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Actuarially Sound Bundled Rates

October 14, 2011

Milliman, Inc. New York, NY

Bruce Pyenson, FSA, MAAAKate Fitch, RN, MEdPrincipals

Milliman, Inc.New York

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Agenda

Key Financial Issues“Where’s the Money”Risk ManagementDiscussion

Milliman, Inc. New York, NY

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Key Financial Issues – What is an “Actuarially Sound”* Bundled Rate?

Actuarially Sound– Appropriate for both payer and providers based on historical

patterns and potential efficiencies– Supports adequate patient care– Clear (e.g., simple): Administration is not ambiguous

What happens if rates are not actuarially sound?– Lawsuits– More distrust between parties– Financial losses– Instability of ACO efforts

* Borrowing concepts from generally accepted actuarial principals and practices. See Section 42 CFR 438.6(c) definition of “Actuarially Sound Capitation Rates” in context of Medicaid capitation rates.

Milliman, Inc. New York, NY

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Our Orientation

Combined 35+ Years at MillimanActuarial work for most kinds of organizations in healthcareInvolved with providers who assume risk since 1990sStructural & system change are overdue

Milliman, Inc. New York, NY

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Basic: How to Deal with Less Money?

1. Pay someone (someone else) less2. Become more efficient3. Increase volume (someone else gets less)

These are not mutually exclusive

Milliman, Inc. New York, NY

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Accountability – The World of a Walmart Supplier?

Current System

1. Increase revenue2. Expect price increases3. Best internal value:

negotiations, politics4. Buzzwords: Daily census,

integration, EMR, revenue cycle, reaching patients, innovation, quality, cardiac surgery, orthopedics, cancer

Accountable to Buyer (aka payer, insurer, CMS, etc.)1. Decrease revenue per unit2. Expect price reductions3. Best internal value: care

efficiency, outcomes4. Buzzwords: risk, system

change, integration, EMR, referral management, efficiency, targets, metrics, quality, PMPM

Milliman, Inc. New York, NY

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Where’s the Money? Example, IP Lap-Band (commercial)

Milliman, Inc. New York, NY

Per Patient Amount

Category IP Stay

30 days post-

discharge

365 days post-

dischargeFacility IP $21,000 $450 $2,400Facility OP $200 $2,400Professional IP $4,000 $50 $400Professional OP $300 $3,500Total $25,000 $1,000 $8,700

Approximate allowed amounts from a large commercial database. For illustration only.

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Where’s the Money? Example, IP Lap-Band Drill-Down on IP Professional (commercial)

Milliman, Inc. New York, NY

Category Per Patient Amount

Facility IP $21,000Professional IP $4,000

Primary Surgeon $2,400Asst Surgeon $300Anesthesia $1,000IP Visits $175Consults & CC Visits $50IP Radiology $50IP Pathology $25

Total $25,000

Approximate allowed amounts from a large commercial database. For illustration only.

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Drill Down to Standard Actuarial Model

Selection from 100+ Categories of facility an professional services

Milliman, Inc. New York, NY

Description. F= Facility, IP = Inpatient, OP = Outpatient, PROF= Professional FIP MedicalFIP SurgicalFIP PsychiatricFIP Alcohol and Drug AbuseFIP Mat Norm DeliveryFIP Mat Norm Delivery - Mom\Baby CmbndFIP Mat Csect DeliveryFIP Mat Csect Delivery - Mom\Baby CmbndFIP Well NewbornFIP Other NewbornFIP Maternity Non-DeliveryFIP SNFFOP Emergency RoomFOP Surgery - Hospital OutpatientFOP Surgery - Ambulatory Surgery CenterFOP Radiology GeneralFOP Radiology - CT/MRI/PET - Cat ScanFOP Radiology - CT/MRI/PET - MRIFOP Radiology - CT/MRI/PET - PETFOP Pathology/LabFOP PharmacyFOP CardiovascularFOP PT/OT/STFOP Other - GeneralFOP Other - BloodFOP Other - OncologyFOP Other - ClinicFOP Other - DiagnosticFOP Other - DialysisFOP Other - DME/SuppliesFOP Other - Obs/TrtmtFOP Other - PsychiatricFOP Other - PulmonaryFOP Other - Alcohol & Drug Abuse

