Distribution of prepaid income.

Tremendous changes in the medical insurance industry in the past decade have had profound effects upon multispecialty group practices. The term "managed health care" has come to be recognized as an established phrase in the practice of medicine and in the reimbursement of medical services. This article addresses methods of handling prepaid production revenues within a group practice that is dominated by fee-for-service and is production oriented.

Traditionally, multispecialty groups have been fee-for-service oriented. When prepaid revenues from health maintenance organizations were introduced, they were often passed off as temporary. Frequently income distribution plans failed to recognize them as separate and distinct entities. As the percentage of prepaid income has risen within many multispecialty groups, concerns over how to distribute these revenues have grown. Alternative forms of managed health care, such as preferred provider organizations and the increasing number of hybrid PPO/ IB40 plans, have reimbursement that is often centered on a discounted fee-for-service basis and therefore have not commanded special consideration. This article addresses the group practice in which the fee-for-service patient represents the majority. It does not address the group in which prepaid revenues represent the dominant source of income. In that special situation, there needs to

The sufficient cash flow to pay operating expenses in addition to paying claims against the plan. Generally this calls for the professional staff to be salaried, perhaps with bonus incentives provided for good performance relative to utilization within the plan. A related issue here is whether or not fee-for-service production should be included within the base salary or should be omitted from the base and treated as extra." Obviously, the incentives and motivations of the group would assist in establishing these guidelines. Making a decision on how to treat prepaid income must be made within the larger context of the group's mission and culture. There are many incentives within groups, but economic factors are frequently the dominant incentive of a professional staff. The question must be asked, "Should economic incentives be the dominant issue, or should more difficult-to-measure factors, such as professionalism, group contribution, quality of care delivered, etc., be employed?" Management frequently spends a considerable amount of time attempting to mold cohesiveness into a group's culture. Pure economic incentives can be divisive to the group's organizational strategy and goals.

If the volume of HMO patients in the group practice is quite low, it may not be required to separate prepaid revenues. If a group's revenues are pure (either entirely fee-for-service or entirely prepaid), this also tends not to be a problem, as long as the motivation for reimbursement is proper. However, if prepaid income becomes 20-25 percent of revenues and if the reimbursement on the prepaid side becomes somewhat low, it can readily impose a profound economic strain on the group and can be devastating for all, reflected by poor attitudes with some of the professional staff.

Fee-for-service incentives are quite different from prepaid incentives. Historically in a fee-for-service system, an increased volume of patients, tests, and services increased group revenues. To increase revenues in a prepaid or capitated system, decreased volume of patients' services and tests are necessary. Thus, the old "work for pay" incentives do not apply.

What are the options for groups that are accustomed to fee-for-service mechanisms to manage prepaid or capitated revenues? Generally, there are six methods (table 1, page 3 1) by which this revenue can be handled: fee-for-service production, capitation of all primary care physicians and specialists by specialty, internal capitation by pooled funds, hybrid capitation/ FFS plan, lump sum, and crediting the entire capitation to the primary care physician.

Fee-for-Service Production With this method, each of the primary care physicians and specialists is credited with fee-for-service production of the capitated patient for professional services delivered. The homogeneity in the treatment of patients remains. In theory this should be successful, as physicians are generally educated to treat all patients the same, no matter what their insurance coverage (if any) may be. However, this option ignores good utilization controls of the prepaid patient population, and decreased reimbursement may result. The method is quite easily implemented. Often it is done without much forethought and is quite inexpensive. Group harmony is generally kept intact until it is realized that the volume of prepaid patients is so great that there is a difference between the two groups. Hence, a lower reimbursement may result, and an unfortunate cycle can develop in which the prepaid patient gets churned" through the system as the professionals realize that the volumes need to be increased to maintain their revenues. It also can fill some physicians' schedules with lesser paying prepaid patients by blocking out times available for more lucrative paying patients.

Capitation by Specialty

In this method, every physician in the multispecialty group is capitated at a certain dollar figure per member/per month for the entire prepaid population. Capitation can reflect accurate revenue generated for services rendered. It does require considerable effort and generally consulting by outside actuaries to review and adjust the changing prepaid population to reflect the actual usage within the group. There are, however, some potential problems associated with this method. There may be no reason for the primary care physician to see the patient (as his/her capitation has already been determined), so generally one has a built-in incentive to refer the patient to a specialist. From the specialist's point of view, the capitation is already there, so there may not be an incentive to deliver to the patient required medical services. This option works in many groups, but it needs to be continually updated to reflect current data and utilization.

Capitation by Pooled Funds

In this system, total capitation for professional services that is received on a per member/per month basis is divided or pooled into three groups: a fund for primary care physicians, a fund for referral or specialty physicians, and an ancillary fund for laboratory tests, radiologic exams, etc. Capitation for primary care physician departments (pediatrics, internal medicine, and family practice) may be based upon industry standards or historical data. Each fund is credited at a discounted value from fee-for-service to create a "withhold pool." Depending upon utilization, each primary care department and specialty physician then has the potential of sharing the surplus in the pool.

This method does require some start-up effort but generally does not require outside actuaries or updating by actuaries. It does recognize the obvious differences in the fee-for-service and the prepaid patient groups and the value of good utilization controls within the HMO population. It requires some time to initially set up, but, once implemented, can be used for more than one HMO plan and is accepted well by professional staff. The sense is that the proper incentives and controls are in place.

Hybrid Capitation/FFS Plan

A variation on capitation by pooled funds would be to capitate the primary care physicians and credit the specalists through a discounted fee-for-service mechanism.

The potential here is to get the "withhold" returned if utilization is good for both the primary care physician and the specialist. Again, this recognizes the difference between the fee-for-service and the prepaid patient.

Lump Sum Payment

This method, generally proposed for primary care departments, credits physicians with a fixed "salary" or lump sum payment for providing medical care to HMO patients. This is a very easy method to establish, and often the rewards can be commensurate with the cost. There appears to be little reason for the primary care physician to deliver services in this system. Incentives seem to be present for the primary care physician to refer to a specialist. This method does, however, recognize that there is a difference between the fee-for-service and the capitated patient.

Credit Capitation to Primary Care Physicians This option can be accomplished quite readily with few costs. One can give all of the capitation to primary care physicians or lessen the amount by a small administrative cost. Primary care physicians pay specialists as necessary for services. This is how a primary care specialty group might handle its capitation. Within a multispecialty group striving for cohesiveness, this can potentially be very divisive, pitting one specialist against the other. While this method is relatively easy to implement, it does carry many of the hallmarks that can be destructive to the group.

There is no single proper or correct method. Advantages and disadvantages of each option are shown in table 2, above. Groups have varying histories and different cultures. A method that works very well for one clinic may be completely foreign to another and be discarded. We need to continually strive for services that are beneficial to the patient as a primary goal, with revenue generated being a secondary consideration. However, theory does not always translate well into reality. Proper controls are necessary with any prepaid system. Those controls are centered around good utilization review, proper referrals to specialists, preauthorization of services, etc.

Certainly there are several variations on the above six methods. And, in reality, every multispecialty group has its own unique manner in which it separates and distributes capitated revenues. Each group will need to experiment to seek the solution that is most compatible with its membership. C3