AHM Network Management: 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.

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 risksharing 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 hospitalbased 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 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

health plans with large or increasing market shares?

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.

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 2A4. 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. 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 feefor-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 100mile 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. Lowincome, 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 higherincome 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 higherincome populations. The health plan should also consider the structure of the local health delivery system for lowincome populations. Figure 2A-5 lists questions that health plans often ask about the delivery system.

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-ofpocket 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 aboveaverage 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. Endnotes 1. The InterStudy Competitive Edge, 8.2 (Minneapolis, MN, 1998), 34. 2. Peter Kongstvedt and Jean Stanford, Health Plan Market Maturity: A New Multidimensional Model (Washington, D.C.: Ernst & Young, LLP, 1997), 8-17. 3. Health Benefits in 1997 (New York: KPMG Peat Marwick, 1997), 22. 4. Health Benefits in 1997, 17.

AHM Network Management: Collecting and Verifying Data for Credentialing Purposes Objectives:
After completing this lesson you should be able to: Explain the data collection and verification processes used in credentialing and describe their importance to a health plan's selection of network physicians. Describe the role in data collection and verification of: o The American Board of Medical Specialties (ABMS) o The Federation of State Medical Boards o The National Practitioner Data Bank (NPDB) o The Healthcare Integrity and Protection Data Bank (HIPDB) o Provider profiling Explain the liability issues involved with credentialing decisions, including: o The requirements of the Americans with Disabilities Act (ADA) o Confidentiality o Vicarious liability o Violation of due process o Negligent credentialing Describe how and why health plans delegate credentials verification to third parties Describe the data collection and verification services provided by: o hospitals and medical facilities o the Physician Organization Certification (POC) program o Credentials verification organizations (CVOs)

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. 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: 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 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.

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.

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.

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, restriction or denial of privileges resulting from changes in a healthcare entitys eligibility investigations of possible misconduct or professional incompetence (surrender or

competitive activities, salary arrangements) criteria

restriction of privileges during or in avoidance of investigation, however, is reportable)

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 plaintiffs 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 Healthcare delivery-related civil convictions by a state or federal court Adverse actions by federal or state agencies responsible for licensing and certifying these Exclusions from participation in federal and state healthcare programs Any other adjudicated actions or decisions as established in regulations 7
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 selfqueries, but HIPDB information is not available to the general public. 9 HIPDB information may be requested for use in the following situations:

judgments resulting from medical malpractice

healthcare professionals, excluding clinical privileging actions

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 generating reports 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.

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. 2. 3. 4. The application may be further investigated and additional information obtained. The applicant may be hired or contracted and granted privileges as requested. The applicant may be hired or contracted with a modification in the privileges. 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.

Granting Privileges Provisional Privileges

The privileging step involves granting permission to candidates to perform specific services, treatments, and procedures, as designated within the health plans 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 plans 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 practitioners condition is a threat to his or her health and safety or the health and safety of others.

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 patients 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 Review credentialing policies and procedures of other hospitals, facilities, and external

regulations.

credentialing services whose credentialing decisions are used instead of an internal process. Review protocols for investigating and verifying an applicants 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 delegates credentialing policies and procedures for compliance with the

health plans standards, state and federal laws, and accreditation agency regulations
Providing the delegate with the health plans credentialing policies and procedures

 Maintaining the confidentiality of the delegates files, reports, and recommendations, and

permitting access only to authorized parties

Sharing with the delegate any UM, QM, member satisfaction, and member complaint Retaining the right to approve, reject, suspend, or terminate any individual provider or

information that relates to the delegated credentialing or recredentialing activities

healthcare delivery site not in compliance with the health plans 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 delegates 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 plans policies and procedures and conducting the delegated

credentialing and recredentialing activities in accordance with these policies and procedures Providing the health plan with the delegates 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 delegates 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 plans 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 MBHOs 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 organizations 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 plans 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 CVOs 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. 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 plans 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.

Endnotes
1. National Committee for Quality Assurance, Accreditation 99, Standards for the Accreditation of Health Plans (Washington, D.C.: National Committee for Quality Assurance, 1998), 69. 2. Peter R. Kongstvedt, M.D., Primary Care in Open Panel Plans in Essentials of Managed Health Care , ed. Peter R. Kongstvedt, M.D., 2nd ed. (Gaithersburg, MD: Aspen Publishers, Inc., 1997), 105.

3. Peter R. Kongstvedt, M.D., Primary Care in Managed Health Care Plans in Essentials of Managed Health Care , ed. Peter R. Kongstvedt, M.D., 4th ed. (Gaithersburg, MD: Aspen Publishers, Inc., 2001), 9697. 4. Ibid. 5. Ibid., 97. 6. Sheryl Tatar Dacso and Clifford C. Dacso, M.D., Health Plan Answer Book , 2nd ed. (New York: Panel Publishers, 1997), 2-48. 7. National Council of State Boards of Nursing, Inc., Healthcare Integrity and Protection Data Bank, 24 February 2000, http:// www.ncsbn.org/files/publications/issues/ vol204/hipdb204.asp (26 April 2001). 8. National Practitioner Data Bank/Healthcare Integrity and Protection Data Bank, Fact Sheet on the Healthcare Integrity and Protection Data Bank, 8 August 2000, http://www.npdb-hipdb.org/pdf/ nh017fs.pdf (26 April 2001). 9. Ibid. 10. Office of the Inspector General, Office of Public Affairs, Healthcare Integrity and Protection Data Bank Set to Launch, News Release, 25 October 1999, http:// oig.hhs.gov/press/hipdb.htm (25 April 2001). 11. National Council of State Boards of Nursing, Inc. 12. National Committee for Quality Assurance, Manual (1994), 2326. 13. Joint Commission on Accreditation of Healthcare Organizations, Accreditation Manual for Healthcare Networks (1994). 14. Sedgewick et al., Healthcare Liability Desk Book, April 1993, at 95. 15. Health Care Quality Improvement Act of 1986. P.L. 99-660; 42 U.S.C. 11101- 11152. 16. National Committee for Quality Assurance, Standards for Health Plans, 1994, Washington, D.C., 2326. 17. Physicians and the ADA. Hospitals, 5 May 1993, 36, 38. 18. Ibid., at 38. 19. M. Herligy and S. Angelo, Health Plan Administrative Risks, Proceeding from the 16th Annual Conference of the American Society for Healthcare Risk Managers, Seattle, WA, 1994, 28. 20. Hagg-Rickert, S., Medical Staff Credentialing and Privileging Determinations: The Emerging Role of the Risk Manager, Perspectives in Healthcare Risk Management , Summer 1991, 11(3) 24. 21. The information about health plan and delegate responsibilities was adapted from PrimeHealth, Inc., Delegated Practitioner Credentialing Agreement, Addendum 6 to Delegation Oversight Program (December 1997). Used with permission of PrimeHealth, Inc. 22. National Committee for Quality Assurance, Guidelines for Advertising and Marketing for NCQA-Certified Physician Organizations, 1998, http://www.ncqa.org/pages/policy/ certification/poc/pocads.htm (4 June 1998). 23. National Committee for Quality Assurance, CVO Certification, http://www.ncqa.org/ pages/policy/certification/cvo/cvotext.htm (24 February 1998).

AHM Network Management: 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

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 the usual fee schedules of the provider or health plan the standard fee schedule of a major insurer, such as Medicare

market

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.

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 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. 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.

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). 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 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 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. 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 DiagnosticRelated 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.

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.

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
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.

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 planprovider 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, highquality 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

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 services 15 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 outof-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 planwide 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. In most cases, capitated PCPs who assume risk only for primary care services do not need stoploss 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 stoploss 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 providers 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 providers 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, performance 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 risksharing 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.

Endnotes
1. Nancy L. Raven and Kathy S. Patterson, "Analyzing Financial Arrangements," in Health Plan Contracting: A Guide for Health Care Professionals, ed. Wendy Knight (Gaithersburg, MD: Aspen Publishers, Inc., 1997), 88. 2. Judith E. Belt and J. Bruce Ryan, "Combating Silent PPOs," Healthcare Financial Management (February 1998): 44. 3. Ibid. 4. Richard Ferreira, "Health Plan Contracting and Reimbursement for Physician Organizations in a Capitated and Risk-Sharing Environment," in Building and Managing Effective Physician Organizations Under Capitation, ed. Douglas Goldstein (Gaithersburg, MD: Aspen Publishers, Inc., 1996), 244. 5. Raven, 94-97.

