member is unable to contact the PCP for advice on the illness or injury or the
member simply forgets the plan’s instructions to contact the PCP for non-emergency
care.
When health plan members without true medical emergencies come to the
emergency department for care, providers are often uncertain about whether to treat
them and whether the health plan will pay for treatment in the emergency care
setting. Although some health plans have developed lists of procedures that are
automatically approved for payment when performed in an emergency department,
most health plan contracts do not attempt to list all emergency services that are
covered under the benefit plan. Instead, contracts usually include a provision that
describes emergency 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’s authorization procedures, responsibilities of the PCP, and payment
arrangements. The linked segment on contracting for emergency care is excerpted
from the chapter titled “Ambulatory and Ancillary 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 to provide, direct, or authorize a member’s emergency care. The PCP or designee
is contractually obligated to be on call 24 hours a day, 7 days a week, to assist members
needing emergency services. 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 the PCP 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 plan will pay nonparticipating providers reasonable charges for emergency
services rendered if they are required because of unforeseen illness or injury. Except in
rare instances, the health plan does not pay for follow-up or continuing treatment
provided by nonplan providers. Payment for covered services outside the service area is
limited to treatment that is necessary before the member can reasonably be transported to
a participating hospital or returned to the care of the PCP.

Special Payment Provisions

Providers should also understand the health plan’s payment policies to ensure appropriate
payment. Many health plan contracts include a provision that precludes payment for
emergency care 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 to an obstetrical patient when she presents to the hospital
with false labor and is monitored for a short 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
structured through 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 the relationship between the hospital and its emergency care providers,
health plans may negotiate separate contracts with emergency care physicians, such as
anesthesiologists or trauma surgeons. Payments for services rendered in the emergency
room by participating primary or specialty care providers are covered in the applicable
contract with that provider.
Fee-for-Service
Reimbursement for emergency room services can be negotiated as a single
discount off usual and customary (U&C) charges, such as a 20 percent discount
per emergency room visit, or a discount with a maximum allowable charge, such
as a 20 percent discount up to a maximum dollar amount of $150 per visit. To
reduce the high costs associated with emergency care and to increase the practice
options available to members, many health plans contract with urgent or
immediate care centers for the treatment of nonemergency care such as fever,
minor wounds, and nausea.

Flat Rates
Flat 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, the contract might reimburse the provider $150 for U&C
charges up to $200 and $275 for U&C charges up to $400. Flat rates for
emergency care can include ancillary services, such as laboratory and radiology,
and can include payments for the hospital-based physicians, as well.

Capitation
As with other specialty care capitation contracts, capitated arrangements for
emergency care services must be structured to avoid the unintended effects of
capitation, such as PCPs unnecessarily referring members for emergency
treatment. As with any provider, the emergency care provider contemplating a
capitation contract must have available to him or her the basic information needed
to evaluate a proposed capitation arrangement, including the services covered
under the capitation rate, the member demographics, the covered benefits and
plan designs, and the historical utilization of the services. Other considerations are
outlined in Figure 6B-3.
The following statement(s) can correctly be made about financial arrangements
between health plans and emergency departments of hospitals:

A. These arrangements typically include payments for services rendered in the

emergency department by a health plan's primary or specialty care providers.

B. Most of these arrangements are structured through the health plan's contract with
the hospital.

Both A and B

A only

B only

Neither A nor B

Adding Subacute Care to Provider Networks

In many cases, an acute care hospital is not the appropriate setting for patients in
need of medical and rehabilitative services. While some patients do not require the
level of care and resources typically offered by acute care hospitals, they are often
so ill or debilitated that home health services are inadequate. In order to provide
these plan members with the appropriate care in the most 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 acute illness, injury, or exacerbation of a disease process. It is goal-
oriented treatment rendered immediately after, or instead of, acute hospitalization to
treat one or more specific active complex medical conditions or to administer one or
more technically complex treatments, in the context of a person’s underlying
longterm conditions and overall situation. Generally, the individual’s condition is such
that the care does not depend heavily on high-technology monitoring or complex
diagnostic procedures. Subacute care requires the coordinated services of an
interdisciplinary team, including physicians, nurses, and other relevant professional
disciplines who are trained and knowledgeable in assessing and managing these
specific conditions and in performing the necessary procedures. Subacute care is
given as part of a specifically defined program, regardless of the site. Subacute care
is generally more intensive than traditional nursing facility care and less intensive
than acute care. It requires frequent (daily to weekly) recurrent patient assessment
and review of the clinical course and treatment plan for a limited (several days to
several months) time period until a condition is stabilized or a predetermined
treatment course is completed.”14

The Zephyr Health Plan identifies members for whom subacute care might be an
appropriate treatment option. The following individuals are members of Zephyr:

• Selena Tovar, an oncology patient who requires radiation oncology services,

chemotherapy, and rehabilitation.
• Dwight Borg, who is in excellent health except that he currently has sinusitis.
• Timothy O'Shea, who is beginning his recovery from brain injuries caused by
a stroke.

Subacute care most likely could be an appropriate option for:

Ms. Tovar, Mr. Borg, and Mr. O'Shea

Ms. Tovar and Mr. O'Shea only

Mr. O'Shea only

Mr. Borg only

Subacute Patients and Providers

Subacute patients are typically elderly; however, many younger patients are also
candidates for subacute care. Subacute patients vary greatly in terms of the types of
disease or injury, treatments required, and length of stay.15 Figure 6B-4 lists some
examples of patients for whom subacute care 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
medical care and monitoring as well as regular rehabilitative and, perhaps,
respiratory therapy before they are stable enough to be discharged home or to a
separate nursing facility. For example, a stroke patient may spend several days or
weeks in a hospital-based subacute unit after leaving the hospital’s acute care unit.17
When subacute care at hospitalbased units is more costly than similar care 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 subacute unit found at freestanding SNFs addresses the
needs of patients who still require periodic monitoring and rehabilitation, such as
exercises to maintain range of motion for limbs, although their overall conditions are
unlikely to improve. Examples of the latter type of case are ventilatordependent
patients and patients with progressive neurological disease. At longterm care
hospitals, subacute units typically provide daily medical care on an extended basis
for patients with complex medical conditions, such as multiple organ system failure.18
For example, a comatose patient who requires ventilator support, nasogastric tube
feeding, and multiple medications 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
“Subacute Care and Health Plan” from The Managed Health Care Handbook, 3rd
edition.† This excerpt describes the various types of reimbursement that health plans
may use for subacute care and some guidelines for selecting a quality subacute care
provider. In this excerpt, the phrase “the Joint Commission” refers to the JCAHO,
and the word “payor” is spelled as “payer.”
Network Management in Health Plans
Pharmacy Networks
Pg 1 to 40
Objectives

After completing this lesson you should be able to:

• Describe the advantages early pharmacy networks had over direct pay and cost-
sharing pharmacy 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
management company (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 services to the members of a designated health plan. Although hospital and
1

physician networks have existed for more than 60 years, pharmacy networks did not
become formally organized until the mid- 1960s. Since then, they have become an
integral part of the managed healthcare system. In this lesson, we will provide a brief
description of the history and development of pharmacy networks and discuss the
features that distinguish pharmacy networks from other provider networks. We will also
describe the impact pharmacy benefits management has had on the way health 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,
pharmacy benefits were delivered through open, direct contact between patients and
pharmacies. Patients needed written authorization from a licensed physician to
obtain prescription drugs, but there were no restrictions on which drugs the
physician could prescribe or which pharmacy the patient could use. Payment was
also direct. The patient either paid the pharmacy in full or shared expenses with an
insurer under a major medical insurance policy. Prescription prices were determined
by the pharmacy and were typically based on the cost of ingredients plus a percent
mark-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 part by someone other than the patient. Most early
third-party prescription programs were sponsored by labor unions and provided
benefits to union members through designated pharmacies. Later, governments,
insurance companies, and employers began offering similar programs. Because they
were designed to serve specific groups, the networks associated with these programs
were organized locally and often consisted of a single pharmacy that served a limited
geographical area. 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 pharmacy and 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. The National Auto Prescription Drug Program went into effect in
October 1969. It offered benefits to program members who used approved pharmacy
networks to obtain legend drugs—those drugs that required a written prescription
from a licensed physician.

Under the terms of the program, plan members could obtain any legend drug from
any participating pharmacy by presenting a plastic ID card and making a small
copayment. The pharmacy would fill the prescription and then bill the plan directly
for reimbursement. Plan members could also obtain prescription drugs from
nonnetwork pharmacies, but they were required to pay the pharmacy in full and file
a claim with the plan for reimbursement. Claims administrators typically charged
plan members a penalty—often as much as 25% of the cost of the prescription— for
out-of-network purchases.

The National Auto Prescription Drug Program

The networks that provided program benefits were organized regionally by the Blue
Cross and Blue Shield plans that underwrote the program. Blue Cross and Blue
Shield plans that had automobile manufacturing plants in their operating areas
developed their own networks. If the health plan was not located in the same area as
the manufacturing plant, the health plan contracted with third-party administrators
(TPAs) to develop networks.3

Most pharmacy TPAs were claims processors that solicited contracts with
independent pharmacies and administered pharmacy benefit programs at the
regional level, but did not underwrite the benefits or assume financial risk.

Requirements for participation in the network were simple. Pharmacies wishing to

contract with the National Auto Prescription Drug Program, either directly or through
a claims processor, had to 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 Auto Prescription Drug Program served as a model
for most of the early pharmacy programs and for the health plans that appeared
later.

Advantages of Early Pharmacy Networks

Pharmacy networks offered the following advantages over direct pay and cost-
sharing pharmacy systems:

• Increased patient access to pharmacy services.

The cost-sharing requirements of direct pay systems and major medical insurance
policies created barriers to patient care. Depending on the cost of drugs and the
amount of deductibles and coinsurance requirements, these barriers could be
substantial. Pharmacy networks allowed plan members to purchase prescription drugs
for a small copayment. By reducing out-of-pocket costs for patients, pharmacy
networks eliminated the price barriers created by direct 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 for administrative tasks such as
claims processing. Third-party administrators found that reimbursing a single
pharmacy for prescriptions for a block of patients was far less costly than reimbursing
that same block of patients individually. For example, a block of paper claims that
could be processed through a participating pharmacy for 40 cents per claim could cost
as much as 95 cents per claim if processed individually.4

• Better data for monitoring and managing the benefit.

Participating pharmacies were required to maintain records of all pharmacy

transactions. These records contained information about prescription drugs, plan
members, physician prescribing patterns, and utilization that administrators could use
to assess and control plan performance.

• Standardized claims processing.

Early prescription card programs took a first step toward standardized claims processing
by requiring network pharmacies to submit claims on designated forms. Unfortunately,
each plan had its own form and it was necessary for pharmacies that participated in more
than one network to maintain and use separate forms for each plan. In 1972, the National
Council of Prescription Drug Programs (NCPDP) was formed to address thirdparty drug
programs’ need for standardized information, and in 1977, the NCPDP developed the
Universal Claim Form (UCF). The NCPDP later developed similar standards for
electronic claims processing.

Health Plan Pharmacy Networks

Early pharmacy networks were typically open panels, in which any pharmacy that
satisfied registration and reimbursement requirements could participate. These
networks expanded patient access to pharmacy benefits, but they did very little to
control costs. In a typical FFS prescription program, a payor (typically a government
agency or employer) contracted with a third-party administrator which, in turn,
contracted with networks of pharmacies to provide services to plan members. This
relationship is illustrated in Figure 6C-1.
TPAs could exert some control over participating pharmacies and plan members by
establishing dispensing 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 increases were typically passed on to payors in the form
of increased insurance premiums.
Health Plan Pharmacy Networks
In the early years of pharmacy benefit programs, cost increases were often
dramatic. Between 1980 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 those costs. A first step in the cost
management process was to establish closed pharmacy panels rather than open
panels.
Closed panels limit participation to a specified group of pharmacies. By directing
patients to specified pharmacies, closed networks offered significant cost savings and
greater control over pharmacy benefits than was possible with open networks.
Closed networks kept costs down for payors by reducing contracting and
administrative costs. Closed networks gave third-party administrators greater
leverage in negotiating with pharmacies by allowing them to trade business volume
for price discounts. They also gave administrators greater control over pharmacy
performance and made implementing additional cost-management programs easier.
Figure 6C-2 describes additional changes that are occurring as direct pay and
costsharing systems evolve into managed care pharmacies.

Unique Features of Health Plan Pharmacy Networks

In terms of structure and operation, pharmacy networks are similar to other
managed care provider 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 of operation but small enough to be manageable and to
offer an attractive volume of plan members 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 are designed to deliver products as well as services; (2) they are developed
around a national standard for 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 that pharmacy panels are designed primarily to deliver tangible
healthcare products to health plan members. Unlike surgical procedures or diagnostic
techniques, medications have a concrete market value. In the minds of some payors,
prescription drugs are similar to commodities and should 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 contracts with drug manufacturers. Health plans have no direct control
over pharmaceutical products, but they do have control over the market for those
products: health plan subscribers. Health plans have been able to offer access to a
large patient base in exchange for price discounts and rebates from manufacturers.
Health plans have similar leverage over pharmacies as distributors of pharmaceutical
products. In order to maintain their customer bases, pharmacies must be willing to
accept the terms of network contracts.

Other types of prescription drug distributors, including chain pharmacies, mail-order

drug services, and pharmacies located at employers’ workplaces, also compete for
the health plan patient base. In some locations, physicians dispense their own
prescription drugs, without the use of pharmacies. In order to compete effectively
against these lowercost distributors, pharmacies must now do more than simply sell
prescription drugs. They must also provide services.

Pharmacies provide services by working with physicians, nurses, and other

healthcare providers to incorporate medications into a patient’s healthcare plan. This
process, which is referred to as pharmaceutical 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 are achieved by incorporating
medications into patient care.

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

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

Standard Reimbursement
Reimbursement for prescription drugs and services in a third-party prescription drug
plan typically 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 individual purchased prescription drugs directly from a
pharmacy and then was reimbursed by the plan. Reimbursement, subject to any
copayment, deductible, and coinsurance requirements, was most often based on UCR
charges. Most major medical plans still follow a reimbursement approach. Under a
service approach, plan members obtain prescription drugs from participating
network pharmacies by presenting proper identification and paying a specified
copayment. The pharmacy then bills the plan directly for the remaining cost of the
prescription. The majority of current health plan prescription drug plans are service
plans.

Reimbursement under virtually all service plans is based on an amount related to the
cost of the drug plus a specified dispensing fee for each prescription. In most
contracts, the cost component of the reimbursement formula is based on the
average wholesale price (AWP), or average wholesale cost (AWC), which
represents the average price that wholesale suppliers or manufacturers charge
pharmacies for medicines. It is important to remember that although the AWP is the
amount the health plan uses in calculating reimbursements for prescription drugs, it
is not necessarily the price the pharmacy pays for the drugs. Plans that purchase
products directly from pharmaceutical manufacturers and distribute those products
through their own pharmacies—such as closed panel group and/or staff model HMOs
—often receive volume discounts that reduce the price they actually pay to the
manufacturer. Open panel plans, such as IPA and network model HMOs, that
dispense drugs through network pharmacies typically reduce their costs 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,
average wholesale prices are published periodically in accepted sources and
serve as a universal pricing mechanism across all segments of the industry.
• Because of volume discounts and rebates, the AWP is often substantially
higher than the actual price the pharmacy pays for prescription drugs. For
example, a pharmacy that receives a 15% discount under its contract with a
drug manufacturer can purchase a drug with an AWP of $25.00 for only
$21.25 ($25.00 – $3.75). The difference between the AWP and the actual
purchase price belongs to the pharmacy.
• Increases in the AWP are passed on by the pharmacy, thereby providing a
built-in hedge against inflation.

Although the AWP offers benefits to pharmacies, it can result in unacceptable costs
for health plans. To avoid this problem, health plans typically use the AWP as a
benchmark and then negotiate the actual reimbursement. Most often, the contracted
reimbursement to the pharmacy is a percentage off the AWP; for example, AWP
minus 10%.9 Health plans have also established alternative 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.

Reimbursement for prescription drugs and services in a third-party prescription drug
plan typically follows one of two approaches: a reimbursement approach or a service
approach. One true statement about these approaches is that:
payments under the reimbursement method typically are not subject to any
copayment or deductible requirements
payments under the reimbursement approach are typically based on a
structured reimbursement schedule rather than on usual, customary, and
reasonable (UCR) charges
most major medical plans follow a service approach

most current health plan prescription drug plans are service plans

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 of ingredient costs and profit, and include operating expenses assigned
specifically to the prescription department.10 Service costs consist of two
components: costs for services associated with dispensing prescription drugs and
costs for cognitive services. Dispensing services include making generic
substitutions, switching prescriptions to preferred drugs, or providing patient
monitoring and education. These services are typically specified by the health plan.
Cognitive services, or professional services, are services identified by the
pharmacist as being medically necessary for the patient, and include (1) counseling
patients about prescriptions and drug therapy, (2) reviewing drug profiles to prevent
or monitor adverse drug interactions, (3) implementing quality improvement
programs, (4) documenting pharmaceutical care in patient records, and (5)
monitoring program compliance. Fees can be uniform—for example, the same
specified amount added to each prescription—or variable, based on specified criteria
such as brand versus generic or the cost of the medication. Figure 6C-3 illustrates
different types of fees.
In health plan pharmacy networks, service costs consist of two components: costs
for services associated with dispensing prescription drugs and costs for cognitive
services. Cognitive services typically include:
making generic substitutions of drugs

counseling patients about prescriptions

providing patient monitoring

switching prescription drugs to preferred drugs

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. The earliest 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 submitting reimbursement was often greater than the actual
claim itself. Computerization has made claims processing faster and more
economical. Using software programs, pharmacies can obtain information 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
the health plan for reimbursement.

Initially, each pharmacy had its own separate computer and database, and there
were no communication links between the computers in various locations. As
computers became more sophisticated, stand-alone systems with limited remote
access gave way to systems which provided comprehensive online communication
with health plans’ and other providers’ databases and allowed pharmacies to manage
their prescription departments and their patients’ needs. These online information
management systems are referred to as point-of-service systems.

Point-of-service capabilities are possible, in large part, because of the standardized

formats provided by the National Council of Prescription Drug Programs. The
NCPDP’s Telecommunication Standard Format provides standards needed for the
exchange of electronic prescription drug claims. Other standards, such as those for
communicating online drug use evaluation information, facilitate the exchange of
pharmaceutical care information, including documentation of drug problems,
pharmaceutical care interventions, and outcomes.

Point-of-service systems allow pharmacies to perform a variety of tasks quickly,

accurately, and economically. In addition to verifying patient eligibility for
prescription drug coverage and determining copayment, deductible, and coinsurance
requirements, point-of-service systems allow 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
currently required 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 prescriptions save both time and money. Prescription
software can check prescribed medications for generic equivalents and for formulary
compliance, issue alerts for noncompliance, offer therapeutic alternatives, and
generate drug-change requests. It can even alert the physician when patients fail to
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

contend that electronic prescriptions represent unnecessary duplication of effort
because pharmacists are already performing the tasks that are included in
prescription software programs—either because of regulatory requirements or as
part of their pharmaceutical care efforts. Some physicians are unable to use the
programs because of state laws prohibiting electronic prescriptions; others worry
that hackers will be able to break into the system and send their own prescriptions;
still others 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 in health plans by the year 2000.14

Pharmacy Benefits Management

We have seen how the use of pharmacy networks allows prescription drug plans to
reduce drug costs. Pharmacy benefits management provides a way to control costs
by managing the entire benefit process. Pharmacy benefits management can be
included in a health plan’s total benefit package, or it can be offered by an
independent, external organization. We will discuss these alternative 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 is a type of health plan specialty service that seeks to control the costs
of prescription drugs while promoting more efficient and safer drug use. Pharmacy
benefits management is an outgrowth of the third-party administration of
prescription drug programs. Many PBMs operating today began as TPAs. Unlike TPAs,
which focus on providing administrative services such as contract negotiations and
claims processing, pharmacy benefit managers (PBMs) attempt to control costs by
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 health plans, as shown in Figure 6C-4.
Health plans no longer simply administer the delivery of pharmacy benefits from
payors, through pharmacy networks, to patients. Instead, health plans influence
each of the players in the pharmacy benefits process.

Influence over Manufacturers

One of the most pressing problems facing health plans has been the rising cost of
prescription drugs. Health plans and PBMs addressed the problem of rising costs by
establishing and managing formularies.

Drugs and treatment protocols included in the formulary are considered preferred
therapy for a given managed population. A health plan with an open formulary
covers drugs that are on the preferred list as well as drugs that are not on the
preferred list. A health plan with a closed formulary covers only drugs that are on the
preferred list. Health plans continually update their formularies in order to ensure
that the medications included represent the current clinical judgement of providers
and experts in the diagnosis and treatment of disease.
Most formularies encourage the use of generic and therapeutic substitutions to
ensure that the drug therapy patients receive is cost-effective as well as safe and
appropriate. In some formularies, such substitutions are required. In order to
compete against lower-cost producers for a 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 better disease 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 management and utilization management requirements and reinforced
by financial incentives. PBMs exert additional 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 over community-based pharmacies. PBMs determine which products and
services pharmacies deliver to plan members and how they will be reimbursed. The
more restricted the network becomes, the more control the health plan or PBM has.
For example, contracting with a single chain of pharmacies rather than with
individual pharmacies reduces the PBM’s contracting, claims processing, and
administrative costs and increases its ability to monitor and manage pharmacy
performance. The overall high-volume, low-cost operations of chain pharmacies may
also make them more willing than independent pharmacies to accept lower
reimbursement or to share operating costs.

Non-community-based distribution systems such as mail-order services also increase

competitive pressures on traditional pharmacies. High-volume, low-cost delivery
capabilities allow mail-order companies to offer health plans and PBMs deep
discounts on prescription drug prices. Mail-order distribution has also proved to be
cost-effective for long-term therapy associated with chronic conditions and for
distribution to patients, such as retirees and disabled patients, who have difficulty
traveling to pharmacies to have prescriptions filled. Faced with the prospect of losing
clientele to these alternative providers, pharmacies are accepting the reimbursement
offered by health plans and PBMs and emphasizing the value of services they
provide.

Independent pharmacies can deflect some of this competitive pressure by joining

forces to create a pharmacy service administration organization. A pharmacy
service administration organization (PSAO) is an organized network of
independent pharmacies created to market competitive drug programs to health
plans. A PSAO gives its members volume-buying power and also provides assistance
with claims processing and reimbursement.

Influence over Drug Use

By participating in outcomes and pharmacoeconomic research, the development of
disease management and practice guidelines, drug utilization review (DUR), patient
monitoring, academic detailing— that is, one-on-one visits to physicians to discuss
prescribing patterns and formulary 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
benefit design, claims processing, utilization management, quality management, and
network management. Pharmacy benefits management can be integrated into a
health plan’s total healthcare package to form a unified pharmacy benefit, or it
can be “carved out” through a separate contract with an independent PBM company.

Unified Pharmacy Benefits

When pharmacy benefits management is incorporated into a health plan’s operations
as a unified benefit, the health plan assumes responsibility for establishing networks
and managing their operation. Some health plans deliver pharmacy benefits only
through retail pharmacy networks, while others combine retail networks with mail-
order services to provide integrated delivery systems. Some health plans require
members to stay within the pharmacy network in order to receive pharmacy
benefits, while others allow members to use any pharmacy but offer richer benefits
for the use of network providers. Some health plans operate locally, while others
operate regionally or nationally. In all cases, the health plan is responsible for
recruiting, selecting, and negotiating contracts with network pharmacies. The more
pharmacies the network includes, the more 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.
The Pine Health Plan has incorporated pharmacy benefits management into its
operations to form a unified benefit. Potential advantages that Pine can receive from
this action include:
the fact that unified benefits improve the quality of patient care and the value
of pharmacy services to Pine's plan members
the fact that control over the formulary and network contracting can give Pine
control over patient access to prescription drugs and to pharmacies
the fact that managing pharmacy benefits in-house gives Pine a better chance
to meet customer needs by integrating pharmacy services into the plan's total
benefits package
all of the above

Criteria for Selecting Pharmacy Providers

Health plans follow the same guidelines when establishing a pharmacy network that
they follow when 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 requirements of a pharmacy network and the factors
health plans use to measure the extent to which pharmacies satisfy those
requirements.

Using these requirements as a base, health plans can develop specific criteria for
network participation. 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 disease
management
 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 plan maximum control over quality, access, cost, and customer service, as
described here.

 Unified benefits improve the quality of patient care and the value of pharmacy
services by giving health plans control over the number and type of pharmacist/physician
interactions, the direction and scope of drug therapy interventions, and the application of
disease management programs.
 Control over the formulary and network contracting gives the health plan control over
patient access to prescription drugs and to pharmacies. By contracting directly with drug
manufacturers and network providers, health plans can design the pharmacy benefit
program to meet the specific needs of their subscribers.
 In-house claims processing, administration, and database management allows health
plans to conduct plan operations from a single, central location, without the added
expense of thirdparty administration or contracting fees.

 Finally, managing pharmacy benefits in-house gives health plans a greater hand in
customer satisfaction by integrating pharmacy services into the health plan’s total
benefits 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 pharmacy benefits management is typically available only to health
plans operating in markets that offer a large patient base in a limited geographic
area. Health plans that serve small markets often do not have the resources
necessary to build and maintain the systems capabilities needed to administer
pharmacy benefit programs. For health plans whose markets are widely dispersed,
consistent administration of benefits is difficult, if not impossible. Health plans that
are unable to manage the entire benefits program in-house do not have to relinquish
all control. Health plans can maintain those parts of the management function that fit
their needs and capabilities and carve out other 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
specialized PBM companies. According to industry statistics, HMO and PPO use of
external PBM companies to 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 most important 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
operations as claims processors for third-party prescription drug programs. Claims
processing is still a major part of PBM operations. It is not unusual PMBs to process
as many as 1 million claims transactions per day.21 The volume of claims processed
by PBMs gives them economies of scale—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 of individual plans show that PBMs do save money. For example, a 1995
study conducted by the General Accounting Office of plans participating in the
Federal Employee Health Benefits Program (FEHBP) showed that PBMs saved over
$600 million.22

Access Advantages
PBMs offer access advantages on two fronts: access to pharmacies and access to
pharmaceutical products and services. A health plan contracting directly with
pharmacies represents a single patient base. While that base may be large, it is only
part of the total market in any given geographical area. PBMs, on the other hand,
typically represent several health plans and other health plans and can use this
expanded patient base to draw pharmacies into the network. Most PBMs also offer a
complete package of pharmacy services, including drug formulary management,
programs for generic and therapeutic substitutions, drug utilization review programs,
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 an added 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 that although the primary appeal of PBMs is their ability to control costs by
managing drug pricing and drug use, increasing numbers of employers and health
plans are turning to PBMs because of their ability to promote safe and effective drug
use, contribute to disease management, and improve 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’s
pharmacy benefits program is relatively easy. Finding the right PBM can be difficult.
For many health plans, selection of a PBM is based on the PBM’s response to
questions related to the following topics:

• Contract arrangements

Does the PBM require fee-for-service reimbursement, or is it willing 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? Is reimbursement available for
nonnetwork purchases? If so, how is this reimbursement handled? Does the PBM
reimburse pharmacies for cognitive as well as dispensing services?

