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Managing parallel payment systems

By Judy Capko & Rebecca Anwar, Ph.D.

Combining fee-for-service and capitation

Integrating fee for service (FFS) and prepaid medicine (capitation) in a medical practice presents new challenges for physicians and staff. In parallel payment systems tracking services, billing and financial operations are difficult challenges regardless of the size of the practice.
Most practices struggle with the challenges of new, prepaid managed care enrollees. Staff understand the importance of obtaining accurate patient information to register the patient in the accounts receivable system and ensure they will be paid for services rendered. But they have difficulty understanding how to process patients and understand the services they are responsible for in a capitated environment. They are accustomed to billing insurance for services rendered on an itemized basis and collecting from patients for non-covered services and annual deductibles. Managing prepaid medicine is an entirely different matter. It requires a cautious approach to utilization and collecting a co-payment from the patient at the time of each encounter.
On the other hand, practices that have traditionally served the managed care enrollees in a prepaid environment know how to track services and utilization, but their concern with patient status has been limited to determining whether or not they are covered on the plan. Beyond this, they want to determine what the co-pay is, and are not concerned with itemized charges. They aren’t accustomed to calculating and collecting the patient’s share of charges, which can be considerably more than the standard co-pay with capitation.
The issues involved in managing a parallel payment system include identifying the distinctions between fee for service and prepaid medicine, responding to these variables and assessing financial performance.
Understanding the distinctions. There are definite distinctions between FFS and capitation. These distinctions must be clearly understood by physicians and staff, since they require a different set of actions in order to manage services and payment in a prudent manner.
The most obvious distinction is that, in a FFS environment, the services are billed to the third party payer following the delivery of the service. Services are paid, usually at a discounted contract rate, based on an itemization of charges for services rendered. In contrast, capitation is paid based on a pre-paid amount per enrollee whether the patient comes in for services or not. With capitation the provider must provide the third party payer with a record of all services rendered to the enrollees as a matter of record, even though this information is not relevant to the capitated.
Responding to the variables. The distinction of how the provider is paid makes a significant difference in the procedures essential to managing patients and finances in a parallel payment system.
In both FFS and capitation, before seeking the care of a specialist, patients generally must be seen and evaluated by their primary care physician. With FFS, specialty services, some diagnostic and therapeutic services, must be preauthorized by the insurance carrier. The process for handling this varies by payer and by contract.
With capitation, the patient is likely to need a referral to a specialist, but may not require authorization from the insurance company. Staff must be aware of the variables between referrals and authorization with specialty and ancillary services to ensure continuity in patient care and patient service. If staff is not clear on the distinctions, providers may be giving away services.
With FFS, when the contract permits, the staff can collect the patient portion of payment at the time of service, thus improving cash flow. Additionally, collecting accurate, up-to-date insurance information allows you to bill the insurance carrier promptly, thus expediting payment of services rendered.
Reimbursement management with FFS begins with collecting current, accurate demographic and insurance information from patients at the time of service. The next step is ensuring that physicians and staff code accurately and “thoroughly” for services rendered. Physician and staff must be acutely aware of coding principles to be sure they are coding accurately. In addition, it will be important to be sure all services rendered are documented on a charge slip, entered into the computer system accurately and billed appropriately.
Beyond this, reimbursement management requires you to monitor the payers’ performance and closely track your accounts receivable aging. This is not existent with prepaid care, but is vital to managing finances with FFS contracted care.
Accounts should age according to when the initial claim is submitted. Although payment may be delayed with contracted FFS, depending on the contract the practice signs, it is likely that payment can be expected within 60 days of submission of the initial insurance claims. Assuming your practice submits accurate claims weekly, you should be paid within 75 days of date of service.
Track your aged receivables by payer class and single out the payers who have not paid within 90 days. If you have one payer who is not performing by paying within 90 days or if you have one provider who is not getting paid, it is likely problems have occurred. Begin your investigative process by examining your internal procedures to ensure services are billed accurately and in a timely fashion. Beyond this, you will need to follow up with the payers who have not paid. Your effectiveness will depend on your communication skills and building solid relationships with appropriate staff at the insurance company. Solicit their help in settling the claims.
Look for red flags. Do you have one payer who owes you a substantial amount of money, accounting for 10 percent or more of your accounts receivable? If this is the case, you will want to respond promptly and interact with the payer. You will want to ensure you are handling the claims process appropriately regarding patient eligibility and authorization process. Or perhaps you have added a physician who is seeing patients but had not been through the credentialing process and may not be authorized to provide care. If this is the case, you may be setting yourself up for considerable financial loss.
An important element of the capitated environment is ensuring you do not provide care for patients who have transferred their care to another provider or who have lost their coverage.
Assessing financial performance. Assessing financial performance in the FFS arena involves two critical areas. First is how claims are handled and the payment allowed. In other words, What is the discount, are their any errors in claims pr

ocessing and are you paid promptly? Second is tracking, monitoring and analyzing financial performance.

