A guide to evaluating managed care companies.

Over the past 15 years, the practice of medicine has changed dramatically, and further changes appear to be on the horizon. A technological explosion has contributed to remarkable success rates in the areas of limb reattachment, organ transplantation, and anesthesia safety. These are changes welcomed by patients and doctors. Traditional medical training keeps pace with the techniques of the practice of medicine, but the rapid changes on the commercial side have left many doctors angry and frustrated.

Many of these commercial changes go under the generic term of managed care. Managed care has no universally accepted definition, but to many doctors it means interference in the care of patients. Managed care is practiced by the federal government in the way it administers the Medicare program, by state governments in their regulation of Medicaid programs, and by the private sector through entities such as preferred provider organizations (PPOs), health maintenance organizations (HMOs), and their variations.

Managed care seeks to insert a layer of control in the way a doctor treats his or her patients, from regulating which drugs can be prescribed to which operations can be performed in various settings. It serves to modify physician decisions with the lofty goal of maintaining quality and holding down prices. Blue Cross and Blue Shield of Wisconsin states in its PPO literature to prospective enrollees that "cost-efficient care is quality care." This statement puts the wrong end first. There is no credible evidence that cheaper is better.

Unfortunately, it is very difficult to regulate quality and very easy to regulate cost. Based on this flawed principle, entrepreneurs have created an entire industry. The blossoming of the industry has, unfortunately, created weeds as well as flowers. Just as some gardeners see flowers where others see weeds, some doctors will see advantages in some managed care firms where others see trouble. I hope the following information will give physicians enough information to determine which is which.

A well-organized evaluation of managed care programs is important to obtain financial security and to ensure emotional comfort that will allow the provider to practice at peak potential. A physician must decide which managed care plans to join, and this is often dictated by emotional or social pressures rather than sound business judgment. Choices are made without regard to the long-term consequences and have, at times, contributed to excellent physicians' leaving medicine to pursue different careers. The alteration in practice patterns required for participation in some managed care programs may be contrary to physicians' training and beliefs.

Physicians are trained to act as patients' advocates. They are often uncomfortable in the role of limiting access to care and are frequently ignorant concerning the rules of managed care programs. They may not know they are paying for the privilege of participating or may be unaware of appeal processes when disputes arise. The interests of patients are best served if the doctor understands the workings of the managed care team he has joined.

Financial reimbursement is at the top of most lists when evaluating managed care participation. Additional areas of concern are restrictions on patient care and what I have chosen to define as logistic parameters.

Financial Considerations

The reimbursement rate a managed care company uses must be fully understood and can prove elusive. Managed care companies set their compensation fees using one of two basic techniques. They may use a preset fee schedule or a negotiated fee schedule. Methods of setting fees may be loose and vary for different providers or may be tightly structured and carved in granite.

Preset fees are usually based on a national or regional fee schedule. A managed care company contracts with a provider, who agrees to accept a percentage discount of this schedule on a fee-for-service basis. This percentage rate may be negotiable. Providers are often asked to sign contracts after seeing only sample lists of fees, but they must insist on seeing all fees applicable to their practice. This is easily done by submitting a list of relevant CPT codes to the managed care company.

Another preset fee schedule, usual and customary (U&C), is based on a database of varying size that is used to calculate what other providers charge for similar services. Ideally, U&C rates should be based on a very large database that reflects the charges of providers with similar training and expertise. It should be adjusted for regional overhead costs, such as malpractice premiums and cost of living expenses. U&C schedules can be internally generated or purchased by the managed care company from outside sources. Providers are not given the opportunity to validate or challenge U&C fees.

Most managed care companies will not reveal details on how their U&C fees were determined. Unless the provider or the patient requests the fee for a specific procedure before the work is done, neither will know what the compensation will be for that procedure until payment is received. Many benefit plans cover only U&C payment.

A major flaw in establishing fee schedules based on retrospective data is that the smaller the database, the more chance for bizarre variations. The use of this type of fee schedule can be self-defeating for the payer. As providers submit charges, they frequently test the upper limits of the schedule by submitting inflated bills. As these inflated bills are received, they are entered into the database for future calculations.

Managed care companies may choose to negotiate a payment schedule based on paying a percentage of the standard fees of the provider. A provider may be required to submit a fee schedule to a managed care company. Doing this allows the managed care company to compare competitors' fees and use this information in future negotiations.

Relative value payment schedules are still being used to determine compensation. Some managed care companies use the diagnostic codes from McGraw-Hill, which were developed by physicians and published by the Health Care Management Group in New York. A relative value scale based on these codes, called the current procedural terminology (CPT), is published by the American Medical Association. A managed care company will dictate or negotiate a compensation fee using a conversion factor that may or may not be acceptable to the provider. Conversion multipliers can be negotiated, but payment logistics become more difficult if different providers have different conversion factors.

Regardless of which reimbursement method is used, the provider must understand how the fees have been determined. When a new procedure or technique is developed, there should be an understanding of how fees for it will determined. Usually, new fees are determined unilaterally by the managed care company.

Providers should also understand the mechanics of obtaining payment. How long does it take to receive payment? Is there a guarantee of payment of nondisputed claims within a specific time, and is the payer penalized if payment is late? If there is a dispute about the fee, what is the review process, and what is the time frame for resolution of such a dispute?

Most PPOs do not pay bills. Their role is to sell the services of care-givers to their clients, usually at discounted fees. Doctors' bills may be sent directly to patients' insurers or to the PPO, where they are repriced (the contracted fee is entered) and sent to the insurer. When payment is slow, the PPO can do little to speed up the process.

