Understanding Financial Risk Models in Nephrology
This article first appeared in Nephology News & Issues, March 2016
Every day there is a new press release regarding the movement away from fee-for-service (FFS) to either attribution to an Accountable Care Organization (ACO) or to enrollment in a health plan. With the federally financed 1115 Medicaid Waiver Demonstrations, Centers for Medicaid & Medicare Innovation (CMMI) State Dual Eligible Demonstrations, and Medicare Advantage, there will soon be no fee-for-service payments for dual eligible Medicare and primary Medicaid beneficiaries. Fee-for-service reimbursement for these populations, as we know it today, could easily be gone in less than 10 years.
The changing payment formula for nephrologists
Today, the national average payer mix for End-Stage Renal Disease (ESRD) patients is 80% FFS Medicare, 8% Medicare Advantage, 8% FFS Medicaid, and 4% commercial. In areas of the country where Medicare Advantage enrollment is high, 1115 Medicaid Waivers are in place, and Dual Eligible Demonstrations are implemented, the payer percentage can be 30% FFS Medicare, 58% Medicare Advantage, 8% Managed Medicaid, 0% FFS Medicaid, and 4% commercial. If there is a Medicare Shared Savings Program ACO active in the area, some of the remaining 30% in FFS Medicare could be attributed to the ACO. In addition, Commercial Health Plans and Employer Self-Funded (ERISA) Health Plans are following the Accountable Care Act’s federal and state health care exchanges with narrow provider networks and some form of provider risk sharing agreements.
In one California county, a local health plan with 130,000 members went from fewer than 100 dialysis members to over 300 members within one year of the implementation of the 1115 Medicaid Waiver and the CMMI Dual Eligible Demonstration project. ESRD membership is projected to double over the next couple of years. This represented 45% of all dialysis patients in the county. This California health plan with a 500% increase in dialysis members will need to control its ESRD medical costs. The health plan is in the process of creating a narrower, more competitive network of nephrologists and dialysis providers, and negotiating provider agreements that pass the financial risk and rewards to those providers.
So what does this mean for nephrologists, nephrology groups, and dialysis providers? Provider contracts will be awarded to clinically integrated narrow networks of providers on either a shared saving (think ESCO) or partial (think bundled) or fully capitated (think Special Needs Plan) risk agreement.
In this article, I will discuss how these new payment models apply to our renal patient population by payer segment. I will also discuss the “3Rs” (Risk Adjustment, Risk Corridors, and Reinsurance) and their implications for renal risk contracting.
Payment models: Definitions and applicability
Model #1: Federally financed State 1115 Medicaid Waiver Demonstrations
Impact: 8-12% of a dialysis center’s patients could be affected.
Notes: Each 1115 Medicaid Waiver is different. These waivers vary in design, because their purpose is for states to pilot different ways to manage Medicaid populations to improve the quality of care and reduce costs. States have used the 1115 Waivers to transition from utilization-driven FFS Medicaid reimbursement to value-based purchasing. In California, 1115 Waivers were used to passively enroll FFS primary Medi-Cal Seniors and Persons with Disabilities (SPDs) into Medi-Cal Managed Care Health Plans. Medi-Cal primary ESRD patients were in the SPD population. In Alabama, the state is using 1115 Waivers to implement provider-based regional care organizations (RCOs). In the future, Alabama will transition Medicaid ESRD beneficiaries away from FFS to these new RCOs. Through a capitated payment, RCOs will manage the full scope of Medicaid benefits, including behavioral health and pharmacy services.
Model #2: CMMI State Dual Eligible Medicare Demonstrations
Impact: 10-40% of a dialysis center’s patients could be affected
Notes: Dual eligible ESRD patients, those with both Medicare and Medicaid, represent approximately 30-40% of a dialysis center’s payer mix. There are currently 13 States participating in the CMMI demonstration: California, Colorado, Illinois, Massachusetts, Michigan, Minnesota, New York, Rhode Island, Ohio, South Carolina, Texas, Virginia, and Washington state. Again, state Dual Eligible Demonstrations vary in design. The state specific demonstrations can be regional or statewide; fully capitated to health plans, or remain in FFS. There are 10 capitated models, 2 managed FFS (Colo. and Wash.), and 1 alternative model (Minn). They can include ESRD, such as in certain counties in California, and statewide in Virginia, or they will age-in over time. In all cases, we see a migration of ESRD patients away from FFS to either attribution in an ACO or enrollment in a Dual-Eligible Medicare Advantage health plan.
