Disease Management

MANAGED CARE November 2000. ©2000 MediMedia USA

Can disease management vendors really show a strong return on a health plan's investment, or are the data just too malleable to be useful?

John Carroll

Contributing Editor

As the chief medical officer for Maryland-based Coventry Health Care, Bernard Mansheim, M.D., has had plenty of opportunity to look into the disease management companies that routinely drop by to peddle their services.

Their basic business plan is simple: Supervision of members suffering from common chronic illness will improve their health habits and reduce your emergency care, which can run into astronomical figures.

Using prenatal case management as an example, the intuitive justification for investing in the program is "if you prevent one premature delivery with its attendant morbidity and cost, which can exceed $500,000, it is easy to justify investment in the program."

Prodding health plans involves more than just dangling the prospect of savings. Accreditation groups are pushing for MCOs to do more than claim a commitment to improving the long-term health of the country's walking wounded. They want proof of zeal for prevention, such as a contract with a DM firm for congestive heart failure or diabetes.

"I've given disease management a lot of thought," says Mansheim. But every time he does the math on the return on investment (ROI), he comes out of it feeling even more skeptical.

No financial benefit that DM companies claim, he says, can be proven. In the often heated debate about the ROI offered by DM, Mansheim has taken a stand squarely opposed to what he calls the "disease-of-the-month club."

"It can take years, if not decades, to see if it's effective," says Mansheim, who has decided that DM strategies are "significantly flawed for a whole lot of different reasons."

Mansheim is engaged now in finding ways to create an effective internal illness-prevention campaign. He disagrees with leaders in the disease management field, many of whom have committed tens of millions of dollars in the sincere belief that they can demonstrate a hard return for the money spent for their services.

Clearly, some managed care executives don't share Mansheim's view. To them, DM companies not only offer them hope for improving long-term outcomes, they deliver hard and verifiable returns in the form of reduced costs.

"Everybody here goes through the exercise with eyes wide open," asserts Gifford Boyce-Smith, director of quality management services for Blue Shield of California. Boyce-Smith has inked deals on two different DM programs, as well as developed five others in-house. After two detailed pilots on asthma were reviewed, he says, Blue Shield found "absolutely dramatic" results, reducing ER visits and other medical expenses by 40 to 50 percent.

Says Boyce-Smith: "It's important to back this up with real numbers. I'm pushing everybody to think hard about it."

Creating a base line

The key to determining ROI, critics and proponents both agree, lies in creating a "base line" for the costs associated with the patients who need to be covered.

It's getting to that base line that provokes some of the strongest arguments for and against disease management.

Health care data, concedes Boyce-Smith, "is just a morass. It's a sea of ICD-9 and CPT codes and so on." Even if the data do come from a swamp, as he puts it, "It's still possible to do terrific reporting in this field" — if you invest in the right kind of people who understand how to mine information through multiple report analyses. "What has to happen for the data to be understood is for the business person and the technical person to be joined at the hip."

Mansheim has taken a look at the same statistical swamp, and couldn't lose the feeling that trying to make sense out of the numbers was a fool's errand, no matter to whom he was joined.

"I've never been secure that developing a base line can be done fairly and accurately," says Mansheim. "Probably at the end of the day, nobody knows who the loser is."

Joel Nitzkin, M.D., M.P.H., agrees. He's a New Orleans-based consultant who often tries to steer MCOs away from DM companies and toward creating internal systems. "Those who advocate disease management are making claims they can't back up," he says, adding that the problem is that everything is constantly changing in health care — thus threatening to skew the data needed to create a base line.

Claims may be delayed months, Nitzkin says by way of example. Definitions of a disease may also change, causing the numbers of people in a health plan that may be covered by any one program to fluctuate.

One of the biggest problems, many say, is the rapid churn of membership, often about 25 percent a year. With that kind of turnover, managed care groups can't always stay focused on long-term care.

"Not to say that there isn't good work being done," says Nitzkin, "but the industry as a whole is in trouble because it can't be backed up."

For most DM companies, the difficulty of demonstrating to health plans and other buyers of DM services that there was a base line created a huge challenge to their acceptance.

Benchmarking, agrees Al Lewis, one of the champions of the field, "is not a process that inspires confidence."

Lewis's guarantees

To help ensure that the health plan comes out a winner, Lewis's Disease Management Purchasing Consortium builds guarantees into contracts, with DM companies offering to return 20 to 100 percent of their fees if they fail to meet preset goals.