• Formulary development

What incentives do pharmacies have to dispense generic products? Do pharmacies

have the authority to make generic or therapeutic substitutions or to recommend
prescription changes? Is the formulary open or closed?

• Drug pricing

What system does the PBM use to reimburse participating pharmacies for drug costs?
Do pharmacies share risks for the costs of drugs dispensed? If so, who is responsible
for establishing a risk-sharing program and for selecting, pricing, and assuring 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 the PBM to
individual pharmacies and to other providers in the health plan?
 • Quality management

How does the PBM measure, monitor, and manage the quality of services provided
by network pharmacies? What quality indicators does the PBM evaluate?

• Customer satisfaction

How does the PBM evaluate patient satisfaction with pharmacy services? How does
the PBM ensure that providers comply with patient confidentiality requirements?

• PBM ownership

Is the PBM controlled by a pharmaceutical manufacturer through an ownership

agreement or other strategic alliance? Are manufacturer discounts limited to specific
drugs because of contract requirements?

Delivery Options for Pharmacy Services

Health plans have five major options for delivering pharmacy services to their
subscribers. Each of these options is briefly described below. Figure 6C-6
summarizes their advantages and disadvantages and their availability in the health
plan system.
Closed Networks

In closed networks, selected pharmacies agree to supply services to plan members

at discounted rates in exchange for guaranteed sales volume. For health plans,
closed panels have a number of advantages over open panels. Closed panels reduce
costs by directing members to specified providers. In addition, closed panels make it
easier for health plans to set standards, monitor performance, and implement cost-
control programs. For many plan members, restricted access is a major disadvantage
of closed panels.

Pharmacy Networks
Open Networks

As you recall, open networks allow any pharmacy willing to accept the terms of a
provider contract to participate. Requirements for participation are generally simple:
pharmacies must be properly licensed and must agree to the reimbursement
specified in the contract. In a number of states, open panels are mandated by any
willing provider laws designed to put participating and nonparticipating pharmacies
on equal footing by preventing favorable reimbursement for selected providers. In
these states, closed networks are allowed only for staff or group model HMOs that
own and operate their own pharmacies. The primary advantage of open networks is
that they provide 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 is limited to setting reimbursement
levels.

Performance-Based Open Networks

Performance-based networks are similar to other open networks in terms of
requirements for participation and patient access. Reimbursement, however, is based
on a pharmacy’s performance on specified criteria such as generic substitutions,
formulary compliance, and average cost of prescriptions. Provider contracts may also
include drug utilization review and willingness to adhere to specified pricing
schedules as key performance factors. Pharmacies that meet the specified standards
receive payment in addition to the standard rate specified for prescribing services.

Performance-based systems give health plans greater control over costs, but they
tend to reduce participation. In addition, compliance among network pharmacies that
are unaccustomed to such tightly managed operations is often minimal.

A health plan has several options for delivering pharmacy services to its subscribers.
Each option has potential advantages to a health plan. An advantage to a health plan
of using:
performance-based open networks is that they tend to increase participation in
the pharmacy network.
closed networks is that they improve the health plan's ability to set standards
and implement cost-control programs for pharmacy services.
customized networks is that they typically are inexpensive to operate.
open networks is that they tend to improve the health plan's ability to control
pharmaceutical costs.

Customized Networks
Customized networks are networks designed to meet the needs of a specific
population. Most often, these networks take the form of company pharmacies that
are owned by large employers and operated at workplace sites. Because of the large
number of employees they serve, company pharmacies can negotiate favorable price
discounts from manufacturers. In addition, company pharmacies provide convenient
access for employees. However, the use of company pharmacies is typically limited
to those companies whose employee base is large enough to warrant the expense of
setting up the network and whose facilities are large enough to accommodate in-
house operations. According to industry guidelines, a company pharmacy requires
4,000 to 6,000 employees, a daily volume of at least 150 prescriptions, and a
minimum of 500 square feet of operating 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 also contract 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 volume discounts and simplified delivery. However,
selecting and managing mail-order services requires special attention. Figure 6C-7
presents guidelines that health plans can use to select mail-order vendors.

Reimbursement Options
In order to achieve its quality, access, and cost objectives, a health plan must
include a clear definition of reimbursement methods in its provider contracts with
pharmacies or PBMs. Health plans 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 a combination of drug costs, service costs, and profit requirements. We
have already described the use of average wholesale price (AWP) as a basis for
determining the drug cost component of the fee-for-service formula. Health plans
can also calculate drug costs according to these pricing systems.

Estimated Acquisition Cost (EAC)

Estimated acquisition cost (EAC) involves establishing a purchasing profile for each
pharmacy in the network and basing reimbursement on the profile. EAC-based
reimbursement to small pharmacies that lack enough leverage to secure volume discounts
or rebates is typically close to the AWP. For large pharmacies whose volume and
purchasing power allows them to secure manufacturer 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
and therefore represents what pharmacies are actually charged for prescription drugs.
This approach reduces the price inflation inherent in the AWP because discounts and
rebates are already deducted. This system, however, has not been very successful because
not all pharmacies purchase drugs through wholesalers.

Actual Acquisition Cost (AAC)

Actual acquisition cost (AAC) is equal to the initial price of a prescription drug minus
any and all discounts, including volume discounts, free goods, and any other mechanisms
used to reduce price. It is the most accurate method of calculating drug costs and provides
the lowest level of cost, but it is also the most complicated method, and the expense of
implementing the system often eliminates its cost savings.

Maximum Allowable Cost (MAC)

Maximum allowable cost (MAC) represents the maximum reimbursement a health plan
will allow for a particular product. The MAC is attractive to health plans because it
allows the health plan to put a maximum limit on the drug cost component of the
reimbursement formula and offers control over multiple-source products. Most MAC
formulas specify that if the cost to the pharmacy 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 plan the higher MAC price. For
example, the MAC list may specify a cost of 8 cents per tablet for a particular drug. If the
pharmacy purchases that drug for 10 cents per tablet, the health plan will reimburse only
8 cents of the cost and the pharmacy may not bill the subscriber for the remaining 2 cents.
If the pharmacy purchases the drug for 6 cents per tablet, it can charge the health plan
only 6 cents, and not the 8 cents specified on the MAC list. MAC pricing is used
primarily for multisource and generic products.
Reimbursement for service costs covers both dispensing services and cognitive
services. We described these different services in our discussion of managed care
pharmacy networks earlier in this lesson. Service costs are negotiated by the health
plan and participating pharmacies and are specified in the provider contract. Unlike
incentive payments, which are based on performance, service cost payments are
based on utilization.

The following statements describe two types of HMOs:

• The Elm HMO requires its members to select a PCP but allows the members to
go to any other provider on its panel without a referral from the PCP.
• The Treble HMO does not require its members to select a PCP. Treble allows
its members to go to any doctor, healthcare professional, or facility that is on
its panel without a referral from a primary care doctor. However, care outside
of Treble's network is not reimbursed unless the provider obtains advance
approval from the HMO.

Both HMOs use delegation to transfer certain functions to other organizations.

Following the guidelines established by the NCQA, Elm delegated its credentialing
activities to the Newnan Group, and the agreement between Elm and Newnan lists
the responsibilities of both parties under the agreement. Treble delegated utilization
management (UM) to an IPA. The IPA then transferred the authority for case
management to the Quest Group, an organization that specializes in case
management.

Both HMOs also offer pharmacy benefits. Elm calculates its drug costs according to a
pricing system that requires establishing a purchasing profile for each pharmacy and
basing reimbursement on the profile. Treble and the Manor Pharmaceutical Group
have an arrangement that requires the use of a typical maximum allowable cost
(MAC) pricing system to calculate generic drug costs under Treble's pharmacy
program. The following statements describe generic drugs prescribed for Treble plan
members who are covered by Treble's pharmacy benefits:

• The MAC list for Drug A specifies a cost of 12 cents per tablet, but Manor pays
14 cents per tablet for this drug.
• The MAC list for Drug B specifies a cost of 7 cents per tablet, but Manor pays
5 cents per tablet for this drug.

To calculate its drug costs, Elm uses a pricing system known as:

estimated acquisition cost (EAC)

package rate cost (PRC)

actual acquisition cost (AAC)

wholesale acquisition cost (WAC)

Capitation
Capitation, which is a common method of reimbursement for physicians, is now
being used for pharmacies by a limited number of health plans and PBMs. Health
plans and PBMs can establish three different types of capitation relationships within
the pharmacy benefit system.

1. The health plan or PBM can establish a capitated contract with individual
pharmacies participating in the network. This arrangement is similar to that used
for capitating physicians.
2. Health plans and PBMs can establish capitated contracts with drug manufacturers.
The agreement may apply to a specific product or to all drug treatment options for
a specific disease. It may cover only the products themselves, or it may include
educational programs.
3. Health plans or PBMs can accept capitated payment for pharmacy benefits from
private or public sponsors. Reimbursement to network pharmacies is independent
of the agreement between the plan sponsor and the health plan or PBM.

Capitation in pharmacy networks has produced mixed reactions. In order for

capitation to be successful, patients must receive all prescriptions from the same
pharmacy and pharmacies must be able to influence prescribing through generic and
therapeutic substitutions. Health plans tend to 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 from always 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 benefit from the guaranteed cash flow generated by the patient
population. However, for small patient bases, actual utilization may be far different
than the industry average. In addition, pharmacies often have little control over
which drugs will be prescribed and how often they will be used, so that control over
utilization is limited.

Other Risk- Sharing Reimbursement Arrangements

Health plans and PBMs have responded to the limitations of capitation systems by
developing a variety of risk-sharing reimbursement options. Like capitation systems,
these options typically set an annual cost-per-member target, but rather than
requiring providers to assume the entire risk of deviations from the target,
risksharing arrangements divide the risk. If the cost-per-member is lower than the
target amount, the health plan and the PBM, the health plan and the pharmacy, or
the PBM and the pharmacy (depending on the parties to the risk-sharing
arrangement) share the savings. If the cost-per-member is higher than the target
amount, the parties to the risk-sharing agreement share the extra costs.

Risk-sharing arrangements are still relatively new approaches to reimbursement in

pharmacy benefit 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, these reimbursement 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 physician reimbursement. 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 pharmacies operate in markets where prices are regulated
by competition, UCR charges have very little meaning. A pharmacy can charge
whatever it wants. A second reason is that drug prices charged by manufacturers
often increase frequently and dramatically, making it difficult for health plans and
PBMs to maintain a current profile of UCR charges. Some health plans incorporate
UCR charges into their reimbursement schedules by specifying in network contracts
that reimbursement will be based on the lower of UCR charges or the pricing formula
included in the contract (e.g., AWP – % AWP + dispensing fee).

Incentive Payments
Another innovation in pharmacy reimbursement is the use of incentive payments.
Incentive payments are payments made to pharmacists who meet specific
performance goals or engage in certain cost-management activities such as generic
and therapeutic substitution or patient education. The amount of the incentive
depends on the pharmacy’s performance on a specified activity and on the total
savings from the activity by all network pharmacies. For example, a pharmacy that
exceeds the target rate for generic substitutions might receive an incentive payment
from the health plan or PBM. The amount of the incentive would depend on the
pharmacy’s substitution rate and on the savings generated by generic substitutions
for the network as a whole.

Network Management in Health Plans

Considerations and Strategies for Specialty Services
Pg 1 to 37
Objectives

After completing this lesson you should be able to:

• Explain some of the different carve-out arrangements that a health plan may use
to arrange access to specialty services
• Describe the criteria a health plan uses to select a sole-source provider for
specialty services
• 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 a separate benefit, network, or program. Cardiac surgery, radiology,
behavioral healthcare, and dental care are examples of specialty services. Ensuring
that plan members have adequate access to high-quality specialty services can be
especially challenging for a health plan. Although many specialty care providers are
physicians, many others are not, so a health plan’s basic approaches to provider
selection, credentialing, and contracting may not apply to specialty care providers.
Specialty services often involve very specialized knowledge or differences in delivery
systems that 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 to specialty services. Next, we discuss considerations for contracting with a
single provider or organization, rather than with multiple providers, for a specialty
service. We also explore network management considerations for several types of
specialty services, including behavioral healthcare, 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 specialty service. This approach is common for cardiac surgery and radiology
services. However, because most 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 networks and 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 a
specialty 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 specialty service and the specific geographic area. Some network rental
companies and network management companies do not provide any services beyond
identifying specialty providers and establishing a reimbursement agreement with
them. In this type of arrangement, the health plan is responsible for credentialing
providers, as well as for all other network and medical management functions.

Using Carve-Outs for Specialty Services

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

Between these two extremes are network arrangements under which an organization
outside the health 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 and the 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 by its specialty service providers. Even if the service is
carved out of the health plan’s scope of services, regulatory and accrediting agencies
hold the health plan accountable for the proper performance of any delegated
functions. With the exception of MBHOs, there are no nationally recognized
accreditation programs for specific types of specialty health plans, network rental
companies, or network management companies. Therefore, it is important that
health plans carefully evaluate the policies, procedures, and capabilities of any
organizations that supply network management and medical management functions
before delegating these functions. A health plan must continue to monitor the
contracted organization’s quality of care and performance 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 of services to all of the health plan’s
members in a defined market.1 Sole source contracts typically include a capitation
compensation arrangement. Choosing an appropriate organization to be the sole
provider of specialty services can be complex. This discussion of sole-source
contracting is excerpted from Health Plan Contracting by Wendy Knight.†

Criteria in Establishing a Sole-Source Relationship

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

Partnership
Because the health plan is replacing multiple providers with one in a sole-source contract,
it wants to ensure that the selected provider is suitable as a long-term partner. The health
plan will look 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. In addition, the health plan wants assurance that the provider
embraces the concept of health plans and has the clinical and administrative capacity to
accommodate the expanded health plan business.

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

Quality
Health plans are very concerned about a provider’s quality assurance activities, especially
in a sole-source arrangement. This includes how a provider hires and trains its clinical
staff, the extent to which it uses contracted personnel, its applicable accreditation status,
its process for measuring quality, and the use of patient satisfaction surveys. In
conjunction with affiliated providers, many health plans are developing specific patient
care programs based on evolving clinical practice guidelines and are interested in
contracting with health care professionals who have the interest and capability of
establishing clinically-based, patient-centered programs.

Information Systems
The key to successfully managing and administering a capitated arrangement is access to
current data and sophisticated information technology. The prospective sole-source
provider must have the sophisticated information systems necessary to obtain, input,
track, and monitor capitation payments, enrollment data, claims payments, and related
data. Moreover, the provider must possess or acquire the system infrastructure that is
indispensable in capturing and analyzing physician referral patterns, utilization statistics,
patient risk factors, and other essential clinical information. The provider’s ability to
manage a capitated contract of this size using compatible and sophisticated information
systems is an important issue in sole-source contracting.

Experience
Providers considering sole-source arrangements should have significant experience in
delivering the specified services, particularly in a health plan environment. Health plans
will look for providers with an established track record of providing high-quality services
and with experience in capitated contracts. Providers lacking considerable health plan
experience should create alliances with providers more experienced in working under
capitated contracts.

Other Considerations for Sole-Source Contracting

A sole-source contract is a major endeavor for the health plan and provider alike and
involves a variety of contractual and operational issues that both should explore
thoroughly. These issues include

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

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 on considerations for specific types of specialty service
networks, beginning with behavioral healthcare.

Network Management for Behavioral Healthcare

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

There are varying opinions on carving out BH benefits. Proponents of carving out BH
believe that a contract with an MBHO results in faster access to care and more
specialized services for members. However, a BH carve-out potentially can decrease
continuity of care due to lack of care coordination between the BH provider and the
member’s PCP. For this reason, some BH providers advocate keeping BH within the
scope of services offered by the health plan’s own network. These providers feel that
mental wellbeing and physical health are very closely linked and that separating BH
providers from the rest of the network significantly reduces provider collaboration.3
As of 1999, NCQA accreditation programs for both health plans and MBHOs assess
the coordination of BH with medical care4 and look for demonstrated oversight of the
MBHO 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 same patient over time. These conditions typically persist for long periods of
time, sometimes even for the 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 for both mental illness and chemical
dependency, from an inpatient level of care to a full range of outpatient services,
including crisis intervention and stabilization. Although the use of inpatient facilities
for BH has decreased greatly in recently years, an health plan must still have
inpatient facilities 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 following types 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 BH conditions in addition to conducting psychotherapy. Psychologists hold a
Ph.D. in psychology and typically are licensed to perform psychological testing in
addition to conducting psychotherapy. Licensed psychological counselors also
perform psychotherapy and typically have at least a master’s degree in psychology
or counseling. The other types of BH practitioners have varying levels of education,
although many social workers, psychiatric nurses, and counselors have master’s
degrees and generally are independently licensed by the state in which they practice.
BH practitioners may also hold certification in specialized treatment modalities such
as chemical dependency counseling, family therapy, or biofeedback. Individual
responsibilities vary according to the practice setting and the scope of practice
allowed by the individual practitioner’s state 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 the same service rendered by a psychologist (Ph.D.), which, in
turn, is more costly than a similar session with a psychiatric nurse, a social worker,
or a counselor. Generally, individual therapy sessions cost more than group therapy
sessions. MBHOs frequently utilize non-physician providers 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 who can
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 PCP who suspects mental illness or chemical dependency can refer the
member directly to a BH provider after obtaining any necessary referral authorization
from the plan. Other health plans require the PCP to refer the member to a BH case
manager who assesses the member and, if indicated, channels the member to the
appropriate BH provider. The BH provider is strongly encouraged 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 the
PCP as a requirement in their policies and procedures for BH providers.

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

Since the PCP already has a relationship with the member, the member may be more
comfortable receiving BH treatment from the PCP than seeing an unfamiliar specialist
specifically for treatment of a mental illness or addiction. However, the reverse may
also be true, with the member being more comfortable receiving such treatment
from a provider who is not also responsible for his or her ongoing medical care. PCP
treatment of BH does enhance continuity of care. However, without additional
training specific to BH, most PCPs lack the clinical expertise to detect, diagnose, and
treat mental disorders and chemical dependency, 7 which may present with
symptoms similar to other medical disorders. Some BH specialists also feel that PCPs
who treat 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 for developing a BH network remains the same. The health plan or MBHO
determines the appropriate composition and size for the network and, on that basis,
selects the providers who are best 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, managed healthcare generally encourages treatment in the most
medically appropriate, least restrictive, and least intrusive setting feasible for a
particular patient. As a result, health plans typically offer coverage for a variety of
BH care levels and settings. Figure 6D-2 describes some of the levels of care and
care settings that health plans may include in their behavioral healthcare benefits.
The levels of care are listed in order from the most intensive and restrictive to the
least intensive and restrictive.
Health plans and MBHOs often use both inpatient and outpatient care options to
meet the needs of individual patients, such as hospitalization for an acute episode
followed by outpatient treatment 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 the different diagnoses (e.g., depression, anxiety disorders, alcoholism,
drug addiction), and clinical interventions (e.g., medications, individual therapy,
group therapy) that are covered in the benefit package. 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 composition
of 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. Health plans typically seek BH generalists whose training and experience
qualify them to diagnose and treat a broad range of common BH conditions. In
addition, a health plan typically needs BH specialists with expertise in problems such
as eating disorders or substance abuse,9 adolescent or pediatric 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), are provided
on a regional basis. In some areas, PCPs screen for BH conditions and then refer
patients to mental health professionals for treatment. In other areas, PCPs are
trained to treat minor conditions. Understanding the regional relationships among
medical generalists and specialists 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
practitioner for 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 also affect the size of the
network. Plan members’ driving times to access BH services should not exceed

• 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 plans consider existing patient-provider relationships when recruiting
providers for a BH network. To promote communication and coordination of care
across providers, health plans also take into account 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 currently providing care for a
specified group of plan members.

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

Applications for participation in a BH network are extensive and detailed, typically

requiring information 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 to participate 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
quality management approaches are consistent with the goals of the health plan.
Health plans, therefore, focus their attention on those practitioners and provider
organizations whose practice patterns demonstrate 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
outcomes assessments, 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 that may prove useful in the selection of BH providers
are (1) the provider’s reputation among local healthcare professionals and
consumers and (2) quality assessments performed by accrediting agencies.

The following statements are about network management for behavioral healthcare
(BH). Three of these statements are true and one statement is false. Select the
answer choice containing the FALSE statement.
Two measures of BH quality are patient satisfaction and clinical outcomes
assessments.
For a health plan, one argument in favor of contracting with a managed
behavioral healthcare organization (MBHO) is that the health plan's members
can gain faster access to BH care.
In their contracts with health plans, managed behavioral healthcare
organizations (MBHOs) usually receive delegated authority for network
development and management.
Health plans generally compensate managed behavioral healthcare
organizations (MBHOs) on an FFS basis.

Network Management for Dental Care

Although indemnity insurance is still the most common form of dental care coverage,
managed dental care is rapidly expanding. You will recall from Healthcare
Management: An Introduction that managed dental care typically takes the form of a
dental HMO (DHMO), a dental PPO, or a dental POS option. A health plan may
establish and manage its own DHMO, dental PPO, or dental POS option, or it may
contract with an existing dental managed care organization. In either case, the
health plan must be sure that the dental network allows members adequate access
to services. Patients should be able to receive routine dental care within two to four
weeks of the request 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. Dentists are typically solo practitioners; however, the number of
multidentist offices is growing.13 In some areas, dental IPAs have emerged to
contract on behalf of individual practitioners, but dental IPAs 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, dental network development often occurs on an office-by-office basis.
Health plans and managed dental care organizations usually need more time to
assemble a dental network than to put together a comparably sized physician panel.
In addition, many dentists in solo practices or partnerships are unaccustomed to
health plan concepts and may require extensive education before they will agree to a
health plan contract. For example, dentists are typically unfamiliar with the
processes of peer review and may be wary about this aspect of performance
management.

Currently, there are no nationally recognized standards for quality in managed dental
care. The National Association of Dental Plans (NADP), a trade association for
DHMOs, is gathering information 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. Like health plans, dental care places a strong emphasis on prevention. More
than 80% of dentists are general 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 are covered by the
benefit plan, the health plan or managed dental care organization must also include
dental specialists in its network.

Almost all dental services are delivered in an ambulatory care setting. Therefore, the
network needs very few healthcare facilities. Nonetheless, it does need to have
access to some inpatient facilities because urgent and emergency situations do
occasionally arise. If admission to an inpatient facility is required for a specific dental
procedure because of an emergency situation or a concomitant medical condition,
the health plan will usually cover the cost of the inpatient admission 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 dental networks, so processes for selecting dental care providers vary
greatly according to state regulations 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 network providers:

• 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 Data Bank (NPDB) for the provider’s malpractice history or other
negative reports and with the state board 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
selection process. Dental PPOs do not usually conduct site visits. Figure 6D-3 lists
factors that are typically assessed during a site visit.

Contracting with Dental Network Providers

Health plan contracts with dentists are quite similar to those for medical service
providers. Dental provider contracts typically specify the services that are to be
provided by general dentists and the conditions that should be referred to specialists.
DHMO contracts sometimes require dentists to obtain prior authorization for certain
procedures.
Compensation for Dentists
The method of compensation for dentists varies with the type of managed dental
care plan. Dental PPOs 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-
model DHMOs and group model DHMOs, capitate general dental practitioners.
Capitation agreements sometimes include withholds based on referrals to dental
specialists.19 The capitation rate for generalists is usually between 60% and 70% of
the FFS equivalent for generalists in the local area.20 Specialists in DHMOs typically
receive payment on a DFFS, fee schedule, or case rate basis. Some DHMOs include a
contract provision that guarantees a minimum total payment per month for capitated
dentists or a minimum rate per hour for dentists who are paid on some type of FFS
basis.21

With regard to the compensation of dental care providers in a managed dental care
system, it is correct to state that, typically:
dental PPOs compensate dentists on a capitated basis
group model dental HMOs (DHMOs) compensate general dental practitioners on
a salaried basis
independent practice association (IPA)-model dental HMOs (DHMOs) capitate
general dental practitioners
staff model dental HMOs (DHMOs) compensate dentists on an FFS basis

Network Management for Vision Care

A health plan’s approach to network management for vision care depends in great
part on the vision 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 other cases, vision benefits also offer partial or full
coverage of routine eye care. Routine eye care includes general eye examinations
to test vision, prescribe corrective lenses, and screen for eye disease and, perhaps,
payment for the corrective lenses as well.

Despite the fact that 60% of Americans need corrective eyewear, most health plans
do not include routine eye care as a standard benefit. Employers who offer a vision
plan often contract separately for this benefit or have their health plan add it to the
basic health benefit plan. However, many health plans are in the process of adding
routine eye care to their benefits or are at least investigating 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.

Network Management for Vision Care

Many consumers and employers view complete vision coverage as an attractive
benefit. As the average age of the population increases, so does the incidence of
presbyopia, a condition which decreases the ability to focus and affects near vision.
22
In addition, the growing use of computers in 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 does not require managed care plans to offer vision benefits; however,
many health plans view eye care 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, and many 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 plans that also offer coverage for routine eye examinations or corrective
lenses have several options for arranging access to these services. A plan may
choose to

• add providers who perform routine eye examinations and dispense lenses to
its own network
• include in its network a provider organization that offers both clinical eye care
and routine eye care
• carve out routine eye care by contracting with an eye care organization, such
as a managed vision care organization (MVCO)
• carve out both clinical and routine eye care by contracting with an MVCO or a
multispecialty provider organization that offers all services related to eye care

A managed vision care organization (MVCO) is an organization devoted to the

delivery of routine eye care, including examinations and corrective lenses, or both
routine eye care and clinical eye care, by implementing health plan concepts such as
credentialing, authorization systems, clinical practice guidelines, utilization review,
and QM. MVCOs that provide the full scope of vision care (clinical and routine)
frequently conduct their operations in a manner similar to 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 typically delegates credentialing, QM, UM, medical records, and administrative
functions to the MVCO or provider organization. The health plan must adhere to the
delegation standards of the applicable accrediting agencies when establishing the
delegation agreement and monitoring the functions performed by the delegate.

None of the major accreditation organizations have established an accreditation

program specifically for MVCOs. However, MVCOs typically follow these accrediting
agencies’ general standards for quality, credentialing, and network management
when developing and managing vision care networks.

