Reimbursement: The foundation for financial decisions

February 1, 2000
Tom Gaffney

,
Mike Turcotte

Pharmaceutical Representative

In our quest as sales reps to provide our physician customers with a valuable sales call, it is crucial to understand what the driving forces are in healthcare delivery and how they affect these customers.

In our quest as sales reps to provide our physician customers with a valuable sales call, it is crucial to understand what the driving forces are in healthcare delivery and how they affect these customers.

At this stage of managed care penetration, the business of healthcare should be a key component of all sales planning and sales presentations. Sales reps need to completely understand what issues are affecting physicians.

No one completely understands how changes in healthcare delivery will effect healthcare in the long term. However, we do know that healthcare has become a business, and many times it is driven by the need to manage the healthcare dollar and not the patient. With the world of fee-for-service reimbursement all but extinct, the most influential factor affecting all medical providers is that of reimbursement.

The majority of physicians across the country are engaged in some type of risk-sharing arrangement with managed care organizations. The most common method of risk sharing has been through capitation. Because of this shift of risk via the capitated reimbursement model, the pharmaceutical industry is faced with the challenge of impacting the capitated dollar.

For example, pharmaceuticals may be the fastest rising healthcare expenditure, but they only account for roughly 15% of total expenditures. This poses a problem for the sales rep selling to the at-risk medical provider. Because pharmaceuticals are only 15% of costs, the focus for most providers lies in other areas such as hospital bed days, emergency room visits, surgeries and radiology costs. How can sales reps effectively sell to their customers if their customers' focus on cost management falls mostly in areas other than pharmaceuticals?

In order to better understand the business of healthcare delivery, sales reps should understand physician integration models, integrated delivery network systems, alternate site utilization and risk sharing. But more importantly, they should understand the catalyst for the movement of medicine from a patient management profession to a business/patient profession: Reimbursement, and the challenge of providing both clinical and financial quality to patients.

Three contract models

There are primarily three contract models utilized to pay physicians today. These contract models are fee-for-service, case rates and capitation.

Fee-for-service. In a fee-for-service contracting environment, providers are paid a specific fee, or line-item charge, for each service they render to a patient. This is typically the case with traditional, indemnity insurance plans. This type of coverage offers a great deal of choice to patients, but little control over the utilization of services.

Historically, indemnity charges were approved retrospectively according to pre-defined criteria known as "usual and customary." Over the years, issues surfaced in terms of the efficacy of usual and customary, and fee-for-service reimbursement resulted in "perverse incentives."

In a fee-for-service environment:


• Providers have a financial incentive to over-treat patients. The more services - tests, office visits and surgeries – they provide, the higher their reimbursement.


• Providers have a strong financial incentive to choose expensive care. For example, a surgeon is reimbursed more for performing bypass surgery than for prescribing a cholesterol-lowering drug, even though both might be equally effective in treating the patient's condition.


• Poor quality and inefficient care may be financially rewarded. A physician, who prescribes an ineffective drug that causes the patient to return for more treatment, is reimbursed for all subsequent visits. Had the patient received the correct drug in the beginning, those visits might not have been necessary.


• Patients have no financial incentive to stay well. Low-cost preventive care, such as vaccines and check-ups, are typically not covered. Patients often skip them rather than pay for them themselves.


• Patients can readily access expensive emergency care, such as ambulances and emergency rooms, which are almost always covered.

Due to this lack of control, we see very little direct fee-for-service contracting. The majority of fee-for-service occurs via a sub-contractual relationship; for example, how independent physician associations may reimburse their physician members.

Case rates. Case rates signaled the beginning of risk shifting, offering increased predictability for both the provider and the payer. Under this contract format, a provider agrees to service patients at an all-inclusive amount for a given disease or procedure. Typically, generally accepted limits are set in terms of the services to be provided, and outliers to the normal scope of services are charged independently. Case rates serve more as a control mechanism than as a risk-sharing method, as there are no guidelines established in terms of utilization of services. They simply define the set of services to be provided.

Capitation. As MCOs identified the need to better manage costs, they began allowing physicians to be the custodians of not only the patient, but of the healthcare dollar as well. Capitation is defined simply as a prospective payment for a pre-determined group of services paid to the party accepting financial responsibility for providing those services, where the level of payment is independent of the amount of services rendered. Under this pricing model, reimbursement to the providers is calculated and paid based on plan membership rather than the number of patients served.

Health maintenance organizations are the most common MCOs to capitate providers. This is because they operate a highly controlled environment - the foundation for successful capitation. Capitation rates can be determined once the overall cost of the products or services to be utilized are determined. That amount is then spread over the plan membership to produce a monthly rate, typically paid as a set "per-member-per-month" fee. Today, an average capitated rate for primary care physicians is approximately $135 per member per month.

Capitation offers a myriad of benefits to a managed care organization, including:


• High predictability of costs.


• Decreased administrative costs.


• Common goals.


• A partnership mentality.


• Information to support outcomes.

Selling knowledgeably

To effectively sell pharmaceutical products to a physician managing capitated lives, it is important to understand the financial analysis which goes into managing the capitated dollar. A capitated contract requires close monitoring and management of all services included in the capitated rate. Most capitated contracts will be structured as:


•Â Global risk, where the physician assuming financial risk via a capitated model will be responsible for all healthcare services including hospital services, physician services and ancillary services. This model may or may not include pharmacy risk, but a medical provider managing global risk will always indirectly be at risk for the pharmaceutical dollar. That is, the therapeutic choices made by medical providers will impact hospital, physician and ancillary services.


•Â Full professional risk, where the physician assuming risk via a capitated model will be responsible for hospital services and physician services.


•Â Professional risk, where the physician assuming risk will be financially responsible for only physician services.

As seen in figure 1 (p. 19), the at-risk provider needs to manage many costs affecting the distribution of the healthcare dollar. There are generally three components that physicians consider when managing a capitated contract. These three components are hospital costs, physician costs and ancillary costs.

Each capitated contract assumes the physician will be at risk for some component of services provided in these areas of medical management. As seen in figure 1, this independent practice association assumed risk in a global capitated model, responsible for services in all of the above mentioned areas. (Regardless of which capitated model is used, the physician services component will always be present.)

In order to effectively sell to the at-risk physician, and remembering that the pharmaceutical dollar only accounts for roughly 15% of the capitated dollar, it is crucial for sales reps to identify which of the listed service lines are high-cost items for the at-risk physician. The successful sales rep will understand how to position a product to help reduce these high-cost items. Using the example from figure 1, a sales rep should create a sales message that focuses on how his or her pharmaceutical product can help the at-risk physicians reduce hospital bed days, emergency room visits, office visits and lab services, to name a few.

A new message

The new sales call needs to provide more than just the traditional messages of efficacy, safety and dosing. In order to impact the business of the physician's practice, there needs to be a financial message included in the sales call. If the features of your products can help to create financial benefits to the physician managing the capitated dollar, you will be viewed as providing true value to the physician's practice. No longer will the value you bring to a physician be limited to samples for patients and lunch for office staff. PR

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