There are some simple figures you can rely on, says Lewis. If you're offering a disease management program for congestive heart failure, you can add up all the claims for CHF conditions in a plan for the year before, specify the savings that are being sought, and provide a guarantee of a significant chunk of your fees that you'll hit that mark.

However, he adds, there are some critical points that need to be figured in. For instance:

• Adjusting for adding new patients to the plan;
• Health plan-specific inflation for any natural increases in costs;
• Removing patients excluded from the contract, such as end-stage renal disease patients.
• Separating patients over and under age 65, as older patients are typically more expensive to care for regardless of preventive measures.
• Making sure that the extraction methodology is the same before and after. The best practice is to include every eligible person in figuring out a base line and projected savings.

That way, says Lewis, the only real risk a health plan runs is that the DM company goes bankrupt. A very cautious organization can arrange for fee insurance to protect against even that contingency.

A 15-year veteran of HMOs, Christobel Selecky, the CEO of Newport Beach, Calif.-based LifeMasters Supported SelfCare, says her company first asks for the raw numbers from health plans and then runs its own analysis.

"Data being what they are, you have to work with what you have," she says. "It's their data. It isn't like they dump the data on us and we come up with a number. It's a very collaborative process. Until both sides agree, we don't have a base line."

It still takes about 18 months for the programs to demonstrate a true ROI, she says. "We're just starting to see disease management report definitive savings. We're still in the stage when the people buying our services are the innovators."

Selecky is also quick to acknowledge a host of problems in gathering health care numbers. Many of the institutions involved have outdated systems that are hard to work with. There isn't any sign of that changing anytime soon.

"The MCOs are still operating on pretty thin margins and don't have much money to invest in new systems," says Selecky. "I'm not seeing a giant investment in information systems infrastructure being made.

That's a problem, she adds. "For health care to improve quality, there has to be greater focus on data."

Reluctant plans

Until the numbers begin to come in on DM, and the industry starts seeing peer-reviewed material on its effectiveness, plenty of big health plans will be reluctant to buy into her vision.

The view on Wall Street toward start-ups in disease management may have turned slightly chillier in recent months, particularly for DM companies relying on the Internet to deliver services — and success.

"A lot of the people who are paying for DM claim that there is a demonstrable savings," says one New York-based financial analyst who specializes in health care. It's going to take more than a few skeptics like Mansheim to change that impression.

Lewis is even harder to budge on the topic. He insists that anyone who gets a guarantee from a member of the consortium can negotiate a DM contract in good faith.

Mansheim, though, says DM advocates' arguments are riddled with holes. "I have an inherent skepticism," he says, "that anyone can prove that spending $100 to try to reduce morbidity costs of a patient with CHF can save $1,000 in treatments."

Lewis agrees that's ridiculous. "Returns average 1.6 to 1, depending on the disease. Still a 60 percent net return is pretty good, considering that it's guaranteed and, to paraphrase Henry Kissinger, it has the additional virtue of being the right thing to do."

However, Mansheim insists that just because you identify a population of people with a diagnosed chronic condition and reduce its medical costs in one year versus the prior year doesn't mean the disease management program worked in creating savings. Patients may have done better entirely on their own, without any direct benefit from having a separate organization calling on them occasionally to encourage better care.

Where the "disease-of-the-month club" suffers, Mansheim says, is from its extraordinary level of fragmentation. Most disease management companies offer programs for only one or two chronic conditions, which is virtually meaningless when trying to create savings for populations that typically suffer from a high degrees of comorbidity.

"We live in a world of multiple comorbidities," says Mansheim. "People do not have homogeneous problems. They have multiple problems."

If a disease management company is assigned to control only one "discrete disease," he says, the approach is so shortsighted that it is bound to fail in reducing the cost of care.

What makes sense on the medical scene is gaining traction in the financial world as well.

"You have too many people running around doing a little of this and a little of that," says one Wall Street banker. Only when the DM industry undergoes a major consolidation will you see a few big players emerge to offer a broad cross-section of programs covering many comorbidities.

Addressed by DM industry?

Again, Lewis agrees with Mansheim's basic point, but adds that the industry addresses it. "Everyone knows that the leading chronic disease vendors do manage comorbidities as well and have for about two years," he says.

Mansheim, for his part, isn't waiting for DM, or Wall Street, to sort things out.