6. Edric B. Engert and Cindy Fore, "As Specialists Regain Control, How Should They Be Paid?" in Medical Network Toolkit, ed. Therese M. Droste (Santa Barbara, CA: COR Healthcare Resources, 1998), 62. 7. Adapted from Health Plan Finance (Washington, D.C.: Academy for Healthcare Management, 1999). 8. Ibid. 9. The InterStudy Competitive Edge 8.1 (Bloomington, MN: Decision Resources, Inc., 1998), 65. 10. Michael Backus, "Health Plan Contracting: Primary Care Physician Capitation," Health Plan Contracting Signature Series (Health Plan Resources, Inc., 1997), online, Available: , 25 November 1997. 11. Ibid., par. 10. 12. Michael S. Backus, "Health Plan Contracting: Reimbursement Models," Health Plan Contracting Signature Series (Health Plan Resources, Inc.,1997), online, Available: , 25 November 1997. 13. Ibid. 14. Raven, 111. 15. Peter R. Kongstvedt, M.D., "Compensation of Primary Care Physicians in Open Panel Plans," in Essentials of Managed Health Care, 2nd ed., ed. Peter R.Kongstvedt (Gaithersburg, MD: Aspen Publishers, Inc., 1997), 121-122. 16. Raven, 115. 17. Ibid., 114. 18. Ibid., 112. 19. Ibid.,125. 20. Backus, par. 9. 21. Raven, 116-17. 22. Ibid. 23. Ibid., 117. 24. Julie A. Jacob, " Protect Your Practice from Catastrophic Loss," American Medical News (March 23/30, 1998): 15-16. 25. Sheryl Tatar Dacso and Clifford C. Dacso, M.D., Health Plan Answer Book - 1998 Supplement (New York: Panel Publishers, 1998), 12-30. 26. Carol K. Kane et al., "Physician Health Plan Contracting," in Socioeconomic Characteristics of Medical Practice 1997/1998 (Chicago: American Medical Association, 1998), 7. 27. Mark Buchanan, "Structuring a Physician Compensation Plan That Rewards Performance in the Health Plan Environment," in Building and Managing Effective Physician Organizations Under Capitation, ed. Douglas Goldstein (Gaithersburg, MD: Aspen Publishers, Inc., 1996), 129.

AHM Network Management: Considerations and Strategies for Specialty Services 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 plans 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 plans 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 Contracting with a provider organization or another health plan that specializes in the

continuing management of a specialty service provider network 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. 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 plans 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 plans 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 organizations 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 plans 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. In the first section of this lesson, we discussed general network strategies (carveouts and solesource 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. ***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 providers 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 providers 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

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 members PCP. For this reason, some BH providers advocate keeping BH within the scope of services offered by the health plans 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 care 4 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 masters 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 masters 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 practitioners 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% Masters degree-level providers, such as psychologists, nurses, social workers,

and counselors8 The needs of a specific plans 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 plans 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 selfdestructive behaviors, suicides, homicides, and other criminal acts. Other quality indicators that may prove useful in the selection of BH providers are (1) the providers reputation among local healthcare professionals and consumers and (2) quality assessments performed by accrediting agencies.

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 members request. The structure of the dental provider community differs from that of medical providers. Dentists are typically solo practitioners; however, the number of multi-dentist 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 specialists 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 plans 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 providers 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 Network Management for Vision Care A health plans 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. 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 include in its network a provider organization that offers both clinical eye care and

network

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 PCPs 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 neuroophthalmology. An ophthalmologists 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 optometrists fees for routine eye care are usually significantly less than an ophthalmologists 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 members 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 ophthalmologists 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 members 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 optometrists or ophthalmologists 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 providers 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 sites 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. 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 physicians 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 plans 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 NCQAs 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 practitioners office to perform an assessment similar to that for a physicians 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 plans 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.

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 members 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 providers

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, post trauma 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 plans 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 ensure high quality of care by using licensed providers and employed (versus contracted) acquire information systems that can track and monitor capitation payments to

necessary

personnel, and offering continual staff education and training

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 plans experience with specialty services network management, and the health plans time and resources available for network activities, influence a health plans approach to network management for a particular specialty service.

Endnotes
1. Wendy Knight and Lisa A. Sansone, Ambulatory and Ancillary Care Contracting, in Health Plan Contracting, ed. Wendy Knight (Gaithersburg, MD: Aspen Publishers, Inc., 1997), 219. 2. Mental Health Benefits in Health Plan, Health Plan Interface (February 1998): 44.

3. Pat Barone, Behavioral Health Addresses The Overtreated and Underserved, Managed Healthcare (January 1997): 2425. 4. National Committee for Quality Assurance, NCQAs Managed Behavioral Health Accreditation Program: Frequently Asked Questions, 22 September 1997, http:// www.ncqa.org/pages/policy/accreditation/ mbho/mbhoqa.htm (15 September 1998). 5. Donald F. Anderson et al., Managed Behavioral Health Care and Chemical Dependency Services, in Essentials of Managed Health Care, ed. Peter R. Kongstvedt, M.D., 4th ed. (Gaithersburg, MD: Aspen Publishers, Inc., 2001), 339-40. 6. Ibid., 347. 7. Ibid. 8. Ibid., 348. 9. M.J. Werthman, Behavioral Health Plan (New York: Healthcare Financial Management Association, 1997), 28. 10. Anderson et al., 348. 11. Ibid. 12. Werthman, 34. 13. American Dental Association, Managed Care: Making Choices (A Dentists Guide to Health Plan Marketplace Information) (Chicago: American Dental Association, 1995), 4. 14. Ibid., 56. 15. Managed Dental Care: 30 Percent of the Dental Benefits Market and Growing, Health Insurance Underwriter (March 1997): 19. 16. Robert J. Ott, Dental Maintenance Measures Strike the Roots of Managed Care, Managed Healthcare (January 1997): 34. 17. Peggy M. Vargas and Richard B. Ryan, Dental Health Plan, in Health Plan Contracting, ed. Wendy Knight (Gaithersburg, MD: Aspen Publishers, Inc., 1997), 257. 18. Health Plan Facts, Trends and Data, ed. Phoebe Eliopoulos (Washington, D.C.: Atlantic Information Services, Inc., 1996), 256. 19. Vargas and Ryan, 258. 20. Health Plan Facts, Trends and Data, 256. 21. Vargas and Ryan, 26364. 22. Jesse Rosenthal, Health Plan Are Beginning to See the Light, Managed Healthcare (March 1997): 75. 23. Lisa Schiff, Vision Benefits Are Worth Looking At, Business & Health (January 1998): 37. 24. Rosenthal, 75. 25. Schiff, 37. 26. Elaine Zablocki, 20/20 Vision Care, Healthplan (May/June 1998): 27. 27. Ibid., 31. 28. Jesse Rosenthal and Mort Soroka, Quality Assurance in Managed Vision Benefits, Employee Benefits Journal (June 1998): 7. 29. Jim Henderson, Survey of HMOs Regarding Alternative Therapies, Health Insurance Underwriter (March 1998): 24. 30. Marian Broida, Integrating Alternative Providers Into Health Plan: A Case Study, Health Plan Interface (September 1997): 67. 31. Daniel Stern, The Building Blocks of a Complementary Medicine Program, Healthplan (January/February 1998): 64. 32. Deborah Shalowitz Cowans, HMO Establishes Alternative Care Network, Business Insurance (February 3, 1997): 12. 33. John Weeks, Structure for CAM Integration, in Best Practices in Medical Management, ed. Peter R. Kongstvedt, M.D., and David W. Plocher, M.D. (Gaithersburg, MD: Aspen Publishers, Inc., 1998), 59697.

34. Alan Dumoff, Complementary and Alternative Medicine, in Best Practices in Medical Management, ed. Peter R. Kongstvedt, M.D. and David W. Plocher, M.D. (Gaithersburg, MD: Aspen Publishers, Inc., 1998), 57980.

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

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. 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. 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.

Primary Care HMOs

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.

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.

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 coverage, 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 regarding 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 Recruiting 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.

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, highquality 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 highquality 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 costeffectiveness. 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

The Tiered Network Structure

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 whether the health plan wants broad geographic coverage in many markets or a

for network development

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.

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.