Even though Dual Eligible beneficiaries are passively enrolled in the demonstration, they can opt-out. Opt-out rates have been as high as 85% in New York and as low as 15% in California. But once the beneficiary experiences the additional services and lower out-of-pocket costs, they stay enrolled.
Model #3: CMMI Medicare Shared Saving Programs (Provider ACOs)
Impact: 5-10% of a dialysis center’s patients could be affected
Notes: Medicare through CMMI offers several ACO programs, including 1) the Pioneer ACO Model for health care organizations and providers already experienced in coordinating care for patients across care settings, 2) Medicare Shared Savings Program for fee-for-service beneficiaries, 3) the Next Generation ACO Model for ACOs experienced in managing care for populations of patients, and 4) the Comprehensive ESRD Care Initiative for beneficiaries receiving dialysis services, otherwise known as the “ESCO.” This demonstration launched in October of last year.
In a January 2015 announcement, the Department of Health and Human Services (HHS) set a goal of tying 30% of traditional, or FFS Medicare payments, to quality or value through alternative payment models, such as Accountable Care Organizations (ACOs) or bundled payment arrangements by the end of 2016, and tying 50% of payments to these models by the end of 2018. HHS also set a goal of tying 85% of all traditional Medicare payments to quality or value by 2016 and 90% by 2018 through programs such as the Hospital Value Based Purchasing and the Hospital Readmissions Reduction Programs. This is the first time in the history of the Medicare program that HHS has set explicit goals for alternative payment models and value-based payments.
Over the past year, approximately 120 organizations have become ACOs in public and private programs, bringing the current total to 744 since 2011.
In addition to growth in the total number of ACOs, there has been continued growth in the number of people covered by ACO arrangements. Since the start of 2014, an estimated 4.5 million people have been included in accountable care arrangements, bringing the total to 23.5 million covered ACO lives. Of these, only 7.8 million are part of the Medicare ACO programs (Pioneer and Medicare Shared Savings Program), meaning that the majority of ACO volume is coming from the commercial and Medicaid sectors. This is a fact to be considered that not all activity is on the Medicare level.
Model #4: Medicare Advantage Health Plans, including the ESRD Special Needs Plans
Impact: 10-25% of a dialysis center’s patients could be affected
Notes: Because of the prohibition of ESRD beneficiaries enrolling in Medicare Advantage unless they either age-in or enroll in a Special Needs Plan, the percentage increases in Medicare Advantage ESRD beneficiaries will mainly come from two sources: the State Dual Eligible Demonstration and ESRD Special Needs Plans. There are currently three Medicare Advantage ESRD Special Needs Plans: VillageHealth, a product of SCAN Health Plan, a contractual agreement between SCAN and DaVita with 1,080 member in Southern California; CareMore ESRD with 1,511 members also in Southern California, and Humana Kidney Care, a contractual agreement between Humana and DaVita in Las Vegas, with 128 members.
Although patient numbers are still small in these contractual ESRD joint venture health plans, joint ventures are an increasing trend. These contractual relationships take many different forms, with the health plans leveraging both their state license and administrative services and the resources of renal provider organizations to develop locally branded community health plans. Essentially, it means creating a narrow preferred provider network of nephrologists and dialysis centers and aligning their clinical and financial outcomes.