The foremost job of the health plan, says Mansheim, "is to take care of the sickest people. It doesn't matter if they have AIDS or cancer or MS. Those are the people we need to manage." After that, it is appropriate to reach out to all members.

By creating a complex case management system, says Mansheim, a managed care group can begin to care for the really chronically ill, no matter what disease or diseases they have.

"With the use of computers, we have — for the first time — the opportunity to manage every one" of Coventry's 1.5 million enrollees, he says. "By classifying each member into one of 114 categories using the Ambulatory Care Groups Case-Mix System developed at Johns Hopkins, programs can be tailored to individuals. This would account for disease management in all 14,000 ICD-9 codes, not just a select few like diabetes or asthma."

Again, Lewis has a response. "Some of the best vendors do exactly what Bernie is saying, but they start showing returns in months instead of the years it takes for a health plan to do it."

Still, Mansheim says that while population management has become a trendy concept, physicians have never lost their focus on the individual because you can't easily lump people by discrete illnesses.

Adds Mansheim: "We don't manage statistics. We manage the process of health care delivery to individuals."

John Carroll is a Texas-based free-lance writer.

MANAGED CARE September 2000. ©2000 MediMedia USA

Within a few years, there may be only 30 DM companies left, says one expert. HMO customers want vendors to handle more than one condition.

John Carroll

At the time L. Peter Smith jumped into the disease management field six years ago, prospective customers in managed care had a simple expectation: Prove what you're pitching. By establishing protocols for handling a chronic illness such as congestive heart disease, companies like Smith's CorSolutions Medical were asking managed care companies to buy into the notion that they could reduce costs. Many disease management companies were willing — and often required — to back that claim with what amounted to a guarantee.

Over the years, though, the demands have grown more complex and the business no longer works on such simple terms.

While most of the DM specialists started by working with health plans and physician groups on a single disease, HMOs began to look for comprehensive help with related illnesses.

Meanwhile, the once slender selection of new companies that were making their pitch suddenly found themselves crowded in a field of some 120 DM companies scrambling for business. Adding to the competition is a host of brash new Internet outfits that have popped online recently. Many players find themselves stranded with one or two contracts and no quick way to build revenue.

Growing trend

Those same market forces have built a pressure cooker for a simmering pot of mergers and acquisitions. For Smith, these led him down a path to an acquisition earlier this year that strengthened his company's diabetes management ability. It's also a harbinger of what many independent observers believe is a trend of acquisitions.

"As the industry continues to grow, you're definitely going to see more consolidation," says Smith. "Probably more than you've seen in the past."

"The industry is certainly ripe for consolidation, and has been for a couple of years," says Vince Kuraitis, a principal in Better Health Technologies.

The shakeout has arrived.

"Right now it's a terrible business," asserts David Loucks, who recently expanded his online disease education service — InLight — with the acquisition of a web-based disease management company, ProMedex Inc. "There isn't enough money out there to fund all the companies that say they are a disease management company. You're going to see some attrition, some companies going away." (About 40 companies so far, says Smith.)

Loucks's view is endorsed by a group of consultants and brokers who say the trend toward consolidation in the DM field has been gradually gathering momentum over the past two years. Now, buyout deals are beginning to create newly expanded companies that are able to offer health plans disease management services for a range of illnesses.

Some CEOs are re-examining the risk agreements that had dominated the field — and several are pushing into population health management, finding that the opportunities may be greater if you're dealing directly with large employers looking for ways to leverage new savings.

Few people are taking anything for granted right now.

"I think anybody who's standing still at this point is making a mistake," says Al Lewis, who runs the Disease Management Purchasing Consortium and is president of the Disease Management Association of America. "There have actually been several deals that have been made in the last few months, more than at any other time. I put two together myself, but they haven't been announced yet."

Warren Todd, president of Disease Management Resources, says this is all happening very quickly "because there are several things driving it."

First, says Todd, came the rush: Companies scrambled into the market in the mid-'90s, eager to stake a claim on a particular disease and ready to take on risk agreements to win a contract. Instead of seeing a rapid drop in new competition, the Internet fueled a new crop of competitors touting technology that promised a market revolution.

Eventually, says Todd, it started to dawn on all the players that the field was crowded and fragmented, with few companies able to build a large book of business. "The first reaction is to start striking alliances," says Todd. "Then they start working on mergers and acquisitions."

Buyout buzz

As word spread and more and more companies hit the acquisition trail, the buzz about buyouts began to grow increasingly loud.