Types of Vision Care Providers

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

Ophthalmologists are physicians with special education and training to treat eye
disease and injury. Ophthalmologists may subspecialize in glaucoma, retinal disease,
ocular plastics or neuro-ophthalmology. An ophthalmologist’s skills also include
conducting routine eye examinations and prescribing corrective lenses, but many
ophthalmologists primarily see patients with more serious eye conditions. Health plan
members usually see an ophthalmologist on a referral from a PCP 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
authorize optometrists to treat minor eye infections and remove foreign objects. An
optometrist’s fees for routine eye care are usually significantly less than an
ophthalmologist’s charges for the same services.26

Optometrists in multispecialty MVCOs that offer clinical and routine eye care often
function as gatekeepers. Depending on the results of the eye examination, an
optometrist may refer the plan member to an ophthalmologist for treatment of
glaucoma, cataracts, or other eye diseases. In some cases, a routine eye
examination detects signs of previously undiagnosed medical conditions, 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 for further investigation and followup on the suspected condition.27

Historically, ophthalmologists and optometrists have disagreed on the scope of

services that each discipline should provide. While many optometrists believe that
they are the appropriate delivery channel for routine eye care, some
ophthalmologists have asserted that, as physicians, they have the knowledge and
skills to provide more comprehensive examinations and other medical services as
needed. Optometrists often complain that patients they refer to an ophthalmologist
for an eye disease or injury are retained in the ophthalmologist’s routine care
practice rather than being returned to the optometrist for routine services.

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

Members typically obtain corrective lenses from an optician. The optician orders
lenses according 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 or optometrist 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 or ophthalmologist’s practice.
A health plan or MVCO assembling a vision care network should keep in mind that a
provider who examines eyes and dispenses lenses may be tempted to prescribe
corrective lenses unnecessarily in order to generate sales of eyeglasses and contact
lenses. Many health plans prefer to separate the examination and dispensing
function to reduce the opportunity for this type of self-referral.28 The use of central
laboratories for the lenses also facilitates quality control for lenses.

Selection of Vision Care Providers

The credentialing and selection processes for ophthalmologists follow NCQA or the
Commission/URAC standards for physician selection. Credentialing and
recredentialing for optometrists 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 the provider. Opticians should provide proof of
certification or licensure.

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

Compensation of Vision Care Providers

In a carve-out arrangement, a health plan typically compensates the contracted
MVCO or provider organization through capitation. In some cases, the capitation
payment covers all services. Other capitation agreements apply only to professional
services, with frames and lenses reimbursed on a DFFS basis. Health plans and
MVCOs that contract with individual vision care practitioners use a variety of
reimbursement methods, including capitation, DFFS, and fee schedules.

The vision benefits offered by the Omni Health Plan include clinical eye care only.
The following statements describe vision care received by Omni plan members:

• Brian Pollard received treatment for a torn retina he suffered as a result of an

accident
• Angelica Herrera received a general eye examination to test her vision
• Megan Holtz received medical services for glaucoma

Of these medical services, the ones that most likely would be covered by Omni's
vision coverage would be the services received by:

Mr. Pollard, Ms. Herrera, and Ms. Holtz

Mr. Pollard and Ms. Herrera only

 Mr. Pollard and Ms. Holtz only

Ms. Herrera and Ms. Holtz only

Network Management for Alternative Healthcare

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

In addition to considering consumer demand for alternative services, health plans

evaluate clinical studies on safety and effectiveness when choosing alternative
therapies to include in their benefit plans.

An alternative therapy is usually an additional benefit available to members through

a PCP referral to the alternative healthcare provider. However, naturopaths function
as PCPs in some health plans. A naturopathic physician’s training includes some
education about traditional medicine as well as training in alternative therapies.
Licensed naturopaths are authorized to perform medical screening tests, administer
immunizations, order X-rays, and prescribe some medications that are naturally
based.30

Arranging Access to Alternative Therapies

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

• 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 services and providers, many health plans lack personnel with the
knowledge and experience to successfully develop and manage alternative
healthcare networks. Health plans can turn to state or national professional
associations, such as the American Chiropractic Association or the National 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 a particular discipline to act as advisor for network development. This
advisor works with the health plan’s network management department to identify
candidates for the network, establish credentialing 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 states regulate acupuncturists, 26 license massage
therapists, and only 11 license naturopaths.31 The only well-established credentialing
requirements for alternative healthcare are NCQA’s credentialing standards for
chiropractors. As a result, credentialing criteria for alternative therapies 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
healthcare practitioners:

• 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
Dangerous Substance (CDS) certificate. The health plan should check with the
appropriate state regulatory agency, state professional associations, Medicare,
Medicaid, and the NPDB for further information about the provider. When possible,
the health plan should visit the practitioner’s office to perform an assessment similar
to that for a physician’s office.

Some traditional providers have training in one or more alternative therapies;

however, traditional medical education, licensing, and malpractice insurance do not
cover the practice of alternative healthcare by traditional providers. Therefore, any
traditional provider who wishes to offer alternative 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 a network management company that specializes in
alternative healthcare, or contract with an alternative health plan. The extent of the
authority transferred from the health plan to the alternative care network varies from
one contracting situation to another.

The Walnut Health Plan provides a number of specialty services for its members.
Walnut offers coverage of alternative healthcare, including coverage of treatment
methods such as homeopathy and naturopathy. Walnut also offers home healthcare
services, and it contracts with home healthcare providers on a non-risk basis to the
health plan. The following statements are about the specialty services offered by
Walnut. Select the answer choice containing the correct statement:
Homeopathy treats diseases by using small doses of substances which, in
healthy people, are capable of producing symptoms like those of the disease
being treated.
Naturopathy is an approach to healthcare that uses electronic monitoring
devices to teach a patient to develop conscious control of involuntary bodily
functions, such as heart rate.
Under a non-risk contract, Walnut most likely transfers the responsibility for
arranging home healthcare to the home healthcare provider organizations.
Federal law allows Walnut to contract with a home healthcare provider
organization only if the provider organization has received accreditation by the
Utilization Review Accreditation Commission (URAC).

Other Considerations for Alternative Healthcare

Networks
Many alternative healthcare providers are solo practitioners who have little
experience with health plans. A health plan should ensure that alternative healthcare
providers receive a thorough orientation and continuing education about the basic
concepts of health plans, the particular requirements of the health plan, and
guidelines for referral to traditional providers. The health plan must also educate its
traditional providers about the role of alternative practitioners in the network,
situations for which a referral to an alternative practitioner is appropriate, and
referral processes.

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

Network Management for Home Healthcare

Arranging for home healthcare presents a unique challenge for health plans because
this specialty service is really a collection of services. In addition, home healthcare
providers must be skilled in providing care at the member’s location. While some
health plans assemble and manage their own panels of home healthcare providers,
other health plans contract with home healthcare agencies. 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 the agency is not
accredited, the health plan must establish its own standards for home healthcare and
evaluate the agency according to those standards.

This section on the management of networks for home healthcare is an excerpt from
Managed Care Contracting by Wendy Knight.† The term usual and customary (U&C)
is equivalent to traditional 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 care services gives members and their physicians an alternative treatment
setting to hospitals. By arranging for home care services for the appropriate diagnoses
and conditions, the health plan and physician 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 Services
In general, home health care services can be arranged for the treatment of any diagnosis
that a physician determines can be managed effectively in the home with proper training
and supervision. Patients suffering from asthma, diabetes, cancer, acquired immune
deficiency syndrome (AIDS), and some neurological disorders often can be treated safely
and effectively in the home. Postsurgical care, posttrauma care, high-risk maternity and
prenatal care, postpartum care, 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 full range of home care services, including skilled nursing care, physical therapy,
durable medical equipment, infusion care, total parenteral nutrition, pharmaceuticals, and
supplies. Home health care is provided by multiple health care professionals including
registered nurses (RNs), licensed practical nurses (LPNs), physical therapists, speech
therapists, occupational therapists, respiratory therapists, and medical social workers.
In non-risk contracts, home health care services are generally coordinated and approved
through the health services department of the health plan. When health plans contract
with provider organizations on a risk basis, they may transfer the responsibility for
arranging home care and related services to the provider organization.

Contractual Arrangements
There 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, and capitation. 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 a single discount off U&C charges, such as a 20 percent discount for
skilled nursing services, or multiple discounts according to type of care or service, such
as a 20 percent discount for skilled nursing services and physical therapy and a 10
percent discount for durable medical equipment.

Flat Rates
Flat rates for home care services are set payments per visit or per day. These can fluctuate
depending on the level of care or type of service provided. A home care service provided
within two hours is usually considered a “visit” and paid accordingly. Services
consuming more than two hours are paid according to a per diem rate schedule. For
example, the health plan may reimburse 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 care company to provide all required home care services to members. These
arrangements generally encompass the full range of home care services and may include
participation in the health plan’s disease management programs and health promotion
activities. Home care companies interested in structuring capitated contracts with health
plans should

• offer a broad spectrum of services, through alliances with other home care
vendors if necessary
• 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 to
subcontractors
• 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 their approaches to network management according to different types of
services, providers, and delivery systems involved. Health plans may alter their
processes for provider selection, contracting, compensation, and management to
accommodate the differences, or in many instances, they contract with another
organization for specialty service network development and management.

Network management practices for specialty services vary greatly from one health
plan to another and even by type of specialty service within a single health plan. A
variety of factors, including the level of specialized knowledge associated with a
specialty service, the health plan’s experience with specialty services network
management, and the health plan’s time and resources available for network
activities, influence a health plan’s approach to network management for a particular
specialty service.

Network Management in Health Plans

Special Considerations for Medicare Networks
Pg 1 to 53
Objectives

After completing this lesson you should be able to:

• Identify federal legislation that has affected the Medicare program and describe
its impact on Medicare health plans
• List the three types of health plans that are authorized to apply for Medicare
contracts under the Medicare+Choice programs, and identify the two types of
health plans that are allowed to establish closed networks of providers
• Describe the steps that Medicare+Choice health plans must take to ensure that
network services are available and accessible to enrollees
• Describe the restrictions on the use of physician incentive plans by
Medicare+Choice health plans
• Discuss several other CMS regulations affecting the relationship between
Medicare+Choice health plans and network providers
• Discuss some special needs of Medicare beneficiaries that health plans should
consider when establishing Medicare networks

This lesson discusses the special needs that health plans must consider when
establishing Medicare networks. We begin with a brief overview of the Medicare program
and its growing acceptance of health plan concepts. We then describe how the Balanced
Budget Act of 1997 has further encouraged the use of health plans in Medicare. Finally,
we present an extensive discussion 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 to provide healthcare coverage for persons age 65 years and over,
persons eligible for a railroad pension, 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 basic inpatient hospital care, inpatient skilled nursing facility care, and
hospice care
• Medicare Part B, an optional program requiring payment of a premium to
CMS to cover the costs of physician professional services provided in a
hospital, a physician’s office, an extended care facility, a nursing home, or an
insured’s home. Benefits under Medicare Part B also include ambulance
services, medical supplies and equipment, outpatient hospital services,
diagnostic tests, and other services necessary for the diagnosis or treatment
of an illness or injury. The premium for Part B is usually deducted from the
beneficiary’s monthly Social Security check

The Medicare program is administered and monitored by the Centers for Medicare
and Medicaid Services (CMS) formerly known as the Health Care Financing
Administration (HCFA) , which is a division of the U.S. Department of Health and
Human Services (HHS) that was created in 1977 to administer the Medicare and
Medicaid programs.

For the most part, the Medicare program has operated as indemnity health
insurance, paying providers for services based on Medicare’s determination of
reasonable costs and reasonable charges (R&C). Within the context of Medicare Part
B, a reasonable charge is the lowest of these amounts.

 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

Various limitations on Part B reasonable charges have been imposed over the years
to help control rapidly rising medical costs. In addition, for many Part B services CMS
now bases payment on a fee schedule.

Because of concerns about managing costs, the Medicare program has also
implemented some health plan techniques, such as utilization review and second
surgical opinion. The original Medicare amendments to the Social Security Act
allowed payments to entities that are now referred to as healthcare prepayment
plans (HCPPs). On a more formal level, amendments to the Social Security Act in
1972 allowed certain types of HMOs to participate in the Medicare program on either
a partial risk-sharing or a cost basis. The HMO Act of 1973 encouraged the
development of federally qualified HMOs and their participation in the Medicare
program.

The Evolution of Medicare Health Plans

Subsequent legislation has allowed the expansion of health plans in Medicare,
including the establishment of demonstration projects that have pioneered innovative
concepts in providing care 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 HMO program. A Medicare risk contract is “a contract payment methodology
between HCFA (now CMS) and a health plan (HMO or competitive medical plan—
CMP) which requires the delivery of at least all Medicare-covered services to
members as medically necessary in return for a fixed monthly 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 services
without regard to cost.”1

Prior to the enactment of the Balanced Budget Act of 1997 (discussed later in this
lesson), which reformed Medicare managed care program methodology, TEFRA risk
HMOs and CMPs enrolled Medicare beneficiaries and provided for their Medicare-
covered primary and acute care services in 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 would have expected to
pay for a Medicare beneficiary who lived in a particular county, adjusted for age, sex,
institutional status, and other factors.

CMPs had fewer restrictions, as applied to commercial enrollees, than federally

qualified HMOs regarding limitation on the scope of services, cost-sharing
requirements (deductibles and copayments), and use of noncontracted providers.

A number of health plans widely marketed HMOs and CMPs via the mass media to
the Medicare population. Advertisements typically emphasized that the HMO or CMP
offered a wider range of benefits than traditional Medicare coverage and sometimes
stated that enrollees were not required to pay plan premiums. A TEFRA HMO or CMP
was not allowed to charge the enrollee a fee greater than the actuarial value of the
Medicare deductible and coinsurance for the basic Medicare-covered benefits.
However, the HMO or CMP was allowed to charge the enrollee a premium for any
additional benefits over and above Medicare benefits —for example, prescription
drug benefits— if the cost of the additional benefits exceeded the payment from
CMS. Health plans that did not require additional premiums usually were located in
areas where the AAPCC was highest, typically the seventieth percentile and above.
The Crimson Health Plan, a competitive medical plan (CMP), has entered into a
Medicare risk contract. One true statement about Crimson is that, as a:
CMP, Crimson is regulated by the federal government under the terms of the
Tax Equity and Fiscal Responsibility Act (TEFRA)
CMP, Crimson is not allowed to charge a Medicare enrollee a premium for any
additional benefits it provides over and above Medicare benefits
provider under a Medicare risk contract, Crimson receives for its services a
capitated payment equivalent to 85% of the AAPCC
provider under a Medicare risk contract, Crimson is required to deliver to
members all Medicare-covered services, without regard to the cost of those
services

Social Health Maintenance Organizations (SHMOs)

Under the Deficit Reduction Act of 1984, Congress established the social health
maintenance oranization (SHMO) demonstration authority for the purpose of
determining whether providing coordinated healthcare, preventive services, and
social services might prevent costly medical complications among the elderly.
Initially, four SHMO demonstration projects were approved. In 1990, Congress
extended the SHMO demonstration authority. SHMOs provide Medicare participants
with standard HMO benefits, such as hospital, physician, skilled nursing facility, and
home health services, together with limited long-term care benefits, such as social
benefits for frail elderly who reside at home. The SHMO philosophy is that “an
integrated system can support medical care by ensuring that medical appointments
are kept, that transportation is available, that medical regimens (for example, diets
and medications) are followed, and that emergent medical problems are spotted and
reported (through both inhome helpers and covered emergency response systems).”2
Later in this section we will discuss subsequent legislation that has expanded 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 of community-based care. Insight 7A-1 describes how the SCAN
Health Plan’s Social HMO in Long 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 of provider 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 of providers, such as social workers and home healthcare
providers, that can support the requirements and intent of an SHMO. SHMOs receive
a capitated payment that is comparable to 100% of the AAPCC.

The Balanced Budget Act of 1997—which we will discuss in detail in a later section —
extended the SHMO demonstrations through December 31, 2000. The limit on the
number of enrollees per plan was increased from 12,000 to 36,000. Congress
instructed CMS to develop a plan that addresses the transition of SHMOs to the
Medicare+Choice programs.3
The Bruin Health Plan is a Social Health Maintenance Organization (SHMO). As an
SHMO, Bruin:
must provide Medicare participants with standard HMO benefits, as well as with
limited long-term care benefits
does not need as great a variety of provider types or as complex a
reimbursement method as does a traditional HMO
receives a payment that is based on reasonable costs and reasonable charges
most likely provides fewer supportive services than does a traditional HMO,
because one of Bruin's goals is to minimize the use of community-based care

Programs of All-Inclusive Care for the Elderly (PACE)

The Omnibus Budget Reconciliation Act of 1986 (OBRA 1986) established a
demonstration program to grant waivers of certain Medicare and Medicaid
requirements to no more than ten public or nonprofit private community-based
organizations that provide integrated healthcare and long-term care services to frail
elderly persons who are at risk of institutionalization. This program, Programs of
All-Inclusivee Care for the Elderly (PACE), sought to duplicate the success of an
earlier demonstration project, On Lok Senior Health Services in San Francisco’s
Chinatown. The On Lok project is a staff-model medical program that requires
enrollees to attend adult day health centers, which are the site for their primary and
preventive healthcare. This care is provided through a multidisciplinaryteam style of
care management that brings together acute and long-term care. Because of the
program’s success, OBRA 1990 expanded to 15 the number of organizations eligible
to conduct PACE demonstration projects.

PACE provides an alternative to intensive institutional care for persons aged 55 and
over who live in a PACE service area, are certified as eligible for a nursing-facility
level of care, and meet the eligibility requirements for the program within their state
of residence. PACE programs provide and manage all healthcare, medical, and social
services to program participants and mobilize other preventive, rehabilitative,
curative, and supportive services as needed. This care is provided 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 as possible.
PACE participants receive all benefits solely through PACE.

PACE programs are reimbursed on a capitated basis through both the Medicare and
Medicaid programs, as well as by private insurance, when available. The monthly
capitation payment for a PACE program is set at 239% of the AAPCC in order to
account for the frailty of the PACE population and their accompanying need for more
intensive services than healthier Medicare recipients. Medicare PACE enrollees who
are not eligible for Medicaid pay a premium equal to the Medicaid capitation amount.

Regardless of the source of funds, PACE providers receive capitated payment only
through the PACE 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 service and without requiring any deductibles,
copayments, or other cost-sharing. The PACE program must provide participants
with access to necessary covered items and services 24 hours a day, 7 days a week.
Just as with SHMOs, PACE programs provide a greater variety of services than
traditional health plans and address multiple areas of a participant’s life. The
provider network for each type of plan must include the appropriate numbers and
types of providers to serve participants’ needs. A PACE program differs from an
SHMO in several ways. Unlike PACE, SHMOs have very little to do with Medicaid and
provide minimal long-term care. In addition, SHMO benefits have an upper dollar
limit, while PACE benefits do not.

The Balanced Budget Act of 1997 established PACE as a permanent program and
gives states the option to provide these services to Medicaid beneficiaries. The
number of PACE programs has been limited to no more than 60 in the first year after
the BBA’s enactment, with no more than 20 programs to be added each year
thereafter. Many of the PACE provisions parallel those of the Medicare+Choice
program.

The Omnibus Budget Reconciliation Act of 1986 (OBRA 1986) established the
Programs of All-Inclusive Care for the Elderly (PACE). One characteristic of the PACE
programs is that:
they are available to United States citizens only after they reach age 65.

they have an upper dollar limit.

they receive a monthly capitation that is set at 100% of the Adjusted Average
Per Capita Cost (AAPCC).
PACE providers receive capitated payments only through the PACE agreement.

In 1997, Congress made significant changes in the use of managed healthcare under
Medicare by enacting the Balanced Budget Act (BBA) of 1997. The BBA
established the Medicare+Choice program, which replaces the Medicare risk program
and provides beneficiaries with new health plan options. In addition, as previously
discussed, the BBA established SHMOs and PACE as a state option under Medicaid,
no longer requiring special authorization by CMS but limiting the number of PACE
providers.

Medicare+Choice
Medicare beneficiaries may continue to receive benefits through the traditional
Medicare FFS programs; however, Medicare+Choice —pronounced “Medicare Plus
Choice”—established under the new Medicare Part C, allows additional types of
health plans to apply for Medicare contracts. The legislation also changed the system
for determining the rates that will be paid to organizations with Medicare contracts.
The new payment methodology was implemented under the 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 that
date. Medicare cost contracts will be phased out as of December 31, 2002. As
illustrated in Figure 7A-1, original government estimates indicated that by the year
2008 nearly 40% of all Medicare enrollees would be members of risk-based
Medicare+Choice plans. Because of some difficulties that health plans have
encountered under the Medicare+Choice program —especially in the area of
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 CMS to provide covered services to Medicare beneficiaries. The
Medicare+Choice program includes any of the following plans:

• A coordinated care plan (CCP), which is offered by a health plan such as an

HMO with or without a point-of-service option, a preferred provider
organization (PPO), a provider-sponsored organization (PSO), or a managed
healthcare plan offered by a religious fraternal 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
contract must transition to a Medicare+Choice contract. If the HMO makes the
transition to a Medicare+Choice contract, beneficiaries who are enrolled in the HMO’s
risk plan as of December 31, 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 meet all 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. These include the establishment of solvency standards for PSOs and a one-
time three-year waiver of state licensure requirements for PSOs. Although the BBA
requires Medicare+Choice organizations to be licensed as risk-bearing entities under
state law, a PSO may apply for a waiver of this requirement under the following
circumstances:

• The state fails to process the PSO’s licensure application within 90 days of
receiving a complete application
• The state denies the application based on solvency standards that are
different from the federal standards
• The state denies the application due to applying standards or a review
process that is not generally 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 insurance arrangements that give consumers a financial incentive to control
their own healthcare costs by combining 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 with high annual deductibles and out-of-pocket expenses of not more than
$6,000 for 1999. The deductibles and out-of-pocket maximums will be increased by
a certain factor annually. Both CCP 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 capitated Medicare+Choice payment and
the MSA plan premium.

After the enrollee pays the deductible and out-of-pocket expenses up to the
established annual maximum, Medicare-covered services are paid at 100% of the
Medicare allowable payment. The provider is free to bill the enrollee for any charges
that exceed the payments made by the MSA plan. The MSA enrollee may make tax-
free withdrawals from the MSA to meet qualified medical expenses that are not paid
by the high-deductible health insurance policy. The enrollee may also make
withdrawals from the MSA for nonmedical expenses, but those amounts are taxed as
income. Any money remaining in an MSA at the end of the benefit year is carried
over to the next benefit year. Enrollees in other Medicare plans may change from
one type of plan to another at any time until January 1, 2002, when a lock-in will be
imposed. However, MSA enrollees must stay in the MSA plan for a minimum of one
year.

Edward Patillo has established a Medicare+Choice medical savings account (MSA).

This MSA will allow Mr. Patillo to:
 carry over any money remaining in his MSA at the end of the benefit year to
the next benefit year
make withdrawals at any time from the MSA, but only for medical expenses
obtain payment at 100% of the Medicare allowable payment for all Medicare-
covered services he receives, without having to pay any deductibles or out-of-
pocket expenses
make withdrawals from the MSA to meet qualified medical expenses that are
not paid by his high-deductible health insurance policy, but these withdrawals
are taxed as income to Mr. Patillo

Private Fee-for-Service Plans

Under a Medicare-approved private fee-for-service (PFFS) plan, Medicare pays a
private indemnity health insurance plan a premium to provide Medicare-covered
services. The PFFS plan then 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 Parts A 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 greater than 115% of the Medicare payment rate, including any deductibles,
coinsurance, or balance billing. The enrollee may also have to pay an additional
premium to the PFFS plan. Providers are not at risk, and members may access any
provider that has agreed to accept the plan’s payment. In fact, a healthcare provider
is treated as having an agreement with the PFFS Medicare+Choice organization 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 payment under 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+Choice program, there are differences in the ways in which the plans are
permitted to establish and use provider networks. For example, a Medicare+Choice
plan that operates as a CCP may establish a network of providers that enrollees must
use in order to receive covered services except in some limited situations. We will
discuss these limitations later in this lesson. A Medicare+Choice CCP plan may also
limit the size of its network to the number of providers that are necessary to meet
the needs of the plan’s enrollees. On the other hand, a PFFS plan must allow
enrollees to obtain services from any provider who is authorized to provide services
under Medicare Part A and Part B 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 Medicare providers 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 this lesson 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 Drug and Modernization Act of 2003 (MMA), taking steps to expand
private sector health care choices for current and future generations of Medicare
beneficiaries. The MMA proposes short-term and long-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 made available 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 required to 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 for millions of Medicare beneficiaries who are covered by health plans in the
Medicare Advantage program, previously known as the Medicare+Choice program.
These coverage improvements became effective on March 1, 2004.

On June 1, 2004, beneficiaries saw additional improvements in Medicare under

another important MMA initiative, the Medicare-Endorsed Prescription Drug Discount
Card Program, which will remain in effect through the end of 2005. This program
gives beneficiaries the option of purchasing prescription drug discount cards—
sponsored by private sector entities and endorsed by Medicare—which offer
discounted prices on prescription drugs. Furthermore, the discount card program is
providing low-income Medicare beneficiaries with up to $600 annually in assistance,
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
health plan 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 Medicare beneficiaries, regional PPO-style plans will be
available as a permanent option under the Medicare Advantage program.

Also beginning in 2006, all beneficiaries will have the option of choosing prescription
drug coverage 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 by Medicare Advantage health plans.

Other important provisions of the MMA address Medigap choices and specialized
Medicare Advantage plans for beneficiaries with special needs. Final regulations are
scheduled to be released in the spring of 2005, and at that time additional content
updates will be made to this course.

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 (now known as Medicare Advantage) organizations. These
programs include the Health Care Quality Improvement 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 to improve the quality of care provided to Medicare beneficiaries by shifting
the emphasis of quality review programs from identifying individual lapses to
improving the overall quality of care. The HCQIP requires Medicare health plans to
contract with an outside quality improvement organization (QIO) to conduct periodic
quality reviews . A quality improvement organization (QIO) is an association of
practicing providers that reviews medical services ordered or furnished by other
practitioners in the same specialty. QIO reviewers determine the reasonableness and
medical necessity of the services provided and monitor the quality of care given to
Medicare patients. External review requirements may be waived for a specified
period of time if the health plan has an excellent record of quality assurance and
compliance with other Medicare health requirements. A plan may be deemed to have
met requirements regarding confidentiality and accuracy of patient records if the
plan is fully accredited and periodically reaccredited by an accreditation agency that
is approved by CMS.

The following statement(s) can correctly be made about the Balanced Budget Act
(BBA) of 1997:

A. The BBA requires Medicare+Choice organizations to be licensed as non-risk-

bearing entities under federal law.

