Relationships between healthcare providers and payers in the U.S. have evolved rapidly over the last few years. In many markets, providers are being asked to adopt global capitation arrangements with their Medicare Advantage Organization (MAO) payer partners. This type of arrangement allows payers to divest much of their risk by paying providers a flat fee per member up front, leaving healthcare systems responsible for managing their annual budgets and member-driven costs of care.
Global capitation relationships are increasingly common under Medicare Advantage plans — especially in competitive markets — and many providers are interested in participating in these risk-based contracts. There are many benefits, but there are also new risks to consider.
When evaluating global capitation agreements, it is imperative that healthcare system executives understand and correctly analyze the sections of the contract that govern the provider’s revenue from year to year. It is equally important for providers to correctly assess their systems and potential performance under global capitation contracts.
Here are the three most important considerations for healthcare providers considering global capitation contracts with payers.
What’s in the DOFR?
There are two major pieces within the division of financial responsibility (DOFR).
First is the technical portion that specifies which party is financially responsible for specific services at a detailed level. The DOFR includes a specific list of service types or categories that fall under the responsibility of the provider. It is vital for providers to understand the specifics of the DOFR before entering a global capitation arrangement.
The second section determines the percentage of revenue allocated to the provider partner. This percentage represents the portion of the CMS capitation amount that is passed on from the payer to the provider. One of the primary influences of this percentage is the DOFR, which determines how broad the services are for which a provider is at risk.
The DOFR can be negotiable, but providers should take steps to bring in the expertise and resources needed to support their position with relevant market data to meet costs and drive a positive margin under the DOFR contract.
Get Compensated for Quality Care
When considering global capitation, healthcare providers may meaningfully contribute to an MAO’s overall quality score, and this influence could be a factor in the percentage of revenue they receive from the payer partner.
The Centers for Medicare and Medicaid Services (CMS) uses a five-star quality rating system to rank payer plans based on the quality of the care they provide, and payers reimburse plans rated above 4 stars with higher benchmarks.
If the provider organization can demonstrate it will meaningfully contribute to a plan’s overall quality rating, the provider organization could be compensated for contributing to the financial benefit the MAO will receive through the Stars Bonus. This can be passed onto the provider organization through an increase to the percentage of revenue the provider receives.
On the other hand, there is some risk for the provider organization when joining a network that has a potentially lower quality rating than its own healthcare system. If a hospital joins a network that experiences a net decrease in quality over the course of a year, the hospital is susceptible to a revenue cut — even if the care at that hospital was undiminished or even improved.
The takeaway for health system executives is to do some research and learn as much as possible about the quality of care within your own network and also the potential MAO’s network. To survive and thrive, health systems must choose networks carefully and then leverage their positions to get the most favorable terms from payers.
Oliver Wyman often advises clients during contract structuring and negotiations and can provide network-specific data to inform decisions.
Risk Coding has Major Implications for Health Outcomes and Revenue
Accurately coding and recoding diagnosis codes has a meaningful impact on both the quality of patient care and a health system’s annual revenue. As providers consider global capitation plans, it is important to assess the organization’s risk coding performance.
From a clinical perspective, accurate coding results in more detailed and complete patient records, which facilitates more informed treatment by healthcare providers. Beyond the immediate medical benefits, good record-keeping builds patients’ trust and confidence and leads to longer tenures within healthcare systems.
A healthcare system’s revenue is also impacted by risk coding. Within CMS programs, the amount providers are reimbursed is determined by three factors: county location (affecting the benchmarks), morbidity (determined by risk coding), and quality rating (determined by the Star Rating at the contract level).
Of these, documenting morbidities is the only metric health system administrators fully control on a case-by-case basis. Correctly coding and recoding morbidities is key to sustaining revenue from year to year because providers are only reimbursed for the patients and conditions coded-in during the previous year.
For example, if a patient with diabetes is not accurately risk coded during each year, the provider will not be reimbursed for the patient’s diabetes for the years when it is not coded, even though the patient still has the condition.
This is not an issue under fee-for-service payment models. However, with global capitation contracts under Medicare Advantage, providers are reimbursed a capitated amount that is risk adjusted annually, based on the morbidities risk coded each year.
The Healthcare Industry is Changing
The landscape is changing rapidly for providers actively partnering with MAOs, and understanding the trends is critical to succeeding under a global capitation reimbursement model.
MAOs will start to expect higher performance from their provider partners in the future, which will translate to increased expectations for providers to take greater risks on their Medicare Advantage populations. These expectations could emerge through greater downward pressure on the DOFR percentage, fewer claim type carve-outs from the DOFR, increased expectations for the provider quality contribution, or several other areas within the contracting process.
In the future, the business requirements to be successful and profitable under these pressures will create additional enterprise challenges for many provider systems.
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Cassidie Cade, ASA, MAAA also contributed to this article.