"After you approach them, they say, maybe we'll talk to a few others," says Richard Friedman, CEO of MIM, which recently announced an acquisition. "The small disease management companies are looking to capitalize. It looks like a good time."

Health plans have played a role in that timing as well.

"Managed care companies are not doing well," Todd says, and as they tighten their purse strings, DM companies start to find it harder to sign a contract. "It takes a hell of a lot longer to close a deal."

Meanwhile, as it gets harder to pump more revenue, the venture capital firms that had romanced DM companies in the '90s with start-up funds are turning cool. As revenue fails to keep pace with expectations and new deals are harder to push through the pipeline, the VC groups are getting restless and looking elsewhere for quick returns.

"Now there's not enough fuel to keep the fire burning," says Kuraitis about the sudden venture capital shift from health care services companies to Internet health companies. In addition, he points out that "clinical folks founded most disease management outsourcing companies, not business people. They developed good technology and software but they didn't get many customers along the way."

What customers they did land often weren't guaranteeing a profit, either.

Lewis, one of the pioneers in the DM field, knows many of the players personally because he helped negotiate quite a few of the contracts managed care companies were pitched back in the "early days" of disease management. With DM companies anxious to prove their worth to HMOs, they often agreed early on to assume risk, essentially backing up their claims that they could reduce the cost of handling a disease by guaranteeing their performance.

Lewis's approach "has become a model for these deals," says Kuraitis. "If you're a health plan, Al's doing you a good service."

Unfortunately for the DM companies, though, the contingent liability associated with these risk agreements puts a crimp on their balance sheets that became increasingly tough to explain to investors.

"For many of these companies, the economic model degenerated into at-risk contracts," says Loucks. "They would go to managed care companies and guarantee savings of, say, 10 percent on the cost of treatment and incur the risk of patient care. The idea was to build up the business with these contracts, and then leverage them into a bigger presence in the market.

"They were putting all their revenue at risk," he adds. "The problem is that it's very costly and difficult to manage." Companies handling a single disease ended up with one or two clients. "You didn't get the efficiencies. That's what's killing many companies. They couldn't make money."

Says Loucks: "You have got to get away from [risk], because you can't make money."

Risk deals

Not everyone agrees. Smith is quick to note that his company has several money-making risk deals.

"From the beginning, Al Lewis laid out that if managed care companies had concerns, risk was a good way to allay fears," says Smith. But Lewis hasn't negotiated every disease management contract in the business, and even some health plans have begun to move away from risk agreements as their relations with mature DM companies have gained a solid footing.

Even with a spate of acquisitions, no one expects to see the crowded field of competitors shrink to a handful of players anytime soon. Lewis expects to see the shakeout cut the field "from a huge number of players down to a large number of players. I think in two years there will be 30 disease management players left."

They'll probably handle a variety of ailments.

"People are getting tired of the single-disease route," says Lewis. "Markets want to address comorbidity. There is a recognition that there are synergies in combining diseases where they are related."

"The future of disease management is to address multiple comorbid chronic illnesses," agrees Kuraitis. "They're migrating together. It's become more patient-based than disease-based."

That move to link DM in different areas was a primary force behind CorSolutions's decision to buy a diabetes management organization earlier this year. Diseases like congestive heart failure and diabetes are often linked, making the demand for dual services more common.

Lewis says that the new attitude by health plans is, "I don't want to deal with two companies when my patient has both" conditions.

And, says Loucks, there's a growing consensus that too many single-disease firms are chasing too few health plans. "There's no need for 50 companies that handle diabetes," he adds.

For Loucks and others, it's logical that the first step of consolidation will follow specialty lines. Diabetes management companies will join forces. Then multispecialty companies will appear, taking on diabetes and heart congestion and other chronic illnesses.

"Then use technology to bring the price points down," says Loucks. And rather than assume risk, DM companies would be better off to share in the benefits of reducing the price of treatment.

In a business where profits are hard to come by, there is a growing emphasis on the Internet to reduce costs and attract new clients.

"With the Internet and the intranets, there's a more effective way to reach employers," says Todd. "The ability to survive is being driven by the Internet."

Lewis, though, remains skeptical of any forecasts that give the edge in this business to pure dot-com DM outfits. "For the most part the Internet will be a complement to disease management companies, not a substitute," says Lewis.

