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Appendices
Appendix 1 Developing and costing a cost-neutral
by Christine Alesso
Ms. Alesso is Assistant Director of Pricing for California, Kaiser Permanente Health Plans. Her analysis here is independent and pro-bono. February 5, 1999 The method of pricing point of service options in health plans is relatively straightforward. Although point of service triple option outpatient mental health benefits programs are not in use as of yet, the health plan point of service calculation approach can be adapted for use with such outpatient mental health visits.
Options 1 and 2 prices are based on negotiations with providers of care. In the initial stage of rating a product, the calculation may be iterative. The desired rate is used to develop the level where the negotiation among the parties needs to be. Then a test is done to see if the required negotiation rate is achievable.
If not achievable, the perceived achievable negotiation rate is used to determine the final rate. Then a test is done to see if this rate is saleable. If a successful match is found, the product can be developed; if not, the product is not viable. The final rate is based on a blend of the three based on some estimate of utilization by Option. I will first use a medical plan as an example of the calculation method. In that case (not presented as a mental health benefit rating, but just to give the reader a common context of how this is approached in medical plans), the rating might look like this:
The exercise to determine whether or not an outpatient mental health POS can be developed that will be revenue neutral to an Option 1 benefit, then, reduces to whether or not a plan of benefits can be designed and negotiated where the rate is the same for all three tiers. Common POS medical plans today generally offer mental health in the first Option (HMO) only. Others may offer an additional benefit in the second Option subject to a deductible and co-insurance which strongly favors use of the first tier. This exercise is based on individually priced plans, not POS. The structure of a typical HMO mental health plan is 20 visits per year at the plan co-payment. For the next example, we will assume a $5 co-payment. (Variations might be from $7 to $35 per visit, or more.) A typical PPO mental health plan would be 20 visits per year at the office visit co-payment. For the next example, we will assume a $15 co-payment fee. A typical indemnity benefit would be 20 visits per year, payable at 50% to a maximum of 50 visits after satisfaction of a plan deductible of $250. If these traditional separate plans were brought together as is, the rating for such a combined plan could look like the following, on a per member per month basis.
The blended rate might be (at 60%/30%/10%) $4.75 which is 11% higher than the Option 1-only benefit. The question then, is this: Can an outpatient mental health plan using Point of Service Triple Option principles be redefined so that the cost of the triple option is the same or revenue neutral to the cost of the Option 1-only benefit plan?
This brings us to the proposed POSTO benefit design. Let us assume a maximum $100 fee for outpatient therapy:
This example assumes that the clinicial provider will always charge the maximum fee allowed. Put another way, in this example this plan will always pay 30% of the cost and the member and the provider will split the remaining 70% in some portion. When the reimbursement is first tier (Option 1), HMO, the clinical provider discounts more than half of the remaining (70%) amount. In the case of the third tier (Option 3), the plan member pays the full remaining amount and the clinical provider discounts nothing. How does this change the rating? Intuitively, even before putting numbers to the example, it would seem that the rates for all three tiers (Options) would be identical because now the payout by the carrier is the same at each level.
The plan design does in fact generate the same claim cost and because the maximum payout is the same we can also use the same trend. For the purpose of this example, I've used average administration costs for the different products. HMO administrative costs average about 12% of the rate while PPO and indemnity costs vary but tend to be higher. I've used 20% to be consistent. So this example is saying that the cost of the triple option is $2.47 versus the tier one (Option 1) cost of $2.42. While this is 2% of the mental health rate it is also pennies and would not be an impediment for sale to a client interested in this kind of benefit. It falls within the definition of reasonably cost neutral. Furthermore, outpatient psychotherapy benefits are only about 30% of mental health costs, with the other 70% coming from inpatient benefits. Mental health costs altogether tend to be about 5% of the total premium rate of a health plan. The effect of this difference is truly miniscule. More importantly, the POS rate above probably should be compared to the common outpatient psychotherapy closed panel benefit in the industry today which uses a $5 or $10 co-payment plan. The $2.47 of this POS calculation then is more correctly compared to the $4.26 calculated for Option 1 in the first mental health example. The POSTO is, when compared to current closed panel practice, actually quite significantly less costly. On the other hand, if another health plan used a closed panel and offered only the visit co-pay benefits of the POSTO Option 1 described above, then the POSTO design option would be essentially cost neutral in comparison with the closed panel plan. **** Technical note: The cost of running a PPO network is considerable, involving initial and annual contracting with providers, as well as credentialing of providers. Many of these costs are assimilated within the overall network maintenance but additional volume expenses are new. The additional fees for administration are I believe justified. There are creative ways, however, in which this cost can be minimized. For example, an HMO/PPO could contract with a professional society of clinical providers and subcontract the credentialing function, as essentially a quid pro quo for opening the covered outpatient psychotherapy benefit beyond the current closed panel practice. It might find that negotiating with a society on behalf of its members might be time and cost effective. If such a method were used effectively, administrative costs would be reduced. **** One further potential cost should be considered. It is possible that persons currently enrolled in HMO plans are receiving outpatient therapy from non-HMO therapists and are absorbing the entire cost of that care because their therapists are not on the HMO list. Introduction of the triple option will result then in somewhat higher covered utilization, as these persons suddenly find themselves with a new though limited insurance benefit. So, while the cost per visit has been controlled by effective plan design, an additional amount should be reserved (or charged) for the potential increase in visits. Is it possible to create a reserve for this utilization other than by charging for it? Potentially there are at least two ways: By assuming that all claims will be paid at the maximum cost, the calculation is conservative. Some providers will charge less than the maximum and this saving can be used to generate a reserve to pay for increased utilization. Another way to establish a reserve is by retaining some portion of the provider discount in the first and/or second tier. For example, if the provider gives a 40% discount, pass on 35% to the member and retain 5% in the reserve. If the basic PPO discount is 20%, raise this required clinical provider discount to 30% during the plan's early period to allow additional reserving while observing actual claims levels. HMOs that rent networks may find it takes professional staff time to negotiate a network expansion through a third party and would thus need some further motivation, probably competitive advantage, to develop such a POS plan. In closing, I believe this POSTO option is viable and would be desirable to many clients. Depending on the health plan model type, some HMOs will find it easier to implement than others. HMOs that own and maintain their own PPO networks will find it easiest. The POSTO outpatient mental health plan design can make sense and provide good value to health plans, patients, and providers alike.