If a "large case" is involved, the payer may choose to bring in another level of management, the "large case manager." Providers may find themselves in the position of having rendered a service that was preauthorized and implicitly approved by the PPO when it was repriced and having it denied by a large case manager. Such an instance is possible if the service or treatment is retrospectively determined to have been unnecessary or experimental. Such retrospective denial is very harmful to the doctor-patient relationship. A managed care contract should prohibit such denials.

HMOs generally pay doctors' bills from premium revenues collected from clients. Providers must seek guarantees that if there is a failure of the HMO, fees earned but not yet paid are safe. Many providers have been left without payment in such situations.

Some managed care companies withhold a portion of fees, with an offer to return them if performance levels are met. This is a particularly perverse technique of cost control, justified because it is supposed to make providers share the risk of health insurance costs. What it actually does is force doctors to be at risk for something they often have no control over. If a withhold is kept, what conditions must be met for its payment? Are the goals realistic and are they based on individual performance or the performance of a group of providers?

One Milwaukee-based PPO bills its provider members 5 percent of the fees they are paid for PPO services. Because all bills are sent to the PPO for repricing, it can easily implement this fee. The payment, called a kickback by some, is designed in such a way that most of the doctors have no idea they are paying 5 percent of fees already discounted back to the PPO. The ethics and legality of this technique must be questioned.

Patient Care

Managed care companies frequently place restrictions on patient care, and prospective providers rarely investigate them. They may take the form of preauthorization for inpatient or outpatient surgery, concurrent or

retrospective utilization review (something Medicare is particularly adept at), mandated second opinions, or restrictions on the type or frequency of diagnostic tests, such as cardiograms and chest x-rays.

A provider must understand the managed care company's method of resolving disputes. The appeal process should be in writing and should detail the mechanism for initiating an appeal, a reasonable time frame for resolution, and a description of the make-up of the appeal panel.

At times, a patient may see a specialist who, after evaluation, recommends diagnostic tests. Efficiency for the doctor and patient is enhanced if the tests can be scheduled from the specialist's office rather than having the patient return to the primary care doctor for the tests. Each managed care company has its own rules in this area, and some are more user-friendly than others.

Preauthorization often is needed before a procedure will be paid for. Who has the responsibility to secure this approval? In some plans, the provider has the responsibility of obtaining any preauthorization. Failure to obtain it may result in denial of payment for a service, so it's imperative that such regulations are understood.

Primary care providers may face penalties if specific regulations are not adhered to. Some managed care plans do not allow telephone referrals or deny referrals retrospectively and enforce financial penalties for violations. One area where this frequently occurs involves emergency department referrals, especially during off hours, such as weekends and evenings.

Not all managed care companies are equal in their tolerance of out-of-plan referrals. To avoid costly financial penalties and patient dissatisfaction, it is wise to understand policies in this area.

Logistics

Questions often ignored when a provider is considering participation in a managed care company concern what I define as "logistics." By knowing the logistics of a doctor's practice and those of the managed care company, the provider will better understand whether or not he or she has positive negotiating leverage.

Managed care companies are often owned by entrepreneurs who wish to make a profit, and these profits come from selling access to groups of doctors, dentists, hospitals, pharmacies, etc. that have agreed to sell their products or services at a discount. If a managed care company needs a specific type of provider in a given location, more favorable terms can be gained.

A prospective provider should ask how many enrollees the managed care company has and the geographic distribution of these potential patients. Convenience of location is a powerful incentive, and managed care companies seek providers to fill specialty gaps based on where their offices are located. The formation of a PPO or HMO can take on the aura of an antique collector filling gaps in a collection.

For a provider to sell services at a discount, there must be a perceived reward, usually the lure of an increased patient work load or, at least, the hope that no patients will be lost. One way a managed care company entices a provider to sign a contract is the promise that patients will be steered in the provider's direction. This steering can be in the form of cash incentives or rebates to patients if they use contracted providers. The most common method of patient directing is to provide greater coverage if a selected provider is used. A provider considering a managed care contract should be aware of ways the managed care companies plan to enhance business. An equitable quid pro quo benefits all parties.

When the steering mechanism is understood, the next step is to discover what penetration the managed care company expects to gain in a given market. Penetration refers to the percentage of insureds that actually use providers under contract. Managed care companies keep detailed records in this area as part of their marketing efforts. In the case of an HMO, penetration approaches 100 percent, because only contracted providers will be reimbursed. PPOs have different levels of penetration that depend on many variables. Among them are the level of steering mechanisms, quality and convenience of providers, and indoctrination of the insured population. A provider who chooses not to participate must weigh potential revenues lost due to seeing fewer patients against those lost from discounts.

Before a managed care contract is signed, a doctor must consider who the other providers are under contract. Reality is that referral patterns are difficult to change. A specialist may want to join a group that has strong steering incentives and a number of new primary care doctors, particularly if there are few similar specialists under contract. A managed care company should seek to keep its providers as busy as possible and should have ways to legally regulate the number of providers.

Provisions for contract termination are important and must be understood before the contract is signed. Too often, the doctor has found he or she is losing money but is obligated to continue providing discounted care for many more months. This is not only a financial disaster but also a possible emotional nightmare.

Managed care is here for the foreseeable future. I have presented a framework for providers to evaluate a managed care company. Every practice will be affected differently. Occasionally, emotions will overshadow good business sense, but, ideally, this will be recognized. More than one practice I am familiar with became overly dependent on a managed care company and, when reimbursement was reduced or the company ran into cash flow problems, the practice was all but destroyed. Providers and patients should insist that managed care companies that are not contributing to solution of the high cost of medical care be eliminated, as the have become part of the problem.

Robert Teplin, MD, FACS, is a principal of Health Care Cost Consulting Group, Mequon, Wis.