Endnotes
1. HMO-PPO/Medicare-Medicaid Digest, Health Plan Digest Series (Kansas City, MO: Hoescht Marion Roussel, 1997), 72. 2. Jon R. Gabel, Kelly A. Hunt, and Kimberly Hurst, "When Employers Choose Health Plans, Do NCQA Accreditation and HEDIS Data Count?" KPMG Peat Marwick LLP, Sept. 1998, online, Available: http://www.cmwf.org/Health_Care/gabel_ncqa_hedis_293.html, 6 Nov. 1998. 3. Lauren Walker, "Is the Gatekeeper a Dying Breed," Business and Health (January 1998): 30-35. 4. Michele Bitoun Blecher, "Choice Words on Open Access," Hospitals and Health Networks (March 20, 1998): 54, 58-59. 5. Peter R. Kongstvedt, M.D., ed., The Managed Health Care Handbook, 3rd ed. (Gaithersburg, MD: Aspen Publishers, Inc., 1996), 88-89. 6. HMO-PPO/Medicare-Medicaid Digest, 74.

Network Management in Health Plans: Continuing Management of Network Adequacy and Provider Satisfaction Objectives
After completing this lesson you should be able to: Describe some situations that may indicate a need to review network adequacy List several factors that health plans examine when reassessing access and availability Explain the importance of provider retention Describe several methods that health plans use to provide continuing education to network providers and their staffs Explain how direct referral and self-referral programs assist providers with utilization management List some of the issues that a health plan typically addresses through surveys of providers and their staffs Explain why health plans often seek to involve network providers in network management and medical management operations

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 plans 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 providers decision to stay with a network or leave it depends on the providers 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 plans 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 asneeded 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 plans network management department may also receive suggestions and recommendations regarding network modification from ***these sources. 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. *** 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 plans 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.

Indicators of Network Adequacy

Network management staff examine a variety of factors when reassessing the adequacy of the health plans 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 plans 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.

Indicators of Network Adequacy

The reassessment of the provider network may reveal that the health plans 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 provider patient relationships. However, a plans 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 plans 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

Strategies for Building Relationships with Network Providers

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 plans 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 providers systems and office staff do not render adequate healthcare services, member dissatisfaction may affect the health plans 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 providers 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 plans primary responsibilities is to support the providers 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 organizations educational programs must represent the perspective of all contracted health plans.

Provider Orientation
Once the contract is signed, the health plans 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 providers 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 plans 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 plans 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 providers staff who are responsible for the administrative tasks associated with providing healthcare. The provider manual is also a useful tool to demonstrate the health plans 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 organizations manual also documents the provider organizations 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 plans 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 plans 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 professionals 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 populations 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 staff 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 providers 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 plans 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 (email) 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 plans 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 plans 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 plans 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 providers 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 plans 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 members 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 plans 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 members 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 providers staff to wait on hold before they are able to verify a members eligibility. Some health plans have reduced the problem of lengthy hold times by installing automated telephone verification systems that allow a providers staff to verify a members eligibility by accessing a daily updated member database. By following the directions given by the automated phone answering system and entering a members ID number, the provider staff can check on the members 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 plans eligibility system, the card reader immediately determines the members 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 providers 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 plans 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 organizations 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 organizations 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 plans 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 plans reports to regulatory agencies the plans 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 plans 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 plans provider relations representatives are the main contact point for providers and their office staffs for problem resolution. While a providers office may work directly with the health plans claims, eligibility, or UM departments, a providers 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 Requests to transfer members who refuse to comply with treatment plans to another Difficulty verifying eligibility information or receiving incorrect eligibility information Contractual issues, such as questions about reimbursement A PCPs difficulty in obtaining follow-up reports from a specialist about the diagnosis General complaints a provider has regarding the health plan

distribute to health plan members provider

and treatment of the PCPs patients who have been referred to that specialist

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 plans UM and QM programs?

Do any of the health plans departments provide poor service or are they unresponsive to Are the health plans procedures easy to follow and use? Are providers satisfied with feedback received regarding their performance, as measured How satisfied are providers with the health plans provider relations programs, staff, and What comments and suggestions for improvement do providers have for health plan

provider needs?

by health plan standards? communications?

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 plans medical director is typically very involved with the clinical aspects of the plans 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 real world 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 plans own QM and UM programs. 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. The quality management committee generally has the responsibility for overseeing the health plans 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 develops action plans for improvement provides oversight of action plan implementation monitors the effectiveness of the action

improvement

The QM committee also reviews and updates the health plans QM program for approval by the health plans 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. The utilization management committee reviews and updates the health plans 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. 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 plans 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 providers participation in the network. Some health plans include peer review activities in the duties of the credentialing committee. 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 committees provider members from one year to another. 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.

AHM Network Management: 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 NCQAaccredited 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. 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. 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. 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. 2. 3. 4. 5. Proposal for delegation Evaluation of the candidate for delegation Decision by the committee responsible for delegation oversight A written document describing the delegation arrangement 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.

The Delegation Oversight Process

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

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. 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. 13

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.15 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.19

Endnotes
1. Frequently Asked Questions: Delegation and NCQA Accreditation, 15 April 1997, par. 19-20, online, National Committee for Quality Assurance, Available http://www.ncqa.org/accred/delgqa.htm, 24 Feb. 1998. 2. Emily Rhinehart, "You Can Pass the Buck, but Not The Responsibility," Managed Healthcare (January 1998): 14. 3. Frequently Asked Questions: Delegation and NCQA Accreditation, par 7. 4. National Committee for Quality Assurance (NCQA), 1998 Surveyor Guidelines for the Accreditation of Health Plans (Washington, DC: National Committee for Quality Assurance, 1998), 356. 5. Ibid. 6. Rhinehart, 14. 7. Angela Lenox, RN, "Quality Assurance for Delegated Services," Healthplan (September/October 1996): 31. 8. Ibid., 28. 9. Ibid. 10. Ibid., 30-31. 11. Ibid. 12. Frequently Asked Questions: Delegation and NCQA Accreditation, par 14. 13. Lenox, 36. 14. Sheryl Tatar Dacso and Clifford C. Dacso, M.D. Health Plan Answer Book, 2nd Edition (New York: Panel Publishers, 1997), E-1. 15. Frequently Asked Questions: Delegation and NCQA Accreditation, par 28. 16. Jane Garwood et al., "Credentialing," Supplement #7, 1998, in Health Plan Law Manual, vol. II (Gaithersburg, MD: Aspen Publishers, Inc., 1998), 68. 17. Joint Commission on Accreditation of Healthcare Organizations (JCAHO), 1998-2000 Standards for Healthcare Networks (Oakbrook Terrace, IL: Joint Commission on Accreditation of Healthcare Organizations, 1998), 110. 18. American Accreditation HealthCare Commission/URAC (the Commission/URAC), Interpretive Guide: Health Network Standards (v. 1.0), Interpretive Guide (Washington, DC: American Accreditation HealthCare Commission/URAC, 1997), 39, 87. 19. NCQA 1998 Surveyor Guidelines for Accreditation of Health Plans, 104.

AHM Network Management: Environmental Consideration for Network Management Objectives

After completing this lesson you should be able to: Understand the numerous legislative and regulatory requirements that affect network management Identify the expectations of purchasers and consumers with respect to network management Describe how health plans balance complex and sometimes competing interests and requirements in managing provider

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 nonhealth 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 Requiring geographic accessibility and 24-hour-a-day/7-day-a-week availability

than emergency services or infrequently used services) must be provided standards for participating providers

Imposing requirements for continuing education and medical record-sharing by network Establishing a quality assurance program that stresses health outcomes, provides for peer

providers

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. 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

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.

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.

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.

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)1 . Such referrals violate federal antikickback 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 Actsthe Health Care Professional Credentialing Verification Model Act and the Managed Care Network Adequacy Model Act have a direct impact on network management The NAICs 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 establishment of a process for providers to use to review and correct credentialing

verification and mandatory recredentialing every three years, and 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 NAICs 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.

** Figure 1B-3
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.

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."4 In other words, if the member 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.6 In addition, 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 providermember 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 qualityevaluation systems. At the same time-much to the relief of health plans concerned about multiple requirementsseveral 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. 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.

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. 8 Employers are also concerned with ensuring that their employees 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 Developing appropriate reimbursement methods

specialties, especially those who have experience in occupational medicine

 Educating providers to evaluate a patient's ability to return to work 11 Developing medical/disability protocols appropriate to work-related injuries

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 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 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.

Endnotes
1. 42 U.S.C. 1395nn(h)(6).