Appendix 2 Implications for Further Research:
Once stakeholders consider the problems described in this dissertations, they may or may not act. They may consider design modification, outpatient mental health humane cost containment and medical cost offset research, health education and health promotion priorities, and cross-stakeholder collaborative dialogue. In brief, expressly beyond the scope of this dissertation, but complimentary to it as a next step and as a second stage of development which can address Loss 4, I believe that a particular piece of further research is particularly necessary: An interdisciplinary field which studies a phenomenon commonly referred to as the "medical care cost offset effect." I hypothesize that findings from that study-to-be-done could stimulate the development of plan design improvements particularly around the fourth loss (therapist-client loss of control over influence and determination of treatment duration). This in turn may motivate planners by use of the research results to significantly increase the underlying and annual budgetary support of outpatient psychotherapy, providing stronger foundations for it in health plan budgets and managed care mental health plan budgets of the future. Specifically, the future study would be to further quantify outpatient psychotherapy treatment's important financial effects on the overall medical treatment costs of the health plan. If research finds sufficiently strong evidence among existing studies (separated now in a wide variety of treatment areas) that outpatient psychotherapy contributes considerable and quantifiable net savings to the plan, then plan designers among the stakeholders are likely to make sure that adequate plan resources are provided to support good outpatient psychotherapy and educational interventions. This would be true not only because outpatient psychotherapy is a very successful healing tradition, but also because, through operation of the cost offset effect, outpatient therapy will increasingly be seen to act as a "net gain center" or "reserves generator" for the whole health plan. If the cost offset effect were more widely understood, the maintenance of an appropriate, strong, and vital outpatient psychotherapy and education system could become a high priority not only to key health plan employees but also to all primary stakeholders around the health plans. Provision of good clinical and educational resources may in turn strengthen the offset effect and increase the net plan savings. This would produce what we might call a win-win-win development among stakeholder groups and their constituencies over time.
Appendix 3 Glossary
Covered The person under consideration is eligible for benefits under his/her health plan. He or she is "covered".
HMO (Health Maintenance Organization) The HMO serves as both insurer of services and provider of services. Beyond moderate co-pays for certain services the HMO provides all covered care to the covered consumer for a fixed monthly payment. There are numerous HMO models (IPA, staff) with a variety of structures for providing care. Care is carefully managed. Cost-effective, coordinated care. There is some provision for preventive medicine, but that is usually limited.
Indemnity plan Traditional health insurance plan that pays for each item of care or service (Ancy, 1997) retail. Also called Fee For Service (FFS). This care provides payment for each item of service and supplies. This payment method is receding rapidly and now covers less than 15% of covered lives. Plan participants/patients can go for service to any licensed health care provider for services covered by the plan.
Managed Care A movement for careful coordination and management of health care services. In a little over a decade, this has taken over most health care in the U.S.
POS (Point Of Service) Plan These plans provide managed care and traditional indemnity plan provisions combined built from a choice-making process for covered participants who choose when they need the service (at point of service) which system for getting care they will use. Costs are higher for the employee who uses therapists not on the panel. Members who choose to use non-participating providers are subject to higher deductibles and co-payments (Ancy, 1997).
POSTO (Point of Service Triple Option) Plan A Point of Service Triple Option (POSTO) managed care mental health plan is a Point of Service (POS) Plan which has three distinction service delivery options from which patients (clients, consumers) may choose: An HMO-type network of therapists, a PPO-type network of therapists, and an option which can accommodate patients who wish to choose therapists who do not wish to participate in and offer therapy services through a panel. By being able to access therapists from any of the three Options, the consumer can choose covered therapy from among all licensed therapists. All licensed therapists could access some level of covered reimbursement for covered consumer therapy visits from the plan.
PPO (Preferred Provider Organization) plan The covered consumer can pick a therapist from among a group of therapists who have become therapy on the PPO panel affiliated with the health plan. Therapists provide services through the PPO at a discount. Service is managed. Because the PPO provides moderated costs to the covered consumer, the participant has an incentive to use the services of the therapy providers in the PPO. In the optimum scenario, the PPO affiliated with the POSTO plan would be ubiquitous.
Appendix 4 MANAGED CARE Provide, provide some balm to ease our pain, What's covered and what claims will be denied? What medicine will cool our feverish brow? Third party payors tightly hold the purse, Tight economic limits rule the day, Be generous, while you contain the cost-
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