B. The Centers for Medicaid and Medicare Services (CMS) is responsible for
implementing the BBA.

Both A and B

A only

B only

Neither A nor B

Quality Assessment Performance Improvement (QAPI)

The regulations that support the BBA established quality assurance and
performance improvement (QAPI) standards for Medicare health plans. Health
plans are required to achieve compliance with these standards to assist Medicare
health plans developing mechanisms for measuring improved outcomes of healthcare
and services. Begun in 1996, QAPI has several major goals.

 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 to
organizations and consumers

 making the most effective use of available quality measurement and improvement
tools, while allowing sufficient flexibility to incorporate new developments

As of this writing, CMS had established QAPI Interim Standards and Guidelines which
apply to all services provided by Medicare health plans for all Medicare enrollees,
including those with special needs, with some variations based on the organization’s
structure. QAPI standards apply to any Medicare coordinated care plan and, at state
discretion, to Medicaid health plans and prepaid health plans. Exceptions include
PACE programs and Medicaid primary care case management programs. Some
standards also apply to non-network Medicare MSAs and private fee-for-service
plans.

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, and other information that will assist plans in developing their quality
assurance programs. CMS has set forth interim quality assurance standards for
Medicare+Choice organizations as described in Figure 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
establishing regulations 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 the
Medicare+Choice program are available and accessible to plan enrollees. CCPs or
network MSA plans that require Medicare+Choice enrollees to use providers from a
specified network must comply with CMS’ requirements; therefore, plans must pay
careful attention to the regulations when establishing their networks. An exhaustive
discussion of these regulations is beyond the scope 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 their networks
meet the special needs of Medicare patients.

General Requirements Regulating Access

CMS regulations require all Medicare+Choice CCPs and network MSA plans to
maintain and monitor a network of providers that is sufficient to provide adequate
access to covered services in order to meet the medical needs of the enrollees. For
example, health plans must provide an adequate number of primary care providers,
specialists, hospitals, skilled nursing facilities, home health agencies, and ambulatory
clinics. Subject to some limitations, if more than one type of provider is qualified to
furnish a particular service (for example, primary care by either a physician 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
or certification.

One of the most important issues in establishing provider networks is the

determination of the service area—the geographical area that the health plan will
serve. The service area determines the number of potential enrollees, which will in
turn determine the requirements for the provider network. The service area must be
consistent with community patterns of care in order to encourage enrollment.

In establishing a network, the health plan must also ensure that the office hours of
network providers are convenient for and do not discriminate against
Medicare+Choice enrollees. The health plan must make covered services available 24
hours a day, 7 days a week when medically appropriate. The health plan must also
ensure that services are provided in a manner that is suitable to the plan’s enrollees,
including those with limited proficiency in English, diverse cultural and ethnic
backgrounds, or physical or mental disabilities.

The health plan must ensure that enrollees receive timely access to care and services
by adopting written timeliness standards that meet or exceed the standards
established by CMS. Both providers and enrollees must be educated regarding the
health plan’s provisions and requirements for access to services. In addition, the
health plan must continuously monitor whether access to care 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 that may be required to meet the healthcare needs of enrollees.
Female enrollees must be able to have access without a referral to a participating
women’s health specialist, such as a gynecologist, for women’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 is required to inform enrollees of their right to maintain access to
specialists and to provide the enrollees with names of other Medicare+Choice health
plans that contract with specialists of the enrollees’ choice.

Continuity of Care and Integration of Services

A Medicare+Choice health plan is required to ensure continuity of care and
integration of services for Medicare enrollees. Specifically, CMS regulations require
that health plans

• designate a practitioner who has primary responsibility for coordinating each

enrollee’s overall 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 to prior authorization or the provider’s network participation status, using the
prudent layperson standard. Medicare regulations further require that the plan may
not deny payment when a network provider or an organization representative
instructs an enrollee to seek emergency services within or outside the plan. The
physician treating the enrollee must decide when the enrollee may be considered
stabilized for discharge or transfer to a network provider, and that decision is binding
on the plan. If an enrollee obtains emergency services outside the health plan’s
network, the enrollee may not be required to pay more than $50, or the amount the
enrollee would have paid if he or she had obtained the services from a network
provider, whichever is lower. In addition, services provided following the enrollee’s
stabilization will be considered approved by the plan if the plan does not respond to
a request for authorization within one hour or cannot be contacted for approval.

The health plan must also have provisions for covering urgently needed services,
which CMS defines as treatment of an unforeseen illness or injury that occurs outside
of the network area or under unusual circumstances within the network area,
requiring the services of a non-participating provider. Finally, Medicare+Choice plans
must cover renal dialysis services provided by a non-participating provider when the
enrollee is temporarily outside the plan’s service area.

Effective Patient Care and Quality Review

A Medicare+Choice health plan must establish procedures to ensure that both the
health plan and its 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 is completed within 90 days of
enrollment. In addition, each provider in the network must maintain enrollee health
records in accordance with standards established by the health plan. The health plan
must also establish procedures that enable the various providers, suppliers, and
practitioners in the network to share information in an appropriate and confidential
manner and to provide input into medical management policies and procedures.
CMS regulations require Medicare+Choice health plans to establish written policies
and procedures that allow medical necessity determinations to be made on an
individual basis and that allow 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,
Congress was concerned that certain types of compensation arrangements between
Medicare health plans and providers might result in enrollees’ receiving a lower level
of services than medically necessary. To help avoid this situation, Congress placed
additional regulatory requirements on the use of certain physician incentive plans by
Medicare+Choice health plans. A physician incentive plan (PIP) is any method of
compensating a physician or physician group that may directly or indirectly 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 not make any payments to a physician as an inducement for the physician
to reduce medically necessary services to a particular enrollee. This rule applies to
both direct and indirect payments to physicians. The prohibition against indirect
payments means, for example, that a health plan may not attempt to induce a
physician to reduce medically necessary services to a particular enrollee by waiving a
debt that the physician owes to the health plan or by giving the physician stock
options in the health plan. CMS regulations also specify that PFFS plans may not
enter into physician incentive plans.

Physician Incentive Plans Creating Substantial Financial

Risk
In addition to prohibiting health plan from making payments to physicians as an
inducement to reduce medically necessary services to specific enrollees, CMS
regulations place additional regulatory requirements on the use of physician
incentive plans that place physicians (or physician 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’s
compensation 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. In basic terms, however, substantial financial risk exists when the
amount for which a physician is at risk for referral services is more than 25% of the
maximum potential total compensation that the physician could receive. The
example discussed in Figure 7A-3 illustrates how substantial financial risk is
calculated.
Examples of compensation arrangements that can put physicians at risk for referral
services include bonuses, withholds, and capitation payments. The common types of
compensation arrangements were discussed in previous lessons. Figure 7A-4
describes situations in which these compensation arrangements create substantial
financial risk. Regardless of the type of compensation arrangement used, substantial
financial risk is not considered to exist if the physician (or physician group) has a
patient panel that exceeds 25,000 patients. In such a case, the physician’s risk is
spread over a large enough population that excessive referral costs caused by
individual patients can be absorbed without serious financial harm to the physician,
thereby eliminating any potential incentive to reduce services. If a physician
incentive arrangement places a physician or physician group at substantial financial
risk, the health plan is required to ensure that the physician or physician group has
adequate stop-loss protection and to conduct annual member surveys.
Michelle Kubiak has contracted with the Gem Health Plan, a Medicare+Choice health
plan, to provide medical services to Gem's enrollees. Gem pays Dr. Kubiak $40 per
enrollee per month for providing primary care. Gem also pays her an additional $10
per enrollee per month if the cost of referral services falls below a targeted level.
This information indicates that, according to the substantial financial risk formula, Dr.
Kubiak's referral risk under this contract is equal to:
20%, and therefore this arrangement puts her at substantial financial risk
20%, and therefore this arrangement does not put her at substantial financial
risk
25%, and therefore this arrangement puts her at substantial financial risk
25%, and therefore this arrangement does not put her at substantial financial
risk

Requirement of Stop-Loss Insurance

A Medicare+Choice health plan must ensure that all physicians who are at
substantial financial risk because of a physician incentive plan have stop-loss
insurance protection. A physician obtains this insurance so that if the financial
liabilities exceed what is expected based on prior experience, 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 referral services for all plan members that exceed the substantial
risk threshold of 25%. In other words, a physician may be liable for no more than
10% of the costs of referral services for which the physician is at substantial financial
risk.
When per-patient stop-loss insurance is used, the stop-loss threshold per patient is
based on the size of the physician’s patient panel. The larger the patient panel, the
higher the stop-loss threshold per patient may be, and, as mentioned earlier, if the
patient panel exceeds 25,000 patients, no stop-loss insurance is required. When
certain conditions are satisfied, a physician is allowed to pool several classes of
patients to determine the size of the patient panel. Patients that may be pooled with
Medicare enrollees when these conditions are met include (1) commercial enrollees,
(2) Medicaid enrollees, and, under certain circumstances, (3) enrollees of other
Medicare+Choice health plans with which the physician has contracts. Once the per-
patient limit is determined, stop-loss insurance must cover at least 90% of the costs
of any referral services that exceed that amount.

Member Surveys
If a Medicare+Choice health plan uses a compensation arrangement that puts
providers at significant 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, the health plan is required to measure
the enrollees’ satisfaction with the quality of services provided and the degree to
which enrollees have access to the services provided by the health plan. A summary
of the survey results must be provided to CMS and to any Medicare beneficiary who
asks for it.

Disclosure Requirements
Each Medicare+Choice health plan must provide enough information to CMS about
the health plan’s physician incentive plan to enable CMS to determine whether the
health plan is in compliance with PIP regulations. This information must be provided
at the time of the health plan’s application for a Medicare contract or a service area
expansion, at the contract renewal date, and within 30 days of a request by CMS.
Currently, CMS requires Medicare+Choice organizations to submit annual disclosure
data on March 31 of each year. CMS will not approve a new health plan’s application
for Medicare contract unless the health plan discloses the physician incentive
arrangements for that contract. Health plans must also provide certain information
about their 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. Health plans 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 a
statutorily specified adjustment amount

Editor's Note
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA)
returned to the idea of linking managed care rates and local fee-for-service costs. The
MMA mandated that for 2004, a fourth amount of 100 percent of projected fee-for-
service Medicare (with adjustments to exclude direct medical education and include a
VA/DOD adjustment) be added to the payment methodology. For the years after 2004,
the Secretary is required to recalculate 100 percent of the fee-for-service Medicare costs
at least every 3 years, so at least every three years the MA capitation rate will be the
higher of the fee-for-service rate and the minimum increase rate.

In addition, for 2004 and succeeding years, the MMA modifies the minimum increase (2
percent in 2003) to be the larger of:

1. 102 percent of the previous year’s rate, or

2. 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, such as 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. For 2004, that amount is $113.07 per month. Prior to 2006,
Medicare Advantage plans may also offer additional benefits such as prescription drugs
or a reduced monthly premium, and plans also may charge premiums and other
copayments for certain extra benefits. Beginning in 2006, Medicare beneficiaries will
have a prescription drug benefit, and most MA plans must offer that benefit as part of the
basic plan.

Because the new payment methodology has reduced the rate of growth in health
plan payments and the BBA imposed substantial new regulatory requirements, some
health plans with Medicare risk 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 per capita costs based on health status. This risk adjustment will
provide higher compensation for health plans with higher-risk enrollment, but may
have a negative impact on payments to health plans with relatively healthy
membership.

The Academy’s Health Plan Finance and Risk Management provides a more thorough
discussion of 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 should familiarize themselves with the provisions of the
BBA that may have an impact on their operations, 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 other regulations that govern the relationship between Medicare+Choice
health plans and their network providers. 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 that network providers are properly credentialed. When credentialing
physicians and other healthcare professionals, a health plan must obtain a signed
and dated application from each provider attesting that the information in the
application is correct and complete. The health plan must verify that the provider is
properly licensed and eligible to participate in the Medicare program and must verify
the applicant’s disciplinary status. In some cases, the health plan may be required to
make a site visit to verify the information in the provider’s application. Of course,
health plans should also perform their usual credentialing activities to assure that the
provider meets the health plan’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 the initial credentialing process and to consider additional indicators
of the provider’s performance. These performance indicators may be collected
through quality assurance programs, utilization management 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 must ensure 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 is either 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 adopts or changes the rules governing the participation of healthcare
providers in the health plan’s network. Under these regulations, health plans must
give providers written notice of any rules for participation, 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
before the changes are put into effect. When a health plan makes a decision under
these rules that is adverse to a provider, the health plan must give the provider
written notice of the decision and allow the provider an opportunity to appeal it.

A Medicare+Choice health plan must also consult with network physicians and other
healthcare professionals about the health plan’s medical policies, quality
management program, and medical management procedures. The purpose of these
consultations is to ensure that the health plan’s practice guidelines and utilization
management guidelines
 • are based on reasonable medical evidence or a consensus of healthcare
professionals in the 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 the rules 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 with network healthcare providers. The term gag clause is sometimes
applied to clauses in health plan provider contracts that restrict providers from
discussing alternative courses of treatment with their patients. Although these
clauses are rarely, if ever, actually used in health plan-provider contracts, they have
received some attention in the media in recent years.

Under CMS regulations, a health plan may not restrict network healthcare providers
from advising patients or advocating on behalf of patients about

• patients’ health status, medical care, or treatment options, including

alternative treatments that 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
also contains a provision known as the conscience protection exception. Under the
conscience protection exception, a Medicare health plan is not required to cover
or furnish a particular counseling or referral service if the health plan objects to
providing that service on moral or religious grounds. For example, Catholic health
plans may exempt coverage of abortions for younger, disabled Medicare
beneficiaries. To obtain the benefit of this exception, an health plan must provide
written information about its policies concerning the counseling or referral service to
CMS and to prospective enrollees before or during their enrollment. A health plan
may obtain the benefits of this exception with respect to current enrollees if it
submits the proposed change in policy 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
between health plans and their providers. For example, any contract between a
Medicare health plan and its providers must contain a provision assuring that the
health plan will pay the providers within the time period agreed upon by both the
health plan and the provider. In addition, Medicare plans are required to pay non-
network providers in accordance with the prompt payment provisions of Medicare
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 from the health plan. If the health plan fails to make payment to non-network
providers according to its prompt payment obligations, CMS may pay the providers
directly. CMS will then reduce the amount it pays to the health plan to reflect the
direct payments to the provider and any administrative costs incurred in making
those payments. Health plans must also pay interest, at a rate specified annually, on
the payable amounts of all clean claims that are not paid to the provider within 30
days of receipt by the health plan.

A Medicare health plan must also ensure that enrollees are protected from any
liability for fees that are the legal obligation of the health plan entity. To accomplish
this, any contract between a health plan and its providers must contain a hold-
harmless clause that prohibits the providers from 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
a requirement that providers indemnify the health plan for damages arising as a
result of the health plan’s denial of medically necessary care, and health plans may
not impose such requirements on providers by any other means. The CMS prohibition
against indemnification by providers means that a health plan may not require
providers to compensate the health plan for any monetary liability the health plan
incurs because the health plan denied medically necessary care to an enrollee.

Denial, Suspension, and Termination of Provider

Contracts
CMS regulations impose procedural requirements on a health plan’s denial,
suspension, or termination of contracts with network healthcare providers. For
example, a health plan that denies, suspends, or terminates a contract with such a
provider is required to give the provider written 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 health plan is required to give the provider at least 60 days written notice.
A provider who wants to terminate a contract with the health plan without cause
must also give the health plan 60 days written notice.

If a health plan suspends or terminates a contract with a healthcare provider

because of deficiencies in the provider’s quality of care, the health plan must give
written notice of that action 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)
may impose various penalties against health plans that violate the regulations
governing health plans contracting 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 refrain from enrolling any new Medicare
beneficiaries and may also provide for the suspension of payments to the health plan
for Medicare beneficiaries who do enroll. These intermediate sanctions remain in
effect until CMS is satisfied that the violations have been corrected and are not 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 type of violation. Some examples of the violations that can result
in civil money penalties or intermediate 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 opportunity to correct the deficiencies that are grounds for the proposed
termination. However, CMS may immediately terminate a plan with financial
difficulties if the plan’s financial status poses a serious risk to the health of its
enrollees.
The BBA provides that the Medicare+Choice standards will preempt any inconsistent
state laws regarding benefit requirements, inclusion or treatment of providers, or
coverage determinations as they apply to Medicare health plans.

The health plan’s network contracting staff should be familiar with state laws, as well
as federal laws.

Accommodating the Needs of Medicare Enrollees

Up to now, our discussion has focused on the CMS regulatory requirements that
govern the use of Medicare health plans' provider networks. These requirements are
important considerations for health plans because, as we discussed earlier, health
plans that violate the requirements may face civil money penalties and intermediate
sanctions. health plans should also be aware of other considerations that may affect
the success of Medicare networks. Some of these considerations arise from the
heightened medical needs of Medicare patients, while others derive from these
patients’ 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 that establishes a reputation for providing a high quality of care that
meets the special needs of Medicare 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 do younger 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 more questions to ask. In order to allow physicians an adequate amount
of time to spend with Medicare patients, a health plan may be required to reduce the
size of each physician’s patient panel and to contract with more network providers
than would be necessary to serve the same number of younger, healthier enrollees.
For example, a physician serving enrollees in a commercial healthcare 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 that Medicare patients are more likely to be disabled than are younger
patients.

Health plans use disease management strategies more vigorously with the disabled,
and coordinate with community resources and programs. Healths implement risk
assessments and health status assessments and assign case managers to provide
constant outreach and education 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
different preferences and expectations of their healthcare plans than do the typically
younger members of commercial healthcare plans. Health plans that are responsive
to these preferences and expectations when they design their Medicare provider
networks may find it easier to recruit and retain plan members. As with other health
plan products, the costs of recruiting new plan members is high, and profitability can
be jeopardized if large numbers of enrollees leave the plan because 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 in areas that are convenient to Medicare patients
and by contracting with providers who have smaller facilities. Elderly patients also
expect to be treated in a respectful, non-patronizing manner by providers and their
staffs and to receive a high level of customer service. Health plans can meet these
expectations by selecting providers who provide the appropriate level of service and
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
network facilities are easily accessible to elderly patients, many of whom are
disabled or frail. Some ways of 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
Commission on the Future of Medicare, which was established by the Balanced
Budget Act and consists of Republican and Democratic lawmakers, health industry
executives, academic health policy experts, and a Medicare caseworker for a
Republican senator. The commission has formed task forces to examine the role of
Medicare in America’s healthcare system and to study the current system, as well as
possible new program designs. The commission’s report was initially scheduled to be
presented to Congress in March 1999.
Network Management in Health Plans
Special Considerations for Medicaid Networks
Pg 1 to 37
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 to networks that serve the Medicaid population, there are a number of special
considerations that health plans must take into account when building Medicaid
networks. Both federal and state legislation set forth certain requirements and
protections for Medicaid program recipients, with the result that health plans must
consider a more complex set of issues when entering the Medicaid 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 regulatory
environment on Medicaid managed care.

In this lesson, we will discuss the factors that health plans must consider when
assembling and managing networks of providers to serve Medicaid recipients. We will
begin with a brief discussion of the history of the Medicaid program and the
characteristics of the Medicaid population. We will then consider the specific
requirements for Medicaid network development and 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 XIX of the Social Security Act. Medicaid is a joint federal and state
program that provides healthcare coverage for low-income, medically needy, and
disabled individualsThe Medicaid program is jointly financed by the federal and state
governments. The role of the federal government in Medicaid is to establish overall
regulations for the program, to provide partial funding to the states, and to set
minimum standards regarding eligibility, benefit coverage, and provider participation
and reimbursement. Many of CMS’ requirements for Medicare health plans, which we
discussed in the previous lesson, also apply to Medicaid managed care plans. In
addition, the federal government mandates that the following basic benefits be
provided by state Medicaid programs:

 Rural health clinic services

 Inpatient hospital services
 Home healthcare for persons eligible for skilled
 Outpatient hospital
nursing services
services
 Laboratory and X-ray services
 Prenatal care
 Nurse-midwife services
 Vaccines for children
 Pediatric and family nurse practitioner services
 Physician services
 Federally qualified health center (FQHC) services
 Nursing facility services
 Ambulatory services of an FQHC that would be
for persons 21 or older
available in other settings
 Family planning services
 Early and Periodic Screening, Diagnostic, and
and supplies
Treatment (EPSDT) services for children under age 21

The individual states administer the Medicaid program and make claim payments,
using state funds 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, with poorer states (based on per capita
income) receiving a higher percentage of reimbursement. States have considerable
latitude to expand the benefits offered under Medicaid, so long as they meet the
minimum federal standards. Because states have the option to expand their
programs beyond the minimum standards set by the government, Medicaid
programs vary greatly from state to state.

Health plans have been an option for state Medicaid programs almost from the
beginning of Medicaid. In fact, most plans have traditionally operated in the manner
of preferred provider organizations (PPOs), as state Medicaid agencies negotiated
with individual providers to accept discounted fee-for-service payment. However, it
was not until the early 1980s that Congress expanded states’ options to use health
plan techniques to help manage rising medical costs. In 1981, Title XIX was
amended to allow states to request waivers to depart from standard Medicaid
coverage by experimenting with new programs aimed at managing costs and
improving the quality of care.

One true statement about the Medicaid program in the United States is that:
the federal financial participation (FFP) in a state's Medicaid program ranges
from 20% to 40% of the state's total Medicaid costs
Medicaid regulations mandate specific minimum benefits, under the Early and
Periodic Screening, Diagnosis, and Treatment (EPSDT) program, for all
Medicaid recipients younger than age 30
 the individual states have responsibility for administering the Medicaid program
non-disabled adults and children in low-income families account for the
majority of direct Medicaid spending

The transition to health plans in Medicaid has been slow but steady. Figure 7B-1
shows the shift in Medicaid enrollment from FFS plans to health plans between 1991
and 2003. CMS reports that, 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-based purchaser, negotiating comprehensive contracts
with providers and commercial healthcare plans. However, Medicaid agencies must
consider issues that do not commonly affect private purchasers, and those issues
also affect the strategies of health plans that hope to win Medicaid contracts. One
issue is that the Medicaid program has historically provided healthcare at a lower
cost than commercial health plans; therefore, some studies indicate that the
maximum potential savings 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 greater economies for Medicaid
programs through reductions in enrollees’ use of high-cost services, such as
emergency room visits for routine care or inpatient hospitalization for conditions that
can be managed on an outpatient basis.

The Nature of the Medicaid Population

The Medicaid population differs from the typical membership of a commerical health
plan, posing a challenge for health plans as they attempt to establish Medicaid
provider networks that efficiently and effectively address the needs of these special
populations.

A major issue that states and health plans must consider in negotiating Medicaid-
managed care contracts and establishing Medicaid provider networks is the
vulnerability of the Medicaid population, 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 is typical of commercial
plan members. If care is not available under Medicaid, the Medicaid recipient does
not have the resources to seek medical care outside the system, making it especially
important that Medicaid health plans provide the appropriate services at the
appropriate time. It is, therefore, important that Medicaid health plans cultivate
relationships with traditional Medicaid safety net providers.

Medicaid safety net providers of care are defined as those providers that have
historically had large Medicaid and indigent care caseloads compared to other
providers and that are willing to provide health and related services regardless of the
patient’s ability to pay. Because many of their patients are uninsured and unable to
pay for services, these safety net providers often rely upon Medicaid payments,
government grants, and private donations to maintain their financial viability. We will
discuss the special considerations for contracting with safety net providers later in
this lesson.

Further, this economic disparity between Medicaid enrollees and commercial

enrollees limits the cost-participation elements— such as copayments, deductibles,
or coinsurance —that are inherent in most managed care plans. Federal Medicaid
guidelines actually limit the cost participation that health plans can require of
Medicaid recipients. Without cost participation, demand management is more
difficult, because Medicaid recipients can utilize services without incurring any
personal cost 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, the option of health plan enrollment is also offered to disabled
individuals, as well as to low-income individuals who are eligible for Medicare.

Serving the Majority

The majority of the Medicaid population is younger (including a high volume of
children), less educated, 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 provide prenatal, perinatal,
and neonatal care to pregnant women and newborns. The program also mandates
well-child care and preventive healthcare services in order to improve the long-term
health of growing children. It is obvious, then, that a Medicaid managed care
organization must include a large number of obstetricians and pediatricians in its
provider network.

Federal Medicaid regulations mandate specific minimum benefits for Medicaid

recipients younger than 21 under the Early and Periodic Screening, Diagnostic,
and Treatment (EPSDT) program. EPSDT provides for health screening, vision,
hearing, and dental services at intervals that meet recognized standards of medical
and dental practices and at other intervals as necessary to determine the existence
of physical or mental illnesses or conditions. Health plans contracting with the
Medicaid program must provide to EPSDT recipients any service that is potentially
covered under a Medicaid state plan and that is necessary to treat an illness or
condition identified by screening, even if the health plan does not normally cover the
service. States have the option to 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

established relationship with a healthcare provider. They may typically have used the
emergency room as a source of first-line care for illness and injury and may be
unfamiliar with—and not necessarily receptive to—the concept of managed
healthcare and health maintenance. As a result, Medicaid health plans must be
prepared to assemble a provider network that offers support services to enrollees,
including foreign language translation and transportation to the offices of medical
providers, in order to ensure that enrollees have adequate access to healthcare and
to encourage appropriate utilization of healthcare services. The health plan should
also encourage its Medicaid enrollees to seek care in appropriate settings—for
example, to seek treatment for non-emergency illnesses 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 in low-income families, this group accounts for only 32.3% of direct
Medicaid spending. The elderly and disabled individuals who make up the other 25%
of Medicaid beneficiaries are responsible for 67.7% of total direct spending.3
Healthcare plans must be prepared to meet the needs 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
outpatient services, 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 by community-based specialty clinics. Many of these
facilities are not currently a part of the health plan industry, although they may have
the most experience and skill in managing the healthcare needs of individuals with
disabilities. In order to serve both the Medicaid and non-Medicaid disabled
populations effectively, health plans must make the effort to include these traditional
safety net providers of Medicaid service in their provider networks.

Individuals with disabilities also require a variety of ancillary services more often
than commercial health plan members. Some Medicaid recipients, including adults
with mental retardation or developmental disabilities, receive care in group homes,
assisted living programs, or supervised apartments. Some Medicaid recipients
require these ancillary services and other community-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 an acute, 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. When considering participation in Medicaid, health plans must
assess their ability to provide such services and either factor the expenses into their
projected budgets or determine if the state agency 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 have come to consider their specialists as their primary care providers,
even though specialists do not routinely see their role as coordinators of care.
Specialists do not usually provide routine health screenings or immunizations and do
not treat medical conditions unrelated to their area of specialty. However, typical
PCPs may not have the experience, skill, or comfort level to coordinate 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
able to handle that role. In fact, individuals who have become accustomed to
managing their own care may find it difficult to turn this role over to a healthcare
plan.