With regard to claims handling, it is important that your staff monitor the performance of each payer to be sure they are paying according to the contract and not under paying or denying payment for changes that should be covered in your contract. It is not uncommon for staff to minimize the significance of claims processing. For example, staff frequently assumes the third party payer has processed the claim appropriately. With this mentality you are sure to take a hit on reimbursement.
Insurance companies make numerous errors that if unnoticed can cost you a significant amount in reimbursement. Examine the explanation of benefits and compare it to the agreed upon contracted amount to be sure the claim is processed correctly. Errors commonly occur with multiple surgical procedures or extensive ancillary services. Your staff must be skilled in monitoring reimbursement and ensuring claims have been processed appropriately.
In terms of analyzing financial performance, prepare and examine monthly reports that compare your major payers performance over time. If you have typically adjusted 25 percent for a payer and you notice the contract adjustments climbing to 30 percent, it’s time to take a closer look at the payer’s performance. Or, if one payer has typically accounted for 10 percent of your amount over 90 days and suddenly it jumps to 20 percent , this is an indicator that something is wrong. It will require further investigative action on your part. The sooner, the better!
Tracking financial performance is quite different with capitation. It requires a different mind set. With FFS, providers are rewarded based on the volume of services provided—the more you do, the more you get paid. With capitation, provider rewards are based on performance. This means that if you can obtain the same patient outcome but with fewer services, the rewards are greater, since providers are paid a set amount for each patient (enrollee), regardless of the services rendered.
Tracking performance. Tracking performance with your capitated patient base requires examining services rendered and the cost for those services, compared to the revenue received. In this case the front office staff has far less responsibility. They simply verify patient coverage and collect a small co-pay, typically less than $20. The clinical staff has more extensive responsibility. They must be sure they do not provide care that is not covered by the capitated contract, such as ancillary lab and other diagnostic studies or therapeutic care such as physical therapy. On the other hand, if such care is covered with the contract, it is important to track it accurately, against the prepaid amount allowed for the ancillary services.
Physicians are paid to provide specific services to the patient for a prepaid amount. The practice must monitor the services provided over time to ensure the capitated payment for all enrollees covers the cost of care provided. This will vary from month to month and must be tracked over time. The cost of services should be tracked, based on the amount you are paid in the FFS part of the practice to perform an effective comparative analysis.
Monitoring performance includes examining the differentials in care provided and the “ordering patterns” between physicians in a group practice. This type of utilization management is familiar to the traditional capitated practice, but new turf for FFS physicians. The services rendered must also be measured against the desired outcome. In other words, is one provider more effective at obtaining a desired clinical outcome with fewer resources than his or her peers? This can be difficult to measure, since there are severity of illness and clinical complication factors that need to be assessed. Most practices, and even large staff models, struggle with collecting accurate data. This requires sophisticated application of management information systems (MIS) that, unfortunately, have not been fully developed to-date. In addition, MIS is a major financial investment expected at a time when providers are experiencing reduced revenues.
Sometimes utilization management is simply a matter of education. The physicians and clinical staff must understand what services they are responsible to provide, what services are referred to another specialist and what procedures are required for diagnostic and therapeutic studies covered by another provider. In some cases it is the primary care physician’s responsibility to complete certain studies before referring the patient, while in some agreements these studies would be the specialist’s responsibility.
The complex variables between FFS and capitation can create havoc in a practice that must adapt to a parallel payment system. Careful planning, a cooperative staff and cautious implementation is critical. You can protect your revenue and avoid unnecessary aggravation by seeking outside resources to help you through the transition. Seeking expert advice is the best way to integrate a parallel payment system in your practice and ensure you protect your future revenue, while providing your patients with the best of care and service.

Judy Capko is based in Newbury Park, CA and Rebecca Anwar, Ph.D., is based in Philadelphia, PA. They are senior consultants with The Sage Group, Inc., a national consulting firm specializing in integrated practice formation, strategic planning and practice management, quality improvement, managed care and marketing for health care providers.

