African American Executive Businessman

The for-profit payer business model is, at its core, simple math. The goal is to make a profit for investors/owners.

In the first article of this series, we discussed how the payer business model and the provider business model are at odds with each other, begging the question, how can we reach the nirvana of frictionless healthcare, when payers are from Mars and providers are from Venus?

As stressed and exhausted providers stare down a third year of the COVID-19 pandemic, let’s dig a little deeper into the payer business model and the tactics that support its voracious growth.

The for-profit payer business model is, at its core, simple math. The goal is to make a profit for investors/owners. These profits are optimized by maximizing the collection of premiums, and paying as little as possible for health services.

Payers’ Tactics to Grow Revenue

For Medicare Advantage (MA) payers, there are a finite number of ways to grow revenue. One option is annual premium increases. On the surface, this option appears to have limited potential, as Medicare sets the premium rate. Fear not; things are rarely what they seem. Under the MA program, Medicare pays a higher premium when a member is expected to require more medical services than the average beneficiary. This methodology is called risk adjustment. The Centers for Medicare & Medicaid Services (CMS) put it in place to ensure that health insurance companies would have incentive to cover all Medicare beneficiaries, not just the “healthy” members. CMS uses physician documentation to assign a risk score to each Medicare beneficiary and determine the adjusted premium to be given to the payer. How have payers used this methodology to their benefit?

Payers use processes to improve documentation capture. Improved documentation is a great benefit of this initiative. However, as is often the case, when documentation lends itself to increased premiums, risk of fraud increases. According to a report by the U.S. Department of Health and Human Services (HHS) Office of Inspector General (OIG), UnitedHealth Group generated $3.7 billion in MA payments in 2016 by listing patient conditions that were unverified through outside medical claims. The report indicated that 40 percent of the company’s claims came from care patients may not have needed or even received.

How can that happen, you ask? The answer…frictionless healthcare. According to Andrew Hayeck, CEO of OptumHealth, “we have been slowly, steadily, methodically aligning and partnering with phenomenal medical groups who choose to join us.” At first glance, this comment seems well-intentioned, and gets us one step closer to our frictionless utopia, right? But on closer inspection, we find that a typical hospitalist group has a low, often single-digit, profit margin. So why would a payer want to take on that low margin and possibly bring down the overall value of the organization? What does the payer get from this frictionless approach? Why did UnitedHealth Group plan to employ 60,000 providers by the end of 2021?

Let’s keep peeling back the layers. Partnering with inpatient medical groups should facilitate the transition to a value-based care arrangement. At the same time, as they together strive to achieve value-based care, the payer supplies the acquired provider with tools powered by payer-developed algorithms, artificial intelligence, and technology to identify all potential diagnoses. Voila; this more intensive documentation process raises risk scores and increases payer reimbursement from governmental programs like Medicare (regardless of whether the payer reimburses providers for the care of those diagnoses), all in the name of frictionless healthcare. Now we can start to see where there’s additional return on investment for a payer owning physician groups that manage inpatient care. This, however, is just the tip of the return-on-investment iceberg. Keep reading to see the other payer benefits of owning physician groups.

Capturing More Market Share

Capturing market share is the most straightforward way to grow revenue. Currently, seven national health insurance companies claim nearly 70 percent of MA customers. Market share growth is being fueled by three factors: 1) an aging population, wherein a higher percentage of the population is eligible for Medicare benefits; 2) eligible members electing to enroll in MA plans instead of traditional Medicare; and 3) market consolidation by larger payers through acquisition of smaller plans. Beyond having a larger enrollment base to drive revenue, with a higher market share, payers can use their market ownership to bully providers into contract terms that must be accepted, out of fear that the provider will become “out-of-network” for the community they are trying to serve.

Payer Tactics to Contain Cost

Payers attempt to control costs through expensive and unreliable member engagement programs (i.e., exercise programs, smoking cessation, weight loss, etc.) With low member engagement and risk that the average member stays with a given plan for only a few years, these tactics haven’t yielded the financial results of reduced clinical costs. The most reliable and fastest tactic to manage clinical costs is to instead avoid paying providers for services provided. But a payer can’t simply take Medicare’s money and not pay for services. The payer must instead create the illusion for all interested parties that if the clinical provider can correctly jump through as many utilization management (UM) hoops as possible, at the end of the process, a fair and equitable reimbursement awaits. See how many of these tried-and-true payer “hoops” sound familiar to you:

Hoop No. 1: make the preauthorization process as time-consuming, opaque, inconsistent, and inefficient as possible. In addition, each payer is permitted to create its own process, so providers must expend resources to manage and comply with the uniquely varied payer approaches or lose revenue. Then incentivize providers to try harder by telling them they can enjoy the opportunity to skip the preauthorization process if they jump through the hoop perfectly for six consecutive months. That’s an endeavor that is doomed from the start, but it engages providers to expend resources because the provider is, in essence, blindfolded due to lack of data – and the hoop can and often will be moved by the payer.

