Utilization management in a mixed-payment environment

Healthcare Financial Management, Feb, 1998 by Rick Krohn, Gregg Broffman

Utilization management can reconcile opposing incentives of

fee-for-service and capitation payment systems.

In many U.S. healthcare markets, the proliferation of managed care plans has

resulted in a mix of fee-for-service and capitation payments within the same

provider organizations. The national averages for capitation and

fee-for-service revenues in physician practices were 32 and 42 percent,

respectively, in 1996.(a)

A mixed-payment environment creates a twofold dilemma for utilization

management in healthcare organizations: first, how to align the financial

incentives of both reimbursement methods and, second, how to reconcile the

differing objectives of utilization management under each method. These

issues can be resolved by consolidating common resources into a single

outcomes-based utilization management program supported by effective

decision-support tools accessible through an integrated, user-friendly,

clinical information system.

Differences between Payment Methods

The approaches to utilization management under fee-for-service and

capitation are fundamentally dissimilar. Under fee-for-service, utilization

management is retrospective, focusing on specific episodes of care that

involve treating established disease states in individual patients. Such

treatments typically involve high costs. By contrast, under capitation,

utilization management is prospective, with a focus on prevention and the

efficient management of care throughout a prepaid patient population (see

Exhibit 1).

In addition, although the fundamental objective of utilization management

under either method is to see that appropriate care is provided, the key

financial incentives for utilization management differ significantly under

each payment method, Under fee-for-service, revenue is volume-driven (ie,

based on the number of services provided). The financial incentive is to

optimize payment levels by ensuring that the care provided is both medically

necessary and covered for payment. Uncertainty about what is meant by

"medically necessary" can lead to overutilization.

By contrast, under capitation, revenue is population-driven (ie, based on

the number of patients covered by the health plan). Because the payment

level is predetermined, the financial incentive is to efficiently manage

care within budgetary limits. In this case, there is a need to ensure

against utilization in excess of budgetary limitations as well as

underutilization that could result in more costly medical complications down

the road.

These basic differences are compounded by the way utilization management is

performed under each payment method. Under fee-for-service, this process is

typically assigned to a utilization review nurse. Under capitation, it is

often conducted by a multidisciplinary team that usually includes a primary

care physician, utilization review nurse, social worker, and other care

providers.

Moreover, because fee-for-service utilization management programs largely

focus on isolated episodes of care, they are primarily concerned with

individual provider judgments made at the time of service, and they,

therefore, do not promote a team approach to managing utilization.

Utilization under capitation, however, depends on the creation of formally

designated clinical teams that use standard, integrated care management

techniques. Such clinical teams, though focused on specific conditions and

disease states, may include nurses, physicians, diagnosticians,

nutritionists, physical and behavioral therapists, social workers, home

health professionals, and others. Through shared information and coordinated

care, the outcomes achieved by such teams have the potential to be

distinctly superior to outcomes of care under traditional fee-for-service

medicine.

The fundamental differences between these two payment methods raise several

questions about the policy and practice of utilization management in a

mixed-payment environment: Do contradictory objectives inevitably undermine

the effectiveness of such programs? Do conflicting payer incentives tend to

fragment utilization management processes and, thus, contribute to

inefficiency across the spectrum of care? Can the contradictions and

conflicting incentives of the two systems be reconciled and merged into a

single, coherent, efficient program?

The answer to the last question is further complicated by the range of

payment types within the broad categories of fee-for-service and capitation

arrangements (see Exhibit 2). Each payment method entails different

financial incentives and clinical obligations. For example, the risk element

associated with discounted fee-for-service does not correspond to that of

single-specialty, carve-out capitation contracting. Furthermore, the demands

of utilization management under retail fee-for-service differ from those of

bundled fee-for-service, just as utilization management under primary care

capitation differs from that under global capitation. Fee caps and