Even after CorSolutions poured $7.5 million into its own web efforts, it remains just part of the company's overall strategy, not a stand-alone operation, Smith says. "There's an awful lot of hype around these companies," he points out. "We don't regard the Internet as something completely different. It is a tool to enable us to do our business better."

An even bigger potential catalyst than the Internet may be found in a new type of client who has, at least up to now, laid outside the realm of disease management. More and more of the companies are looking at expanding their business into total population health management, driven by the same market forces that are pushing many health plans to boost rates.

Why the sudden shift in focus?

"Employers unhappy over the rising rates being handed out by health plans are starting to look at direct contracts with disease management companies," says Todd.

By going direct to DM experts, a big employer with 50,000 workers is in a position to dictate better financial arrangements with health plans. That move, in turn, is helping drive some organizations to pull together complete DM programs.

"Both health plans and disease management companies are going to population management control," agrees Kuraitis.

For Loucks, total population-based care — where disease management companies move away from just providing and promoting protocols for treating chronically ill patients — offers companies like his the chance to strike deals to handle care for large population groups while profiting by slicing overall health care costs.

Time, and an increasingly profit-driven market, will tell who is right and who gets bought out next.

"It's always been an interesting, changing picture," says Smith about the tumultuous, if brief, history of DM. But it won't always be this topsy-turvy.

Says Smith: "Sooner or later, those pieces are going to come together."

John Carroll is a free-lance writer in Dallas.

MANAGED CARE April 2000. ©2000 MediMedia USA

Mark D. Abruzzo, J.D.

In Managed Care's November 1999 issue, Al Lewis, president of the Disease Management Association of America, wrote about potential pitfalls facing DM. One identified by Lewis was state privacy laws, a topic that merits further attention.

When the Health Insurance Portability and Accountability Act became law in 1996, it was the most sweeping health care legislation in decades. We haven't felt the full brunt of it yet.

HIPAA covers broad categories that include provisions for health insurance coverage portability when employees lose or change jobs. It also expands the scope for fraud-and-abuse investigations.

However, the part of the law that has been simmering on the back burner — "administrative simplification" — is going to envelop the entire health care industry in a little more than two years.

Administrative simplification requires all health care organizations — including HMOs, physicians groups, and clearinghouses — to use specific computer technology that is standard to all.

It standardizes transactions between physicians, payers, and the government — covering such things as health care claim encounter information, enrollment and disenrollment data, eligibility and referral activity, and premium payments.

Implementation will be painful and expensive for all involved. Short-term pain and suffering, however, should yield long-term benefits of reduced costs and improved quality for our health care system.

One pothole along the road to standardization is violations of privacy. On Nov. 3, 1999, the U.S. Department of Health and Human Services proposed a rule containing standards to protect privacy of health information covered under HIPAA.

The proposal includes provisions for security when exchanging the information, and more provisions that would guarantee the privacy of health information.

Information needed

Privacy, insofar as DMAA is concerned, however, is where problems begin to mount. DM programs need access to information, plain and simple. Privacy guarantees that impair such accessibility can have a crippling effect on the process.

DMAA lobbied Congress intensely last summer and its efforts may have paid off. Privacy protections under the proposed rule do not extend to health care management of the individual through risk management, case management, and disease management.

Each of these is considered an extension of patient treatment under the rule. Information, in turn, may be used and disclosed in furtherance of patient treatment.

The rule is proposed, however — not final. HHS is accepting comments from the public right now pertaining to the proposal (the department is being besieged, actually) and it will review those comments before making the rule final with or without modification.

DMAA, rest assured, will do everything in its power to be sure that there is no modification with respect to carveouts.

Enter state statutes

Unfortunately, the proposed federal privacy rule does not preempt more stringent state statutes that relate to the privacy of health information. Preemption is a major issue under the rule, and is likely to be the topic of considerable debate in the future because the rule includes many exceptions to preemption.

Most states have privacy laws. Few, however, address privacy within this context. This figures to change in a hurry. In 1999 alone, lawmakers in 35 states introduced more than 300 bills relating to the confidentiality of medical records.

In 1999, California passed legislation that allows access to patient information by DM programs only after receiving authorization by treating physicians.

DMAA views the physician authorization requirement as a substantial impediment to its purpose and, undoubtedly, hopes that other states choose to follow the proposed federal rule.

Whether states choose to emulate the federal law or enact legislation along the lines of California's law remains to be seen. In making the decision, they'll no doubt be forced to weigh the importance of patient privacy rights against the public need for proactive programs that are designed to improve overall health and reduce costs.