2. The Advisory Commission on Consumer Protection and Quality in the Healthcare Industry, Executive Summary, Consumer Bill of Rights and Responsibilities, preliminary draft, January 16, 1998. 3. Jerry Geisel, GOP Backs Proposal on Patient Protection, Business Insurance (June 29, 1998): 4. 4. Jacqueline M. Saue and Gregg H. Dooge, ERISA and Health Plan, in The Managed Health Care Handbook, Peter R. Kongstvedt, M.D., ed., 3rd ed. (Gaithersburg, MD: Aspen Publishers, Inc., 1996), 956. 5. American Association of Health Plans, Guide to Accreditation (Washington, D.C.: American Association of Health Plans, June 1996), 83. 6. Sheryl Tatar Dacso and Clifford C. Dacso, M.D., Health Plan Answer Book, 2nd ed. (New York: Panel Publishers, 1997), 5-51. 7. Brian Christaldi, A Risk Analysis of Managed Care Liability, Managing Employee Health Benefits (spring 1997), 67. 8. Employee Benefit Research Institute, Typical Employee Benefit Package in Medium and Large Private Establishments with 100 or More Full-Time Employees, http://www.ebri.org/facts/0298afact.htm (23 July 1998). 9. Jon R. Gabel, Kelly A. Hunt, and Kimberly Hurst, When Employers Choose Health Plans: Do NCQA Accreditation and HEDIS Data Count? KPMG Peat Marwick, LLP, September 1998, http:// www.cmwf.org/programs/health_care/ gabel_ncqa_hedis_293.asp (6 November 1998). 10. Health Plan in Medicare and Medicaid, Fact Sheet (CMS Press Office, January 28, 1997). 11. Dacso and Dacso, 11-3411-35.

AHM Network Management: Identifying and 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. 2 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. 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. Costs. 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. Types and quality of services offered. 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.

 Reputation. 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. Level of participation in health plans. 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. Accreditation status. 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. 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 Direct mail. 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. Contact with practitioners in training programs. 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. 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. Professional recruiting agencies. 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. 1 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.

Endnotes
1. Robin Warshaw, Too Much Independence for NPs? ACP-ASIM Observer, American College of PhysiciansAmerican Society of Internal Medicine; January 1998, http:// www.acponline.org/journals/news/jan98/ toomuch.htm (6 February 1998). 2. Herbert S. Diamond, Elliot Goldberg, and Janine E. Janosky, The Effect of Full-Time Faculty Hospitalists on the Efficiency of Care at a Community Teaching Hospital, Annals of Internal Medicine 129 (1998): 197. 3. More MD Assistants, Hospitals & Health Networks (April 5, 1998): 20. 4. Robert M. Wachter, Hospitalists Fan Winds of Change, and Inpatient Care Wont Be the Same, Managed Healthcare (January 1998): 37. 5. Marianne F. Fazen, St. Anthonys Managed Care Desk Reference, 19961997 ed. (Reston, VA: St. Anthony Publishing, Inc., 1996), 272.

6. JA Johnson and JL Bootman, Drug-Related Morbidity and Mortality, a Cost of Illness Model, Archives of Internal Medicine 155 (October 9, 1995): 1953. 7. Peter R. Kongstvedt, M.D., Primary Care in Closed Panel Plans, in Essentials of Managed Health Care , ed. Peter R. Kongstvedt, M.D., 2nd ed. (Gaithersburg, MD: Aspen Publishers, Inc., 1997), 8485. 8. James C. Robinson, Blended Payment Methods in Physician Organizations Under Health Plan, Journal of the American Medical Association (6 October 1999): 1258. 9. Peter R. Kongstvedt, M.D., Primary Care in Managed Health Care Plans, in Essentials of Managed Health Care , ed. Peter R. Kongstvedt, M.D., 4th ed. (Gaithersburg, MD: Aspen Publishers, Inc., 2001), 89. 10. Ibid., 90. 11. Fazen, 288. 12. Kongstvedt, 4th ed., 90. 13. Ibid., 91. 14. Ibid. 15. J. R. Woodside, R. Bodne et al., Intensive, Focused Utilization Management in a Teaching Hospital: An Exploratory Study, Quality Assurance Utilization Review 6 (1991): 4750, as cited in Peter R. Kongstvedt, M.D., Primary Care in Managed Health Care Plans, in Essentials of Managed Health Care , ed. Peter R. Kongstvedt, M.D., 4th ed. (Gaithersburg, MD: Aspen Publishers, Inc., 2001), 9091. 16. Kongstvedt, 4th ed., 91.

Network Management in Health Plans: Managing Provider Performance 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: Structure Process Outcomes 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 plans 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 plans 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 implement a program of continuous quality improvement based on outcomes and

customer expectations and plan standards 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 plans goal is to avoid both of these situations by encouraging providers to utilize services appropriately. 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 plans 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 ensureand 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.

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 providers educational and professional qualifications prior to contracting. Although some health plans also assess a providers 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 providers 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 plans 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 plans 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 providers interactions with plan members. Behavioral measures are not associated with numbers or statistics, but with the providers 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 providers staff, equipment, and facilities. Aspects of a providers practice that are appropriate for structural measurements include the providers
compliance with specific regulatory or accreditation requirements in such areas as conformity to standards for prescribing controlled substances procedures for controlling infection procedures for ensuring patient access to care

licensing and medical record keeping practices

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 physicians officesuch 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 physicians medical records. Incorrect diagnostic or treatment codes can also affect the value of encounter data. Outcomes Measures Outcomes measures focus on the direct results of a process. In other words, outcomes measures evaluate a patients 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 patients progress throughout the treatment. The health plan can then compare a providers performance on the measure to established standards. In many cases, outcomes standards are expressed as functional scales comparing the patients 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. 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 groups research findings, available in print or on the agencys 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 patients carethe PCP, the specialist, the hospital, and the physical therapisthas 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 specialties, 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 providers practice patterns. In the example described in Figure 8B-2, it would allow the health plan to place Dr. Chous seemingly unusual and excessive practice patterns in perspective with the more normal patterns of Dr. Blake and Dr. Fenton.

Patient Satisfaction Measures

Many health plans include patient satisfaction with the providers delivery of medical services in performance measures. Patient satisfaction measures are typically behavioral measures and evaluate everything from the friendliness of the providers staff to the patients 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 plans 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 members reaction to services received during a specific encounter:

Wait times before appointments at the providers 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 servicesthe 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 members overall satisfaction with the plans 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 plans 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 plans 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 plans quality improvement programs, survey data help health plans meet accreditation requirements. NCQAs 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 childrens 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 providers 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 members 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 plans 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 members relocation to another geographic area, or some other unrelated reason. It may also be the result of dissatisfaction with the quality of the provider. Feedbackboth positive and negativecan 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 patients expectations. In addition, a patients 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. 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 providers performance, from compliance with the health plans operational policies and procedures to participation in the health plans quality and utilization management activities. A provider profile focuses on patterns of an individual providers care rather than on the providers 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 providers 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 providers performance with that of his or her peers, identifying practice patterns that deviate from the norm, and guiding quality improvement efforts. Health plans can also use provider profiles to identify high-value providersthose 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 plans success. 6 The major limitation of individual provider profiling is that health plans typically have access only to information about the providers 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 providers performance throughout his or her entire practice. Using the appropriate measures to assess different aspects of a providers performance should reveal an overall picture of the providers 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 plans 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 plans medical director also plays a key role in modifying physician behavior. When a physician is identified as having a potential utilization or quality problemduring recredentialing or during the normal course of quality improvement activitiesthe pertinent medical records and documentation are typically reviewed by the health plans 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 physicians 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 highquality, 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 physicians 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 physicians 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 physicians 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 physicians 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 patients 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 plans 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 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 directors 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 plans 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 fact finding and collegial discussion.

Provider Services
Continuing Management of Network Adequacy and Provider Satisfaction details many of the services an health plans 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, physiciansespecially those new to health plansoften 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 plans 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 double edged 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 and to assist them to identify ways to implement that 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.

Financial Incentives
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. Nonfinancial incentives may include providing services for a physicians 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 plans 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 physicians 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 physicians 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 physicians 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 plans 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 physicians 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 physicians 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 physicians 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 physician specific health programs run by the state or the states 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.

AHM Network Management: Pharmacy Networks 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.1 Although hospital and 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 pharmacys desired gross profit margin.2 Early Pharmacy Networks In the late 1950s and early 1960s, third-party prescription programs began to emerge. A thirdparty 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 drugsthose 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 non network 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 penaltyoften as much as 25% of the cost of the prescription for out-of-network purchases. 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 UAWs 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-ofpocket 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 thirdparty 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. 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 cost sharing systems evolve into managed care pharmacies.

