Incentive plan analysis can avoid problems

HCFA surveys due back in March

Managed care organizations are now completing the Health Care Financing Administration’s third annual survey of the various financial incentive arrangements they have with their various outside physician providers. Completed surveys are due back to the office of Health Plan Purchasing and Administration by March 31.

"Where fraud enforcement in the fee-for-service days focused primarily on curbing the temptation for physicians to reap financial rewards by overusing medical services and generating excessive referrals, the growth of the commercial capitation and prospective pay system has forced regulators to also focus on preventing incentives to provi ders to underuse medically necessary services," says Christopher Rolle, JD, a lawyer in the Boca Raton, FL, offices of Broad and Cassel.

Accordingly, the purpose of HCFA s physician incentive program (PIP) regulations is to determine if managed care organizations have instituted incentives for physicians or physician group to reduce or limit "medically necessary services" to individual Medicare beneficiaries or Medicaid recipients.

According to HCFA, "If these incentives place the physician or group at a substantial financial risk for referral services, the MCO must ensure that adequate stop-loss is provided and enrollee surveys conducted to monitor access to services and quality of care." Under HCFA guidelines, referral services include any specialty, inpatient, outpatient or laboratory services the physician or physician group does not directly furnish to a patient.

"Substantial financial risk occurs when the incentive arrangements place the physician or physician group at risk for amounts beyond the risk threshold, if the risk is based on the use or costs of referral services," says Howard Robinson, another Broad and Cassel attorney. "Amounts at risk based solely on factors other than a physician’s or physician group’s referral levels, however, do not contribute to the determination of substantial financial risk."

Where withholds (a percentage of payment or set dollar amount deducted from the physician’s payment to be repaid to the physician depending on predetermined performance criteria) are used, a physician or group is deemed to be at substantial financial risk if withholds from physician payments exceed 25% of the maximum "potential payments" (as defined in the rules), or if the physician or physician group is liable for amounts exceeding 25% of the maximum payments.

Similarly, if potential bonuses in an incentive package are greater than 33% of potential payments (minus the bonus), then there is substantial financial risk. If incentives are based on a combination of withholds and bonuses, the risk threshold is surpassed if, according to a formula set out in the rule, the combination of incentives exceeds 25% of potential payments.

With capitation, the risk threshold is surpassed if the difference between the maximum potential payments and the minimum possible payments exceeds 25% of the maximum potential payments, or if the maximum potential and minimum possible payments are not clearly explained in the physician or physician group’s contract. A contract also could have problems if it contains any other incentive arrangements that could leave a physician or physician group liable for more than 25% of potential payments.

"There is one important exception to these rules where a physician or physician group will never be deemed to be at substantial financial risk for referral services," says Rolle. "That is when the patient panel size of a particular physician group is over 25,000 patients. Then that physician or physician group will never be at substantial financial risk for referral services."

The HCFA survey not only applies to MCOs’ contracting arrangements with providers, but to subcontracting arrangements with "intermediate entities" as well. Intermediate entities include independent practice associations (IPAs) that contract with one or more physician groups, as well as physician-hospital organizations. IPAs that contract only with individual physicians and not with physician groups are considered physician groups under the rule.

According to the final rule, if a PIP puts a physician or physician group at "substantial financial risk" for referral services:

• The MCO must survey current and previously enrolled members to assess member access to and satisfaction with the quality of services.

• There must be adequate and appropriate stop-loss protection.

Substantial financial risk is set at greater than 25% of potential payments for covered services. The term "potential payments" means the maximum anticipated total payments that the physician or physician group could receive if the use or cost of referral services were low enough. If the cost of referrals exceeds the 25% level, the financial arrangement is considered to put the physician or group at substantial financial risk.

For example, a doctor contracts with an MCO that holds back a certain amount of his or her pay (e.g., $6 per member per month). The MCO will give the $6 per member per month back to the doctor only if the cost of referral services falls below a targeted level. That $6 is considered to be "at risk" for referral services. The amount is equal to the difference between the maximum potential referral payment and the minimum potential referral payment (but does not include any bonus payment unrelated to referral services). The six dollars is put into the numerator of the risk equation.

