HCFA could set off bidding war among Denver MCOs

Competitive pricing may create chaos for payers

The Denver medical community is mystified by a new Medicare risk pricing formula set for testing in that area next year that is certain to cut payment rates for both payers and outpatient providers. The formula could make chaos of existing managed care agreements, according to one local health plan executive.

The formula, a competitive bidding plan for setting prices under local Medicare managed care contracts, will disrupt established relationships in the medical community between providers and insurers, says Val Dean, MD, executive vice president and chief executive officer of FHP of Colorado in Englewood.

Worse yet, it will destroy most existing contract arrangements and create a logistical nightmare for actuarial accountants and medical business offices, Dean adds.

The Baltimore-based Health Care Financing Administration (HCFA) says its wants to use competitive pricing to improve beneficiaries’ ability to make informed choices about their Medicare options. The agency also wants to study the effect of competitive pricing on managed care enrollment and reimbursements.

Under the pricing plan, health plans that already contract for Medicare risk will have to submit bids for what it will cost them per member per month (PMPM) to pay for services. If the amount varies from what HCFA is willing to pay, the plan may have to charge beneficiaries a premium. HCFA still is considering using one of two possible bidding models.

But local industry players question how HCFA officials selected Denver as the area in which to implement the three-year demonstration project, and why HCFA chose to spring the news on the community the way it did. Peg O’Keefe, vice president of public affairs at the Denver-based Colorado Hospital Association, says local HCFA officials released an announcement regarding the project 24 hours before scheduling an orientation for insurers and providers.

A HCFA official in Baltimore says the agency has held discussions with payers about the Medicare Managed Care Competitive Pricing Demonstration project for more than a year and has kept participants informed the entire time.

The official, who asked not to be identified in accordance with agency policy, also indicated that Denver was one of two sites chosen for its brisk managed care activity and high reimbursement levels based on the current Adjusted Annual Per Capita Cost (AAPCC). Denver’s AAPCC ranges between $467 and $503 PMPM.

The other location chosen for the demonstration project is Baltimore. But that site has been troubled by stern opposition from payers to the bidding project. In all, three geographically diverse sites will participate in the demonstration. The third site has yet to be selected. The HCFA official emphasized that the project is not designed as a mechanism for depressing AAPCC rates.

However, it does appear to be designed to reduce payment rates, says Rick Hale, senior vice president of managed care with Centura Health in Englewood, CO, who worries that competitive pricing may force some outpatient providers to lose their patients.

Patients pay premium

Under one of the two bidding models being considered, patients will be charged a premium, which would have the effect of diverting some enrollees to a plan that doesn’t contract with a particular outpatient provider, Hale says.

Also, payment levels to insurers will be determined by a formula using standardized AAPCC figures. Dean worries that the data collected in markets such as Denver will lead to reductions in future AAPCC rates, although HCFA denies this.

"To the extent that this will drive down the AAPCC, it will also drive down the amount of money going to hospitals and physicians. Everyone will take a proportionate hit," Dean says.

The two bidding models under consideration by HCFA are somewhat similar. Both use the government’s PMPM payment rate as a benchmark for paying HMOs and involve potential out-of-pocket costs to beneficiaries. They work as follows:

The first option.

Under this model, health plans will submit bids to HCFA for a standard benefits package. The agency will then compare the rate to its own per-member payment level. If a plan’s bid is greater than the HCFA amount, the plan will be required to charge beneficiaries the difference.

HCFA has not yet determined either the beneficiary premium amount or its payment level for insurers. But the amount will be set above 50% of all the bids when arrayed from low to high. However, in no event would the amount be greater than 95% of the AAPCC.

The second option.

In this scenario, health plans would bid on a standard benefits package. But plans with bids that exceed the government’s level will be paid less by the same percentage that it exceeds the government’s level.

For example, if a plan is 10% over the cutoff, HCFA will pay the insurer at 90% of the government’s rate. All plans whose bids fall below the cutoff will be paid the government’s level, regardless of their bid. Plans above the cutoff could charge a beneficiary premium to recover up to the full bid amount, but they aren’t required to.

Before the project is implemented, HCFA will suspend all existing Medicare payment and contract options, which means all risk contracts will be placed on hold throughout a five-county area for three years. There are six major health plans, including FHP and Kaiser Permanente based in Denver, that are likely to be participants in the project. The two HMOs have the largest enrollment base in the Denver area.

The demonstration also will be preceded by an open enrollment conducted by a third-party administrator and an informational education program.

Enrollees may lose benefits

Although the project is far from implementation (it’s scheduled for an early 1998 launch), some local providers already are predicting the outcome. "Physicians may end up advocating for their patients on the basis of competing plans and diverting members to plans that pay more," warns Hale.

Others, such as Sally A. Arnaud, RN, vice president of administration at Paramount Physician Network in Denver, a 900-member independent practice association, say many Medicare senior plans will lose their generous drug, vision, and dental benefits. "And the presence of premiums could discourage new members," Arnaud says. Together, the two factors could result in slower senior managed care enrollment growth, Arnaud argues.

According to Arnaud, the answer to Medicare managed care isn’t competitive pricing but direct contracting between a provider and HCFA. Health plans have generally become extraneous, Arnaud says. "I do not see how the plans add to the quality of the care we, as providers, deliver," she adds.