Poor marketing and lack of a pre-existing condition clause opened the gates to patients who got specific services and then left.
ALAN K. VITBERG
Once upon a time, an independent practice association lost $4 million in a single year because of poor payer marketing practices and misplaced trust ...."
This is a story as gruesome as any fairy tale.
It's a disaster that really befell a 4,000-member IPA in a northeastern state that contracted with an HMO on a full-risk basis. The IPA--I won't name it because it's a client and it's suffered enough already — trusted that the HMO's product was sound, its premium pricing — and the actuarial basis for that pricing — adequate to pay claims and turn a profit, and the global-capitation contract sufficient to reimburse the IPA members.
It didn't turn out that way.
Instead, what the HMO got was enrollment of a population too small for actuarial soundness, compounded by significant adverse selection. Subsequently, the IPA bore the brunt of financial losses in the market and, ultimately, a trip to the precipice of insolvency.
Provider organizations like IPAs have to understand the implications of payers' marketing activities — from product design and pricing to distribution to promotion — and to seek and acquire a voice in developing and executing marketing plans and products.
We marketers use an approach known as the "Four P's"--product, placement, pricing and promotion — to create and execute a marketing program. We also use these components as a means to help a physician organization analyze its relationship with payers to avoid disaster.
In this case, "product" refers to the health plan offered by the payer, and design refers to the plan's medical benefits, nonmedical benefits and costs. In our disaster scenario, the HMO entered the market with a health plan similar to ones offered by competitors except for one noticeable exception — its product did not contain a clause concerning pre-existing conditions, and that immediately opened a Grand Canyon-like chasm for people all too willing to take advantage.
Some joined the plan during the course of a pregnancy, had the child and then immediately dropped the plan. This alone left the IPA with more than $1 million in unpaid claims for care for people who were no longer paying premiums. At a minimum, the HMO should have enforced clauses in the contract spelling out circumstances — including time frames — under which someone could drop the plan.
The product was also designed around "in-network" and "out-of-network" (point-of-service) options, where in-network copayments and deductibles were lower. The IPA, of course, was capitated on a per-member, per-month basis for projected in-network expenses. With the lack of a pre-existing condition clause, members flocked to the plan and because they favored less-expensive in-network services, the HMO's in-network projections were blown out of the water.
Total per-member, per-month costs were estimated by the HMO at about $140. The IPA's per-member, per-month payment was projected to be 70 percent of in-network usage, resulting in a per-member, per-month payment of about $98 (the other $42 per-member, per-month payment was budgeted for out-of-network claims). What actually happened, because of poor product design, was that in-network usage was 20 percent greater than projected. That meant that the IPA's capitation was inadequate to cover costs. Consequently, the IPA experienced a revenue shortfall of more than $16 per member, per month, leading to additional losses well in excess of $1.5 million.
A poorly designed health plan (i.e. high benefits, low costs or even omission of key protective clauses) may lead to an inaccurate projection of how enrollees will select and use services. If your organization is taking risk, you should make sure the plan enforces its enrollment policy. Also, the product must be designed to attract a large population so you can therefore more accurately predict utilization. If the physician organization's income is based on the health plan attaining certain membership levels and those levels are not reached, revenue and profitability will be compromised.
Placement refers to product distribution and sales. In the case of health care plans, placement can occur indirectly through an employer and can be negotiated by the HMO's own sales representatives or outside brokers. In our disaster scenario, the HMO used a broker that capitalized upon the lack of a pre-existing condition clause and attracted a less-than-desirable consumer base. The HMO had had little experience with brokers and did not bother to monitor this one until it was too late.
Your IPA should know what kinds of businesses the product will be marketed to, and with which benefit packages. It should be offered to an appropriate cross section of businesses, and if the organization is accepting risk, you should have a voice in how and where product is being placed.
On the other side of the coin, the organization should seek to place its product (the medical delivery system) with more than one "customer" (HMO, indemnity payer, third-party payer) to minimize risks associated with exclusivity.
Health plans call their prices "premiums," and the development of premiums is complicated, depending on costs associated with "manufacturing" the product, the competitive environment, state and federal regulations and principles of insurance related to actuarial soundness. The disaster for our unlucky IPA was compounded by the fact that the HMO kept reducing premiums to meet market demands while concurrently reducing payment to the IPA.
Another problem with the HMO's pricing scheme was that the projected average contract size was seriously underestimated. Premiums should be based on revenue needed for the product, correctly estimating the average contract size (the number of family members covered and the desired representation of single, two-person and family contracts). Because this health maintenance organization estimated average contract size incorrectly (and based its premiums on that projection), the premiums yielded less than it had budgeted. Consequently, more people in the plan meant higher-than-expected gross medical expenses and the premiums couldn't cover those expenses.
To make up the difference, the only place the HMO could turn to was the IPA.
Consequently, the HMO's misunderstanding of the market and the IPA's lack of involvement regarding product pricing were fundamental causes of a clearly avoidable disaster.
If your organization is accepting risk, you should have a voice in how the product is being priced.
Promotion means designing a compelling message and then selecting the best, most cost-effective way to deliver it. In our disaster scenario, the HMO underfunded the media plan, gave the broker some brochures and a sales kit that highlighted the worst feature of the product (no pre-existing condition clause) and left it up to the broker to decide how and where to use the brochures. The broker went for easy sales and consequently delivered a pool of bad risk.
Your physician organization needs to know how, why, when and where the payer's plan is being promoted.
".... and they lived happily ever after."
It would have been nice to write this ending, but I couldn't. Both the IPA and the HMO have suffered and will continue to suffer serious financial losses, and their relationship has been damaged beyond even the repair capabilities of a fairy godmother.
The lesson? There is a strong relationship between the payer's health care plan, product and marketing activities, and the physician organization's viability. Understanding how payer marketing affects risk, compensation and utilization control is one of the most complex challenges facing physicians today.
Physician organizations will be more successful when they understand these relationships and develop the capabilities needed to manage them. Consider, for example, that health plan enrollment correlates to physician organization revenue and the organization's ability to pay members and meet fixed operating costs.
Another lesson deals with the issue of trust, as the IPA in this case trusted that the HMO knew what it was doing and believed that the HMO would act in the interests of the IPA. I don't suggest that you never trust a payer — rather that you base your trust on sensible business practices and appropriate knowledge.
Alan K. Vitberg, president of the Crestwood Group, a Fairport, N.Y.-based management consulting firm specializing in health care issues, wrote "If We Build It, Will They Come?" for the March 1997 issue.