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 cost sharing 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 patients 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 drugs effectiveness in treating disease and are achieved by incorporating medications into patient care. Quality of life outcomes involve improving the patients physical, social, and emotional wellbeing as observed by both the healthcare team and the patient.7 ***Therapeutic outcomes include

curing the patients disease preventing or slowing the progression of disease eliminating or reducing the patients symptoms preventing a disease or symptom diagnosing a disease avoiding drug-related problems

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 HMOsoften 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. Standard Reimbursement The fee component of the reimbursement formula consists of the pharmacys 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 uniformfor example, the same specified amount added to each prescriptionor variable, based on specified criteria such as brand versus generic or the cost of the medication. Figure 6C-3 illustrates different types of fees.

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 plans 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 NCPDPs 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 programseither 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 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 plans 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 PBMs 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 compliancePBMs 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 plans 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 plans 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 cost-containment activities such as developing and managing the formulary and customer service activities such as establishing quality improvement programs.

management

monitoring patient and prescriber compliance

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 plans 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 third party 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 plans 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 scaleand 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 plans ability to monitor and control utilization, have an added benefit: they expand patient access to pharmaceutical products and services.

Quality Advantages
Todays 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 plans 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 PBMs response to questions related to the following topics:
Contract arrangements. Does the PBM require fee-for-service reimbursement, or is it Network development. Is the network open or closed? Does the network include mail

willing to contract on a risk-sharing or capitation basis?

order services? How are participating pharmacies selected? Network reimbursement. How does the PBM reimburse network pharmacies? Is reimbursement available for non network 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 measure, monitor, and manage the quality of services provided by network pharmacies? What quality indicators does the PBM evaluate? 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 pharmacys 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. 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 mailorder 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. 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. 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.

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. 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 plans 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. 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.

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 pharmacys 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 pharmacys substitution rate and on the savings generated by generic substitutions for the network as a whole.

Endnotes
1. Chester S. Hejna, Pharmacy Networks: Origins, Functions, and Future Directions, in A Pharmacists Guide to Principles and Practices of Health Plan Pharmacy, ed. Susan M. Ito and Suzanne Blackburn (Alexandria, VA: Foundation for Managed Care Pharmacy, 1995), 119. 2. Ibid., 120. 3. Ibid. 4. Ibid., 119. 5. K. R. Levit et al., National Health Spending Trends in 1996, Health Affairs (1998): 17:3551. 6. Academy of Health Plan Pharmacy, Pharmaceutical Care, Concepts in Health Plan Pharmacy, 1997, http:// www.amcp.org/public/pubs/concepts/ pharm.html (1 October 1998). 7. Ibid. 8. Albert H. Taubman and Chester S. Hejna, Pharmacy Benefits Design, in A Pharmacists Guide to Principles and Practices of Health Plan Pharmacy, ed. Susan M. Ito and Suzanne Blackburn (Alexandria, VA: Foundation for Managed Care Pharmacy, 1995), 133. 9. Ibid. 10. Mary Sevon, Managing the Pharmacy Benefit: Employer Options, Employee Benefit Plan Review (April 1998), 29. 11. Marvin D. Shepherd and Michael F. Gremillion, Information Systems in Health Plan Pharmacy, in A Pharmacists Guide to Principles and Practices of Managed Care Pharmacy, ed. Susan M. Ito and Suzanne Blackburn (Alexandria, VA: Foundation for Health Plan Pharmacy, 1995), 115. 12. Sevon, 29. 13. Maureen Glabman, Hold the Phone! Going Online with Prescriptions, ACP-ASIM Observer, American College of Physicians American Society of Internal Medicine,

14. 15. 16. 17. 18. 19.

20. 21. 22. 23.

October 1996, http://www.acponline.org/ journals/news/oct96/presconl.htm (23 September 1998). Ibid. Norrie Thomas, Lon N. Larson, and Nancy N. Bell, Pharmacy Benefits Management (Brookfield, WI: International Foundation of Employee Benefit Plans, Inc., 1996), 6. U.S. Bureau of Labor Statistics, Trends in Medical Care CostsEvolving Market Forces, Statistical Bulletin (JulySeptember 1998): 14. Thomas, Larson, and Bell, 39. Vicki Bladassano, Lead Report: Pharmacy Benefit Management, BNAs Health Plan Reporter 4, no. 19 (1998): 471. Kenneth W. Schafermeyer, Overview of Pharmacy in Managed Health Care, in A Pharmacists Guide to Principles and Practices of Health Plan Pharmacy, ed. Susan M. Ito and Suzanne Blackburn (Alexandria, VA: Foundation for Managed Care Pharmacy, 1995), 23. Bladassano, 471. Hejna, 121. The Increasing Dominance of the Pharmacy Benefit Manager, Health Plan Interface (May 1998): 46. U.S. General Accounting Office, Pharmacy Benefits Managers, Medical Benefits (March 30, 1997).

Network Management in Health Plans: Provider Networks for Workers Compensation 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 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. 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 selfreferral. 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 coverageboth the medical and the disability componentswith 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 plans quality initiatives, and participate in the health plans 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. Workers comp programs must pay 100% of work related medical and disability expenses. From the health plans point of view, one major disadvantage of first-dollar and last dollar 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 employers or workers comp programs 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 non network 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 nonnetwork 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.

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 plans 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 providers 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 work related 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, highcost 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 employees 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 networks 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 employees 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 providers skills at communicating the employees status to the various interested parties. These parties may include the employee, the employees

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, risksharing 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 states 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 plans 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 employers 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 7 programs to increase employee awareness of safety and health issues

Endnotes
1. Patrick A. Gallagher and William L. Granahan, Report on Third Annual Milliman & Robertson Survey: HMO Managed Workers Compensation Strategies and Products,

2. 3. 4. 5. 6. 7.

Milliman & Robertson, 1997, http:// www2.milliman.com/milliman/publications/ reports/HDP01/ (12 October 1998). Sheryl Tatar Dacso and Clifford C. Dacso, M.D., Health Plan Answer Book, 2nd ed. (New York: Panel Publishers, 1997), 11-5. Musculoskeletal Injuries Most Common Cause of Lost Time, Workers Comp Health Plan (November 1998): 10. Dacso and Dacso, 11-6. Gallagher and Granahan. Ibid. Michael Weipner, Bringing Health Plan to Workers Comp, Business Insurance (May 25, 1998): 31.

AHM Network Management: 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. 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 selffunded 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. In 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 members 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 providers 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

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. 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. 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 in the event of a dispute about coverage-the procedures and medically based criteria a

incentives

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 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 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 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.

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. 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 loose leaf binder for quick review. 17 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. 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 mid1990s, 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. 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 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 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 coordinating care with specialty providers so the UM program can review the medical complying with a review process that includes provider or member reconsideration

prospective, concurrent, and retrospective reviews of services rendered

necessity and appropriateness of inpatient and outpatient services to determine coverage 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 waittimes 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.

 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. 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. 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 plans 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 patients 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 purchasers contract relating to retroactive enrollment changes. Such a clause typically places a time requirement on a purchasers reporting of changes in a members 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 members 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-ofnetwork 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 selfinsured 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. 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. 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.

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 holdharmless 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. 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 clauseswithout 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 a provider's failure to comply with state or federal certification sanctions against or loss of the provider's medical license

adequate instrument sterilization procedures

 provider's loss of participating status in Medicare or Medicaid programs 27 gross negligence by the provider.

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 Endnotes 1. Kerry McDonald, Critical Issues in Negotiating Capitated Contracts, in Building and Managing Effective Physician Organizations Under Capitation, ed. Douglas Goldstein (Gaithersburg, MD: Aspen Publishers, Inc., 1996), 284. 2. Richard Liner, Physician Deselection: The Dynamics of a New Threat to the PhysicianPatient Relationship, American Journal of Law and Medicine 22, no. 4 (1997): 515 and Percentage of Nonfederal Physicians in Practices with Health Plan Contracts, 1997

3. 4.

5. 6. 7.

8. 9. 10. 11. 12. 13. 14.

15.

16. 17.

18. 19.

20. 21. 22. 23.

24. 25. 26.