Contractual joint venture ESRD health plans are not new. Similar to SCAN/DaVita, Fresenius had a contractual relationship with Sterling Insurance and American Progressive Insurance Companies to implement their CMS ESRD Disease Management Demonstration project (2006 –2010). Aetna and other health plans have business strategies, beyond renal, that include the creation of these contractual and equity local JV health plans. Examples include:
Anthem Blue Cross and several hospital systems, including UCLA Health and Cedars-Sinai forming “Vivity,” an integrated health plan in Southern California
Florida Hospital Healthcare System and Health First Health Plans forming a commercial health plan in central Florida
Aetna and Inova Health System Foundation forming “Innovation Health,” a stand-alone health plan serving Virginia
DaVita Health Partners and Independence Blue Cross forming “Tandigm Health,” a primary care delivery platform focused on chronic diseases in the Philadelphia region.
Payment Model #5: End Stage Renal Disease Seamless Care Organization (ESCO)
Impact: If an ESCO is formed, 65-85% of a dialysis center’s Medicare FFS patients could be affected.
Notes: There are 13 ESCOs participating in the recently implemented demonstration. NN&I has covered this program extensively on their website (www.NephrologyNews.com). So where does the ESCO fit into the payer models? Because ESCO is a Medicare shared savings ACO, the dialysis company has either a corridor of risk with up and down financial potential or only upside potential. In the ESCO, there is an additional optional truncation clause whereby any beneficiary who exceeds the 99% threshold is removed from the shared saving financial reconciliation. Because this calculation is done on the average ESRD expenditure nationwide, there are advantages to being in geographic locations with high Medicare costs, i.e., areas with high wage indexes. In lieu of the CMS truncation, the ESCO can buy stop loss insurance which can create an opportunity to benefit from reduced costs in the outlier layer. In all cases, the population health management cost is born by the dialysis provider. They must cover their costs and generate a return by receiving a percentage of the shared savings.
Preparing for the new paradigm: The “3Rs”
There have been numerous articles, webinars, and presentations on managing renal patients to improve clinical outcomes, but very few articles on what it means to take financial risk for renal patients. The exception to this is the three renal CMS Demonstration Projects: the Medicare ESRD Managed Care Demonstration Project; the Medicare ESRD Disease Management Demonstration, and the Medicare Care Management for High Cost Beneficiaries (CKD focus). The first two CMS renal demonstrations were capitated health plan models and the last one, the Care Management for High Cost Beneficiaries, had a shared saving model very similar to the methodology and protocols used in the ESCO.
In these three renal demonstration projects and all of the private and public risk agreements in play today, they had or have a variation of the “3Rs” (risk adjustment, risk corridors, and reinsurance). An understanding of the “3Rs” is a critical success factor. One needs to know when and where they apply and how they vary by private and public payer.
Risk adjustment helps adjust for unexpected changes in severity of the health status of patients included in the baseline and performance periods to better measure actual savings. It can be either prospective, as in Medicare Advantage, or concurrent as in commercial health plans. Medicare Advantage uses risk scores in determining the premium amounts CMS pays the health plan. ESRD patients are notorious for having poor provider coding for risk scores. The reason is when nephrologists assume the role of primary care physicians, they focus on nephrology codes and often times may overlook coding for the patient’s comorbid conditions, such as diabetes. If diabetes is not coded at least once every year, Medicare will pay the Medicare Advantage health plan as if the patient were cured. The same scenario applies to amputees. Medicare will pay as if the amputated limb grew back. As a result, renal providers can add value by ensuring the health plan receives the proper codes and maximizes its reimbursement from Medicare. For example, health plan capitated agreements pay providers for ensuring proper coding by contracting on a percentage of premiums. The more accurate the coding, the higher the premium, the higher the dollar amount received by the provider as a percentage of premiums. Dialysis provider coding is not accepted. The codes must be from either a physician or hospital and do not include diagnostics codes.
Commercial health plans use concurrent coding to adjust for “coding creep.” Each year you can expect a payer’s book of business to have higher risk scores than the prior year, solely due to improvements in coding. In the ESCO, CMMI will calculate weighted average risk scores for five eligibility categories. The weights used to produce the average are the beneficiary-months of new beneficiaries and established beneficiaries in each category. The five categories of Medicare beneficiaries (for purposes of calculating historical expenditure baselines) or ESCO beneficiaries (for purposes of calculating performance year expenditure benchmarks) are combined according to their reason for Medicare entitlement and, if applicable, Medicaid enrollment status. If the risk scores are not calculated properly, the historical expenditure baselines could be underestimated and negatively affect the shared savings potential.