The denominator of the risk equation is equal to the maximum potential payment that the doctor could receive, which is the sum of the MCO payment for directly provided services, referral services, and administration. Therefore, if the same doctor receives $24 per member per month for the primary care services he or she provides and is subject to the $6 withhold, the risk equation is as follows:

Risk level: 6/24 = 25% — Not at substantial financial risk.

Note that if a physician group’s patient panel is more than 25,000 patients, then that physician group and the group’s physicians are not considered to be at substantial financial risk.

When it comes to determining significant financial risk for referrals, the formula is:

Referral risk: Amount at risk for referral services divided by Maximum potential payments.

The amount at risk for referral services is the difference between the maximum potential referral payments and the minimum potential referral payments, according to HCFA regulations.

Bonuses unrelated to utilization (e.g., quality bonuses such as those related to member satisfaction or open physician panels) should not be counted toward referral payments. Maximum potential payment is defined as the maximum expected total payments that the physician/group could receive.

But, if there is no specific dollar or percentage amount noted in the incentive arrangement, then the PIP should be considered as potentially putting 100% of the potential payments at risk for referral services.

According to HCFA, the following incentive arrangements should be considered a significant financial risk:

• withholds greater than 25% of potential payments;

• withholds less than 25% of potential payments if the physician or physician group is potentially liable for amounts exceeding 25% of potential payments;

• bonuses that are greater than 33% of potential payments minus the bonus;

• withholds plus bonuses that equal more than 25% of potential payments. The threshold bonus percentage for a particular withhold percentage may be calculated using the formula: Withhold % = -0.75 (Bonus %) +25%;

• capitation arrangements, if the difference between the maximum potential payments and the minimum potential payments is more than 25% of the maximum potential payments, or the maximum and minimum potential payments are not clearly explained in the physician’s or physician group’s contract;

• any other incentive arrangements that have the potential to hold a physician or physician group liable for more than 25% of potential payments.

Under PIP rules, stop-loss protection must be in place to protect physicians and/or physician groups assuming substantial financial risk for the Medicare contract. The rule specifies that if aggregate stop loss is provided, it must cover 90% of the cost of referral services that exceed 25% of potential payments. Physicians and groups can be held liable for only 10%. If per patient stop-loss is acquired, it must be determined based on the physician or physician group’s patient panel size and must cover 90% of the referral costs that exceed per patient limits. (See chart, p. 28.)

Estimated Stop-Loss Levels
Patient Panel
Size
Single Combined
Limit
Separate Institutional
Limit
Separate Provider
Limit
1 - 1,000
$6,000*
$10,000*
$3,000
1,001 - 5,000
30,000
40,000
10,000
5,001 - 8,000
40,000
60,000
15,000
8,001 - 10,000
75,000
100,000
20,000
10,001-25,000
150,000
200,000
25,000
>25,000
none
none
none

* The asterisks in this table indicate that, in these situations, stop-loss insurance would be impractical. Not only would the premiums be prohibitively expensive, but the protections for patients would likely not be adequate for panels of fewer than 500 patients. MCOs and physician groups clearly should not be putting physicians at financial risk for panel sizes this small. It is our understanding that doing so is not common. For completeness, however, we do show what the limits would be in these circumstances.

The institutional and professional stop loss limits above represent the actuarial equivalents of the single combined limits.The physician group or MCO may choose to purchase whatever type is best suited to cover the referral risk in the incentive arrangement.

Source: Health Care Financing Administration, Baltimore.

To determine the patient panel size in the chart, entities may pool risk in order to determine the amount of stop-loss required if they meet all of the following criteria:

— Pooling of patients is consistent with the relevant contracts governing compensation arrangements for the physician or group (i.e., no contracts can require risk be segmented by MCO or patient category).

— The physician or group is at risk for referral services with respect to each of the categories of patients being pooled.

— Terms of the compensation arrangements permit the physician or group to spread the risk across the categories of patients being pooled (i.e., payments must be held in a common risk pool).

— Distribution of payments to physicians from the risk pool is not calculated separately by patient category (either by MCO or by Medicaid, Medicare, or commercial).

Note: If a physician group’s patient panel is more than 25,000 patients, then that physician group and the group’s physicians are not considered to be at substantial financial risk.