PROF Inpatient Surgery - Primary SurgeonPROF Inpatient Surgery - Asst. SurgeonPROF Inpatient AnesthesiaPROF Outpatient SurgeryPROF Office SurgeryPROF Outpatient AnesthesiaPROF Maternity - Normal DeliveriesPROF Maternity - Cesarean DeliveriesPROF Maternity - Non-DeliveriesPROF Maternity - AncillaryPROF Maternity - AnesthesiaPROF Inpatient Visits - GeneralPROF Inpatient Visits - Extended Care VisitsPROF Inpatient Visits - Critical Care VisitsPROF Office/Home Visits - OfficePROF Office/Home Visits - HomePROF Urgent Care VisitsPROF Office Administered DrugsPROF Allergy TestingPROF Allergy ImmunotherapyPROF Miscellaneous Medical - GeneralPROF Miscellaneous Medical - GastroenterologyPROF Miscellaneous Medical - OphthalmologyPROF Miscellaneous Medical - OtorhinolaryngologyPROF Miscellaneous Medical - Vestibular Function TestsPROF Miscellaneous Medical - Non-Invas. Vasc. Diag. StudiesPROF Miscellaneous Medical - PulmonologyPROF Miscellaneous Medical - NeurologyPROF Miscellaneous Medical - Central Nervous System TestsPROF Miscellaneous Medical - DermatologyPROF Miscellaneous Medical - DialysisPROF Miscellaneous Medical – ChemotherapyPROF Immunizations

Etc.

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Cost are Heavily Weighted to Hospital Stay Average Daily Cost Per Patient Within ± 30 Days From Surgery

Hip Arthroplasty, Commercial

Milliman, Inc. New York, NY

$ 27,300

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Details! DRG & ICD Proc Codes: Hip and Knee Replacement

Milliman, Inc. New York, NY

81.51 Total Hip Replacement81.52 Partial Hip Replacement81.53 Revision of Hip Replacement81.54 Total Knee Replacement81.55 Revision of Knee Replacement00.70 Rev. of Hip Repl. ‐ Acetabular and Femoral Components00.71 Rev. of Hip Repl. ‐ Acetabular Components00.72 Rev. of Hip Repl. ‐ Femoral Components00.73 Rev. of Hip Repl. ‐ Acetabular Liner and/or Femoral Head Only00.80 Rev. of Knee Replacement ‐ Total (All Components)00.81 Rev. of Knee Replacement ‐ Tibial Component00.82 Rev. of Knee Replacement ‐ Femoral Component00.83 Rev. of Knee Replacement ‐ Patellar Component00.84 Rev. of Knee Replacement ‐ Tibia Insert (Liner)00.85 Resurfacing Hip, Total, Acetabulum and Femoral Head00.86 Resurfacing Hip, Partial, Femoral Head00.87 Resurfacing Hip, Partial, Acetabulum

DRG 469: Major Joint Replacement Or Reattachment Of Lower Extremity with MCCDRG 470: Major Joint Replacement Or Reattachment Of Lower Extremity without MCCDRG 466: Revision Of Hip Or Knee Replacement with MCCDRG 467:  Revision Of Hip Or Knee Replacement with CCDRG 468:  Revision Of Hip Or Knee Replacement without CC/ MCCDRG 461: Bilateral or Multiple Major Joint Procedureof Lower Extremity with MCCDRG 462: Bilateral or Multiple Major Joint Procedureof Lower Extremity without MCC

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Risk Lessons from Insurers and Actuarial Science

Margins are required for success– The healthcare system is inherently chaotic. If success depends on

perfectly following your plans, you will likely be disappointed!

Complex contracts do not necessarily produce better results– Complex definitions and risk adjustment provide a false sense of

security and probably add to risk

Risk comes in (at least) 3 categories. Results may be differentfrom expected because of,– Catastrophic events (fluctuations, outliers)– Non-catastrophic events (inadequate rates but not outliers)– Business / execution risk

Milliman, Inc. New York, NY

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What is Risk?

Source: Milliman analysis of MedStat Commercial 2009 Database after adjustment to Standard Milliman HCG 2010 Demographics

Milliman, Inc. New York, NY

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Risk Analysis--Example

Milliman, Inc. New York, NY

Type of Surgery

Nominal Revenue per Case

Nominal Expense per Case

Required Margin

Annual Number of Cases

Probability Actual

Expense > Revenue

Expected Excess

Cost Given Loss

Lap Band $25,000 $20,000 $0 100 < 1% $750,000

50 1% $200,000

All amounts are illustrative.

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A Word About Bundled Payment Vendors and Systems

Administrative systems can create risk—they do not manage riskSimplicity and clarity in contract terms are undervalued virtues– Consider simple exclusions and date ranges

CMS may be moving away from complex risk adjusters (e.g., diagnosis-based risk adjusters) because of gaming potential

Milliman, Inc. New York, NY

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Discussion

Milliman, Inc. New York, NY