Managed care and downstream risk: placing the provider and the patient at-risk. (Health Policy Update).

As the United States health care delivery system evolves around the philosophy of "managed care," we face ever-increasing challenges related to the tools used to control costs by HMOs and other organizations. One such tool is sharing financial risk with providers, a practice known as "downstream risk."

Downstream risk is defined as "the transfer, by an HMO, of the responsibility to provide or pay for certain health care services to another entity." (1) As a result of this transfer of responsibility, the downstream provider (i.e., the primary care doctor, specialist, hospital, etc.) is at-risk for the cost of health care services that may exceed the fixed sum/capitation received from the upstream provider (the managed care organization). Furthermore, providers are particularly vulnerable since many managed care organizations tend to downstream certain carve-out-services, such as mental health or substance abuse treatment, which can be expensive.

Health care providers and insurance administrators are increasingly alarmed by downstream risk, most significantly with the financial stability of providers. In less than two years, large downstream provider groups in several states have filed for bankruptcy and/or ceased operations due to financial reasons. These insolvencies have caused major disruptions in the delivery of health care services to patients and the delay in payments to providers. Additional questions have been raised regarding the downstream risk providers' accountability for satisfying the legal, contractual, and quality standards that apply to the managed care organizations, their "upstream" contractors.

Downstream arrangements also tend to distort measurements of the amount of premium dollars managed care organizations spend on the actual delivery of health care services. When managed care organizations report expenditures, they include the entire capitation amount paid to the downstream providers as medical expenses, even if the provider group performs administrative functions such as billing. This practice distorts medical-loss ratios and makes them difficult to compare between plans.

Several states are grappling with the problems related to downstream risk and the subsequent insolvency of provider groups. In particular, states with a high penetration of managed care organizations, such as California, are faced with large numbers of recipients who are suddenly without care because provider groups have filed bankruptcy and/or closed shop.

In three years, 115 of California's 300 large medical practices and independent practice associations (IPAs) have closed or declared bankruptcy. A recent article in Managed Care predicts at least 35 more will cease to operate before the end of this year. (2) The California Medical Society describes a health care system of "networks that have evolved into bureaucracies that suck money out of the system without necessarily improving care." (3) The Medical Director of Blue Cross of Pennsylvania recently told a Congressional committee that 'risk shifting did not result in reduced expenditures as originally anticipated.' (3)

For insurers, downstream risk is a way to minimize their liability and exposure. Often, reluctant providers sign contracts as a cost-cutting measure without a clear understanding of the risks they are assuming, termination clauses, physician responsibilities, exclusions, and patient coverage requirements. According to a recent article in Perspectives on the Marketplace, these risk-sharing contracts "often leave it unclear when the obligation to treat under capitation ends in cases of patients with severe conditions." (4) Requiring physicians to treat a certain number of patients for a set amount may encourage them to refer more cases to expensive specialists.

Regulating downstream risk

As health care becomes more complicated, state and federal regulators must reevaluate and reconfigure the regulatory oversight of all providers. For example, the effect of downstream risk on the Medicare market is similar to the commercial market. Medicare providers are entering into contractual agreements that obligate them to provide a wide range of services to patients on a fixed cost, regardless of the utilization of services. The Federal Health Care Financing Administration (HCFA) organized a Downstream Provider Insolvency Workgroup following the recent insolvency of a Medicare + Choice program contractor. This group will study the impact of downstream risk on managed care organizations, providers, and consumers.

While concerns about the solvency of health care provider groups are important, regulators must consider issues surrounding provider accountability and patient care. In its capacity as a contractor/partner for the managed care organization, the provider group should be held accountable for the delivery of all services they provide on behalf of the upstream partner. However, in most states these providers are not subject to licensure as a managed care entity or insurer as long as their upstream partners are licensed.

Further, the solvency regulations only require the upstream contractor to comply with monitoring and contingency requirements. Therefore, the provider groups function as unlicensed insurers that are exempt from monitoring regulations. In late 1999, nine states, including California, New Jersey, and Maryland had adopted or were considering legislation to address the regulatory oversight of downstream risk arrangements between provider groups and managed care entities, as well as other licensed health insurance carriers.

These states are attempting to regulate or apply standards to downstream risk subcontractors by requiring certain provisions between the provider group and a licensed carrier. In some cases, regulators are placing limitations on the carriers' ability to downstream risk to provider groups and require limited licensure of the downstream provider. Some states are also exploring how to ensure the managed care organization is financially responsible for the debts of the downstream provider in the event of insolvency.

Next steps

While the most significant outcome of downstream risk insolvency is the disrupted payment of claims submitted by providers for treating health plan members, there is also a direct impact on the patient's ability to access care. There are several options available to regulators to address the deficiencies:

* Clarify the responsibilities and obligations of HMOs/MCOs as they relate to contractual agreements.

* Establish a specific formula to ensure HMO/MCO reserve funds are adequate to cover all claims forwarded by external providers.

* Establish direct regulation over downstream contractors, which requires accurate reporting procedures of medical and administrative expenses.

* Apply the same consumer protection laws to subcontractors, as well as to the HMOs and MCOs, to ensure all entities are providing health care services to members.

Conclusion

The inherent risks associated with downstream risk contracts among managed care providers have a potential negative impact upon patient care. Physician executives need to ensure that providers have the knowledge-base to prevent their practices from becoming financially insolvent. When financial difficulties occur, continuity of health care should be the top priority. Executives working with industry regulators must make sure that health care providers at all levels are able to honor their contracts.

Note

The stated views are those of the author and do not represent those of the State of Maryland or the Department of Health and Mental Hygiene.

References

(1.) "The Report on Downstream Risk," The Maryland Insurance Administration, January 2000.

(2.) Dalzell, Michael D. California Physicians Struggling-Problems Ahead for Other States? Managed Care, October 1999.

(3.) Rundle, Rhonda. California Doctors Face Piles of Unpaid Claims as Care System Frays, The Wall Street Journal, November 15, 1999.

(4.) Moskowitz, Daniel B. Provider Risk-Sharing in Managed Care: Still Viable Despite Current Unpopularity, Perspective on the Marketplace, February 21, 2000.

Georges Benjamin, MD, FACP, is the Secretary of the Department of Health and Mental Hygiene in Maryland, Baltimore. He can be reached by calling 410/767-6505 or via email at [e-mail].