There are several approaches—each requiring additional provider training—that an

health plan may take to bridge the gap between primary and specialty care for the
disabled. The health plan may utilize PCPs as case managers, with the requirement
that they receive additional training in the diagnosis and treatment of specific
disabilities. Alternately, the health plan may enlist specialists who are currently
treating the disabled and require the specialists to receive additional training 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 and certified 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
management programs. Some disabled individuals, such as those with mental
retardation, may require more community support than medical care, while those
with other disabilities or chronic health conditions may require more medical
coordination but less long-term support. The key to managing this care is to identify
an individual’s particular medical management needs as soon after enrollment as
possible and to provide access to the most appropriate level of care for the
individual, using a team approach to provide services at the appropriate level. CMS’s
proposed amendments to its Medicaid managed care regulations require that a
treatment plan be developed for persons with complex and serious medical
conditions. If appropriate, the treatment plan should specify an adequate number of
direct access visits to specialists. This provision is intended to ensure that enrollees
with complex and serious medical conditions can be seen by appropriate specialists
without having to obtain a referral for each visit. Insight 7B-1 describes an HMO that
provides effective case management for its enrollees.
Credentialing Providers for the Disabled
Just as in commercial health plans, Medicaid managed care plans should credential
their providers. However, the credentialing of a provider for the disabled should be
modified to obtain information and documentation about the provider’s training and
experience in working with the disabled, as well as the accessibility of the provider’s
offices to disabled individuals. Figure 7B-2 lists some questions that health plans
should ask when credentialing providers to serve disabled patients.

During the provider selection process, health plans must also consider the
accessibility of a provider’s location to individuals disabilities. Health plans should
perform site visits or request information to determine provider has

 accessible office space, o a telecommunications device

including handicapped-accessible
entry, examining rooms,
hallways, waiting rooms, and
restrooms
 appropriate equipment,
including examining tables,
scales, dental chairs, or
mammography equipment to
accommodate individuals with
different disabilities
for deaf, a teletypewriter, and
American Sign Language interpreter
capacity
o the ability to offer services
and information for people with
visual impairments
o training/experience in
communicating with individuals with
cognitive disabilities.

Serving the Elderly: Medicare, Medicaid, and PACE

Medicaid also serves the low-income elderly population, typically providing standard
Medicaid services that are not covered by Medicare. Individuals who are covered by
both Medicare and Medicaid are referred to as being dually eligible. Because
Medicare is the primary coverage for dually eligible individuals, Medicaid managed
care networks should include Medicare participating providers.
As we discussed in the previous lesson, the Balanced Budget Act (BBA) of 1997
formally established a program called Programs of All-Inclusive Care for the Elderly
(PACE) as a state option. Originally developed as a demonstration project, PACE was
the first health plan program designed to serve a special needs population. PACE
operates within both the Medicare and the Medicaid programs, with Medicare
providing the primary coverage for individuals who are covered by both programs.
States may elect to contract with health plans to provide PACE program services to
individuals who are Medicaid-eligible and meet the PACE criteria. These individuals
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-model HMOs or integrated delivery systems (IDSs) because they provide all of
a PACE beneficiary’s care under a capitated reimbursement rate. Most PACE
programs are smaller than other health plans, 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 a healthcare “safety net” for persons unable to afford private
healthcare coverage. States’ efforts to find creative ways to serve the Medicaid
population, including mandatory enrollment in health plans, have opened new
opportunities for health plans to expand into this market. One way that state
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
Medicaid programs under freedom of choice waivers. Section 1915(b) waivers
have allowed states to mandate certain categories of Medicaid recipients to enroll in
health plans. The 1915(b) waiver is called 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 selecting providers. Mandated
managed care enrollment creates an instant market for health plans that are
selected to serve the Medicaid population. Most mandatory Medicaid managed care
programs have evolved in urban areas where health plans are well established in the
private sector and providers 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
demonstration projects in order to test new approaches to benefits, services,
eligibility, program payments, and service delivery. In cooperation with health plans,
a number of states have developed innovative programs under these waivers. The
first such program was the Arizona Health Care Cost Containment System
(AHCCCS), which was implemented in 1982 and is a statewide system consisting
entirely of prepaid health plans. AHCCCS depends upon a competitive bidding
process that 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 health plan enrollment mandatory for Medicaid recipients or to offer more
comprehensive services to certain categories of recipients. The BBA eliminated the
need for formal application for waivers.

The following statements are about waivers and the Medicaid program. Select the
answer choice containing the correct statement:
The Balanced Budget Act (BBA) of 1997 eliminated the need for states to make
formal applications for waivers.
Section 1115 waivers allow states to bypass the Medicaid program's usual
requirement of giving recipients complete freedom of choice in selecting
providers.
 Title XVIII waivers allow states to mandate certain categories of Medicaid
recipients to enroll in health plan plans.
Section 1915(b) waivers allow states to establish demonstration projects in
order to test new approaches to benefits and services provided by Medicaid.

Mandating Medicaid Health Plans

Under the greater freedom granted by the BBA, more states have begun to require
health plan enrollment for Medicaid recipients. Mandatory enrollment in Medicaid
allows state Medicaid agencies to establish better management of costs, utilization,
and quality. However, Medicaid health 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, if the immunization program is
not pursued aggressively, young Medicaid recipients may contract childhood diseases
that lead to further health problems. Plans must also address the ongoing needs of
the disabled, the chronically ill, and the elderly who are Medicaid recipients to the
extent that state Medicaid health plan programs cover these populations. Special-
needs children, Medicare beneficiaries, and enrolled members of federally recognized
Native American tribes are exempt from the BBA’s mandatory Medicaid health plan
enrollment. States may still obtain waivers to require special-needs children and
dually eligible individuals to enroll in Medicaid managed care programs.

Medicaid Health Plan Entities

If a state mandates Medicaid managed care enrollment, federal regulations require
that Medicaid beneficiaries be given a choice between at least two managed care
entities. However, for Medicaid beneficiaries living in rural areas that have minimal
health plan development, the state is allowed to offer only one option for health
plans. Medicaid defines health plans as either managed health plans or primary care
case managers (PCCMs). Note that the definitions that follow are specific to
Medicaid.

Under Medicaid regulations, managed care organziations (MCOs) have the

characteristics of HMOs in that they provide inpatient and outpatient care and are
subject to extensive regulatory requirements. 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 are already operating within the state and (2) startup plans that are
developed specifically for the Medicaid program. An HMO accepts fully capitated risk
for comprehensive services. The startup plans are typically sponsored by local
practitioners who are traditional Medicaid providers with an established Medicaid
patient load. A number of traditional Medicaid providers are forming provider-
sponsored organizations in order to continue contracting with the Medicaid program.
Some startup plans are established as prepaid health plans (PHPs), which accept
financial risk for 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 the state’s Medicaid agency to provide primary care services, as well as
administrative case management. A primary care case manager may be a physician,
a physician group practice, an entity employing physicians, or—at state option —a
nurse practitioner, nurse-midwife, or physician assistant. While PCCMs have been
particularly popular in rural areas with low health plan penetration, they tend to be a
transitional type of managed care entity, with minimal health plan controls, and are
decreasing in numbers as health plans become more common.

Because PCCMs are often individual practitioners or small groups and focus almost
exclusively on primary care, our discussion of provider networks will refer to health
plans, rather than using Medicaid’s umbrella term health plan entities.

If a Medicaid enrollee does not choose an health plan, the Medicaid agency may
assign the enrollee to a health plan or a PCCM. Typically, the agency tries to
preserve any preexisting relationship 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 their provider 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 enrollment brokers,
which are third-party entities that handle the recruitment and enrollment of Medicaid
recipients for health plans. Enrollment brokers must present the various options
available to the enrollee, but they add an extra layer of communication between the
enrollee and the health plan and provider.

The following statements are about Medicaid health plan entities. Select the answer
choice containing the correct statement:
To keep Medicaid enrollment costs as low as possible, states typically prohibit
the use of third-party entities known as enrollment brokers to handle the
recruitment and enrollment of Medicaid recipients in health plan plans
Primary care case managers (PCCMs) are individuals who contract with a
state's Medicaid agency to provide primary care services mainly to urban
areas.
Typically, Medicaid beneficiaries must be given a choice between at least two
health plan entities.
Medicaid health plan entities are responsible for providing primary coverage for
all dually-eligible beneficiaries.

Serving the Uninsured

Some states have used the cost savings from health plans to expand Medicaid
eligibility under Section 1115 waivers to low-income uninsured adults and children
who do not qualify for coverage under the standard Medicaid guidelines. In order to
encourage broader healthcare coverage for children, the BBA also established Title
XXI of the Social Security Act, the Children's Healthcare Insurance Program
(CHIP), which gives states latitude—and additional federal matching funds—to
provide healthcare coverage to low-income uninsured children who do not qualify for
Medicaid or other health coverage. Approximately 11.4 million children under age 19
were uninsured in 2003.5 In addition, there are several million other children who are
eligible for Medicaid but not enrolled. These numbers illustrate the need for outreach
to these unprotected children.

One of the options available to states for implementing CHIP is the expansion of the
state’s Medicaid program. Prior to CHIP, a number of states had already expanded
Medicaid coverage for uninsured children under Section 1115 waivers.

States that incorporate the CHIP program into the existing Medicaid program offer
the same benefits to both Medicaid enrollees and CHIP enrollees, including EPSDT
benefits. States that develop separate CHIP programs have a great deal of flexibility
in designing the benefits. Those benefits plans must meet the criteria for one of the
following three categories:

1. Benchmark coverage
2. Benchmark-equivalent coverage
3. 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 little disruption to their healthcare as possible and to maintain this status,
while dealing with overlapping funding issues.

As we previously mentioned, Medicaid must also provide prenatal care for pregnant
women who qualify for Medicaid. The intent of these programs directed at children
and pregnant women is to promote the improved health of infants and children,
under the premise that healthy children incur fewer medical costs. Prenatal care and
infant health services are especially suited to case management programs, especially
when the covered population has high rates of neonatal mortality or morbidity or
infant mortality.

The success of this approach is illustrated by North Carolina’s Baby Love program.
Under this program, which was begun in 1987, a statewide network of specially
trained nurses and social workers—called maternity care coordinators—provides
comprehensive prenatal care and infant health services to Medicaid recipients in the
state’s 100 counties. The program includes traditional 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, nutritional counseling,
psychosocial counseling, and postpartum/newborn home visits. Since 1987, the
state’s Medicaid infant mortality rate has dropped 27%. Researchers estimate that
the North Carolina Medicaid program has saved $2 in medical costs for newborns for
every $1 spent on the Baby Love program.8 North Carolina’s program is typical of
prenatal and infant health programs throughout the nation.
As we previously mentioned, Medicaid must also provide prenatal care for pregnant
women who qualify for Medicaid. The intent of these programs directed at children
and pregnant women is to promote the improved health of infants and children,
under the premise that healthy children incur fewer medical costs. Prenatal care and
infant health services are especially suited to case management programs, especially
when the covered population has high rates of neonatal mortality or morbidity or
infant mortality.

The success of this approach is illustrated by North Carolina’s Baby Love program.
Under this program, which was begun in 1987, a statewide network of specially
trained nurses and social workers—called maternity care coordinators—provides
comprehensive prenatal care and infant health services to Medicaid recipients in the
state’s 100 counties. The program includes traditional 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, nutritional counseling,
psychosocial counseling, and postpartum/newborn home visits. Since 1987, the
state’s Medicaid infant mortality rate has dropped 27%. Researchers estimate that
the North Carolina Medicaid program has saved $2 in medical costs for newborns for
every $1 spent on the Baby Love program.8 North Carolina’s program is typical of
prenatal and infant health programs throughout the nation.

Medicaid Compared to Commercial Health Plans

Because of the nature of Medicaid’s main constituencies, Medicaid programs often
have different emphases than commercial health plan programs. For example,
private insurers or health plans typically receive premiums in exchange for assuming
risk, and they limit coverage to treatment that 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 to help sick,
elderly, and disabled individuals access necessary primary, acute, and long-term
healthcare. Medicaid covers services that are needed to maintain maximum
functional levels for individuals 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 a health plan, but health plans are
prohibited from health-screening potential enrollees. In other words, 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 as behavioral 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 of high-risk categories of care. The PACE program
described earlier in this lesson is one example of a carveout. Just as with commercial
health plans, provider compensation for carve-out programs may 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
Medicaid agencies and network providers, we will address both sides of the
contracting picture. The nature of a health plan’s contract with the Medicaid agency
greatly influences the way that the health plan can contract with providers. Although
federal contracting requirements exist, state Medicaid agencies 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 multiple
health plans operate within an area that has few Medicaid enrollees, the state may
be more selective in choosing only a few plans. However, the opposite situation may
exist when there is a large Medicaid population but very few established health
plans. In this situation, the Medicaid agency may have little choice in selecting health
plans. The two basic approaches to contracting with health plans are open
contracting and selective contracting.

Open contracting allows any health plan that meets the state’s performance
standards and the federal Medicaid requirements, and is willing to accept Medicaid’s
reimbursement levels, to enter into a Medicaid contract. This approach may be
attractive to enrollees, because it gives them a choice among a variety of health
plans. The success or failure of a health plan’s Medicaid contract will depend upon
the number of Medicaid enrollees who select the plan and the network providers’
ability to manage costs. Open contracting makes it impossible for the Medicaid
agency to offer enrollment volume guarantees, because enrollment is spread among
a large number of plans. A health plan needs to have a certain number of enrollees
in order to operate efficiently and profitably; therefore, the Medicaid agency can
attract more interest from health plans if it is able to offer enrollment guarantees.

Selective contracting represents a more competitive approach to contracting,

requiring health plans 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 Medicaid managed care plans must be clear and
measurable. The state agency evaluates the proposals submitted by health plans and
selects what it considers to be the best plans for participation in the Medicaid
program. The selection process also includes a thorough evaluation of a health plan’s
existing programs in addition to its proposal for Medicaid.

State Medicaid programs are subject to very specific legal constraints, such as state
procurement laws. The RFP issued to health plans is typically very specific about the
requirements and expectations a health plan must meet to participate in a Medicaid
program. In developing the RFP, the state Medicaid agency may assign weights to
such essential components as the health plan’s provider network design, case
management approach, and capitation rates.

Setting specific standards for health plans streamlines the evaluation and selection
process for both the Medicaid agency and the applicant. Some state insurance
departments have established compliance standards for private plans that conform
to the Medicaid requirements for such functions as management information
systems, credentialing programs, and geographic access standards. When this is the
case, the Medicaid agency may accept documentation from the Department of
Insurance that a health plan is in compliance with standards. The RFP can list a
number of minimum performance requirements that the health plan must meet,
ranging from provider network composition to member service and quality assurance
activities. The health plan is 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 plan in exchange for the plan’s development of a better product that offers
enhanced benefits to enrollees. The competition among plans to win a Medicaid
contract may encourage more innovation 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 they are not as competitive on
price or performance as larger, more established national

The two basic approaches that Medicaid uses to contract with health plans are open
contracting and selective contracting. One true statement about these approaches to
contracting is that:
open contracting requires health plans to meet minimum performance
standards outlined in a state's request for proposal (RFP)
open contracting makes it possible for the Medicaid agency to offer enrollment
volume guarantees
selective contracting requires any health plan that meets the state's
performance standards and the federal Medicaid requirements to enter into a
Medicaid contract
selective contracting requires health plans to bid competitively for Medicaid
contracts

Selection of Medicaid Managed Care Organizations

After reviewing the proposals submitted by health plans, the state scores and
evaluates each health plan, performs site visits, hears any oral presentations, then
verifies the references offered by the health plan. State Medicaid officials will most
likely also conduct interviews with a health plan’s chief financial officer (CFO),
medical director, department managers, and contracted providers.

In order to succeed in obtaining and keeping a Medicaid contract, health plans must
offer assurance that their participating providers are capable of delivering clinically
appropriate healthcare services to all enrollees on an ongoing basis. The
credentialing process, discussed earlier in this lesson and in Collecting and Verifying
Data for Credentialing Purposes, provides information that allows the health plan to
make an informed decision regarding a provider’s qualifications. The Medicaid agency
will require health plans to submit ongoing information about network providers’
performance through monthly or quarterly summary reports on service delivery,
including encounter level data, quality monitoring, and outcomes reporting. Ideally,
the state Medicaid agency will use the information to provide feedback to the health
plan, which in turn 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 and regional market. A health plan will be required to provide maps of the
service area it can cover and to identify the locations of specific PCPs, specialists,
and hospitals. The state can then note any gaps within the service area. The state
may also require the health plan to identify the office sites of the Medicaid safety net
providers included in the network. Finally, health plans are usually expected to
describe their outreach programs, quality improvement programs, complaint and
grievance processes, and member satisfaction assessment programs, as well as the
modifications they will make to these programs to serve the Medicaid population.

Selection of a Managed Care Organization

Because of the greater complexity of providing healthcare to the Medicaid
population, the contracts between state Medicaid agencies and health plans must be
precise and specific in their statement of plan responsibilities and accountability. The
frequently changing environment of federal and state regulation makes it difficult for
contracts to remain current. As a result, some states have begun to merge their
contracting and regulatory processes by codifying in their state regulations many of
the service and performance specifications that are typical of Medicaid managed care
contracts. The contracting health plan is bound by these regulations, even if they are
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 may modify requirements in the regulations without having to
make amendments to its Medicaid contracts. Contracting health plans should be
aware of any requirements outside of the contract itself. However a state chooses to
impose such requirements, a health plan should analyze any Medicaid managed care
contract within the context of federal and state laws governing the Medicaid
program.9

Just as with the Medicare program that we discussed in a previous lesson, CMS
imposes penalties on Medicaid MCOs that violate regulations governing plan
performance. These penalties may include civil monetary penalties or intermediate
sanctions. These penalties should be clearly specified 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 an individual’s eligibility for Medicaid may change from month to month,
based on a change in the individual’s employment or income status. This fluctuation
can make it difficult for the health plan to determine its ongoing network needs. The
BBA contains provisions to encourage more stability in Medicaid coverage by allowing
states to grant a six-month period of coverage or transitional coverage for
individuals who may suddenly no longer meet the Medicaid coverage criteria but are
ineligible for other healthcare coverage. This minimum coverage period assures
individuals of a certain amount of healthcare and helps health plans predict network
needs based on the anticipated Medicaid enrollment in their plans. Still, providers
should take care to verify Medicaid patients’ current eligibility in order to be assured
of reimbursement. Health plans should also account for this potential enrollment
volatility in their business and computer systems planning for Medicaid contracts.

Some state Medicaid agencies reward plans that meet certain standards, such as
including safety net providers in the health plan’s network, by assigning to the plan
Medicaid enrollees who have not 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
compensated providers 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 to Medicaid enrollees. Most states use their FFS
experience to set health plan capitation rates at the average FFS cost reduced by
some percentage, thereby ensuring that health plan costs are lower than FFS and
providing the state with some cost savings. For example, a state may set its
Medicaid capitation rate at 95% of the average historical FFS rate for providing care.
Federal regulations require that Medicaid capitation rates be no higher than the
Medicaid FFS average for all covered services and that the rates be actuarially sound.
Health plans must operate within that capitation to compensate network providers.
Most health plans have found it critical to their future profitability to challenge
capitation rates that seem unreasonable prior to entering into Medicaid contracts.

State Medicaid agencies have often found it difficult to set capitation rates for
chronically ill populations, for whom the cost of care is significantly higher than for
healthier Medicaid enrollees. There is also a wide variation in the cost of treatment
among individuals with a specific disabling condition. Therefore, capitation that is
based on average cost may put at a disadvantage a health plan that effectively
treats and, therefore, attracts a high number of severely disabled individuals. Some
states are considering diagnosis-based rate-setting techniques to distribute risk more
equitably. Colorado is one state that has already implemented a diagnosis-based
system that more accurately reflects the actual costs of health plans that provide
care to individuals with disabilities and other chronic illnesses.

As we discussed in Strategies for the Specialist Component of the Provider Network,

capitation of primary care services is simpler than capitation of specialty services,
which are likely to be less predictable in occurrence, as well as more intensive—and
more expensive —in nature. Specialists may not see enough Medicaid members to
make capitation practical. Some state programs have taken the approach of
capitating primary care, while continuing to provide compensation for specialists’
services on an FFS basis until enough data has been accumulated to determine a
more effective way of managing the costs of specialist care.

Capitation helps the state Medicaid agency determine its cost for providing
healthcare to Medicaid enrollees. However, some health plans believe that they have
not been adequately compensated under Medicaid capitation. These plans maintain
that the preventive care and improved access to healthcare services mandated under
Medicaid health plans have increased utilization beyond the traditional FFS costs.
Costs have also increased because of mandated outreach and member services
programs, increased administrative and reporting requirements, and health
education and quality assurance standards. Therefore, some health plans have
withdrawn 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 than follow historical FFS data.

In turn, Medicaid providers—particularly safety net providers that provide a wide

variety of services—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 developed creative ways of compensating these providers,
such as developing an enhanced ca capita pita pitation tion rate or an encounter rate
for the greater number of services required to manage these patients. In order to
develop enhanced capitation rates, the health plan must determine caseload levels,
service or visit expectations, and salary costs. These additional costs can be
calculated as a cost 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 a share in any savings from reductions in emergency room or inpatient
hospital services. This type of incentive is different from the withhold procedure we
discussed in Compensation Arrangements Between Health Plans and Providers, in
that the health plan typically also offers enhanced payments for office or home visit
services. The emphasis is on changing the location of the 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 specialists at an hourly rate. For example, a consultant might provide specialty
services at a community health center or a practice that needs assistance on an
occasional basis to serve members with complex needs. A specialist might be hired
on an hourly contract to review patient files, assist with 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 services that are not typically included in its provider network. For example,
the health plan might hire nurse practitioners, social workers, or other staff to
develop and administer such services as assisted living programs, outreach
programs, adult foster care, or personal care services. If these services already exist
in the community, the health plan may simply contract with community-based
providers. Especially if Medicaid enrollment levels are low or unpredictable, paying
contract rates for specific services may be more attractive for the health plan than
building the capacity to provide those services. Contracting with safety net or
communitybased providers may provide more culturally appropriate services, while
strengthening relationships with community providers and building enrollment.
Health plans may consider providing the following services on a 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-sponsored services for mentally ill and disabled persons, and
funded medical education in public academic health centers. Medicaid payments have
also traditionally subsidized providers who render services to indigent, uninsured
individuals. However, the implementation of managed care in Medicaid poses a
threat to this traditional role.

One way Medicaid has subsidized indigent care is through payments to

disproportionate share hospitals. 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 services rendered to a specific
patient; instead, the payments provide supplemental assistance to hospitals that
serve the uninsured. The federal government matches state funds designated for
DSH payments. DSH payments are usually made directly to the hospital, rather than
being included in the capitation payment made to the health plan. In this way, the
Medicaid agency continues to subsidize DSHs so that they can afford to serve the
Medicaid and uninsured populations.

The Medicaid program subsidizes indigent care through payments to disproportionate

share hospitals (DSHs). The Preamble Hospital is a DSH. As a DSH, Preamble most
likely:
receives financial assistance from the federal government but not a state
government.
is at a higher risk of operating at a loss than are most other hospitals.
receives no payments directly from Medicaid for services rendered but rather
receives a portion of the capitation payment that Medicaid makes to the health
plans with which Preamble contracts.
is eligible for capitation rates that are significantly higher than the FFS average
for all covered Medicaid services.

Because providers who have traditionally provided care to Medicaid patients may not
be part of existing health plan networks, some state Medicaid agencies require health
plans to take steps to include those providers, which include federally qualified
health centers (FQHCs), large urban teaching 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, and many 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 and monitoring of Medicaid services and
participating with health plan networks to provide clinical and “enabling” services.
There is some evidence to suggest that many Medicaid patients prefer to continue
receiving direct services from local health departments, rather than from the primary
care providers offered by Medicaid managed care. Health plans can make effective
use of state and local health departments to provide niche services that will improve
the health plan’s overall quality of care. At the very least, health plans should be
aware of the level of services provided by health 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 of Medicaid enrollees have an established relationship with a PCP at the
safety net provider site and because these traditional providers are often efficient at
delivering care for the Medicaid population. However, contracting with safety net
providers can present special challenges to health plans and to statesThis is
especially true with regard to provider reimbursement. Prior to the BBA, federal law
required states to pay certain safety net providers—specifically RHCs and FQHCs—a
cost-based reimbursement (CBR). Cost-based reimbursement (CBR) is a
retrospective payment methodology that reimburses providers for their reasonable
costs for services as determined according to specific cost allocation and
apportionment rules. Under CBR, safety net providers received 100% of their
reasonable costs of providing services Medicaid recipients.

Between the years of 2000 and 2003, the BBA provides for phasing out CBR for
RHCs and FQHCs 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
supplemental payments 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 to health 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 to provide payment that is not less than the level and amount of payment
that the health plan would make for the services if they were rendered by a provider
that was not an FQHC or RHC. This requirement will be repealed as of October 1,
2003.

If the state Medicaid agency does not require health plans to include safety net
providers in their networks, the health plan may wish to consider a number of issues
when deciding whether or not to 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 be wary of the changes that managed care will bring to their practices. As
result, health plans may have to work with these providers to bring them up to
speed in health plans. For example, safety net providers may be accustomed to
operating independently without formal referral relationships with other providers.
Contracts with safety net providers should be very specific about referral
requirements, and the health plan should educate providers about their roles in
relation to other providers in the network.

Health plans may also consider providing assistance to safety net providers to help
them improve their systems, infrastructure, or processes, as long as the health
plan’s compliance with Medicaid requirements is not compromised. For example, a
health plan might allow a provider a period of time to comply with certain standards,
or provide or support any necessary administrative or clinical training. Because of
the precarious financial situation of many safety net providers, they may need
assistance in finding capital to invest in the facilities, staff, or equipment to meet
certain 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 computer systems needed to comply with reporting
requirements.

One key to successful relationships between health plans and safety net providers is
to treat the providers as partners in providing quality, cost-efficient care to the
Medicaid population. These providers’ experiences in treating this population can
serve as an extremely valuable—and often cost-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 are included 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 selection processes to health plans that include
traditional safety net providers. Ohio mandates relationships between HMOs and
providers that have traditionally provided care for disabled Medicaid recipients.

California’s “Two-Plan” model allows Medicaid enrollees to choose either a private or

a public health 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 state offers higher capitation rates and minimum
enrollment guarantees to public health plans in an effort 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 be awarded a contract to serve state employees, a health plan
must also agree to serve Medicaid beneficiaries.

