Purpose of “risk-sharing” or “incentive” pools is to encourage appropriate use of specialist and hospital related fees, such as to reduce unnecessary or duplicitous care

Managed Care Organizations (“MCO’s”) often use actuarial techniques common to the insurance industry to predict within a statistical range the utilization of medical services to a patient population. The basis to estimate these costs are derived from studies that estimate expected utilization of each service covered on a percentage basis of an overall population (for example — the number of patients expected for a specific service during the course of a year per 1,000 insureds). MCO’s typically look at its insured base and attempt to use various external and internal sources of data to estimate health care service utilization and costs to provide those services. Profit for the MCO’s that assume financial risk for medical care utilization is derived from the aggregate premium revenue in excess of cost for rendering care.

Based on the assumptions of utilization of services (ands associated costs) for the insured group, an Employer Group may agree to pay an HMO a certain dollar amount per Subscriber and dependents for a specified package defining medical care to be provided. HMO in turn assumes the risk to provide such services within that premium rate. HMO’s transfer all or part of this risk onto providers by using capitation or risk-sharing pools. Under the capitation system, providers agree to provide a defined set of medical services for a flat rate based on a certain calculation such as per member per month.

An example of capitation is as follows: Primary Care Physician (“PCP”) agrees to accept $11.00 per member per month for all medical services whether rendered or not. The MCO sends PCP 1000 members. $11.00 per member times 1000 members equals $11,000 per month for all services whether rendered or not to members. PCP would be paid this amount around the beginning of each month regardless of number, scope or intensity of services rendered. The PCP is at financial risk to cover any expense incurred over the $11,000 per month and if costs are less than this $11,000 per month then that is profit for the PCP.

Risk sharing pools may be used by HMO’s or other MCO’s among providers in which they may set aside certain dollar amounts to cover certain costs such as hospital and specialist charges. After the payment of such charges within a specified time frame, the remainder may be paid to providers and called a “bonus” or “withhold”. Risk Pools are set up as a “withhold” or “bonus” or “incentive” to encourage appropriate use of specialist and hospital related fees, such as to reduce unnecessary or duplicitous care. The term “withhold” may be used in reference to part of the capitation amount being “withheld” to cover such designated costs as referrals to specialists and hospital charges. More commonly, the term “withhold” has evolved to the term “bonus” or “incentive”.

“Risk” involves:

(1) Accuracy of the actuarial approach. This takes into account the age and other characteristics of the specific patient population.

(2) Services covered are defined appropriately. One of the best ways to is to assume risk only for services that can be controlled.

(3) Catastrophes are covered in some way such as by reinsurance.

Key: Understand the financial risk involved in contracting with Managed Care Organizations .

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