Case Study: Star Memorial Hospital/Newport Healthcare - Capitation and Risk Sharing. This case permits students to examine the issues involved with payment allocation and risk sharing within an integrated delivery organization (PHO). Although there are many quantitative elements to the case, there also are numerous qualitative issues that merit discussion.
- What reimbursement method would you recommend for each of the following providers (Primary Care Physicians; Specialists; Hospital and Other services)? Justify your answers.
- What allocation of premium dollars do you recommend for each provider? Justify your recommendations.
- Should all the physician hospital organizations (PHO) physicians participate in the contract, or should subpanels be formed?
Star Healthcare: Capitation and Risk Sharing Star Healthcare is a community hospital in Green Bay, Wisconsin. Recently, the hospital and its affiliated physicians formed Star Memorial Hospital, a physician-hospital organization (PHO). Star is close to signing its first contract to provide exclusive local healthcare services to enrollees in BadgerCare (the plan), the local Blue Cross Blue Shield of Wisconsin HMO. For the past several years, the Plan has contracted with a different Green Bay PHO, but financial difficulties at that organization have prompted the plan to consider Star as an alternative. In the proposed contract, Star will assume full risk for patient utilization. In fact, the proposal calls for the PHO to receive a fixed premium of $200 per member per month from the Plan, which is then can allocate to each provider component in any way teams best using any reimbursement method it chooses. Star's executive director, Dr. George O'Donnell, a cardiologist at a recent graduate of the University of Wisconsin Non-resident Program in Administrative Medicine, is evaluating the Plan's proposal. To help to this, Dr. O'Donnell hired a consulting firm that specializes in PHO contracting. The first task of the consulting firm was to review Star's current medical panel and estimate the number of physicians, by specialty, required to support the Plan's patient population of 50,000, assuming aggressive utilization management. The results in exhibit 1.1 show that Star's medical panel consists of 249 physicians, whereas the number of physicians required to support the Plan's patient population is only 59. Note, however, that Star's physicians serve patients other than those in the Plan. Thus, the total number of physicians required to treat all of Star's patients far exceeds the 59 shown in the right column of the table. The second task of a consulting firm was to analyze Star's physicians' current practice patterns. Clearly, utilization, and hence cost, is driven by Star's physicians and that variation in practice patterns is costly to Star. Results of the analysis show significant variation in practice patterns, both in physician's offices and in the hospital. For example, exhibit 1.2 contains summary data on hospital costs by physician for three common diagnosis-related groups (DRGs). Consider DRG 127 (heart failure). The physician with the lowest hospital costs averaged $4,271 in costs per patient, the highest cost physician averaged $7,394, and the average cost for all physicians was $5,319. The consulting firm commented that reducing this variation is important because Star is at full risk for patient utilization. The third task of the consulting firm was to recommend an appropriate allocation of the premium dollars to each category of provider. Specifically, the contract calls for Star to receive $200 per member per month, for a total annual revenue of $200 x 50,000 members x 12 months = $120,000,000. To reduce potential conflicts about how to divide the $120,000,000 among providers, the consulting firm proposed a "status quo" allocation that would maintain current revenue distribution percentages shown in exhibit 1.3. Final task of the consulting firm was to recommend provider reimbursement methodologies that create appropriate incentives. In the contract, Star assumes full risk for patient utilization, so the consulting firm recommended that all component providers be capitated to align cost minimization incentives across throughout Star. Furthermore, capitation of all providers would eliminate the need for risk pools, and risk sharing arrangement that Star has never used. In addition to the consulting firm's report, Dr. O'Donnell decided to ask Star's new operations committee for a short report on the current line of thinking among Star's major providers. The committee provided the following information. 