Network Management in Health Plans

Provider Networks for Workers’ Compensation
Pg 1 to 22
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
insurance program that provides benefits for medical expenses that are incurred and
wages that are lost by workers who suffer work-related injury or illness.
Traditionally, the primary goal for medical services provided under workers’ comp
has been to return the employee to work as soon as possible in order to control the
expense of reimbursing workers for lost wages. Because of the emphasis on quick
recovery, workers’ comp providers are usually less concerned about overutilization
and strict definitions of medical necessity than other providers. Health plans offer a
way for workers’ comp programs to manage medical costs as well as the costs of lost
wages. A health plan that provides medical care under workers’ comp may need to
adjust its goals for healthcare delivery in order to manage both medical expenses
and the cost of lost wages. Part of the adjustment process is tailoring the
management of the provider network to emphasize rapid recovery 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’ compensation networks and issues
that affect the selection of providers for a network. We also describe
compensation 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 as managed workers’ comp or simply managed comp) is still in its early
stages. Nevertheless, many experts see potential advantages to managed comp.
Specifically, health plans can reduce the costs and improve the quality of the care
provided under workers’ comp. In situations in which health plans have already been
applied to workers’ comp, studies show that these objectives have been achieved.1

Although they constitute a relatively small percentage of all healthcare costs,

workers’ comp healthcare costs still amount to billions of dollars a year in expenses
for employers. In addition, in recent 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 prevalent work-related injuries was several times higher
under workers’ compensation than under group health coverage. For example, the
average reimbursement for a back injury under workers’ comp was 4.2 times the
average reimbursement under group health ($961 vs. $228). The average
reimbursement 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 of medicine 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 that health 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’ comp is that unmanaged (traditional) workers’ comp programs still feature
fee-for-service (FFS) provider compensation. Thus, providers still have an economic
incentive to maximize the number and intensity of services provided. In addition, few
mechanisms are in place to monitor the quality and appropriateness of the care
given to workers’ comp recipients. These problems are compounded by the fact that
workers’ comp claimants (employees who suffer work-related illnesses or injuries)
typically have free choice of providers and little, if any, incentive to choose cost-
effective providers.

Health plan strategies, such as alternative compensation schedules, provider

networks, case management, quality management (QM), and utilization
management (UM), can help control these 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, or benefit limits. Workers’ comp coverage is also available to all
employees, regardless of their eligibility for health insurance coverage. In addition,
workers’ comp coverage provides reimbursement for lost wages, a benefit that is not
available through group health plans. These features may tempt employees to
represent illnesses or injuries that are not workrelated or that are not covered by
group health plans as work-related in order to receive medical benefits and
reimbursement 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 occurs when a provider refers claimants to healthcare facilities, such as
ancillary services facilities, in which the provider has a financial interest. An
orthopedist who refers a patient with a back injury to 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 in which providers have a financial interest.

Duplication of Expenses
Most workers’ comp programs are administered separately from group healthcare
plans, even though 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 is increased further if the employer offers
separate disability benefits. Additional resources are required 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 separating benefits into different plans reduces administrative expenses.
It also reduces the need to distinguish between work-related illnesses and
injuries and non-work-related conditions. In an integrated system, cause is
irrelevant. The focus is on returning all employees to work as quickly as
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 many believe 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 and quality advantages.

Health plans offering 24-hour coverage can realize efficiencies and cut overall costs
by combining administrative services. They can also improve the quality of care
members receive by maintaining comprehensive information about patient care from
all sources in one location. Providers can use this information to coordinate services
and ensure that patients receive appropriate 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 the same point of entry to the
healthcare system (they call the same number or contact the same person) whether
their condition is job related or not.

• Twenty-four-hour coverage minimizes the reasons for and effects of cost-

shifting. It can also help the health plan identify and avoid other forms of
fraud. For example, UM and QM programs that monitor the treatment
delivered to plan members from all sources can help prevent a practice
sometimes called double-dipping, in which patients claim benefits for the
same healthcare services 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 other provider networks. Like other provider networks, workers’ comp provider
networks consist of carefully selected, appropriately credentialed medical
professionals who provide their services to claimants at a discounted cost. The
network is designed to ensure quality and reduce medical costs. Providers who
participate in the network agree to accept the reimbursement specified by the health
plan, cooperate with the health plan’s quality initiatives, and participate in the health
plan’s UM efforts in return for increased patient volume. However, a managed comp
network must comply with certain legal requirements specific to workers’ comp. In
addition, it must satisfy 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. State laws mandate the type of coverage that must be provided and the
circumstances under which benefits 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, employees are bound by the
exclusive remedy doctrine, which requires them to accept workers’ comp benefits
as their only compensation in cases of work-related injury or illness. Employees
cannot sue their employers for additional amounts, except in certain extreme
situations.

Laws governing workers’ comp differ from state to state, which creates considerable
complexity for organizations offering workers’ comp coverage in multiple states.
However, certain requirements 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 through deductibles, coinsurance, copayments, or
disability waiting periods. In addition, workers’ comp is last-dollar coverage,
meaning that health plans may not place limits on the benefits they will pay for a
given claim. Worker’s comp programs must pay 100% of workrelated medical and
disability expenses. From the health plan’s point of view, one major disadvantage of
first-dollar and lastdollar coverage is that employees are insulated from the cost of
the healthcare they receive and have little incentive to seek cost-effective care.

Most states place limits on an employer’s or workers’ comp program’s ability to

require employees 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 the provider 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 a certain period of time
(such as one month) or for a certain number of visits. After that time, the employee
may switch to a nonnetwork provider. Because of state limitations on employers’ and
health plans’ abilities to direct care to network providers, many workers’ comp
networks are organized as preferred provider organizations (PPOs). The American
Accreditation HealthCare Commission/URAC (the Commission/ URAC) has
established an accreditation program for workers’ comp networks.

• When the employee has the option to choose a non-network provider, all the
health plan can do is encourage the employee to choose a network provider.
In this situation, employee satisfaction with 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 she
knows of other employees who have been satisfied with the network. An
employee who is required to use a network provider during the initial part of
his or her treatment is more likely to stay with that provider after the initial
period if he or she is highly satisfied with the care received from the provider.

The employees of the Trilogy Company are covered by a typical workers'

compensation program. Under this coverage, Trilogy employees are bound by the
exclusive remedy doctrine, which most likely:
allows Trilogy to deny benefits for an employee's on-the-job injury or illness,
but only if Trilogy is not at fault for the injury or illness.
allows Trilogy to place limits on the amount of coverage payable for a given
claim under the workers' compensation program.
requires the employees to accept workers' compensation as their only
compensation in cases of work-related injury or illness.
provides the employees with 24-hour coverage.
 •

Provider Requirements for a Workers' Comp Network

• For a health plan, supplying a network of providers to furnish healthcare to

workers’ comp beneficiaries is not simply a matter of reapplying a network
that has already been created for a group health plan. Some providers who
are suitable for the health plan’s other networks may not offer the specialized
services required to treat workers’ comp patients. Others may not understand
the clinical practice guidelines for occupational illnesses or injuries. As a
result, the composition of 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 a different
approach to practicing medicine than providers in other networks.

Appropriate Specialists
With the exception of specialty networks, most provider networks emphasize primary
care and consist mostly of generalists. A smaller number of specialists are available
on referral from the primary care provider. The predominant types of treatment
delivered to workers’ comp beneficiaries differ significantly from the types of
treatment most often furnished to other health plan 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 expenses in
other member populations. In addition, minor injuries account for about 20% of
workers’ comp claims but only 1% of other groups’ medical expenses.4 These
conditions often require the immediate attention of medical specialists such as
orthopedic physicians or emergency physicians. The extended rehabilitation
associated with work-place injuries and illnesses also requires the services of
physical and occupational therapists and chiropractors. In order to meet these
patient needs, a network serving workers’ comp patients typically includes a higher
concentration of specialists than do other networks.

• The nature of the work done by the covered employee group also influences
the composition of the network. Workers in certain industries may be prone to
certain types of illness or injury. For example, coal miners and textile workers
are more likely to suffer lung ailments than are most other types of workers,
so their managed comp networks need to include an adequate number of
pulmonologists.

In addition to the basic credentials described in previous lessons, health plans

typically have additional training and experience requirements for their workers’
comp providers. Health plans often 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 to providing medical expense benefits, workers’ comp also replaces any
wages an employee loses as a result of a work-related illness or injury. This disability
benefit is often referred to as the indemnity component of workers’ comp.

With workers’ comp, employers are interested in minimizing the total costs of
workrelated injuries 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 the future, these benefits are likely to account for
an even greater percentage of total costs. The introduction 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 to reduce 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
understand that the approach to treating workers’ comp beneficiaries should focus on
rapid recovery rather than cost. This approach contrasts with the approach generally
taken by other health plan providers, who base their treatment selection on medical
necessity and the cost-effectiveness of the 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 member suffering 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 back pain, 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 more conservative
approaches, the physician might order a costly diagnostic test, such as
magnetic resonance imaging (MRI), in order to determine the cause of the
pain and develop the next phase of treatment. Depending on the severity of
the injury, the process can be quite lengthy. On the other hand, if the
treatment is covered by workers’ comp and the employee is missing work
because of the back pain, the physician would likely send the employee for an
MRI during the first 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 cost associated 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 have experience and expertise in determining whether or not employees are
disabled from the standpoint of being able to perform their work duties. In many
situations, providers must also be able to decide whether an employee who is not
ready to return to his or her original job can instead return to light duty. Light duty
is work that is less physically demanding than the employee’s original job. Many
occupational medicine providers also have expertise in determining disability status.

Health plans and many employers have begun to address disability issues by
implementing integrated disability management (IDM) programs that include
guidelines on the expected duration of various types of disabilities, clinical practice
guidelines, return-towork protocols, and guidelines for reducing the number of work-
place accidents. Most employers, health plans, and providers rely on disability
duration guidelines to estimate how long an employee will be absent from work.
Integrated disability management programs require the participation and cooperation
of all of the network’s providers.

Reporting and Communication Capabilities

Providers with occupational medicine backgrounds should have experience
generating the reports that are required for workers’ compensation. The state, the
health plan, and the employer must be kept apprised of the employee’s treatment
and progress toward return to work. Often these reports must be in a specified
format. When deciding whether to include a provider in a workers’ comp network, a
health plan must consider whether the provider has the knowledge and information
system capability to create the necessary reports.

The health plan must also consider the provider’s skills at communicating the
employee’s status to 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 or disability 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
compensation system to help control costs and to increase quality. Compensation
systems that health plans typically 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 healthcare services rendered under the state’s workers’ comp
program. Many health plans reimburse workers’ comp providers according to state
workers’ comp fee schedules or state schedules for Medicare and Medicaid. Fee
schedules allow health plans to regulate increases in medical care by limiting how
much medical fees may increase each year. They also ensure that the fees paid to
various providers for workers’ comp benefits are consistent.

Many other health plans use discounted fee-for-service (DFFS) arrangements. Under
a DFFS agreement, the provider accepts a discount from his or her usual rates or
from the state fee schedule. In return for this discount, the provider gains a potential
increase in patient volume from participation in the health plan’s workers’ comp
network. The health plan may also pay the provider a bonus if the provider meets
certain cost-reduction goals for workers’ comp cases. A 1996 survey found that
around 80% of HMOs surveyed used state fee schedules or discounted fee-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 to compensate workers’ comp network providers. One form of risk-
sharing compensation arrangement used under workers’ comp is case rates. For
example, with case rates, a provider would 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

claims experience among different industries and occupational groups is much
greater in workers’ comp than in group health, making it difficult to determine
meaningful utilization averages.
• Exposure to higher levels of risk. Because of the long “tail” on workers’ comp
claims, a workers’ 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 condition requires treatment. An employee who changes jobs
during the course of treatment may be entitled to continued benefits even
though he or she is no longer an active employee or a member of the original
employer’s group healthcare plan. This contrasts sharply with the risks
associated with treating isolated disease episodes.

• Because of these factors, capitation and other risk-sharing arrangements are

used far less frequently 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, a provider might receive an outcomes bonus us if a specified percentage
of injured workers return to work in advance of or by their predetermined target
dates. Target dates are set according to established 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’
comp networks, 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, clinical practice guidelines, utilization review, and prevention
programs.

Case managers for workers’ comp are generally registered nurses or physicians with
experience in occupational medicine or in disability management. The case manager
coordinates the care furnished to the employee by various types of providers. The
case manager can improve the quality of care and facilitate the return-to-work
process by ensuring that the care provided is appropriate and by verifying that the
care conforms to available guidelines. The case manager can also reduce the overall
costs of care by making sure that the different providers furnish services that are
complementary and non-duplicative. The case manager can also discourage
unnecessary care.

Clinical practice guidelines are gaining increasing prominence in workers’ comp. In

fact, many states are creating mandatory workers’ comp guidelines. In addition,
health plans may create or adopt their own managed comp guidelines. Guidelines
help ensure that employees receive appropriate, 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 that employees are receiving quality, appropriate care and to identify
instances of overutilization. Health plans use utilization review results to educate
providers concerning improvements they can make in their practice patterns.

Just like other health plan products, workers’ comp health plans promote good health
through preventive care initiatives. Workers’ comp prevention initiatives often
include components such as

• analysis of the work site for safety or health hazards

• injury-prevention programs
• programs to increase employee awareness of safety and health issues7

Clinical practice guidelines are gaining increasing prominence in workers’ comp. In

fact, many states are creating mandatory workers’ comp guidelines. In addition,
health plans may create or adopt their own managed comp guidelines. Guidelines
help ensure that employees receive appropriate, 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 that employees are receiving quality, appropriate care and to identify
instances of overutilization. Health plans use utilization review results to educate
providers concerning improvements they can make in their practice patterns.

Just like other health plan products, workers’ comp health plans promote good health
through preventive care initiatives. Workers’ comp prevention initiatives often
include components such as

• analysis of the work site for safety or health hazards

• injury-prevention programs
 • programs to increase employee awareness of safety and health issues7

Network Management in Health Plans

Continuing Management of Network Adequacy and
Provider Satisfaction
Pg 1 to 36
Introduction
To ensure that its provider networks continue to offer plan members appropriate
access to medical services, a health plan monitors its networks, its member
populations, and the health plan’s environment on an ongoing basis. Because of the
dynamic nature of member populations and the entire healthcare industry, health
plans often need to adjust the size and composition of networks. One factor that is
critical to managing the availability of healthcare services is the retention of high-
quality providers in the network. In many cases, a provider’s decision to stay with a
network or leave it depends on the provider’s level of satisfaction with the health
plan, so enhancing 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 to changes in members’ needs and changes in the health plan’s
environment. In the second part of the 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 that the recommended specialty care services are not readily available.
For example, when assessing a proposed referral to a rheumatologist, the UM
department discovers that the network has too few rheumatologists to serve
member needs in a timely manner or the rheumatologists’ practice sites are
located too far from members’ homes and workplaces.
• Member satisfaction surveys or member complaints about appointment lead
times or office hours indicate that specialty care (or even primary care) is not
readily accessible in a specific area.
• Contracted PCPs provide feedback to the health plan that more specialists or
different types of specialists are needed in the network.
• A review of utilization and claims reports identifies a high level of use of
noncontracted providers by plan members. The use of nonparticipating
specialists is often an indication of too few providers in the network,
inconvenient provider locations, a lack of the necessary types of providers, or
the absence of members’ preferred providers in the network.
 • The health plan changes or adds benefits to its coverage. For example, the
addition or expansion of chiropractic benefits should result in a review of the
network to ensure an adequate number of contracted chiropractors.
• The health plan gains or loses a large employer as a purchaser, which directly
impacts the overall volume of services required.
• Network adequacy requirements of regulatory or accrediting agencies change.
For example, a state that previously required health plans to make providers
available within 30 miles of members or 30 minutes of driving time changes
its requirements to 20 miles or 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 who speak the applicable foreign languages.
• A provider organization terminates its contract with the health plan.
Depending on the number of members receiving healthcare from this provider
organization and the amount of excess capacity in the rest of the network,
the health plan may need to add providers to ensure that the number of
providers remains adequate to meet member needs.

Health plans also use capacity reports generated by their information systems to
indentify PCP practices that have reached health plan developed thresholds of
practice capacity. These reports identify which PCPs have closed their practices to
new members and the length of time the practices have remained closed, as well as
PCPs who have recently reopened their practices. This data 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
and recommendations regarding network modification from these sources.

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

committees. These health plan personnel and committees are likely to be aware of access
or availability problems that have had a negative impact on the quality of care.
 The plan’s customer service department. The customer service department can
provide the network management staff with regular updates on member complaints about
the network and on unmet needs, such as requests for different types of providers.
 The marketing research, business development, sales, or marketing departments.
These departments have regular contact with purchasers and, perhaps, with members.
They are often a good source of information about providers that members would like to
add to the network and problems that members have experienced with current providers.
 Contracted provider organizations. Provider organizations may have suggestions
about changing the number or types of providers in the network, based on the services
that their patients need.

 Satisfaction surveys from members and providers. Member satisfaction surveys

should indicate how well the network is meeting the needs of the members, and provider
surveys tell how well the health plan and its network management department are
meeting provider needs. Both types of surveys are useful for identifying areas that need
improvement.
The network management department should develop a system to obtain network
information on a regular basis from the sources described above. Network
management should also request to be notified immediately of any major access
problems that are reported.

Indicators of Network Adequacy

Network management staff examine a variety of factors when reassessing the
adequacy of the health plan’s network relative to the healthcare needs of its
members. Figure 8A-1 lists indicators that 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 to the size and composition of the network in order to best meet
member needs. For each of the factors listed, the health plan collects and analyzes
data in order to measure its performance against 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 health plans that
require members to initiate all non-emergency episodes of healthcare through their
PCPs.

When a health plan’s provider network does not meet the applicable standards for
access and availability of services, the health plan must develop and implement
action plans to correct the deficiency. The corrective action may address physician-
specific access problems, such as limited office hours, or a network-wide problem,
such as too few PCPs in a geographic area. In the latter case, the network
management department initiates the selection, negotiation, and contracting
processes to add PCPs to the network. The health plan must continue to reevaluate
network adequacy to determine whether the implemented action plans have
improved member access to services.

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

One technique that a health plan can use to maintain network adequacy is the
systematic monitoring of provider contract status. By monitoring the status of
provider contracts and contract negotiations, the health plan can avoid delays in
renegotiations that may result in a network that cannot meet member needs. To
monitor and manage contract status, a health plan develops or purchases 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,
and accreditation standards for adequacy. Health plans typically try to retain a stable
base of providers from one contracting period to another, especially if their
contracted providers have demonstrated the ability to deliver high-quality care in a
cost-effective manner. The process of credentialing and contracting with new
providers takes time and money, plus plan members are typically dissatisfied if their
chosen providers are no longer in the network. Even a health plan that wants to
reduce the size of its provider network needs to renew contracts with some of its
providers. To improve retention rates, health plans use a variety of approaches to
enhance provider satisfaction and encourage providers to remain with the health
plan. These approaches include training for providers and their staffs, provider
satisfaction surveys, provider involvement in medical management committees, and
various types of administrative service and support. Throughout the implementation
of their educational and support activities, health plans also try to establish good
working relationships with their providers to further enhance provider satisfaction
and loyalty to the health plan.
Strategies for Building Relationships with Network
Providers
Through their provider relations staffs, health plans actively work to foster the
development of true partnerships between the health plan and contracted providers.
Provider relations personnel are responsible for communicating with providers
regarding questions about health plan procedures, 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
wants differentiate itself in the eyes of its contracted providers will develop a
positive, open relationship with its providers. To create this type of relationship, a
health plan must dedicate the services and personnel 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

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

Communication is a key element for developing a strong, mutually supportive

relationship between the health plan and its providers. Figure 8A-2 lists
communication methods that are often used by health plans to educate network
providers and collect information regarding provider needs.
Communication programs initiated by the health plan need active participation from
providers and their staffs in order for the communication efforts to be effective.
Providers and their staffs should respond to these opportunities by providing
feedback to the health plan, attending meetings, and participating in health plan
programs. Apathy from either party can result in poor provider relations, disgruntled
providers, and, eventually, in health plan members who are dissatisfied 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 with the key elements of a health plan’s administrative, operational, and
medical management processes. However, once under contract, the provider must
take the additional steps necessary to become familiar with all obligations and
procedures included in the contract. If the provider’s systems and office staff do not
render adequate healthcare services, member dissatisfaction may affect 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
plan and the provider.

Because providers typically contract with more than one health plan, providers and
their staffs must make a conscious effort to understand the requirements and follow
the routine processes established by each health plan. Health plan provider manuals
and regular training sessions conducted by the health plan with the provider’s staff
can help the provider reduce or avoid confusion about the administrative functions
related to patient care. In some instances, providers may need to enhance the
automation of their office systems in order to comply with health plan program
requirements. For example, a provider may need to upgrade its computers or obtain
new software 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 plan departments may directly or indirectly support the provider network by
providing specific information 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 to treat providers as both business partners and
customers. The provider is a business partner because, without the provider, the
healthcare services guaranteed by the health plan cannot be delivered. The provider
is a customer because one of the health plan’s primary responsibilities is to support
the provider’s delivery of healthcare services to members.

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

Provider Orientation
Once the contract is signed, the health plan’s provider relations staff conducts a
provider orientation program to communicate all operational aspects of the health
plan contract to new providers. Provider relations personnel may hold the orientation
program on an individual basis at the provider’s location or on a group basis for all
newly contracted providers. The timing of this orientation is important. Unless the
health plan has furnished the provider with an administrative manual and other
resources at the time of contracting, the orientation should take place before the
provider begins to deliver services to health plan members. While programs vary
from one health plan 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 steps for completing and submitting claims or encounter forms.

Some providers are employed directly by the health plan (as with staff model HMOs)
or provider organization (as with some medical groups). For providers employed by a
health plan or provider organization, the orientation is more a new employee
orientation than an introduction to managed care 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
provider manual. This manual is a valuable reference that includes information to
help providers meet the requirements of the managed care contract. The provider
manual reinforces contractual provisions, especially if the contract references the
manual as an attachment that documents required health plan processes. Figure 8A-
3 lists some of the components commonly included in provider manuals.

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

The provider manual is also a useful tool to demonstrate the health plan’s
compliance with accrediting agency standards concerning provider performance and
communication between the health plan and provider. Some accreditation standards
that can be addressed in the provider manual include requirements for network
access, the communication of QM activities, and documentation of contractual
requirements.
Individual practitioners or provider organizations that contract with multiple health
plans receive a provider manual from each plan. If the health plan delegates
utilization and quality functions to a contracted provider organization, the provider
organization is then responsible for disseminating the appropriate information to the
individuals in the organization. Because most health plans follow similar guidelines
and procedures, a provider organization typically writes its own provider manual,
noting any procedural differences between the various health plans. For example,
requirements and procedures for authorization of referrals and services vary greatly
among health plans. The provider organization’s manual also documents the provider
organization’s own policies and procedures for functions that are delegated to the
provider organization 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 with the provider organization.

Ongoing Education for Providers and Staff

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

• Changes or updates to existing health plan programs, such as referral or

service authorizations, 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 and visits by provider relations staff, periodic meetings
with providers and their staffs, and online information.

Provider Newsletters
Many health plans find newsletters to be an effective tool to keep their providers up-
to-date. Most health plans use a monthly or quarterly publication to communicate
new programs, update existing programs, and address specific issues of concern. For
example, newsletters often provide clinical information, such as updates on
outcomes research, and explain how this information affects 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 to remind
patients to get annual immunizations against influenza. To ensure that all providers
have access to the newsletter, some health plans mail their newsletter to all network
practitioners even when there is an intermediary provider organization.

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

To ensure that providers are familiar with the information that plan members
receive, the health plan 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 plan information, such as how to access health
plan services. Provider newsletters often address these same issues but from a
healthcare professional’s perspective. Many health plans write different member
newsletters for the various populations they serve. Each newsletter targeting a
specific population 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 for Medicare members typically includes information about
diseases and injuries associated with aging and suggestions for remaining physically
active and healthy during retirement. For a population that includes families with
young children, newsletter topics might cover childhood illnesses 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 providers or their staffs is by telephone. Many health plans also
establish visitation programs and require their provider relations representatives to
visit each provider practice site periodically, usually once or twice per year. Provider
relations staff schedule additional visits to providers who are experiencing problems
that can be addressed through further education. For instance, provider relations
representative may work with a provider’s staff to show them how to prepare routine
UM and QM reports.

A health plan may enhance the relationship-building aspect of calls and visits by
assisting providers and their staffs with issues that are not necessarily health plan-
related. For example, the provider 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 improving provider-
patient communications or on managing the care of special populations, such as
Medicaid recipients.

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

Periodic Provider Meetings

One of the most effective means of maintaining an informed provider network is to
hold regular meetings 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 cover clinical issues, provider performance
measurement results, and contractual issues. Meetings for provider staff address
operational issues, such as claims and encounter report filing or referral
requirements. Health plans may also present general information about health plans
to help educate providers and staff who may not be familiar with managed
healthcare. Provider and staff meetings are also a good forum to solicit ideas for
operational changes or feedback on new programs the health plan may be
considering.

Online Information
As the Internet becomes a more popular vehicle for disseminating information, many
health plans have established websites specifically for their members and providers.
Websites can be used to create positive publicity for the health plan with their
members by communicating information about health plan products, services, and
network providers. Websites for providers typically include healthcare-related
information, such as recent articles from medical journals or information about
disease management.

Increasingly, health plans are creating account-based, password-secured websites so

that providers can access health plan information regarding service authorization,
claim status, and in some 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 plan receives questions from
providers by e-mail, the plan must ensure that a designated employee reviews and
responds to the e-mail communication in compliance with procedures established for
other forms of communication, such as telephone or mail. For example, responses to
e-mail questions 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
website should not replace more traditional communication such as manuals and
newsletters. Online communication should be used as a communication option to
reinforce other communication tools.
Service and Support to Providers and Staff
Perhaps the most significant way a health plan can ensure provider satisfaction with
the plan is to make the commitment of time, resources, and energy to ensure
operational excellence in the service and support given to providers. The health
plan’s delivery of service and support directly shapes providers’ perception of the
health plan and strongly influences their desire to maintain a relationship with the
health plan. Simply stated, if the health plan’s personnel are responsive to the needs
and questions of providers, and if operational functions such as claims payment,
referral processing, 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 communicate that satisfaction to health plan members.

Although the provider relations department is the centralized resource for provider
information, a provider’s routine interaction with the health plan can be more
efficient if the provider has direct access 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 rather than sending the request
through a provider relations representative. Direct access to utilization review
expedites the processing of requests for procedure authorization.

Assistance with Utilization Management Issues

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

Electronic Referrals
Just as health plans are adopting electronic processes for claims submission, some
health plans are also creating more automated referral submission processes. An
electronic referral system allows providers to either fax the referral request or
submit it via e-mail. The UM decision is returned to the provider in the same manner.
More sophisticated electronic referral systems integrate the authorization process
with claims processing.

