Doing the math in PSO financial formulas not easy
Doing the math in PSO financial formulas not easy
AAPCC rate holds the key to profit opportunities
One of the most difficult things for physicians and other providers to understand about risk contracting with Medicare is how they get paid.
Provider-sponsored organizations (PSOs) will have capitated risk contracts with the Health Care Financing Administration (HCFA) to serve Medicare beneficiaries. These contracts are more complex than the typical fee-for-service agreements most providers sign.
The amount Medicare pays per beneficiary per month varies according to the geographic area and how high the average health care costs are in that area. HCFA calls this figure the average adjusted per capita cost (AAPCC). Medicare risk contracts pay 95% of the AAPCC, says Peter N. Grant, JD, PhD, a partner with Davis Wright Tremaine law firm in San Francisco. Grant is a health law specialist and a member of the HCFA negotiated rule-making process with respect to federal solvency standards for Medicare+Choice PSOs. Grant also spoke about PSOs at the 10th Annual National Managed Health Care Congress (NMHCC) held in April in Atlanta.
This method results in high premiums in some areas and low premiums in other areas, so HCFA made some changes in how it's calculated by creating a formula that will even the score a little, Grant told providers at the NMHCC conference.
The AAPCC will be the greater of two numbers: either the floor amount (which is $367 this year) or a local-national blend of the AAPCC, which now is a blend of 10% based on the national average and 90% based on the local average. In five years, the AAPCC will be split 50-50 between the local and national averages.
If a provider's area has an AAPCC of less than $400, then it likely would not be worthwhile to start a PSO, says Phyllis Costanza, senior manager with The Lewin Group in Fairfax, VA. The health care consulting firm works with providers, managed care organizations, and government entities.
"We think an AAPCC of above $500 is good," Costanza says. "In rural parts of some states, such as North Carolina and Georgia, the AAPCC is the minimum of $367, and so it would be very difficult for PSOs to make money in those areas."
In other regions, particularly urban areas where health care costs tend to be high, the AAPCC might be as high as $700.
"Miami has a higher rate; Los Angeles, San Diego, and New York have high rates," says James Reynolds, president of Reynolds & Co. in New York City. "So you really have to look at each area that Medicare computes that AAPCC rate for, and it's up to you to provide care within that number."
Medicare wants to raise the AAPCC in rural areas where it has traditionally been low, and it wants to lower it in areas where it is high. Plus the government has placed a 2% cap on increases in the AAPCC this year, Costanza says.
An example of a high AAPCC area is Wayne County in Michigan, home to Detroit and the auto industry, Costanza says.
The AAPCC rate is more than $650 and Medicare has 300,000 eligible beneficiaries. But managed care Medicare penetration is only 5.5%, about one-third of the average penetration level across the country, Costanza adds.
"One reason for this is most of the HMOs are provider- driven, meaning the providers own the HMOs already," she explains. "The other reason is that retirees have generous retirement benefits from the auto industry, so they don't need supplemental Medicare insurance."
Thus, there has not been much incentive for pro viders to cut back utilization and move Medicare patients into managed care, Costanza concludes.
The federal government's advantage in encouraging PSOs to enter into these risk contracts is very clear, Reynolds says. "If Medicare is paying a per capita amount to providers or to HMOs, then they are no longer at risk for cost increases from year to year, and they have a cap on their budget to some extent."
Medicare still may have to raise the AAPCC rate when costs increase, Reynolds says, but here's the catch: If an area's AAPCC rate is $400, then Medicare will pay the PSO 95% of that amount per Medicare beneficiary per month. But to make a profit, the PSO will have to cut costs and become more efficient so it will deliver health care services to that Medicare population at a rate that is lower than the $380 it's being paid. If it does this successfully, then when Medicare adjusts the AAPCC rate for the next year, it may be a little lower at $380. So now Medicare will pay the PSO 95% of $380, which is $361 per beneficiary per month.
The AAPCC rate also will be affected by the national average, so it could go up or down each year because of that, as well.
Costanza advises physicians to do a thorough feasibility study before jumping blindly into a PSO. "You have to consider every aspect of this, from how will the providers in your region feel about this to whether they will accept whatever you are willing to pay them."
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