Integrating fee for service (FFS) and prepaid medicine (capitation) in a medical practice presents new challenges for physicians and staff. In parallel payment systems tracking services, billing and financial operations are difficult challenges regardless of the size of the practice.
Most practices struggle with the challenges of new, prepaid managed care enrollees. Staff understand the importance of obtaining accurate patient information to register the patient in the accounts receivable system and ensure they will be paid for services rendered. But they have difficulty understanding how to process patients and understand the services they are responsible for in a capitated environment. They are accustomed to billing insurance for services rendered on an itemized basis and collecting from patients for non-covered services and annual deductibles. Managing prepaid medicine is an entirely different matter. It requires a cautious approach to utilization and collecting a co-payment from the patient at the time of each encounter.
On the other hand, practices that have traditionally served the managed care enrollees in a prepaid environment know how to track services and utilization, but their concern with patient status has been limited to determining whether or not they are covered on the plan. Beyond this, they want to determine what the co-pay is, and are not concerned with itemized charges. They aren’t accustomed to calculating and collecting the patient’s share of charges, which can be considerably more than the standard co-pay with capitation.
The issues involved in managing a parallel payment system include identifying the distinctions between fee for service and prepaid medicine, responding to these variables and assessing financial performance.
Understanding the distinctions. There are definite distinctions between FFS and capitation. These distinctions must be clearly understood by physicians and staff, since they require a different set of actions in order to manage services and payment in a prudent manner.
The most obvious distinction is that, in a FFS environment, the services are billed to the third party payer following the delivery of the service. Services are paid, usually at a discounted contract rate, based on an itemization of charges for services rendered. In contrast, capitation is paid based on a pre-paid amount per enrollee whether the patient comes in for services or not. With capitation the provider must provide the third party payer with a record of all services rendered to the enrollees as a matter of record, even though this information is not relevant to the capitated.
Responding to the variables. The distinction of how the provider is paid makes a significant difference in the procedures essential to managing patients and finances in a parallel payment system.
In both FFS and capitation, before seeking the care of a specialist, patients generally must be seen and evaluated by their primary care physician. With FFS, specialty services, some diagnostic and therapeutic services, must be preauthorized by the insurance carrier. The process for handling this varies by payer and by contract.
With capitation, the patient is likely to need a referral to a specialist, but may not require authorization from the insurance company. Staff must be aware of the variables between referrals and authorization with specialty and ancillary services to ensure continuity in patient care and patient service. If staff is not clear on the distinctions, providers may be giving away services.
With FFS, when the contract permits, the staff can collect the patient portion of payment at the time of service, thus improving cash flow. Additionally, collecting accurate, up-to-date insurance information allows you to bill the insurance carrier promptly, thus expediting payment of services rendered.
Reimbursement management with FFS begins with collecting current, accurate demographic and insurance information from patients at the time of service. The next step is ensuring that physicians and staff code accurately and “thoroughly” for services rendered. Physician and staff must be acutely aware of coding principles to be sure they are coding accurately. In addition, it will be important to be sure all services rendered are documented on a charge slip, entered into the computer system accurately and billed appropriately.
Beyond this, reimbursement management requires you to monitor the payers’ performance and closely track your accounts receivable aging. This is not existent with prepaid care, but is vital to managing finances with FFS contracted care.
Accounts should age according to when the initial claim is submitted. Although payment may be delayed with contracted FFS, depending on the contract the practice signs, it is likely that payment can be expected within 60 days of submission of the initial insurance claims. Assuming your practice submits accurate claims weekly, you should be paid within 75 days of date of service.
Track your aged receivables by payer class and single out the payers who have not paid within 90 days. If you have one payer who is not performing by paying within 90 days or if you have one provider who is not getting paid, it is likely problems have occurred. Begin your investigative process by examining your internal procedures to ensure services are billed accurately and in a timely fashion. Beyond this, you will need to follow up with the payers who have not paid. Your effectiveness will depend on your communication skills and building solid relationships with appropriate staff at the insurance company. Solicit their help in settling the claims.
Look for red flags. Do you have one payer who owes you a substantial amount of money, accounting for 10 percent or more of your accounts receivable? If this is the case, you will want to respond promptly and interact with the payer. You will want to ensure you are handling the claims process appropriately regarding patient eligibility and authorization process. Or perhaps you have added a physician who is seeing patients but had not been through the credentialing process and may not be authorized to provide care. If this is the case, you may be setting yourself up for considerable financial loss.
An important element of the capitated environment is ensuring you do not provide care for patients who have transferred their care to another provider or who have lost their coverage.
Assessing financial performance. Assessing financial performance in the FFS arena involves two critical areas. First is how claims are handled and the payment allowed. In other words, What is the discount, are their any errors in claims pr

ocessing and are you paid promptly? Second is tracking, monitoring and analyzing financial performance.