In these systems, after the service has been rendered and the claim submitted, the
system automatically links the authorization to the claim, further streamlining the
health plan’s operations 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 greater freedom to make healthcare referrals by adopting direct referral or self-
referral programs. Under direct referral programs, PCPs can make most referrals to
specialists without obtaining prior authorization. Self-referral programs allow
members to bypass the PCP and see a specialist without a referral under certain
circumstances. For example, a self-referral program may permit members in an area
with a high incidence of skin cancer to see a dermatologist without a PCP referral.
Some self-referral programs allow members with chronic conditions, such as
diabetes, to receive specialist services as needed without a PCP referral once the PCP
has identified the chronic 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’s eligibility for coverage, the health plan must provide eligibility verification
mechanisms that are accurate, easily accessible, and available to all providers. While
the health plan may not always receive timely eligibility information from purchasers,
the health plan’s established eligibility verification systems should not create further
inaccuracies and delays.

The health plan is responsible for issuing health plan ID cards to all members.
Additionally, the health plan compiles and distributes monthly eligibility lists to PCPs.
However, the most accurate way for a provider to verify a member’s eligibility on the
date of service is to call the health plan department 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’s eligibility.

Some health plans have reduced the problem of lengthy hold times by installing
automated telephone verification systems that allow a provider’s staff to verify a
member’s eligibility by accessing a daily updated member database. By following the
directions given by the automated phone answering system and entering a member’s
ID number, the provider staff can check on the member’s current eligibility as listed
in the database. Some health plans use ID cards with magnetic coding information
that is read by a card-reader device at the provider site. Through an electronic
connection with the health plan’s eligibility system, the card reader immediately
determines 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 FFS reimbursement arrangements can amount to a
significant portion of a provider’s income, it is important for a health plan to
reimburse the provider in a timely and accurate manner within the guidelines 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. If providers submit incomplete or inaccurate claims, the result will be
delays in processing and payment. Figure 8A-4 lists examples of claims submission
and processing mistakes that can have a 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 submission by a provider, the department notifies the appropriate provider
relations representative. The representative can show the provider specific examples
of the claims problem to clarify any misunderstanding and then provide additional
training as needed.

Claims errors sometimes occur when the health plan delegates claims processing to
a provider organization. If a provider organization that contracts with a health plan is
responsible for processing claims, the provider organization must clearly
communicate to its individual practitioners how to submit claims. Otherwise,
providers may submit claims to the health plan rather than to the provider
organization, resulting in confusion and delayed processing. When the health plan
receives a claim that should have been sent to the provider organization’s claims
department, 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 or Explanation of Benefits form sent to providers. If the
individual provider persists in sending claims 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
through electronic data interchange (EDI). The Centers for Medicare and Medicaid
Services (CMS) championed the electronic submission of claims as a means of
managing healthcare financial data. The private sector has adopted electronic claims
submission to some extent, in part to comply with CMS requirements, but also
because the use of EDI results in more accurate claims adjudication, more cost-
effective claims processing, and earlier notification to the provider if there 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 determine software and hardware requirements. The health
plan also provides the necessary training for the provider and office staff to submit
claims electronically and, in some instances, even offers software 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
provider typically does not file claims for services provided within the scope of
capitation. However, the provider documents the services delivered as encounter
reports, and health plans often require providers to submit these encounter reports
to the plan. Health plans need encounter data describing 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 the health plan. Some providers feel that not submitting information is one of
the benefits of being paid through capitation. Unless providers understand why the
health plan needs the information and 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, a health plan may estimate the expected number of encounters based
on the assigned population and 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 noncompliant providers 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 main contact point for providers and their office staffs for problem resolution.
While a provider’s office may work directly with the health plan’s claims, eligibility, or
UM departments, a provider’s office 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, to distribute to health plan members
• Requests to transfer members who refuse to comply with treatment plans to
another provider
• Difficulty verifying eligibility information or receiving incorrect eligibility
information
• Contractual issues, such as questions about reimbursement
• A PCP’s difficulty in obtaining followup 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 and network providers, health plans also survey contracted providers and their
staffs to assess their satisfaction with the health plan from an administrative and
operational perspective. Survey results help the health plan determine answers to
the following questions:

• Do providers feel that they are able to provide quality healthcare within the
guidelines of the health plan’s UM and QM programs?
• Do any of the health plan’s departments provide poor service or are they
unresponsive to provider 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 better meet 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 and maintaining a health plan that is responsive to the needs of network
providers and health plan members. 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 or the medical director often seek input
from network providers. These providers usually have professional relationships with
non-network providers in the community and may be able to identify and help
evaluate likely candidates for the network. For example, PCPs can offer information
about local specialists and ancillary providers.

Health Plan Committees

Another way in which health plans involve providers in health plan operations is
through committee membership. The health plan’s medical director is typically very
involved with the clinical aspects of the plan’s UM and QM programs. However,
achieving significant improvement in medical management often requires clinical
expertise beyond the contributions of the 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 the organization. Quality
management standards from accrediting agencies require a health plan to establish
and maintain specific medical management committees and to have active
provider participation on these committees.

Because network providers are directly involved in the provision of healthcare on a

daily basis, they bring a significant realworld perspective to QM and UM programs. In
addition to lending their clinical expertise, providers who participate on QM and UM
committees also serve as a communications conduit to and from the provider
community. Providers who are committee members can help the health plan educate
its network about the principles of QM and UM and the specific activities and
requirements of the health plan’s own QM and UM programs.

Health Plan Committees

Each health plan has a variety of organizational committees related to quality and
utilization management. 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 include network 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 specifically for peer review, credentialing, and evaluation of
medical treatments.

Health Plan Committees

The quality management committee generally has the responsibility for overseeing
the health plan’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 the health plan’s board of directors and recommends policy decisions to
the board. Associated committees and subcommittees may also participate in quality
activities. health plans may separate the QM committee into two components: a
clinical QM committee, composed primarily of providers, and a corporate QM
committee that does not include contracted providers. When the QM committee is
divided in this way, the clinical component often serves as an advisory board to the
corporate committee. For example, when the clinical QM committee develops action
plans that involve increased costs or policy changes, these action plans are
submitted as recommendations to the corporate committee for its approval or
rejection of the plans.

Health Plan Committees

The utilization management committee reviews and updates the health plan’s UM
program description 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 only members of this committee who have voting rights
are the providers.

Health Plan Committees

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

The credentialing committee establishes and updates credentialing processes and

criteria, subject to approval from the board of directors, and reviews the credentials
of new applicants and contracted providers during the credentialing and
recredentialing processes. Depending on the authority granted the committee by the
board, the credentialing committee may either make recommendations to the board
or make the final decision regarding a provider’s participation in the network. Some
health plans include peer review activities in the duties of the credentialing
committee.

Health Plan Committees

The number of providers on a committee varies depending on the nature of the
committee, the size 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. Most health plans require that physicians
participating on committees be board-certified. Other types of providers should have
appropriate professional licensure or certification. The UM and peer review
committees also draw from network providers for ad hoc committees when the
expertise of 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 the opportunity to become more familiar with health plan operations. In addition,
such a provider has an opportunity to help shape the programs and activities of the
health plan. To encourage provider participation on committees, health plans may
reimburse providers for the time they serve on committees. To maintain continuity of
provider participation on committees, some health plans attempt to carry over at
least 50% of a committee’s provider members from one year to another.
The Aztec Health Plan has a variety of organizational committees related to quality
and utilization management. These committees include the medical advisory
committee, the credentialing committee, the utilization management committee, and
the quality management committee. Of these committees, the one that most likely is
responsible for providing oversight of Aztec's inpatient concurrent review process is
the:
medical advisory committee

credentialing committee

utilization management committee

quality management committee

Conclusion
So far in this assignment, we have discussed the importance of monitoring overall
network performance to ensure that health plans remain responsive to the demands
of the healthcare environment and the needs of plan members. We have also
described some of the methods health plans 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 ways in which
health plans measure, evaluate, and modify provider performance.

Network Management in Health Plans

Managing Provider Performance
Pg 1 to 58
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:
o Structure
o Process
o Outcomes
o 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 that they claim to provide. Therefore, it is necessary
for health plans to establish methods to measure and manage provider performance.
The previous lesson presented a number of ways that health plans build positive
relationships with their providers. In this lesson, we discuss how these methods
combine with performance measurement and other techniques to manage provider
performance.

First, we provide some background information on medical management and the

relationship between medical management and provider performance. We then
address some of the ways that health plans measure and influence provider
performance and quality. Last, we discuss how health 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 providers are 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 avoid both of these situations
by encouraging providers to utilize services appropriately.

Medical Management and Provider Performance

At the same time, health plans must evaluate and manage the performance of
individual providers and implement programs to support continuous quality
improvement. Continuous quality improvement (CQI) in healthcare consists of a
“structural organizational process for involving personnel in planning and executing a
continuous stream of improvements in systems in order to provide quality healthcare
that meets or exceeds customer expectations.”1 Quality improvement efforts typically
focus on (1) assessing plan performance to identify the best and worst outcomes and
utilization patterns and (2) developing and implementing strategies such as
treatment protocols and practice guidelines to improve performance. The key to
implementing CQI is the quality of the health plan’s network of providers.

With increasing competition among health plans, health plans have begun to
recognize the advantage of being able to present evidence to purchasers and
consumers that the health plan offers a quality product. Purchasers of healthcare are
increasingly demanding accountability from health 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 network
participation and that these providers contribute to the overall quality of care and
services offered by the health plan.

In order to evaluate and manage the performance of individual providers in its

provider network, the Quorum Health Plan implemented a program that focuses on
identifying the best and worst outcomes and utilization patterns of its providers. This
program is also designed to develop and implement strategies such as treatment
protocols and practice guidelines to improve the performance of Quorum's providers.
This information indicates that Quorum implemented a program known as:
an integrated delivery system (IDS)

a coordinated care program

ostensible agency

continuous quality improvement (CQI)

Measuring and Evaluating Provider Performance

In Collecting and Verifying Data for Credentialing Purposes, we described how health
plans use the credentialing process to evaluate a potential provider’s educational and
professional qualifications prior to contracting. Although some health plans also
assess a provider’s practice patterns prior to formalizing an initial contract,
credentialing typically does not provide quantifiable information about provider
performance. The recredentialing process, which plans conduct at regular intervals
after signing the initial contract, offers an opportunity for the health plan to evaluate
the provider’s current performance. In this section, we describe how health plans
measure and evaluate the quality of their providers’ performance.

Performance measurement provides a health plan with quantifiable information about

the care and service that a provider delivers to the health plan’s members.
Performance evaluation allows the health plan to generate a meaningful, valid, and
accurate picture of the quality of its providers’ performance by comparing measured
results against established performance standards. Performance standards define
the level of performance that the provider must reach in order to meet plan
objectives. This level may be either a minimum level of service and care, an average
level of performance, or a best practice.

Standards can be developed internally or externally. Internal standards are

developed inside the health plan and are based on the health plan’s own historic
performance levels. For example, a utilization standard based on the average
utilization of all providers in the network would be classified as an internal standard.
External standards are based on outside information such as published industry-
wide averages or the best practices of recognized industry leaders.

Performance Measures
Performance measures can be either quantitative or behavioral. Quantitative
measures evaluate how quickly, how often, and how accurately services are
delivered. Behavioral measures, or qualitative measures, evaluate a provider’s
interactions with plan members. Behavioral measures are not associated with
numbers or statistics, but with the provider’s ability to communicate effectively 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 provider
performance.

Performance measures typically focus on four areas: structure, process, outcomes,

and patient satisfaction.
Structure Measures
Structure measures evaluate a provider’s staff, equipment, and facilities. Aspects of
a provider’s practice that are appropriate for structural measurements include the
provider’s

• compliance with specific regulatory or accreditation requirements in such

areas as licensing 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 can be standardized for comparisons between individual providers.

Process Measures
Process measures evaluate the healthcare services offered by a provider to the
health plan and its members. Process measures apply to such areas as the
availability and use of preventive health screenings or childhood immunizations.
Health plans often compile summary statistics from claims and encounter data about
the types of services a provider offers or how often the provider performs a
particular procedure. These data can then be compared to the number of members
who are patients of this provider to determine if the services are appropriate to the
membership. For example, do plan members receive regular preventive health
screenings, or do young patients receive appropriate immunizations at the right age?
Health plans may require that providers submit regular encounter reports on certain
types of services to verify that they are being rendered appropriately.

Encounter data, however, are not always accurate or complete. For example, a
patient who obtains services at a location other than the physician’s office—such as
flu shots or immunizations received at a health clinic— may be receiving appropriate
care, even though information about that care is not included in the physician’s
medical records. Incorrect diagnostic or treatment codes can also affect the value of
encounter data.

The provider contract that the Canyon Health Plan has with Dr. Nicole Enberg
specifies that she cannot sue or file any claims against a Canyon plan member for
covered services, even if Canyon becomes insolvent or fails to meet its financial
obligations. The contract also specifies that Canyon will compensate her under a
typical discounted fee-for-service (DFFS) payment system.

During its recredentialing of Dr. Enberg, Canyon developed a report that helped the
health plan determine how well she met Canyon's standards. The report included
cumulative performance data for Dr. Enberg and encompassed all measurable
aspects of her performance. This report included such information as the number of
hospital admissions Dr. Enberg had and the number of referrals she made outside of
Canyon's provider network during a specified period. Canyon also used process
measures, structural measures, and outcomes measures to evaluate Dr. Enberg's
performance.

Canyon used a process measure to evaluate the performance of Dr. Enberg when it
evaluated whether:

Dr. Enberg's young patients receive appropriate immunizations at the right

ages
Dr. Enberg conforms to standards for prescribing controlled substances
the condition of one of Dr. Enberg's patients improved after the patient
received medical treatment from Dr. Enberg
Dr. Enberg's procedures are adequate for ensuring patients' access to medical
care

Outcomes Measures
Outcomes measures focus on the direct results of a process. In other words,
outcomes measures evaluate a patient’s condition after a clinical treatment. One
example of an outcomes measure is the five-year patient survival rate following a
specific treatment plan for a particular illness or a particular patient population.
Health plans can obtain initial information about a procedure or treatment plan by
examining claims and encounter data. A review of patient medical records provides
additional information about specific types of conditions and about the patient’s
progress throughout the treatment. The health plan can then compare a provider’s
performance on the measure to established standards.

In many cases, outcomes standards are expressed as functional scales comparing

the patient’s condition before and after treatment. For example: Did the patient get
better or worse? Did functional levels increase or decrease? Did the treatment
resolve an acute illness? Was the treatment successful in managing the associated
complications of a chronic illness?

Additional standards are established through outcomes research, which documents

the effectiveness of various treatment plans and identifies which treatment plans
produce the most desirable outcomes. Once effective treatment practices are
identified, they can replace other, less effective treatment practices through the
development of clinical pathways, clinical practice guidelines, and disease
management strategies. These preferred practices are used for benchmarking in
outcomes measurement.

Outcomes Measures
Because most health plans lack the resources to conduct extensive outcomes
research, most plans use information from external sources. One such source is the
Agency for Healthcare Research and Quality (AHRQ), a U.S. Public Health Services
agency that supplies research results designed to improve the quality of healthcare
while reducing costs. In 1996, AHRQ began the development of the Quality
Management Network, which is intended to help health plans identify, choose, and
use clinical performance measures.2 AHRQ, through its Center for Outcomes and
Effectiveness Research, funds research activities to identify clinical interventions that
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. The group’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 assessment initiatives within healthcare
institutions.3

A number of other public and private companies also supply outcomes research
information applicable to healthcare. Some health plans even use Internet-based
benchmarking software that allows them to retrieve outcomes data from other
organizations.

Health plans are in a unique position to implement outcomes measures because they
have access to data that encompass entire episodes of care. For example, consider a
situation in which a PCP refers a patient to a specialist who, after examining the
patient, recommends surgery at a local hospital. Following surgery, the patient
undergoes two months of physical therapy. Each of the individual providers involved
in the patient’s care—the PCP, the specialist, the hospital, and the physical therapist
—has data about only one segment of that care. The health plan has data about the
entire treatment program. This ability to capture data about patient care from
beginning to end gives health plans a significant advantage over other healthcare
providers when it comes to measuring and managing quality.

Case Mix/Severity Adjustment

When evaluating a provider's success or failure in meeting standards, the health plan
must make case mix/severity adjustments for any unusual factors that may exist in
the provider's ptient population or in a particular patient. Case mix/severity
adjustments allow for a more equitable comparison of data between providers for
both inpatient and outpatient care. Knowing that Provider A's patients die sooner
than Provider B's patients is of little value unless it is also known that Provider A's
patients are sicker to begin with. Performance results for a PCP whose patients suffer
from a greater number of chronic conditions, such as diabetes or asthma, cannot be
compared equitably to results for a PCP who has a typically healthy patient base
unless case mix/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 specialists patient base is fundamentally different from the
general patient population. Within specialities, some specialists may have specific
qualifications to treat very high-risk patients or to perform particularly complicated
surgical procedures. For example, a perinatologist is more likely to provide care for
high-risk pregnancies than a general obstetrician.

Case mix/severity adjustments help maintain the statistical integrity of outcomes

measurement by providing a means of comparing providers to similar providers
delivering similar services to similar patients. They also help reduce the number of
providers who might otherwise be considered outliers. An outlier is a provider who
is using medical resources at a much higher or lower rate or in a manner noticeably
different from his or her peers. Figure 8B-2 illustrates the effect of case mix/ severity
adjustments.

Case mix/severity adjustment can explain some or all of the variation in a provider’s
practice patterns. 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.
When evaluating the success of providers in meeting standards, a health plan must
make adjustments for case mix or severity. One true statement about case
mix/severity adjustments is that they:
typically are more important in measuring the performance of PCPs than they
are in measuring the performance of specialists
help compensate for any unusual factors that may exist in a provider's patient
population or in a particular patient
tend to increase the number of providers who are considered to be outliers
allow for a more equitable comparison of data between providers of outpatient
care but not providers of inpatient care

Patient Satisfaction Measures

Many health plans include patient satisfaction with the provider’s delivery of medical
services in performance measures. Patient satisfaction measures are typically
behavioral measures and evaluate everything from the friendliness of the provider’s
staff to the patient’s perception of how well the provider addressed a particular
medical problem.

As customers of the health plan, members offer critical feedback to the health plan
about their experiences related to healthcare services received and interactions with
providers. This information is used to validate the quality of service delivered by the
providers and the plan and to assist in identifying and prioritizing areas needing
improvement within the health plan’s delivery 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 to change PCPs.

Member Satisfaction Surveys

Member satisfaction surveys help a health plan gauge whether the care and
services rendered by its 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 specific information 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 more general information about the member’s overall satisfaction
with the plan’s services. One example of a periodic survey that is used throughout
the industry is the Consumer Assessment of Health Plans (CAHPS) member
satisfaction survey developed by AHRQ. A health plan can also collect more
generalized feedback through focus groups or health status surveys.

Member satisfaction surveys are useful in evaluating provider performance because

they may yield information not evident in profiling. Because the request for feedback
is initiated by the health plan, member satisfaction surveys reflect a broader range of
the health plan’s member base than complaint and grievance data and create the
opportunity to collect both positive and negative feedback. Although members may
be quick to complain when they perceive a problem, they may not 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, new mothers or elderly members.

HEDIS
In order to allow for comparison between providers, a health plan must use
standardized survey tools that provide consistent information about each provider. In
addition to providing data for measuring provider performance and fueling the health
plan’s qualityimprovement programs, survey data help health plans meet
accreditation requirements. NCQA’s performance measurement tool, HEDIS, which
we discussed in a previous lesson, requires health plans to survey a sample of
members to assess their health status and to measure patient satisfaction with the
delivery of care. NCQA uses the CAHPS, which is a combination of the original HEDIS
member satisfaction survey and the CAHPS survey to measure consumer
satisfaction. HEDIS also includes a survey that is designed to collect information from
parents about their experience with their children’s healthcare.5

Although the HEDIS surveys are convenient and practical, a health plan may choose
to conduct additional surveys to obtain more specific member feedback regarding the
performance of network providers.

One issue a health plan must address when conducting member satisfaction surveys
is whether to ask 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 information that can be used to create provider profiles or
that can be included in the provider’s recredentialing file.

Access to Care Surveys

In order to allow for comparison between providers, a health plan must use
standardized survey tools that provide consistent information about each provider. In
addition to providing data for measuring provider performance and fueling the health
plan’s qualityimprovement programs, survey data help health plans meet
accreditation requirements. NCQA’s performance measurement tool, HEDIS, which
we discussed in a previous lesson, requires health plans to survey a sample of
members to assess their health status and to measure patient satisfaction with the
delivery of care. NCQA uses the CAHPS, which is a combination of the original HEDIS
member satisfaction survey and the CAHPS survey to measure consumer
satisfaction. HEDIS also includes a survey that is designed to collect information from
parents about their experience with their children’s healthcare.5

Although the HEDIS surveys are convenient and practical, a health plan may choose
to conduct additional surveys to obtain more specific member feedback regarding the
performance of network providers.

One issue a health plan must address when conducting member satisfaction surveys
is whether to ask 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 information that can be used to create provider profiles or
that can be included in the provider’s recredentialing file.

Access to Care Surveys

The results of these surveys are compared at both the provider and health plan
levels to determine the 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 use may 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 inadequate number 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’s
physicians in general.
Complaints and Grievances
Complaints, grievances, and requests for change of PCP provide feedback regarding
services that are not delivered. Filing a complaint or grievance is an obvious
indication that the member is dissatisfied with some aspect of his or her healthcare.
It is also important to determine why a member changes PCPs. Such a decision may
be a matter of poor “fit” between member and provider, the member’s relocation to
another geographic area, or some other unrelated reason. It may also be the result
of dissatisfaction with the quality of the provider. Feedback—both positive and
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 provider may 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 practice guidelines or negative even when the
provider rendered the best possible treatment.

Performance measurement is a complex process that varies greatly from one health
plan to another. Insight 8B-1 describes the concept of transparency; standardized
performance metrics and outcomes reports that are easily accessible to all players in
the health care process.

Insight 8B-1

Health care is a fragmented system," says Donald Berwick, MD, MPP, president and
CEO of the Institute for Healthcare Improvement. "It has many defects and broken parts,
so it's impossible to isolate one element of it and say that's what's wrong. Most of us don't
think in systems terms, so it'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
some providers — are starting to call for the same thing: universal transparency, that is,
standardized performance metrics and outcomes reports that are easily accessible to
absolutely everyone. Hospital and surgical mortality and morbidity rates, physician
compliance with chronic disease management, charges and reimbursements — everyone
knowing everything at the click of a mouse, and we know how elephants feel about mice.

Transparency is seen as the beginning of an awakening. It has the ability to create a

paradigm shift, to move us from a model of acute care that primarily rewards episodic
intervention to a model of chronic care management that rewards — and here's a
shocking thought — keeping people healthy.

The theory is that data exposure will lead to patient empowerment, which will result in an
increase 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 standards from already exists. It's in Medicare databases, hospital discharge forms,
and commercial claims databases. 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 are removed. Second, implement the information
technology necessary to report outcomes. According to 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 outcomes with
incentive payments. That means more of the kind of pay-for-performance programs now
being implemented in California by a coalition of purchasers, plans, and providers called
the Integrated Healthcare Association; in Boston, Atlanta, and other cities by individual
health plans like Blue Cross Blue Shield of Massachusetts and Cigna HealthCare of
Georgia; and by employer coalitions like the Leapfrog Group, which rewards through
purchase preferences, and Bridges to Excellence, which rewards providers directly, for
enhanced diabetes management, for example.

Agreement that transparency is a good thing — or at least agreement that players need to
get together and that something needs to be done — is virtually mandated by how bad
things are, say Ness and others. The cost of systemic blindness is severe. The National
Committee for Quality Assurance, which measures health plan performance through its
Health Plan Employer Data and Information Set program, said in its 2003 annual "State
of Health Care Quality" that at least 57,000 deaths occur each year because of what it
calls "quality gaps." "These gaps are the result of factors such as poor use of technology
and irrational payment systems," says NCQA president Margaret O'Kane. "But they are
not equally prevalent throughout the system. Among health plans that 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 their
performance data, clinical care improved in most areas."

Savings potential Open sharing of data could save a lot of money, according to the Center
for Information Technology Leadership. According to a report given by CITL officials at
the Healthcare Information and Management Systems Society Annual Conference in
February 2004, standardized health information exchange among health care IT systems
could save $86.8 billion annually. The savings would result from fewer tests and the
improved efficiency of automated data sharing among health care organizations. Fewer
administrative tasks could lead to less redundancy and reduced labor costs. CITL officials
called the estimates "conservative projections," because the study only considered health
care transactions involving providers. The Consumer-Purchaser Disclosure Project's
published three-year goal calls for nothing short of a miracle: "By Jan. 1, 2007,
Americans will be able to select hospitals, physicians, physician groups/delivery systems
and treatments based on public reporting of nationally standardized measures for safety,
timeliness, effectiveness, efficiency, equity and patient-centeredness." IOM's report
Those measures are known by their acronym, STEEEP. They form the Rosetta Stone of
transparency, allowing for creation of a common set of standards, and come from another
ambitious text: the Institute of Medicine's 2001 report, "Crossing the Quality Chasm: A
New Health System for the 21st Century." It called for Congress to create a fund of $1
billion to support 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 reform number seven is replacing secrecy with transparency: "The health care system
should make available to patients and their families information that allows them to make
informed decisions when selecting a health plan, hospital, or clinical practice or when
choosing among alternative treatments. 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

Care Magazine, March, 2004.

Using the Results of Performance Measurement and

Evaluation
Health plans use the results of performance measurement and evaluation to provide
feedback to individual providers and to develop health plan-wide quality-
improvement activities. One common form of performance feedback is provider
profiling. A provider profile includes cumulative performance data for an individual
provider and can encompass all measurable aspects of the provider’s performance,
from compliance with the health plan’s operational policies and procedures to
participation in the health plan’s quality and utilization management activities. A
provider profile focuses on patterns of an individual provider’s care rather than on
the provider’s specific clinical decisions and expresses those patterns as a measure
of resource use or quality during a defined period and for a defined population. For
example, a provider profile for a PCP might include an assessment of the average
wait time to schedule routine physical 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 the provider’s service.

Because they provide information about providers’ actual performance, provider

profiles are a valuable 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 her peers, identifying practice patterns that deviate
from the norm, and guiding qualityimprovement efforts. Health plans can also use
provider profiles to identify high-value providers—those providers who give quality
medical care in a cost-effective manner. These high-value providers can 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
access only to information about the provider’s activities with health plan members.
The need to comply with industry and regulatory standards related to patient
confidentiality and competition makes it difficult for a health plan to evaluate the
provider’s performance throughout his or her entire practice.

Using the appropriate measures to assess different aspects of a provider’s

performance should reveal an overall picture of the provider’s quality. With this
overall picture in mind, the health plan can begin to manage provider performance.
It is important that the health plan focus on patterns of performance rather than on
individual instances because it is patterns that will help identify areas where
improvement is necessary.