Hoop No. 2: ALWAYS question medical necessity. Make the provider prove medical necessity before, during, and after a service is provided to a patient. Question it early and question it often, regardless of how obvious it is that medical necessity exists (e.g., a patient who experiences cardiac arrest and passes away shortly after urgent presentation to the ICU, despite numerous appropriate interventions.)

Hoop No. 3: Make the providers work for it. The September 2018 HHS OIG report titled Medicare Advantage Appeal Outcomes and Audit Findings Raise Concerns About Service and Payment Denials clearly demonstrated that providers will leave money on the table for an appropriate claim if payers increase the amount of work necessary for providers to get paid appropriately. Don’t take my word for it; the OIG report found that beneficiaries and providers appealed only 1 percent of denials to the first level of appeal, with officials recognizing that there were many more than 1 percent of claims that should have been appealed.

Hoop No. 4: Fear of denials will condition hospitals to self-deny. Instead of billing inpatient claims when appropriate, UM teams start to convert patients to observation because of the assumption, based on past payer behavior, that the payer will deny the case.

Hoop No. 5: Small denials pave the path to profitability. Providers will save precious time by not appealing a small-value denial because the costs of appeal often outweigh the amount of the denial. It becomes more cost-effective for the provider to just accept the smaller denials. However, lots of such denials add up fast. Deny early; deny often. The result is often a provider death by a thousand cuts.

Hoop No. 6: If the provider is still in the game at this point, stall. Time is the payer’s friend, and they often feel no reason to rush. Unlike the time limitations payers place on providers, the payer has no requirement to pay claims on time, and can easily delay the appeal process. Accounts payable dollars sitting in the payers’ bank accounts can be used for other revenue-generating efforts like financing growth, that lead to further profit being made from dollars that rightfully belong to providers.

Hoop No. 7: Scare providers from taking issues to arbitration or litigation by making them believe they will become out-of-network for your members. Make sure the provider understands that if they stop caring for your members (for free), the payer will take its members out-of-network and pay another provider to care for them.

And finally, Hoop No. 8: If a legal dispute ensues, delay, fight, but always settle at the last minute. By settling at the last minute before trial, the payer avoids losing in court, avoids setting a precedent, and avoids creating public awareness about the tactics above. Also, the payer gets to hold on to the money for a few years, and isn’t spending any extra money on the effort, since it already has in-house counsel and medical directors already on the payroll.

The Fox Guarding the Hen House

Wait a minute; let’s not forget about those payer-employed provider groups mentioned earlier. They can also be a powerful force on the cost containment side. By creating physician incentives to limit placing hospital patients in inpatient admission status, hospitals can be denied appropriate reimbursement without the payer ever having to issue a denial. Provide payer-owned or payer-influenced physicians with access to and incentives to use payer-created artificial intelligence tools, calculators, and criteria, and the payer can incentivize physician behavior that avoids appropriate payments for inpatient care, minimizes the medical loss ratio (MLR), and maximizes payer profits. 

Expand revenue, check. Control expenditures, check. But wait, the payer still has that pesky minimum MLR requirement to contend with. The MLR is the cost margin (clinical services + quality improvement) divided by premiums. The payer must demonstrate that 80-85 percent of that revenue is spent on clinical services or quality improvement. Phew; good thing we got those physicians on the payroll. Not only did they help the payer increase premiums and control expenditures, but now their payroll cost qualifies as a legitimate clinical service, and goes into the numerator of and helps increase the MLR calculation.

As the line between insurers and providers continues to blur, it becomes more challenging for providers to accurately identify these payer tactics. As providers evaluate the never-ending barrage of shiny new programs and tools offered by payers and vendors touting frictionless or denial-free healthcare, it is imperative to ask the question, does the outcome favor the provider or the payer? Spoiler alert: the answer to the question is that it almost always favors the payer.

Unfortunately, without a careful analysis of the approach used to achieve frictionless healthcare, many providers have entered arrangements with payers with an inherent conflict of interest. Join me for the third part of this series, when we will talk about how providers can defend themselves from payers.

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