When providers become payers under managed care

Healthcare Financial Management,  March, 1994  by James J. Moynihan

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The claims payment process in the healthcare industry is about to change. With the first capitation payment made to a hospital or a physician hospital organization (PHO), the financial manager becomes responsible for a radically different claims process. Hospitals or PHOs that accept capitation payments will pay claims submitted by other providers. Providers will become payers. Healthcare financial managers need to develop skills historically held by third-party administrators (TPAs) and insurance companies. Accepting capitation contracts requires assuming insurance risk. That, in turn, will require new risk management procedures and the use of new financial systems. Electronic data interchange (EDI) will provide tools to administer the new payer responsibilities undertaken by providers.

In an indemnity program, healthcare financial managers are responsible for preparing and submitting "clean" claims to payers. EDI can help the progressive financial manager automate eligibility inquiries, claims submissions, and remittance processing. The signs of an efficient patient accounting department are lean staffing, lower than average charge-offs, and accounts receivable levels that are lower than the industry average.

Greater challenges lie ahead

In a managed care contract environment, hospitals or PHOs accept the liability for acute care (or all care) for covered individuals. As a result, providers must undertake many important new tasks.

Capitation payments are made in advance for coverage, and providers attempt to perform necessary services for less than the amount received to make a profit. In insurance industry terms, premiums should exceed losses.

Like insurance companies, managed care providers must maintain an accurate list of enrolled individuals and respond to eligibility inquiries from other providers. They also have to manage reinsurance requirements and administer claims receipt and payment operations.

Healthcare services provided must be tracked to determine profitability, but many services may be rendered by other provider organizations. The contracting hospital may receive claims from the local children's hospital, a tertiary cancer center, or an out-of-town emergency room facility that treated an enrolled member. Managed care providers must be concerned about incurred-but-not-reported losses for services rendered by other providers.

Some providers new to managing capitation contracts may attempt to jury-rig current systems to adjudicate claims. They may try simply to process claims payments through the accounts payable department. Many of these attempts will fail as managed care programs increase and volume grows. Last year was the first year that more Americans received insurance coverage from a managed care program than from an indemnity program. Healthcare financial managers should realize that the administrative procedures they put in place may soon be required to process the bulk of their business.

EDI standards: The sure foundation

Healthcare financial managers should adopt EDI standards for the administration of managed care contracts. The economic arguments for early adoption of EDI standards are overwhelming. If the number of managed care contracts a provider administers increases rapidly in 18 months, non-EDI claims processing may require 25 people to manually enter and adjudicate claims. How competitive will that provider's bids be against providers that use EDI to acquire claims and adjudicate them automatically with only a handful of staff? The administrative costs of processing claims may total 10 percent to 15 percent of the capitated payment. Labor costs may total 50 percent of that amount if information and funds are managed with claims forms and checks. The impact of using the Health Care Claim (837) standard and the Health Care Claim Payment/Remittance Advice Standard (835) can be tremendous. PCS, the largest processor of pharmacy claims, for example, reduced its keyboard-entry staff from 2,000 to a little more than 200 as that industry moved from paper-based claims to electronic claims. Lower claims-related data-entry costs, however, are not the greatest benefit EDI can offer managed care facilities. Utilization review (UR) is a process that is both labor and information intensive. UR management consumes the time of highly trained medical professionals, but two new EDI standards will soon be available to automate the utilization review process: the Health Care Service Review Request (279) and the Health Care Service Review Report (278). Developers in the ANSI X12 insurance committee predict that 80 percent of all UR transactions will be able to be automated using EDI.

Competing in a managed care environment

Hospitals and PHOs will compete intensely for capitated contracts in a managed care environment. Healthcare financial managers must manage traditional accounts receivable functions while developing new administrative procedures and systems. The estimated $2.00-per-member-per-month that can be saved by using EDI may represent the difference between winning or losing a contract. It may also mean the difference between making money or losing money.