1 Star Healthcare Historically, the profitability of Star Healthcare has been roughly in line with the industry. Last year, when the hospital received about 75% of charges, on average, the hospital achieved an operating margin of about 3%. However, hospital managers are concerned about its profitability if the Plan's proposal is accepted. The managers believe that controlling costs under the full-risk contract would require extraordinary efforts and the most effective wat to control costs is to create a subpanel of physicians to participate in the capitation contract. When asked how the subpanel should be chosen, the operations committee recommended choosing physicians would do the best job of containing hospital costs. Primary Care Physicians Many of the primary care physicians are dissatisfied. On average, primary care physicians receive only about 60% of charges and are concerned about being penalized by accepting utilization risk for the Plan's enrollees. Primary care physicians know they are paid less and believe they must work much harder than do the specialists. Furthermore, primary care physicians believe that the specialists supplement their own incomes by over using in office tests and procedures. Some primary care physicians are even talking about dropping out Star to form their own contracting group, taking away the entire capitation payment from the Plan and contracting themselves for specialist and hospital services. Specialist Care Physicians The specialists believe that the primary care physicians refer to many patients to them. The specialists do not mind the referrals if their reimbursement is based on charges because, on average, they receive 90% of charges. However, if they are capitated, the specialists want to primary care physicians to handle more of the minor patient problems themselves. Also, whenever the subject of subpanels is raised, many of the specialists become incensed. After all," they say, "the whole idea behind the PHO is to protect the specialists." Both sets of physicians - primary care and specialist - agree that the hospital is hopelessly inefficient. Said one specialist, "No matter how much revenue the hospital receives, it still seems to barely make a profit." Assume that you have been hired to advise Dr. O'Donnell and Star's executive committee regarding these challenges. Because your report will serve as the basis of Star's implementation plan if it accepts BadgerCare's contract, the report must address the concerns raised by the physicians and the hospital. Furthermore, the report must include specific recommendations on how to implement these changes. Exhibit 1.1 - Star Healthcare: PHO Members and Estimated Needs For 50,000 Enrollees Specialty Number in PHO Estimated need per 50,000 Enrollees General Medicine 42 20.9 Pediatrics 15 4.1 Total Primary Care 57 25.0 Anesthesiology 9 2.5 Cardiology 12 1.4 Emergency Surgery 10 2.5 General Surgery 13 2.7 Neurosurgery 3 0.3 Obstetrics/Gynecology 27 5.4 Orthopedics 11 2.5 Psychiatry 19 1.9 Radiology 8 3.0 Thoracic Surgery 0 0.4 Urology 5 1.3 Other Specialties 75 10.1 Total Specialists 192 34.0 Grand Total 249 59.0 DRG 98 127 Exhibit 1.2 - Hospital Costs for Three Common DRGs By Physician Minimum Average Bronchitis/Asthma $2872 $4018 Heart Failure $4271 $5319 Vaginal Delivery Without Complications $6498 $7568 Maximum $4638 $7394 $8015 373 13% Exhibit 1.3 - Proposed Allocation of Premium Dollars PHO administrative/overhead Paid to within system physicians Primary care Specialists Ancillary services Administration/profit Paid to within system hospital Paid for prescription drugs Paid to out of system providers Total Premium Dollars 10 18 5 1 38 10 5 100% 3 Star Healthcare: Capitation and Risk Sharing Star Healthcare is a community hospital in Green Bay, Wisconsin. Recently, the hospital and its affiliated physicians formed Star Memorial Hospital, a physician-hospital organization (PHO). Star is close to signing its first contract to provide exclusive local healthcare services to enrollees in BadgerCare (the plan), the local Blue Cross Blue Shield of Wisconsin HMO. For the past several years, the Plan has contracted with a different Green Bay PHO, but financial difficulties at that organization have prompted the plan to consider Star as an alternative. In the proposed contract, Star will assume full risk for patient utilization. In fact, the proposal calls for the PHO to receive a fixed premium of $200 per member per month from the Plan, which is then can allocate to each provider component in any way teams best using any reimbursement method it chooses. Star's executive director, Dr. George O'Donnell, a cardiologist at a recent graduate of the University of Wisconsin Non-resident Program in Administrative Medicine, is evaluating the Plan's proposal. To help to this, Dr. O'Donnell hired a consulting firm that specializes in PHO contracting. The first task of the consulting firm was to review Star's current medical panel and estimate the number of physicians, by specialty, required to support the Plan's patient population of 50,000, assuming aggressive utilization management. The results in exhibit 1.1 show that Star's medical panel consists of 249 physicians, whereas the number of physicians required to support the Plan's patient population is only 59. Note, however, that Star's physicians serve patients other than those in the Plan. Thus, the total number of physicians required to treat all of Star's patients far exceeds the 59 shown in the right column of the table. The second task of a consulting firm was to analyze Star's physicians' current practice patterns. Clearly, utilization, and hence cost, is driven by Star's physicians and that variation in practice patterns is costly to Star. Results of the analysis show significant variation in practice patterns, both in physician's offices and in the hospital. For example, exhibit 1.2 contains summary data on hospital costs by physician