Annual Audits of IDS Risk Contract Settlements Improve Payment Accuracy - integrated delivery systems

Healthcare Financial Management, Dec, 1999 by Jonathan W. Pearce

Integrated delivery systems (IDSs) should conduct annual audits of payers' settlements under risk contracts to verify that the payer attributed the appropriate amounts of revenue and charged the appropriate claims expenses to the IDS. In particular, IDSs should verify that payers calculated revenues and expenses based on consistent member counts and that the determined commercial revenue was based on the actual premiums paid.

IDSs also should determine whether payers have used appropriate demographic factors and countywide rates as a basis for determining Medicare revenue, charged the IDS for claims only for valid members, paid capitated providers the correct capitation amounts, and used appropriate historical data to estimate the amounts of incurred-but-not-reported claims attributed to the IDS.

Every year, upon completion of their risk contracts, integrated delivery systems (IDSs) should review their final payer settlements. A risk-contract audit is designed to disclose errors in the payer's reconciliation calculation that may be unfavorable to the IDS. This review should entail an audit of both the revenue attributed to the IDS and the medical expenses charged against the IDS under the contract. The audit may include an in-depth analysis of the claims paid under the contract, the member counts, the revenue computation, and other aspects of the settlement to ensure that they are in compliance with the contract. Cost-effectiveness is the key factor in designing these audits. Thus, to justify conducting such an audit, the expected recovery from correction of errors must exceed the fees associated with conducting the audit. The IDS's level of confidence in the payer's ability to pay claims properly therefore is an important factor in determining how comprehensive such an audit should be.

Payer Reconciliation Report

Under most risk contracts, the payer prepares a reconciliation report of the financial results of the contract at a specified date after the end of the contract period. This report shows the revenue attributed to the IDS during the period, the medical expenses charged against that revenue, any other financial transactions involved in the contract (eg, risk-sharing arrangements, stop-loss insurance, or incurred-but-not-reported [IBNR] adjustments), and the resulting surplus or deficit.

This report will provide the basis for the audit. Therefore, the IDS's contract with the payer should stipulate that the payer provide sufficient detail in the reconciliation to allow all amounts to be traced back to the original source documents and all calculations involved in the reconciliation process to be reviewed.

Data Requirements

To audit a risk contract, an IDS requires two basic data resources and access to other data pertaining to payment rates. [a] First, the IDS should have a complete database of all health plan members for whom it provides healthcare services, specifying whether the member is covered by Medicare, Medicaid, or a commercial plan. This database should, at a minimum, contain each member's health plan ID number, primary care physician identifier, and date of enrollment with the primary care physician. Second, the IDS should have a database containing all the claims billed under the risk contract. This database should contain all information necessary to review each claim transaction for legitimacy, including member and provider ID numbers, service dates, payment amounts, claim numbers, benefit codes, service or CPT codes, and provider settings (eg, inpatient, outpatient, physician office, and emergency department).

Other data required for the audit include estimates of provider payment rates, amounts paid to IDS providers (including primary care physicians) under capitation contracts, and current payment rates for enrollees under Medicare HMO contracting.

Verifying Member Months

A principal objective of a risk-contract audit is to verify that consistent member counts (ie, numbers of member months) were used to calculate both revenues and expenses for the IDS. In addition, the IDS needs to review the actual members in those counts to ensure that claims charged against the IDS's risk pool were for services provided to members for whom the IDS received revenue. For purposes of comparison, the payer should provide the IDS with its database of covered members, showing the effective dates of each member's coverage.

The IDS also should determine the effective dates of each primary care physician's participation in the IDS's network. These dates may be determined simply by referring to the signature dates on the physicians' IDS participation agreements, which may be kept by the payer or the IDS. The dates then should be compared with the members' primary care enrollment dates as listed in the IDS's plan-member database to determine the actual number of months each member should have been attributed to a primary care physician.

Two difficulties may occur during this process. First, establishing the actual date a primary care physician started or ceased participating in the network may be difficult because physician practices sometimes split, consolidate, or change locations, and records may not be up-to-date. For example, the payer's records may indicate a physician's start date coinciding with the date the physician joined a new practice, whereas the physician actually may have been a network participant long before that date. Research therefore may be required to determine correct participation dates.