(Table 100), Physician Marketplace Statistics 1997/1998 (Chicago: American Medical Association, 1997). Tom Neal, The Legal Issues of Managed Care Contracts in Health Plan, Outcomes, and Quality: A Practical Guide, ed. Steven F. Isenberg (New York: Thieme Medical Publishers, Inc., 1998), 57, 63. M. Toni Waldman and Alan Gneissen, Reviewing the Provider Contract, in Health Plan Contracting, ed. Wendy Knight (Gaithersburg, MD: Aspen Publishers, Inc., 1997), 66. Thomas R. Miller and Judith E. Belt, Conducting a Health Plan Contract Review, Healthcare Financial Management (January 1998): 41. Liner, 516. Bernice Steinhardt, Health Plan: Explicit Gag Clauses Not Found in HMO Contracts, But Physician Concerns Remain (Washington, D.C.: U.S. General Accounting Office, 1997), 6. Ibid., 7. Ibid., 8. Ibid., 1011. John Hoff, Regulation of Health Plan Contracting, in Health Plan Contracting, ed. Wendy Knight (Gaithersburg, MD: Aspen Publishers, Inc., 1997), 27677. National Committee for Quality Assurance, 1998 Standards for Accreditation of Health Plans (Washington, D.C.: National Committee for Quality Assurance, 1998), 42. McDonald, 285. Denise Cameron, Health Plan Contracting: A Review of the Process, Managed Care Contracting Signature Series, Managed Care Resources, Inc., 1997, http:// www.mcres.com/mcrmcc05.htm (14 November 1997). Gary Scott Davis, Specific Contract Terms: Non-reimbursement Terms, in Managed Care Contracting: Advising the Provider, BNAs Health Law and Business Series No. 1800 (Washington D.C.: The Bureau of National Affairs, Inc., 1996), 1800.04.A. Waldman and Gneissen, 67. Michael S. Benninger, M.D., Referral Guidelines in Health Plan, Outcomes and Quality: A Practical Guide, ed. Steven F. Isenberg (New York: Thieme Medical Publishers, Inc., 1998), 26. Davis, The Management of Health Plan, in Health Plan Contracting, 1800.06.B.3. Dolores M. Blanco, Michael J. Alper, and Richard A. Gold, Exploring Issues for Group Contracting in Health Plan Contracting, ed. Wendy Knight (Gaithersburg, MD: Aspen Publishers, Inc., 1997), 57. Maria K. Todd, The Health Plan Contracting Handbook: Planning and Negotiating the Health Plan Relationship (Chicago: Irwin Professional Publishing, 1996), 131. H.R. 815/S, 356, Access to Emergency Medical Services Act, Legislative Update, 10 April 1998. American Association of Health Plans, Code of Conduct (Washington, D.C.: American Association of Health Plans, summer 1998), 5. Sally K. Richardson, State Medicaid Director Letter (Emergency Services), Centers for Medicare and Medicaid Services, 20 February 1998, http://www.hcfa.gov/ medicaid/bba2208c.htm (20 June 1998). Janice Perrone, Medical Record Privacy: Open Secrets, Hospitals and Health Networks 71 (November 5, 1997): 68. Paula Nelson, Health Plan Contracting: Term and Termination Clauses, Managed Care Contracting Signature Series, Health Plan Resources, 1997, http:// www.mcres.com/mcrmcc06.htm (25 November 1997). McDonald, 274.

27. Ibid. 28. Ken Terry, No Cause Terminations: Will They Go Up in Flames? Medical Economics 75 (January 12, 1998): 130. 29. Nelson, 3.

AHM Network Management: Special Considerations for Medicaid Networks 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 Managements 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 individuals. The 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: Inpatient hospital services Outpatient hospital services Prenatal care Vaccines for children Physician services Nursing facility services for persons 21 or older Family planning services and supplies Rural health clinic services Home healthcare for persons eligible for skilled nursing services Laboratory and X-ray services Nurse-midwife services Pediatric and family nurse practitioner services Federally qualified health center (FQHC) services Ambulatory services of an FQHC that would be available in other settings Early and Periodic Screening, Diagnostic, and 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 states Medicaid program ranges from 50% to 80% of the states 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.

A Brief History of the Medicaid Program

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 commercial 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 patients 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 withand not necessarily receptive tothe 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 settingsfor example, to seek treatment for non-emergency illnesses or injuries in the PCPs 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 childrens 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 basisif at all while disabled individuals often require the services on a longterm 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 approacheseach requiring additional provider trainingthat 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 Medicaids 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 individuals 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. CMSs 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 providers training and experience in working with the disabled, as well as the accessibility of the providers 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 providers location to individuals disabilities. Health plans should perform site visits or request information to determine provider has: accessible office space, 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 a telecommunications device for deaf, a teletypewriter, and American Sign Language interpreter capacity the ability to offer services and information for people with visual impairments training/experience in communicating with individuals with cognitive disabilities.4

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 states 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 beneficiarys 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

programs 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 states Medicaid capitation rates. ***Insight 7B2 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.

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 BBAs 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 organizations (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 states 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, orat 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 Medicaids 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.

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 latitudeand additional federal matching fundsto 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 states Medicaid program. Prior to CHIP, a number of states had already expanded Medicaid coverage for uninsured children under Section 1115 waivers. Serving the Uninsured 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 Carolinas Baby Love program. Under this program, which was begun in 1987, a statewide network of specially trained nurses and social workerscalled maternity care coordinatorsprovides comprehensive prenatal care and infant health services to Medicaid recipients in the states 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 states 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 Carolinas 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 Carolinas Baby Love program. Under this program, which was begun in 1987, a statewide network of specially trained nurses and social workerscalled maternity care coordinatorsprovides comprehensive prenatal care and infant health services to Medicaid recipients in the states 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 states 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 Carolinas program is typical of prenatal and infant health programs throughout the nation.

Medicaid Compared to Commercial Health Plans

Because of the nature of Medicaids 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 patients 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 carveouts 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 plans 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 plans 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 states performance standards and the federal Medicaid requirements, and is willing to accept Medicaids 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 plans 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 states 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 plans existing programs in addition to its proposal for Medicaid.

The Nature of Medicaid Managed Care Contracts

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 plans 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 plans 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 plans.

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 plans 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 providers 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 states 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. 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 agencys contract with health plans.

Fluctuating Medicaid Enrollment

The member base for a Medicaid managed care organization may fluctuate widely because an individuals eligibility for Medicaid may change from month to month, based on a change in the individuals 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 plans 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 intensiveand 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 providersparticularly safety net providers that provide a wide variety of servicesoften 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 capitation 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 costeffective 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 communitybased 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 community based 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 communitybased 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. 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 governmentfunded 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 plans 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 states. This is especially true with regard to provider reimbursement. Prior to the BBA, federal law required states to pay certain safety net providersspecifically RHCs and FQHCsa 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 plans 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 plans 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 valuableand often cost-effectiveresource 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 Washingtonamong othershave 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. Californias 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 Medicaidhealth 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.

Endnotes
1. James M. Verdier, Implementing Medicaid Health Plan Amid Skepticism, Anxiety, and Controversy: Suggestions for Program Design, Monitoring, and Reporting (Princeton, NJ: Center for Health Care Strategies, Inc., November 1997), i. 2. The Alpha Center, Medicaid Health Plan and Safety Net Providers: A Technical Assistance Guide for Health Plans (Princeton, NJ: Center for Health Care Strategies, Inc., April 1998), 1. 3. David Liska, Medicaid: Overview of a Complex Program, Assessing New Federalism: Issues and Options for States, The Urban Institute, 1998, http:// newfederalism.urban.org/html/anf_a8.htm (26 June 1998). 4. Adapted with permission of the publisher from Carol Tobias, Health Plan for Special Populations: Developing Responsive Provider Networks (Princeton, NJ: Center for Health Care Strategies, Inc., November 1997), 11. 5. Ron Shinkman, Week in Healthcare: Problem Takeoff, Modern Healthcare (August 10, 1998): 30. 6. Health Care Financing Administration, Child Health Insurance Program State Plans, 20 August 1998, http:// www.hcfa.gov/init/chip-map.htm (31 August 1998). 7. Paul B. Ginsburg, Health System Change in 1997, Health Affairs 17, no. 4 (1998): 168. 8. North Carolina Department of Health and Human Services, Division of Medical Assistance, Medicaid in Depth, State of North Carolina, 26 January 1997, http:// www.dhr.state.nc.us/DHR/DMA/ depth97.htm (29 September 1998) and Elements of Effective Health Service Delivery for the Low-Income Population: Background Papers (Henry J. Kaiser Family Foundation, 1993).

