D405 Task 2 Managed Care Strategy Example

From Fee-for-Service to Managed Care Contracts: Three Strategies a CFO Would Recommend for a Composite Nonprofit Community Health Organization

Student Name

Leavitt School of Health, Western Governors University

D405: Financial Resource Management and Healthcare Reimbursement, Task 2

Course Instructor

Month Day, Year

From Fee-for-Service to Managed Care Contracts: Three Strategies a CFO Would Recommend for a Composite Nonprofit Community Health Organization

The Organization and the Shift

Lakeshore Family Health is a composite nonprofit community health organization that runs three primary care clinics and a behavioral health program in a mid-sized city. It serves about 22,000 patients a year, 58% of them covered by Medicaid, and has annual revenue of about $31 million. Almost all of its revenue comes from fee-for-service payment, in which it is paid a set amount for each visit, test or procedure. The state's Medicaid program has announced that within three years it will contract with health systems through managed care organizations (MCOs) that increasingly pay for outcomes and populations rather than individual services. As chief financial officer, I have been asked to recommend how Lakeshore should prepare.

The change is fundamental. Under fee-for-service, more visits mean more revenue. Under managed care arrangements that share risk, such as shared savings or capitation, in which the organization receives a fixed per-member payment every month regardless of how often members use care, revenue depends on keeping patients healthy and using resources well. Payment models are often described along a continuum from pure fee-for-service, through payments linked to quality and shared savings, to population-based payments such as capitation (Health Care Payment Learning & Action Network [HCP LAN], 2017). Lakeshore needs to move along that continuum deliberately rather than jumping to the end.

Strategy One: Know What Care Costs, Per Patient and Per Condition

Lakeshore knows what it charges for a visit but not what it costs to care for a patient with diabetes for a year. Under capitation, that is the number that decides whether a contract makes or loses money. The first strategy is to build cost and utilization data: allocate staff time, space and supplies to services, then combine them with claims data from payers to calculate cost per member per month by patient group. Porter and Kaplan's time-driven approach to costing, which tracks how many minutes each clinician and staff member spends on each step of care and what those minutes cost, is offered as a practical way for providers to learn their true costs before accepting bundled or population-based payment (Porter & Kaplan, 2016).

The CFO's office would lead this work with the clinical informatics team, beginning with the three most common chronic conditions. Cost: an estimated $180,000 in analyst time and software over eighteen months. Benefit: Lakeshore can price contracts it understands and refuse ones that would lose money.

Strategy Two: Move Into Risk in Stages

Taking full financial risk before the organization can manage it would threaten its survival. The second strategy is to negotiate contracts that phase in risk. In the first year, Lakeshore would seek fee-for-service payment plus bonuses for quality measures, such as diabetes control and depression screening. In the second, it would add a shared savings arrangement with upside only, in which it keeps part of any savings below a spending target but owes nothing if spending runs over. Only in the third year, with cost data and care management in place, would it consider two-sided risk or partial capitation.

Evidence from Medicare's accountable care organizations suggests why patience is wise. In early years, savings were modest, about 1.4% for one cohort and near zero for another, although some quality measures improved, and savings were greater among independent primary care groups than among hospital-integrated ones (McWilliams et al., 2016). For a primary care organization like Lakeshore, that last finding is encouraging, but the modest overall savings show that gains take time. Contracts should include risk corridors that cap losses and data-sharing terms that give Lakeshore timely claims for its patients.

Strategy Three: Invest in Care Management and Financial Reserves

Under population payment, a small share of patients drives most costs. The third strategy is to invest in care management for high-need patients: nurse care managers and community health workers who follow patients with frequent emergency visits or uncontrolled chronic disease, arrange follow-up after hospital discharge and connect patients with behavioral health and social services. These services are rarely paid under fee-for-service but pay for themselves under shared savings or capitation if they prevent admissions.

At the same time, Lakeshore must strengthen its balance sheet. Revenue under risk contracts is less predictable, and a bad year could come from a few costly patients. The organization should build operating reserves toward 90 days of expenses, up from its current 45, and consider purchasing stop-loss insurance that limits its exposure for any single patient. Cost: about $650,000 a year for six care management staff, partly offset by quality bonuses and, later, shared savings.

Changes to the Revenue Cycle

Managed care changes the revenue cycle as much as the payment rate, and each change supports the three strategies. At the front end, staff must confirm every patient's plan and assigned primary care site at each visit, because under capitation Lakeshore is paid only for members attributed to it, and a patient enrolled with the wrong clinic is revenue lost for the year. Prior authorization rules differ by MCO, so the scheduling team needs a current list for each contract and a single point of contact for exceptions.

In the middle of the cycle, documentation and coding become a financial priority. Payments to MCOs, and in many contracts to providers, are adjusted for how sick the population is, so a patient's chronic conditions must be documented and coded completely at least once a year. Coding that misses a patient's diabetes or depression makes Lakeshore's population look healthier than it is and lowers the payment that should fund that patient's care. Accurate coding is a matter of compliance as well as revenue, and audits should check for overcoding as carefully as for gaps.

At the back end, the business office must reconcile monthly capitation payments against member lists, track denials by payer and reason, and follow up on quality bonus and shared savings reports, which often arrive months after the year ends. A monthly revenue cycle dashboard showing attribution, denial rates and days in accounts receivable by MCO would let the finance team see problems early instead of discovering them at year end.

Financial Summary

The three strategies are sequenced. Cost data come first because they make informed contracting possible. Phased contracts allow Lakeshore to learn while its risk is limited. Care management and reserves prepare the organization to succeed, and to survive a bad year, when it takes on more risk. Taken together, they require about $1.3 million in new spending over the first two years (the data build, then a care management team growing from 4 to 6 staff by the second year), funded from a combination of operating margin, a request to the organization's foundation and quality incentive payments.

Risks

The main risks are that the MCOs offer only contracts with immediate downside risk, that care management does not reduce costs as quickly as expected and that staff accustomed to productivity targets based on visits resist change. The responses are to negotiate jointly with other community health centers for better terms, to track avoidable admissions monthly among patients in care management, and to change productivity measures for clinicians gradually so that quality and population outcomes count alongside visit volume.

Conclusion

Moving from fee-for-service to managed care changes what earns Lakeshore its revenue. Knowing true costs, taking on risk in stages and investing in the care and reserves that population payment requires will let the organization make the shift without endangering the services its community depends on.

References

Health Care Payment Learning & Action Network. (2017). Alternative payment model (APM) framework: Refreshed for 2017. The MITRE Corporation.

McWilliams, J. M., Hatfield, L. A., Chernew, M. E., Landon, B. E., & Schwartz, A. L. (2016). Early performance of accountable care organizations in Medicare. New England Journal of Medicine, 374(24), 2357-2366. https://doi.org/10.1056/NEJMsa1600142

Porter, M. E., & Kaplan, R. S. (2016). How to pay for health care. Harvard Business Review, 94(7-8), 88-100.