Modifying Provider Behavior

The health plan’s medical director plays a key role in managing provider performance
by providing leadership and credibility to all areas of medical management, including
quality management, utilization management, network management, and medical
policy. The health plan’s medical director also plays a key role in modifying physician
behavior. When a physician is identified as having a potential utilization or quality
problem—during recredentialing or during the normal course of quality improvement
activities—the pertinent medical records and documentation are typically reviewed
by the health plan’s peer review or other appropriate committees. The medical
director often participates as a member of these committees. The medical director
then contacts the physician to discuss potential and documented problems, with the
intention of changing the physician’s behavior.

Earlier in this lesson, we described how health plans use provider profiles to provide
feedback to physicians. In the following paragraphs, we describe other approaches
health plans use to modify physician performance. Although our discussion focuses
on modifying physician behavior, some of the ideas also apply to other types of
providers.

Physicians are key partners of health plans. During regular office visits, physicians
communicate face-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 toward health plans. Physicians are key customers of
health plans as well. With the growth of health plans over the past decade,
physicians have become more dependent on health plans for their patients, and
continued participation in one or more health plans is often critical for the survival of
their practice. Physicians also rely on the health plan to help them succeed in a
health plan environment 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, customer expectations, and regulatory and access requirements often make
it necessary for health plans to contract 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, poor
clinical quality, poor service quality, or inappropriate physician behavior. Figure 8B-3
gives examples 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 the physician’s practice, for the members who go to that
physician, and for the health plan, especially if the physician is in an area in which
access to similar providers is limited. Therefore, it is typically in the best interest of
all concerned for the health plan to attempt to modify unacceptable practice patterns
and to work with physicians to achieve desired quality, satisfaction, and cost goals.

The specific approach a health plan takes to modify physician behavior depends on
the physician and 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
continuous reevaluation 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 a perceived threat to physician autonomy, a
perceived conflict between the physician’s role as caregiver and his or her role as
agent of the health plan, and a negative perception of managed care.

Physician Autonomy
The nature of the medical school selection process and the medical training
experience emphasize the need for self-confidence, decisiveness, willingness to
accept responsibility and exercise authority, and the belief that what you are doing is
right. While these characteristics are often admirable 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 student who is closely supervised by residents and attending physicians, to
the resident who gains progressively more authority, to the attending physician who,
until the advent of health plans, was essentially free of supervision. Health plans’
introduction of medical management into healthcare delivery 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 specialists and many of the services provided by specialists. Many plans still
attempt to manage utilization by 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 be more selective in
applying authorization requirements, the perceived threat remains. In a national
survey of physicians conducted in 1999 by the Kaiser Family Foundation and the
Harvard University School of Public Health, 47% of physicians responded that the
controls inherent in health 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’s caregiver and their role as an agent of the health plan in determining what
is medically necessary and covered. As caregivers, physicians feel responsible for
providing whatever services they or their patients believe are needed, without
concern for cost or the true medical necessity of the service. For some physicians,
the fact that a health plan is financially liable for only those services that meet the
terms of the benefit contract can be problematic. These physicians see the health
plan’s position as creating a conflict between what patients need and what patients
can actually 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, but also to care that is not covered because of benefit
limitations and exclusions. The perception of conflicting roles stems, in part, from a
lack of understanding by some physicians of the contractual nature of the coverage
provided by the health plan. Although this conflict is not as common as physicians
seem to believe, the perception of such conflicts must be addressed when working to
modify physician behavior.

Attitude Toward Health Plans

Many physicians have an unfavorable view of health plans. For example, 68% of
physicians included in the Kaiser Family Foundation/Harvard University survey
indicated that health plans have had a somewhat negative or mostly negative impact
on their practice. Of the physicians surveyed, 95% said that it had increased the
amount of administrative paperwork, 83% said that it had decreased the time that
they spend with their patients, and 72% indicated that they believed that health
plans had decreased the quality of healthcare for people who are sick. On the
positive side, 68% indicated that health plans increased the use of practice
guidelines and disease management protocols in patient care, and 45% said that it
increased the likelihood that patients will get preventive services such as
immunizations, health screenings, and physical exams. The perceived impact on
healthcare costs was somewhat mixed, with 32% believing that health plans had
increased them, 30% believing they were decreased, and 36% indicating that they
believed that there was no effect.8

It is essential for the health plan medical director and network management staff to
overcome negative attitudes and other barriers to change, both in their day-to-day
interactions with physicians 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 will respond to information that is presented in a positive and collegial
manner and that is supported by evidence. Physicians may not respond to
recommendations that they feel are demeaning or imply that their judgment is
wrong. Health plan personnel must learn to communicate effectively and must use
tools that provide support for their messages in order to be able to modify
physicians’ behavior. Many of these tools have been discussed in previous lessons as
normal health plan functions. In the following sections, they will be discussed in the
context of improving 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 provider manuals, newsletters, mailings, Internet Web
sites, and e-mails, and through personal contact with network management and
medical management staff, including the medical director. In all cases, it is
important for provider communications to be

• Focused on provider issues. It is important for the health plan to

differentiate communications intended for the office staff (such as a notice of
new billing requirements) from information intended for physicians (such as
new clinical guidelines or quality initiatives).
• Up-to-date and accurate. All physicians receive a provider manual when
they join the network. As you recall from The Provider Contract, the provider
manual is often included as part of the provider contract. However, physicians
do not always receive, or do not insert, updates. The health plan should
document that physicians receive updates and make sure that both physicians
and their office staff understand the importance of keeping and using these
updates.
• Two-way exchanges. The health planhealth plan must be willing to ask
physicians for their ideas and to listen to physician concerns and respond to
them. It is also essential (and necessary for accreditation) that practicing
network physicians have input into health plan programs such as utilization
management, quality management, and credentialing of new providers.
Physician participation not only ensures appropriate clinical input into the
programs, but also helps to validate them in the eyes of the medical
 community and to establish the contributing physicians as advocates for the
programs. Soliciting input from physicians helps to reinforce the message that
the health plan values its providers.
• Personalized. Dealing with sensitive issues is much easier when a good
relationship has already been established. It is far more difficult when the
parties are strangers or one has a negative perception of the other, as
providers often do of unfamiliar health plan personnel. Medical directors (and
other health plan personnel) should seek opportunities to meet with network
physicians whenever possible, especially outside of their health plan roles.
Attendance at medical society, hospital, or community functions and at
continuing medical education activities builds relationships and enhances the
medical director’s clinical and personal reputation in the community.

It is also important to remember that rewards are often more effective in modifying
behavior than sanctions. The use of positive feedback and communication about
good performance can be a powerful tool for change. The mailing of a thank-you
note from the medical director to a physician 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 physician with a question rather than a conclusion. Many health plan decisions
are based on limited reviews of a specific case or issue. The provider often has more
information or has a reason that is not readily apparent for an action or decision.
Even if the action appears to be unacceptable, the provider deserves the opportunity
to explain his or her perspective.

The medical director can most effectively interact with the physician by explaining
what information the plan has and then asking the physician to clarify why he or she
chose the action or made the decision. This approach gives the physician the
opportunity to supply additional information, 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 criticize their 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 a routine request for a referral approval), physicians in the Kaiser Family
Foundation/ Harvard University survey responded that 42% of issues were resolved
in favor of the patient, 22% were resolved in the plan’s favor, 21% resulted in a
compromise, and 15% had not been resolved at the time of the survey.9 This would
seem to indicate that neither party is right all of the time and that there is clearly a
need for additional factfinding and collegial discussion.

Provider Services
Continuing Management of Network Adequacy and Provider Satisfaction details many
of the services an health plan’s network management staff offer physicians and other
providers. As with communication, the key to effective provider service is for the
health plan to develop a personal relationship with the office staff and, whenever
possible, with the providers. It is also important for the health plan to address the
concerns shared by physicians and their staff. The health plan is not likely to be able
to supply everything the physician wants, but it can provide clear answers regarding
what will be done and why the other requests cannot be met. The network
management staff must be perceived by the physician and office staff as a valuable
resource, if not an advocate, in their dealings with the health plan.

One of the major concerns of physicians and staff is the impact that health plan
policies and procedures have on physician practices. According to the Kaiser Family
Foundation/Harvard University survey, 95% of physicians think that health plans
have increased their administrative paperwork. The level of concern physicians
expressed was related to the number of health plans with which physicians
contracted. For example, 39% of physicians who did not contract with a health 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 eliminate unnecessary paperwork provide some relief and are recognized by
physicians as an indication that the plan has heard their concerns and cares about
them. These efforts make future requests or recommendations by the health plan
less onerous.

On the other hand, when administrative paperwork is necessary, it is important for

the health plan to 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 as possible 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 adopt common policies and guidelines (within the limits allowed by
antitrust law) so that physicians will have only one set of standards to meet. Some of
these initiatives also involve local medical societies or provider groups to enhance
their acceptance by the medical community. These initiatives will simplify the
administrative work of the practices and should be supported by health plans
whenever possible.

Physician Education about Health Plans

As noted earlier, physicians—especially those new to health plans—often lack
knowledge of the basic aspects of managed care. Health plans can prevent this lack
of understanding from distorting 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 regarding both the care being delivered (for quality management)
and the medical necessity of services (for utilization management). As noted in the
discussion of communications, providers often have additional 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 to
understand the type of information that supports the need for a service and the
importance of documenting that information can reduce (1) the number of calls the
physician gets from the health plan (which is a highly desirable goal for the provider)
and (2) the number of potentially contentious issues for the medical director.

Physician education can be offered in a number of ways. For example, health plans
can address one or more of the issues described above during their regular
interactions with physicians and staff. Health plans can also present a basic
introduction to health plans as part of CME programs sponsored by hospitals or
medical societies. In addition, some medical schools and residency programs are
beginning to incorporate health plan topics into their curricula. This is an excellent
opportunity for medical directors to meet with future network physicians and to
positively impact their view of health plans.

Clinical Education
Clinical education for physicians can be delivered through clinical practice guidelines
or ongoing medical education programs that address immediate education needs.
Another approach that has gained 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 and understanding of the cost and quality of care. Many of their practice patterns
were established during their training or early in their careers based on the practices
of their teachers or senior members of their departments. Much of the information
about appropriate care was based on “expert” opinion, personal experience, and
anecdotal evidence rather than on documented scientific evidence. In many
instances, scientific evidence about appropriate care was not available. Efforts to
measure quality typically focused on structure, process, and short-term results
rather than long-term outcomes and patient satisfaction.

Over the last decade or more, interest in evidence-based medicine and the use of
outcomes studies to better document the true impact of the healthcare services
being delivered have grown. Interest in the development of clinical practice
guidelines and clinical pathways has also increased. For physicians, 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 preventive
healthcare.

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), national organizations (e.g., the American Diabetes Association, the
National Asthma Education Program), and national medical societies (e.g., the
American College of Obstetrics and Gynecology). Clinical practice guidelines have
also been developed on the local level by hospitals, provider groups, and health
plans. Health plans can adopt existing guidelines or modify established guidelines to
meet their specific needs. When no authoritative guidelines exist, health plans can
develop their own using evidence-based recommendations from network physicians
and internal staff.

In all cases, health plans must make certain that they use guidelines that are
clinically sound and appropriately validated. Although many externally developed
guidelines are based on solid scientific evidence, others, even when published in the
peer-reviewed medical literature, do not meet established methodological
standards.11 To avoid potential problems, all clinical practice guidelines should be
reviewed by network physicians and approved by the plan’s quality management
committee before implementation.

Distribution of clinical practice guidelines to physicians and members has a positive

impact on both clinical care and on the perception of health plans as working to
improve the health of the member. Unfortunately, as has been demonstrated by a
variety of measures, distribution does not ensure application. For example, HEDIS
includes measures of compliance with clinical practice guidelines, such as
measurement of the prescribing of beta-blockers after heart attacks. National results
on these measures vary, but many fall below the norm.

Most physicians intuitively understand the importance of evidence-based information,

but they do not necessarily change their practice patterns in response to it.
Convincing them to adopt evidence-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 provider behavior.

Continuing Medical Education

Most ongoing clinical education for physicians is offered in the form of continuing
medical education (CME) programs available from accredited sponsors. Physicians
typically spend a significant amount of time in CME activities in order to update their
knowledge and to meet requirements for licensure (some states have minimum
requirements), professional society membership, or specialty certification. Many CME
programs are patterned after undergraduate medical education with lectures,
audiovisual presentations, and printed materials.

A review of studies on the effectiveness of CME programs in changing physician

practice patterns 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-on practice) and those that were sequenced (with
multiple sessions) did show significant impact on change, 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 health plans 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, this is not an unreasonable approach.
Opinion Leaders
Opinion leaders are providers in the local community who are willing to evaluate and
adopt new ideas before the majority does and who are respected by their peers.
Identifying the local opinion leaders and having them support the appropriate
guideline or practice enhances the likelihood of acceptance and adoption by the
majority of the medical community. Opinion leaders can also be utilized to present
CME programs or to validate the information presented. This is a relatively new
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,” to heart and have invested in a variety of computer systems to help them
analyze and report on physician performance. Although as many as 70% of
physicians nationwide are subject to profiling,14 physicians do not always consider
the data that health plans provide as useful. For example, only 25% of physicians
surveyed in the Kaiser Family Foundation/Harvard University study reported that the
data provided about their clinical practice had been useful in making the care they
delivered more effective and efficient.15

Whether profiles are likely to influence provider behavior depends on such factors as
physician acceptance of the validity of data and of internal and external standards,
appropriate use of profiling 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 either
authorization data (which are entered by the health plan staff) or claims data
(which are submitted by physicians). Both of these sources are only as good
as the people doing the coding and data entry. Nevertheless, each of these
data sources provides a wealth of information, which can help physicians
improve the efficiency and effectiveness of their practice. The health plan
must be prepared to provide information regarding the nature of the data and
its strengths and limitations.
• Sensitive to differences in patient populations. It is common for
physicians to perceive that they treat a sicker population than their peers (or
whomever they are being compared to). For this reason, a comparison of data
about one physician with data about other physicians is generally more
acceptable if it is case mix/severity adjusted. The use of sophisticated
profiling systems that make adjustments based on diagnoses, severity of
condition, and presence of other illnesses, rather than rudimentary systems
that make adjustments only for age and sex, will improve the validity and
acceptance of comparative data even more.
• Statistically significant. Physicians typically learn basic statistics as part of
their education and often question the statistical significance of any variance.
It is important to limit analysis to practices that have a large enough volume
 of patients and to focus on variances 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 most physicians, a value two
standard deviations from the mean is recognized as a statistically significant
variance.

Using Profiles Appropriately

Providers often see profiling as a doubleedged sword. On one hand, profiling can be
used as a positive tool to help physicians improve their practice. On the other hand,
it can be used to impose economic sanctions against poor providers. In spite of their
fears, physicians are not likely to be disciplined today based on profiling and only
about 15% of physicians have economic incentives based on profiling.16

One approach to gaining acceptance of profiling data is to acknowledge that the data
are not perfect and to use profiling to help identify areas to evaluate further. Health
plans today largely use profiling as a means of identifying physicians whose practice
patterns differ in some manner from those of their peers. Data are often compared
to data about other similar physicians in the network or to some regional or national
norm. Most provider profiles start with fairly high level data that look at performance
across the entire population. It is important to acknowledge that a statistical
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 records will help to identify the reasons for the variance and
whether there is a true deviation from accepted patterns of care.

Making Profiling Data Useful

Provider profiles should provide physicians with information they can use to improve
their practices. When an unacceptable pattern of care is identified, the plan should
use the information to help the physician identify ways to improve. Even if the
pattern represents a substantial risk to the members and requires immediate
suspension of a physician from the network, the ultimate goal should be to help
physicians address their shortcomings so that they may continue to practice safely
and effectively.

All too often, a physician receives a profile in the mail and has no idea what it
measures or how to use it. The initial profile should either be delivered in person by
the medical director or network management staff or should be accompanied by a
detailed explanation along with the telephone number or e-mail address of a contact
person for questions or further discussion. If the data provided are high level,
additional detail should be available for areas with substantial variance. Additional
detail might include further breakdown of the data into smaller categories or patient-
specific information to allow review of medical records. The medical director, or other
staff familiar with the profiles and with data analysis, should be available to discuss
the results with any interested physician. The key is to help physicians obtain
information that allows them to identify what specific practice they need to change

Pharmacy reports provide a good example of how different levels of data provide
different opportunities. A health plan may include some measure of pharmacy
utilization as part of a provider profile. This often is a high-level measure such as
total pharmacy dollars or dollars per member per month. Knowing that pharmacy
costs are high tells the physician to look at prescribing 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 prescribing pattern and
allow the physician to review practices in these areas. Data on the top 10 drugs
prescribed 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 the changes. For example, a list of the most common brand-name drugs
used when a generic is available or of non-formulary drugs and their formulary
alternatives provides specific examples of changes in prescribing patterns that the
physician can make. A list of members receiving a brand-name drug when a generic
is available or of those who received non-formulary drugs provides specific patients
to whom the physician can apply the change. The health plan must make sure that
the data provided allow the physician to identify what change needs to be made and,
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 and utilization measures, service measures, quality measures, and
satisfaction measures. Surveys of physicians, looking at data from 1996 to 1999,
found that only about 15% were subject to cost and utilization incentives, while far
more had incentives based on quality of care and patient satisfaction.17

Whether financial incentive programs are effective or ineffective in motivating

physicians to change depends on the following factors:

• Physician perception that the incentive is fair. Capitation must be clearly

defined in terms of what services are or are not included; incentives or
withholds should not be perceived by the physician as punitive; and risk
arrangements should not place the physician or practice in financial jeopardy.
In addition, the overall reimbursement plan must be understandable so that
physicians can clearly identify what impact their actions will 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 providing medically necessary services or punish physicians for
providing care that is medically necessary. When designing incentive
programs, plans must be extremely careful not only to make certain that
there are no inappropriate incentives, but also to avoid any appearance that
there might be such incentives. It is essential for plans that do provide
incentives tied to utilization to carefully monitor physician practices for both
overutilization and underutilization.
• Alignment of incentives. Ultimately, financial incentive programs should be
designed to align 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 either financially or in terms of quality of care and
member satisfaction.
In addition to direct financial incentives, health plans can also use indirect financial
incentives to influence providers. For example, the development of a network-within-
a-network, which was discussed in Considerations for the Structure, Composition,
and Size of the Network, rewards high-quality, cost-effective physicians by including
them in the more selective network, which provides them with access to additional
patients and, consequently, with more income.

Another example of an indirect financial incentive is the sharing of performance data

with employers or members or, in the case of specialists, with referring physicians.
Although this incentive does not limit or expand physicians’ access to additional
patients, it does enhance the reputations of those physicians who have performed
well and should result in their seeing more patients.

Non-Financial Incentives
While the use of financial incentives has been part of the reimbursement
methodology of health plans 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 the physician or staff to attend an educational or a
social function sponsored by the plan, or paying the tuition for the physician or staff
to attend an outside educational program.

Plans may also reduce administrative requirements for physicians with good practice
patterns. For example, for practices that meet certain standards, the plan may allow
direct referral to specialists or not require precertification for procedures. This
approach reduces the administrative work for the practice and improves office staff
morale. It may also reduce practice overhead (an indirect financial 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 the practice. While provider support services may be offered
on an ongoing basis, it can also be beneficial to tie them to specific performance
measures. An invitation to the physician or office staff to participate on plan
committees or on panels at plan presentations may also be perceived as a reward
since it allows physicians and staff to learn about the health plan and to provide
input into health plan operations. It also provides them (as well as their patients and
their peers) with an indication 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 are occasions when unacceptable practice patterns occur. In some cases,
unacceptable practice may entail 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 meet acceptable standards. As we discussed
earlier in this lesson, unacceptable practice may involve overutilization or
underutilization of services, poor clinical quality, poor service quality, or
inappropriate provider behavior. Regardless of the pattern or the type of issue, the
approach to the physician is similar and involves identification, evaluation, and
management of potential quality issues.
The one exception to this approach is an event that indicates the potential for harm
to future patients. Such events require immediate suspension of the physician from
the network until the issue has been fully investigated and resolved. Suspension is a
very serious step that should not be undertaken lightly.

Identification of Potential Quality Issues

Unacceptable actions or practice patterns are identified by plans in a number of
ways. Often a plan member will call member services to complain about a physician.
Common complaints include

• 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, precertifying outpatient care, or working with members in case
management. These issues may include

• 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, either through overutilization or underutilization.

Evaluation and Management of Quality Issues

Once a potential quality issue is identified, it must be thoroughly investigated,
evaluated, and managed.

Issue Investigation

The member complaint or health plan staff report is thoroughly documented and all
relevant records, including hospital or office medical records, are obtained. Profiling
data are analyzed to identify specific unacceptable behaviors rather than just a
statistical variance. Some health plans contact the physician during this process to
obtain his or her perspective, while other health plans wait 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 it and, if it involves clinical issues, submits the information for review
by a medical director or other physician. Many plans use a numerical severity score
to rate a quality issue. This score may be based on the extent of the breach of the
accepted standard of care (ranging from a minor misunderstanding to a flagrant
violation of basic standards of care) or on the impact of the breach on the member
(ranging from no negative impact to loss of limb or death). Severity scores allow the
plan to track the severity of breaches for any given physician as well as the overall
pattern for the plan. Severity scores also help the plan determine whether immediate
suspension from the network 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 previously been contacted) to discuss the case. Depending on the nature of the
issue, this contact may be made by mail, over the telephone, or in person. This
discussion should allow the physician to present his or her side of the story and
should involve an effort to reach agreement about what took place and what
corrective actions, if any, are needed. Whenever possible, discussions should be kept
collegial and should be approached as an opportunity to work with the network
physician to improve the quality of care for plan members. The use of questions (as
discussed earlier) rather than 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 is closed. Sometimes, the health plan lacks adequate evidence to determine
if the single event represents a quality issue, but the plan makes note of the event
and documents its intent to track and trend any future events to see if there is a
pattern of unacceptable actions. When a true quality issue is identified, the plan
must decide how to proceed with further investigation and corrective action.

Most health plans have a quality management committee or other peer review
committee that is responsible for evaluating quality issues. Potential quality cases
may be presented to the quality management committee prior to contacting the
physician or after the physician has responded. The committee members evaluate
the information provided and make the final determination on whether the
physician’s behavior represents a true quality issue. If necessary, the committee
may request review by an outside provider in the same specialty. If a quality issue is
identified, the committee then recommends further action, up to removal from the
network. The committee also reviews 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 the physician to keep similar issues from recurring. Most health plans
require the physician to develop a corrective action plan that addresses the specific
breach. The corrective action plan includes 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 an acceptable corrective action plan,
preferably the physician takes responsibility for actual plan development as the
physician will have more invested in making it work. Once the peer review
committee approves the plan, the plan is implemented and its progress is
periodically monitored. Documentation of plan completion is presented to the quality
management committee for approval.

Disciplinary Action
In spite of efforts to resolve issues collegially with network physicians, there may be
times when disciplinary actions are necessary. For example, disciplinary action may
be necessary for inappropriate behavior on the part of the physician, refusal to
cooperate with a corrective action plan, 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. The documentation of formal
disciplinary actions should be included in the physician’s credentialing file 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 no change. 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 to make an appointment with the
medical director to discuss the issue. This allows time for reflection before the actual
meeting.18 If formal discipline is not effective, or if it is not considered adequate by
the health plan’s peer review committee, the plan may proceed with formal
sanctions, such as not allowing the physician to accept new patients or referrals, or
termination. Health plan sanctions are typically based on quality issues or on the
physician’s failure to comply with plan policies. The plan may also sanction or
terminate physicians based on actions taken by outside agencies, such as state
medical boards or CMS. External sanctions may be based on issues such as fraud,
inappropriate actions with patients, or serious breaches of the accepted 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 restrict a physician’s ability to practice or result in termination must be reported
to the National Practitioner Data Bank (NPDB). Health plans that terminate a
physician from the network must also satisfy other regulatory requirements. One of
the most important of these is due process, as outlined by the HCQIA. The
requirements for due process, which are described in Environmental Considerations
for Network Management, apply to all terminations based on quality issues. Many
states have passed laws that require some form of due process for terminations that
are not based on quality issues as well.

The HCQIA also includes guidelines for the use of peer review. For example, HCQIA
requires peer 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 review process is determined by the health plan or
by state regulations. Health plans encourage participation in peer review by
supporting full disclosure and fair evaluation and by guaranteeing protection for
participants from lawsuits and protection for documents generated during peer
review from legal discovery. These guarantees are critical to the success of the peer
review process.
Unfortunately, the guarantees health plans have traditionally offered may not be
available in the future. In June 1999, the Supreme Court issued a decision allowing
individuals to subpoena peer review records for federal lawsuits.19 This decision is
likely to have a significant impact on the approaches health plans use to modify
physician behavior.

Physicians may also voluntarily withdraw from practice for a variety of reasons. One
common reason for physicians to be sanctioned or to withdraw from practice is
recognition by a physician or others that the physician’s practice is impaired by
alcohol or substance abuse or by psychiatric illness. Although health plans cannot
allow physicians to participate in the network while they are being sanctioned or
during an absence from practice, many plans will consider allowing physicians to
rejoin the network if they successfully participate in a recognized assistance program
for impaired physicians.

Assistance Programs for Impaired Physicians

Physicians are no more immune to alcoholism, chemical dependency, or psychiatric
disorders than are members of the general population. When a physician suffers
from an addiction or psychiatric 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 appropriate action when they have impaired
physicians among their employees or contracted providers.

Health plans often become aware of impaired physicians through member

complaints, reports by coworkers, or observations made by health plan staff during
an office site visit. When a health plan learns of a possibly impaired physician, the
plan can contact physicianspecific health programs run by the state or the state’s
medical society in order to help the impaired physician return to a healthy personal
and professional life.

Unless the physician has committed a negligent act which affects the quality of
patient care or causes a serious incident which may result in disciplinary action by
the state licensure board, the impairment is not reported to the National Practitioner
Data Bank. The situation usually remains confidential under medical peer review
protection.

Many impaired physicians successfully complete treatment programs and are able to
maintain their medical licenses and continue in practice. Figure 8B-4 outlines the key
features of an assistance program for impaired physicians.
Some health plans take a proactive approach to treating impairment and inform
providers through newsletters and other provider communications about impairment
programs designed specifically for physicians and other healthcare professionals.
Health plans may also communicate the appropriate process for a physician or other
individual to report a suspected impaired physician to the appropriate authorities.

Conclusion
Once its provider network is in place, a health plan must manage the network on an
ongoing basis. 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 accommodate those changes. In addition, the health
plan must take steps to retain network providers by increasing 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 the
performance of individual network providers. By effectively managing its provider
network, the health plan can present evidence to its purchasers and plan members
that it offers a quality product.