With regard to claims handling, it is important that your staff monitor the performance of each payer to be sure they are paying according to the contract and not under paying or denying payment for changes that should be covered in your contract. It is not uncommon for staff to minimize the significance of claims processing. For example, staff frequently assumes the third party payer has processed the claim appropriately. With this mentality you are sure to take a hit on reimbursement.
Insurance companies make numerous errors that if unnoticed can cost you a significant amount in reimbursement. Examine the explanation of benefits and compare it to the agreed upon contracted amount to be sure the claim is processed correctly. Errors commonly occur with multiple surgical procedures or extensive ancillary services. Your staff must be skilled in monitoring reimbursement and ensuring claims have been processed appropriately.
In terms of analyzing financial performance, prepare and examine monthly reports that compare your major payers performance over time. If you have typically adjusted 25 percent for a payer and you notice the contract adjustments climbing to 30 percent, it’s time to take a closer look at the payer’s performance. Or, if one payer has typically accounted for 10 percent of your amount over 90 days and suddenly it jumps to 20 percent , this is an indicator that something is wrong. It will require further investigative action on your part. The sooner, the better!
Tracking financial performance is quite different with capitation. It requires a different mind set. With FFS, providers are rewarded based on the volume of services provided—the more you do, the more you get paid. With capitation, provider rewards are based on performance. This means that if you can obtain the same patient outcome but with fewer services, the rewards are greater, since providers are paid a set amount for each patient (enrollee), regardless of the services rendered.
Tracking performance. Tracking performance with your capitated patient base requires examining services rendered and the cost for those services, compared to the revenue received. In this case the front office staff has far less responsibility. They simply verify patient coverage and collect a small co-pay, typically less than $20. The clinical staff has more extensive responsibility. They must be sure they do not provide care that is not covered by the capitated contract, such as ancillary lab and other diagnostic studies or therapeutic care such as physical therapy. On the other hand, if such care is covered with the contract, it is important to track it accurately, against the prepaid amount allowed for the ancillary services.
Physicians are paid to provide specific services to the patient for a prepaid amount. The practice must monitor the services provided over time to ensure the capitated payment for all enrollees covers the cost of care provided. This will vary from month to month and must be tracked over time. The cost of services should be tracked, based on the amount you are paid in the FFS part of the practice to perform an effective comparative analysis.
Monitoring performance includes examining the differentials in care provided and the “ordering patterns” between physicians in a group practice. This type of utilization management is familiar to the traditional capitated practice, but new turf for FFS physicians. The services rendered must also be measured against the desired outcome. In other words, is one provider more effective at obtaining a desired clinical outcome with fewer resources than his or her peers? This can be difficult to measure, since there are severity of illness and clinical complication factors that need to be assessed. Most practices, and even large staff models, struggle with collecting accurate data. This requires sophisticated application of management information systems (MIS) that, unfortunately, have not been fully developed to-date. In addition, MIS is a major financial investment expected at a time when providers are experiencing reduced revenues.
Sometimes utilization management is simply a matter of education. The physicians and clinical staff must understand what services they are responsible to provide, what services are referred to another specialist and what procedures are required for diagnostic and therapeutic studies covered by another provider. In some cases it is the primary care physician’s responsibility to complete certain studies before referring the patient, while in some agreements these studies would be the specialist’s responsibility.
The complex variables between FFS and capitation can create havoc in a practice that must adapt to a parallel payment system. Careful planning, a cooperative staff and cautious implementation is critical. You can protect your revenue and avoid unnecessary aggravation by seeking outside resources to help you through the transition. Seeking expert advice is the best way to integrate a parallel payment system in your practice and ensure you protect your future revenue, while providing your patients with the best of care and service.

Judy Capko is based in Newbury Park, CA and Rebecca Anwar, Ph.D., is based in Philadelphia, PA. They are senior consultants with The Sage Group, Inc., a national consulting firm specializing in integrated practice formation, strategic planning and practice management, quality improvement, managed care and marketing for health care providers.

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