9. Center for Health Policy Research, The George Washington University Medical Center, A Nationwide Study of Medicaid Health Plan Contracts, 2nd ed., Center for Health Care Strategies, 1998, http:// www.chcs.org/oview.htm (29 July 1998). 10. Carol Tobias, Health Plan for Special Populations: Developing Responsive Provider Networks (Princeton, NJ: Center for Health Care Strategies, November 1997), 21. 11. Ibid., 2023. 12. Susan Wall, Transformations in Public Health Systems, Health Affairs 17, no.3 (May/June 1998): 7679. 13. Patricia Barry and Sharon Connors, Medicaid Health Plan Contracting Guide (Princeton, NJ: Center for Health Care Strategies, Inc., August 1997), 1114.

AHM Network Management: Special Considerations for Medicare Networks

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 Medicare Part B, an optional program requiring payment of a premium to CMS to cover

inpatient hospital care, inpatient skilled nursing facility care, and hospice care

the costs of physician professional services provided in a hospital, a physicians office, an extended care facility, a nursing home, or an insureds 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 beneficiarys monthly Social Security check A Brief Overview of the Medicare Program 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 Medicares 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. 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 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 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 planCMP) 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.

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 in home 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 Plans 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 1997which 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

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 Franciscos 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 programs 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 participants 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 BBAs 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.

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 Choiceestablished 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 providersponsored 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 HMOs 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 PSOs licensure application within 90 days of receiving a The state denies the application based on solvency standards that are different from the The state denies the application due to applying standards or a review process that is not The state requires the PSO to offer a product other than Medicare

complete application federal standards

generally applicable to similar entities

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.

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 maintain a provider network that is capable of providing all Medicare-covered services a combination of both

A and B for covered services rendered

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 plans 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 patients 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 plans 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 programs 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 cardssponsored by private sector entities and endorsed by Medicarewhich 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 standalone 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. 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. 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 organizations 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. *** 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

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 areathe 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 plans 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 plans 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 womens health specialist, such as a gynecologist, for womens 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 enrollees

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 providers 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 plans 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 enrollees 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 nonparticipating provider. Finally, Medicare+Choice plans must cover renal dialysis services provided by a non-participating provider when the enrollee is temporarily outside the plans 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 enrollees 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 physicians 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 physicians 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.

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 physicians 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 plans 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 plans 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 plans 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 plans 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 years rate, or 2. An increase by the Medicare growth percentage over the previous years 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 plans 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 Academys 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 applicants disciplinary status. In some cases, the health plan may be required to make a site visit to verify the information in the providers application. Of course, health plans should also perform their usual credentialing activities to assure that the provider meets the health plans 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 providers 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 plans 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 plans medical policies, quality management program, and medical management procedures. The purpose of these consultations is to ensure that the health plans practice guidelines and utilization management guidelines
are based on reasonable medical evidence or a consensus of healthcare professionals in consider the needs of the enrollees are periodically reviewed and updated

the relevant field

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 the risks, benefits, and consequences of treatment or nontreatment the opportunity to refuse treatment and to express preferences about future treatment

that may be self-administered

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, nonnetwork 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 plans 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 plans 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 providers 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 providers 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. CMSs 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 plans 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 plans 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 plans 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 physicians 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. Health plans 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 Americas healthcare system and to study the current system, as well as possible new program designs. The commissions report was initially scheduled to be presented to Congress in March 1999.

Endnotes
1. Health Care Financing Administration, Medicare Health Plan Terminology, http://www.medicare.gov/managedcare/ glossary.html (25 September 1998). 2. W. Leutz, M.R. Geenlick, and J. Capitman, Integrating Acute and Long-Term Care, Health Affairs (fall 1994): 58. 3. Carl Peterson, Social HMOs: Making Seniors Lives Better at Home, Healthplan (March/April 1998): 45. 4. Health Care Financing Administration, Medicare, ASPEs Disabilities and Managed Care Website, 27 July 1998, http:// managedcare.hhs.gov/program_descriptions/ medicare/index.html (21 September 1998). 5. Gail A. Jensen and Robert J. Morlock, Why Medical Savings Accounts Deserve a Closer Look, Journal of American Health Policy (May/June 1994): 14. 6. Health Care Financing Administration, Project Activities: Quality Assessment Performance Improvement (QAPI), Quality of Care Information, 28 September 1998, http://www.hcfa.gov/quality/docs/ qismc-in.htm (29 November 1998). 7. Roger S. Taylor and Craig Schub, Medicare Risk Plans: The Health Plans View, in The Managed Health Care Handbook, ed. Peter R. Kongstvedt, M.D., 3rd ed. (Gaithersburg, MD: Aspen Publishers, Inc., 1996), 751. 8. Gloria Gerrity, When Is a Group Practice Ready for Medicare Risk Contracting? Healthcare Financial Management (May 1998): 63.

AHM Network Management: 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 diagnosisrelated 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 plans 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 plans 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 hospitals 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 hospitals current accreditation status? What quality problems were identified during the hospitals last review for accreditation and how have those problems been addressed? Utilization level and cost of services. How do the hospitals utilization of resources and costs for services compare to the health plans 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 hospitals affiliations with other providers in the community. For example, how many of the networks 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 physicianhospital 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 hospitals 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 centers clinical outcomes and the providers 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 facilitys 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 well trained, 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 centers 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 members 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 centers location to plan members? If the center is not in the health plans 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 centers 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 plans 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 plans quality standards. The payment methods for centers of excellence vary among health plans. The reimbursement approaches include case rates such as global fees and diagnose is related groups (DRGs), per diem payment, and discounted fee-forservice (DFFS) payment.5

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 hospitals 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 plans 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 plans 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 diagnose is related 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 medicalsurgical 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 hospitals 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 partialrisk 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 goalimproving 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 facilitys 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 patients 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 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 plans 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 plans 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 plans 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 members 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 plans 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 plans 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. 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 persons underlying long term conditions and overall situation. Generally, the individuals 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

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) 16 long-term care hospitals

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 hospitals 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 hospitalbased 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 Griffins 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.

Endnotes
1. Richard Rognehaugh, The Managed Health Care Dictionary (Gaithersburg, MD: Aspen Publishers, Inc., 1996), 32.

2. Daniel Dragalin and Philip D. Goldstein, The Centers of Excellence Phenomena, in The Physicians Guide to Health Plan, ed. David B. Nash, M.D. (Gaithersburg, MD: Aspen Publishers, Inc., 1994), 16366. 3. Sheryl Tatar Dacso and Clifford C. Dacso, M.D., Health Plan Answer Book, 2nd ed. (New York: Panel Publishers, 1997), 15-20. 4. Ibid., 15-21,15-22. 5. Health Plan Company Strategies for Centers of Excellence, Health Plan Week (September 21, 1998): 6. 6. Peter R. Kongstvedt, M.D., Negotiating and Contracting with Hospitals and Institutions, in Essentials of Managed Health Care, ed. Peter R. Kongstvedt, M.D., 2nd ed. (Gaithersburg, MD: Aspen Publishers, Inc., 1997), 166. 7. Ibid., 16667. 8. ORION Consulting, Inc., APC Essentials, 1999, http://www.orion-consulting.com/ apc. 9. Ibid. 10. Harris Meyer, Prospective Payment Gets Legs, Hospital & Health Networks (August 1998): 50. 11. ORION Consulting, Inc. 12. Ibid. 13. Marianne F. Fazen, St. Anthonys Managed Care Desk Reference, 19961997 ed. (Reston, VA: St. Anthony Publishing, Inc., 1996), 175. 14. Joint Commission on Accreditation of Healthcare Organizations (JCAHO), 1995 Survey Protocol for Subacute Programs (Oakbrook Terrace, IL: Joint Commission on Accreditation of Healthcare Organizations, 1995). 15. Kathleen M. Griffin, Subacute Care and Health Plan, in The Managed Health Care Handbook, ed. Peter R. Kongstvedt, M.D., 3rd ed. (Gaithersburg, MD: Aspen Publishers, Inc., 1996), 389. 16. Ibid. 17. Ibid., 400. 18. Ibid., 400401. 19. Joint Commission on Accreditation of Healthcare Organizations, Subacute Care Protocol (Oakbrook Terrace: Ill.: Joint Commission, 1994). 20. Commission on Accreditation of Rehabilitation Facilities (CARF), Standards for Comprehensive Inpatient Rehabilitation Programs, in 1995 Standards Manual and Interpretive Guidelines for Medical Rehabilitation (Tucson, Ariz.: CARF, 1995). Excerpted from Wendy Knight and Lisa A. Sansone, Ambulatory and Ancillary Care Contracting in Managed Care Contracting, ed. Wendy Knight (Gaithersburg, MD: Aspen Publishers, Inc., 1997), 214216. Used with permission. Excerpted from Kathleen M. Griffin, Subacute Care and Health Plan in The Managed Health Care Handbook, ed. Peter R. Kongstvedt, M.D., 3rd ed. (Gaithersburg, MD: Aspen Publishers, Inc., 1996), 393397. Used with permission.