for three common diagnosis-related groups (DRGs). Consider DRG 127 (heart failure). The physician with the lowest hospital costs averaged $4,271 in costs per patient, the highest cost physician averaged $7,394, and the average cost for all physicians was $5,319. The consulting firm commented that reducing this variation is important because Star is at full risk for patient utilization. The third task of the consulting firm was to recommend an appropriate allocation of the premium dollars to each category of provider. Specifically, the contract calls for Star to receive $200 per member per month, for a total annual revenue of $200 x 50,000 members x 12 months = $120,000,000. To reduce potential conflicts about how to divide the $120,000,000 among providers, the consulting firm proposed a "status quo" allocation that would maintain current revenue distribution percentages shown in exhibit 1.3. Final task of the consulting firm was to recommend provider reimbursement methodologies that create appropriate incentives. In the contract, Star assumes full risk for patient utilization, so the consulting firm recommended that all component providers be capitated to align cost minimization incentives across throughout Star. Furthermore, capitation of all providers would eliminate the need for risk pools, and risk sharing arrangement that Star has never used. In addition to the consulting firm's report, Dr. O'Donnell decided to ask Star's new operations committee for a short report on the current line of thinking among Star's major providers. The committee provided the following information. 1 Star Healthcare Historically, the profitability of Star Healthcare has been roughly in line with the industry. Last year, when the hospital received about 75% of charges, on average, the hospital achieved an operating margin of about 3%. However, hospital managers are concerned about its profitability if the Plan's proposal is accepted. The managers believe that controlling costs under the full-risk contract would require extraordinary efforts and the most effective wat to control costs is to create a subpanel of physicians to participate in the capitation contract. When asked how the subpanel should be chosen, the operations committee recommended choosing physicians would do the best job of containing hospital costs. Primary Care Physicians Many of the primary care physicians are dissatisfied. On average, primary care physicians receive only about 60% of charges and are concerned about being penalized by accepting utilization risk for the Plan's enrollees. Primary care physicians know they are paid less and believe they must work much harder than do the specialists. Furthermore, primary care physicians believe that the specialists supplement their own incomes by over using in office tests and procedures. Some primary care physicians are even talking about dropping out Star to form their own contracting group, taking away the entire capitation payment from the Plan and contracting themselves for specialist and hospital services. Specialist Care Physicians The specialists believe that the primary care physicians refer to many patients to them. The specialists do not mind the referrals if their reimbursement is based on charges because, on average, they receive 90% of charges. However, if they are capitated, the specialists want to primary care physicians to handle more of the minor patient problems themselves. Also, whenever the subject of subpanels is raised, many of the specialists become incensed. After all," they say, "the whole idea behind the PHO is to protect the specialists." Both sets of physicians - primary care and specialist - agree that the hospital is hopelessly inefficient. Said one specialist, "No matter how much revenue the hospital receives, it still seems to barely make a profit." Assume that you have been hired to advise Dr. O'Donnell and Star's executive committee regarding these challenges. Because your report will serve as the basis of Star's implementation plan if it accepts BadgerCare's contract, the report must address the concerns raised by the physicians and the hospital. Furthermore, the report must include specific recommendations on how to implement these changes. Exhibit 1.1 - Star Healthcare: PHO Members and Estimated Needs For 50,000 Enrollees Specialty Number in PHO Estimated need per 50,000 Enrollees General Medicine 42 20.9 Pediatrics 15 4.1 Total Primary Care 57 25.0 Anesthesiology 9 2.5 Cardiology 12 1.4 Emergency Surgery 10 2.5 General Surgery 13 2.7 Neurosurgery 3 0.3 Obstetrics/Gynecology 27 5.4 Orthopedics 11 2.5 Psychiatry 19 1.9 Radiology 8 3.0 Thoracic Surgery 0 0.4 Urology 5 1.3 Other Specialties 75 10.1 Total Specialists 192 34.0 Grand Total 249 59.0 DRG 98 127 Exhibit 1.2 - Hospital Costs for Three Common DRGs By Physician Minimum Average Bronchitis/Asthma $2872 $4018 Heart Failure $4271 $5319 Vaginal Delivery Without Complications $6498 $7568 Maximum $4638 $7394 $8015 373 13% Exhibit 1.3 - Proposed Allocation of Premium Dollars PHO administrative/overhead Paid to within system physicians Primary care Specialists Ancillary services Administration/profit Paid to within system hospital Paid for prescription drugs Paid to out of system providers Total Premium Dollars 10 18 5 1 38 10 5 100% 3