“Shared Saving” bonuses, such as the ESCO, are often structured as risk corridors using either medical loss ratios (total medical costs / premium) or baseline medical costs improvements (difference between historical expenditure baseline and actual). Typically, quality measures and cost ratios must be met before any shared savings are distributed.
With the Affordable Care Act, risk corridors share health insurance risk between CMMI and the exchange health plans. In simple terms, health plans making higher profits would pay into the program, while those plans losing money would receive a payment from the program for part of their losses. This is one of the reasons behind the failures of the CO-OPs. There was insufficient funding from the profitable exchange health plans to offset the losses generated by the unprofitable plans. The unprofitable CO-OPs received only 12.5% of the risk corridor funding, placing most of them into regulatory financial jeopardy.
In the ESCO, the Large Dialysis Organization (LDO) two-sided model has an initial risk corridor with 10% shared saving and 10% shared loss caps. In contrast to the ACA risk corridors, each ESCO stands alone and is not aggregated with other ESCOs. The savings and losses generated by the ESCO are shared between CMMI and the individual ESCO. On the shared saving side, CMMI gets the first 1% (guaranteed savings), the ESCO gets 70% of the savings not to exceed 10% of the benchmark expenditure, and any saving beyond 10% of the benchmark goes to CMMI. The reverse is true for losses. In both cases, the ESCO is still responsible for the population health management expense which is additive to the losses or subtracted from the shared savings. ESCO shared savings or shared losses are capped at 10% of the Total Payment Year (PY) Expenditure Benchmark in PY1 and PY2, and at 15% in PY3 and later years. For additional information on how this financial reconciliation works for both the non-LDO one-sided and LDO two-sided models and how quality indicators affect the payout, refer to the CMMI ESCO website.
Reinsurance and insurance
Last but not least, reinsurance and insurance offer financial protection against the possibility of losses. While they are similar in concept, they are quite different in terms of how they are used and who uses them. Reinsurance is what health plans purchase to cover their catastrophic risks after retaining a deductible. Reinsurance protects the health plan against a loss, while insurance protects the provider. Providers will often obtain insurance protections either by purchasing it from a third party insurer or by building the protections directly into the contract, e.g., the ESCO’s risk corridor and truncation clause. There are two basic types of insurance protection for providers: individual specific and aggregate insurance. Provider individual specific excess insurance puts a limit on a single member’s annual claims (e.g., the ESCO truncation), while aggregate “benchmark” excess insurance puts a limit on the overall ESCO’s annual claims (e.g., the ESCO risk corridor).
In the renal shared savings agreement, renal providers have several insurance options, but not all are available under CMMI’s current MSSP and ESCO rules:
Provider Individual Excess Insurance
As mentioned, the ESCO can accept the CMMI truncation, placing an upper limit on an individual’s annual claims. Or the ESCO can buy provider-specific excess insurance to mute the impact of an individual outlier, e.g., any beneficiary who exceeds the 99% threshold. If the ESCO opts into the CMS truncation, the beneficiary is removed from the financial reconciliation of the shared savings once the beneficiary exceeds the truncation point. If the ESCO buys insurance, the ESCO is protected for all individual claims beyond the truncation point. Depending on the geographic Medicare costs and the difference between the benchmark medical costs and the associated truncation point, the ESCO may be wise to buy insurance. Effective management of patients in this outlier layer may reduce costs compared to the benchmark and increase the ESCO’s shared savings.