AHM Network Management: 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 plans 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 facilityemployed 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. Hospitalbased specialists are more likely to accept and comply with health plan contracts if the health plans 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 Salary reimbursement systems offer providers a guaranteed income that is not tied to

services they deliver.

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-forservice (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 specialists charge exceeds the established fee. If a specialists 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 physicians 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.

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 networkhours. 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 PCPs 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 plans 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 plans 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 plans 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. 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 plans 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 plans 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 plans members who have a particular medical condition, sometimes on a capitated basis.

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 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 groups 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. 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 high quality, 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 patients 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. *** The need to manage multiple contracts with multiple variables. An health plan or physician organization that contracts with individual specialists must manage a variety of individual reimbursement methods. Some physicians may receive monthly capitated amounts, while others receive FFS payments or complex salary plus incentive payments. Each different contract involves different variables that can affect data collection, distribution of revenues, and physician reimbursement. The need to manage multiple forms of capitation. Common specialties for which utilization and costs are easy to measure often lend themselves to standard capitation arrangements. Specialties with variable utilization may require modified capitation arrangements, such as contact capitation or carve-out arrangements. The need for systems that can collect clinical, financial, and operational data and make it usable for internal and external reporting. The need for systems that can track and measure services covered by a single capitated payment. Capitated payments provide little incentive for physicians to document individual services. In addition, capitated encounters do not produce claim forms. As a result, data collection is often time-consuming and difficult.

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 Endnotes 1. Richard Ferreira, Health Plan Contracting and Reimbursement for Physician Organizations in a Capitated and Risk- Sharing Organization, in Building and Managing Effective Physician Organizations Under Capitation, ed. Douglas Goldstein (Gaithersburg, MD: Aspen Publishers, Inc., 1996), 23940. 2. Ibid. 3. American Association of Health Plans, 1999 Industry Profile: A Health Plan Reference Book (Washington, D.C.: American Association of Health Plans, 1999), 102. 4. Peter R. Kongstvedt, M.D., Contracting and Reimbursement of Specialty Physicians, in Essentials of Managed Health Care, ed. Peter R. Kongstvedt, M.D., 4th ed. (Gaithersburg, MD: Aspen Publishers, Inc., 2001), 154. 5. Ibid. 6. Kevin M. Kennedy and Daniel J. Merlin, Alternatives to Traditional Capitation in Health Plan Agreements, Healthcare Financial Management (April 1998): 48. 7. Ibid. 8. Ibid., 49. 9. Kongstvedt, 15152. 10. Norbert Goldfield et al., Methods of Compensating Health Plan Physicians and Hospitals, in Physician Profiling and Risk Adjustment, ed. Norbert Goldfield and Peter Boland (Gaithersburg, MD: Aspen Publishers, Inc., 1996), 12829. 11. Geoff Baker and Tom Wargo, To Capitate Its Specialists, HealthAmerica Sticks to the Basics, St. Anthonys Health Care Capitation Report (July 1997): 4. 12. Merriam-Websters Collegiate Dictionary, 10th ed. (Springfield, MA: Merriam-Webster, Inc., 1996), 616. 13. James A. Rodeghero, Physician Compensation in Groups and Integrated Delivery Systems, in The Managed Health Care Handbook, ed. Peter R. Kongstvedt, M.D., 3rd ed. (Gaithersburg, MD: Aspen Publishers, Inc., 1996), 15960. 14. Mark Hagland, Payment Challenges, Healthcare Informatics (November 1999): 40.

AHM Network Management: 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

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 list s 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 Experience in dealing with a variety of personalities under stressful situations Knowledge of the local healthcare market and patient population

own organization

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. Figure 4B-2 http://www.educode.com/Images/ahm530A10fig4b2.pdf 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. ***

Health plans and healthcare professional societies and publications State insurance department records, including financial analyses of health plans Health plan annual reports, if the company is publicly held Newspaper and magazine articles Websites for the health plan and other healthcare organizations, such as regulatory or accrediting agencies Marketing and promotional materials from the health plan Employees and former employees of the health plan Customer surveys and focus groups Industry consultants

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 What affiliations exist among local providers? How many other health plans operate in the same local market? What terms and Which providers do local consumers and purchasers prefer?

for providers?

reimbursement arrangements do these competitors offer?

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 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

resource to answer questions from the other team

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.

Endnotes
1. Sheryl Tatar Dacso and Clifford C. Dacso, M.D. Health Plan Answer Book, 2nd ed. (New York: Panel Publishers, 1997), 13-11. 2. John L. McDonald, "The Contract Negotiations," in Health Plan Contracting, ed. Wendy Knight (Gaithersburg, Md: Aspen Publishers, Inc., 1997), 37. 3. Irwin M Birnbaum, "Legal Issues Associated with Health Plan Contracting," in Building and Managing Effective Organizations Under Capitation , ed. Douglas Goldstein (Gaithersburg, Md: Aspen Publishers, Inc., 1996), 266.

AHM Network Management: 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 risksharing, 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 6. Procedures for verification of membership and determination of applicable benefits 7. Agreements to exchange information and to the right to access and audit plan members' medical records 8. Grievance processes and an agreement to indemnify the health plan from claims due to the negligence of providers and vice versa 9. The term of the contract and the amendment and termination processes 10. 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. 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 furnished in the least intensive type of medical care setting required by the

healthcare provider

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." 2 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. 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 Responsibilities 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. 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 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. 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 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. 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. 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 Warranties and representations of the legal status of all parties to perform the obligations

benefit from the contract, such as organizations that rent the provider network 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 creditchecking 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.

Endnotes
1. Bruce W. Clark, "Negotiating Successful Health Plan Contracts," Healthcare Financial Management (August 1995): 28. 2. Sally K. Richardson, Letters to State Medicaid Directors, 20 Feb. 1998, par. 5, online, CMS, Available: http://www.hcfa.gov/medicaid/bba2208c/htm, 20 June 1998. 3. American Association of Health Plans (AAHP), Putting Patients First, online, AAHP, Available: http://www.aahp.org/services/initiatives/patients_first/policies/Policy/htm, 12 Oct. 1998. 4. "NAIC Adopts Emergency Coverage Standard," BNA's Health Plan Reporter 2, (June 19,1996): 597.

AHM Network Management: The Role of Network Management in a Health Plan Objectives
After completing this lesson you should be able to: Explain the meaning of network management and list some of the activities that are typically included in this function Describe the role of a network management director, a contracting specialist, and a provider relations representative in network management Define profiling and explain its significance in network management Describe some training and support approaches that health plans use to improve the performance of network management staff Explain the relationship between network management and medical management, risk management, member services, and claims administration

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 Different 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 non physician 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 lesson

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 pre-established 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 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. An executive-level committee at the health plan may oversee and set policies for netwo rk 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.

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.

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 keypad1.

Cross-training
Given the dynamic nature of the health plan industry, health plans should be proactive in crosstraining 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 requirements2. Medical management includes the health 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. 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 management3 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 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 itself4. Member services also monitors overall 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. 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 .

Endnotes
1. Kenneth Huggins, Dani L. Long, and Caroline W. Sundberg, Customer Service in Insurance: Principles and Practices (Atlanta: LOMA, 1997), 234-235. 2. Mary Sadjak and Zachary B. Gerbarg, " Medical Management Overview," from Medical Management Signature Series by Health Plan Resources, Inc., par. 2, online, Available: http://www.mcres.com/mcrmm01.htm. 11 November 1997. 3. Ibid., par. 4. 4. Peter R. Kongstvedt, " Member Services and Consumer Affairs," in Essentials of Managed Healthcare, 2nd ed., ed. Peter R. Kongstvedt (Gaithersburg, MD: Aspen Publishers, Inc., 1997), 378.