Provider Aggregate Excess Insurance
A renal ACO could also buy aggregate benchmark excess insurance to protect itself from downside losses associated with the risk corridor. In the ESCO, CMMI has capped the risk corridor at 10% in the first year and 15% in the second year and beyond. This downside risk could be covered by provider aggregate excess insurance. It is not an option under the current CMMI 2016 Medicare Shared Saving Program’s (MSSP) or under the ESCO’s financial methodology. The current repayment mechanism methodology prescribed by CMS as the means in which CMS can be repaid starting in 2016, are either funds placed in escrow, surety bonds, or a letter of credit. CMMI removed the reinsurance option for new CY2016 MSSPs, including the ESCO. But a renal ACO contracting with a private or public health plan could either buy provider excess insurance or enter into a quota share agreement with a (re)insurer sharing both gains and losses.
Nephrology groups are already entering into professional capitation agreements with payers. At this stage, I am not aware of any nephrologists including dialysis in these contracts, but it is a logical extension. The nephrologists are contracting with payers on a dollar per member per month capitation basis for a defined population of members. This capitated amount is reconciled against encounter data and compared to the dollars that would have been reimbursed on a fee-for-services basis. If the reconciliation is under the capitation, the payer shares the difference with the nephrologists. If the reconciliation is above the capitation, the payer will reduce the rates paid to the nephrologists on an incremental basis.
Integrated delivery systems understand these risk models. They have gone as far as establishing insurance captives offshore to retain their malpractice, property, and causality risks which enable them to profit off those retentions and buy additional reinsurance from third party reinsurers to protect against catastrophic events beyond their retained risk. As an example, Fresenius has a Cayman Island Captive Reinsurance Company to retain their health plan, provider, malpractice, and property and casualty risks.
Renal risk provider contracting is happening now and will increase. As a subspecialty professional service, renal care providers have avoided the payer spotlight. Renal patients’ prevalent rates are well below other chronic conditions and, as a result, have not been on the radar of most health plans. Renal patients will become an ACO/Health Plan priority. With the migration of FFS renal patients to Health Plans and ACOs, the number of patients and their aggregated medical costs become a higher percentage of a plan’s medical loss ratios or baseline medical costs.
The time is now to have risk-oriented discussions and enter into collaborative efforts with payer organizations, other partners in care, and with insurers/reinsurers. In order to effectively compete, nephrologist and dialysis providers will need to assume risk and learn how to adapt in this new world of health care reform.
The 13 ESCOs will test this, but don’t think that this only applies to the ESCO. Like the California health plan mentioned above, health plans everywhere are experiencing increases in dialysis members and will react accordingly.
Resources on understanding payer models
Medicaid 1115 waivers: www.medicaid.gov/medicaid-chip-program-information/by-topics/waivers/waivers_faceted.html
State Dual Eligible Demonstrations: www.cms.gov/Medicare-Medicaid-Coordination/Medicare-and-Medicaid Coordination/Medicare-Medicaid-Coordination-Office/FinancialAlignmentInitiative/Evaluations.html
Medicare’s approach to value-based payments: www.hhs.gov/about/news/2015/01/26/better-smarter-healthier-in-historic-announcement-hhs-sets-clear-goals-and-timeline-for-shifting-medicare-reimbursements-from-volume-to-value.html http://healthaffairs.org/blog/2015/03/31/growth-and-dispersion-of-accountable-care-organizations-in-2015-2/
Medicare Advantage ESRD Special Needs Plans:www.caremore.com/~/media/7DA8240F4449440BA11BC3B82E8F56A5.ashx http://press.humana.com/press-release/regional-news/davita-healthcare-partners-villagehealth-and-humana-team-create-humana-k
Comprehensive ESRD Care Demonstration: https://data.cms.gov/dataset/Comprehensive-ESRD-Care-Model/3gz6-gn7x,
Medicare ESRD Managed Care Demonstration Project: www.cms.gov/Medicare/Demonstration-Projects/DemoProjectsEvalRpts/downloads/esrd_managed_care_final_report.pdf
Medicare ESRD Disease Management Demonstration: www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/Reports/downloads/Arbor_ESRD_EvalReport_2010.pdf
Medicare Care Management for High Cost Beneficiaries (CKD focus): www.rti.org/publications/abstract.cfm?pubid=23147