Different ball game

DMAA successfully lobbied Congress, but lobbying successfully at the state level would be a different, more difficult, ballgame. A more likely scenario would have the DMAA hoping that most state legislation falls in line with the federal rule.

The DMAA would then have to resort to lobbying medical societies in those states, such as California, where physician authorization is required for access.

Still, I don't share the DMAA's gloom that state statutes like California's are terrible obstacles. At the present time, most states have broad physician-patient privacy statutes. Patient authorization for access to records is common, however.

For example, physicians — as a condition of treatment — generally require patient authorization to submit patient information to insurers in connection with the reimbursement process.

This is nothing more than formality. Is the DMAA's contention that physicians don't want to deal with the hassle of authorization or that they would rather not provide authorization for financial or other reasons?

Frankly, I don't see either as a viable concern for the DMAA. In any event, it's my hope that this doesn't become a widespread issue and that the majority of states will support disease management and follow the federal rule.

Mark D. Abruzzo, J.D., specializes in health care law at the Berwyn, Pa.-based law firm of Wade, Goldstein, Landau & Abruzzo.

MANAGED CARE January 2000. ©1999 MediMedia USA

• For a listing of other articles in this series, see end of article

The Disease Management Purchasing Consortium & Advisory Council tracks the growth and success of the industry, based on first-hand information from the roughly 70 percent of all purchases of DM programs that go through the consortium, and from information gleaned about the other 30 percent.

The numbers the organization has gathered suggest that the $340 million DM industry is one of the fastest-growing investments in health care.

Dollars spent on DM, 1997–1999

Of course, each condition within DM represents its own little growth area. Which franchises are most popular? Between 1997 and 1999, the dollars appear to be heading toward cardiology and maternal/neonatal, says the consortium.

Getting a better deal: guaranteed savings by disease category

The consortium is so sure of itself that it tells prospective clients that it can guarantee a certain amount of savings for certain diseases. Al Lewis, the consortium's president, suggests that the savings will be largest by combining multiple diseases into a single program. For a plan with considerable Medicare business, doing cardiac disease, diabetes, and COPD together can reduce medical losses by a combined total of several percentage points, even after the disease management fees themselves.

Mix of RFPs by disease type 1999 vs. 1998: Asthma down, others up

At least among Disease Management Purchasing Consortium members, demand for new asthma programs dipped in 1999, but all other categories showed strong growth in requests for proposals.

Industry trends: market sizes and compositions (1999)

A total of $290 million in contracted disease management programs were in force in 1999. What's interesting is that so many categories are of similar size, says Al Lewis of the Disease Management Purchasing Consortium, which collected the data. Figures are percent of $290 million.

Employers turning toward DM

The purchasing consortium isn't the only one spotting a growing interest in DM. Wyeth-Ayerst Laboratories surveyed 375 employers representing nearly 12 million beneficiaries and found increasing DM use.

SOURCE: 1999 WYETH-AYERST PRESCRIPTION DRUG BENEFIT COST AND PLAN DESIGN SURVEY REPORT

HMOs, POS plans embrace disease management

Disease management showed "remarkable growth" in 1999, according to a survey conducted by the William M. Mercer consulting company. That spurt was evident in both HMOs and point-of-service plans.

SOURCE: WILLIAM M. MERCER NATIONAL SURVEY OF EMPLOYER-SPONSORED HEALTH PLANS, 1999

MANAGED CARE January 2000. ©1999 MediMedia USA

• For a listing of other articles in this series, see end of article

Naturally, doctors are more likely to buy into a physician-led DM program. Rewarding them for resulting lower medical costs keeps them in the game.

MargaretAnn Cross

If a patient whose physician works for Harvard Vanguard Medical Associates ends up in a hospital with congestive heart failure, odds are high that the patient will be enrolled in the group's disease management program. The goal: never repeat that hospital visit.

The congestive heart failure program is run by three nurse-practitioners employed by Harvard Vanguard, a 550-provider group based in Boston. The nurses, who work closely with primary care physicians and cardiologists, see patients regularly, assessing their medications, aiding their rehabilitation, and educating them about CHF and how best to take care of themselves.

It's a success, says Diane Gilworth, R.N., clinical manager of the program. From 1997 to 1998, patients enrolled in the CHF program had 92 percent fewer emergency room visits and 40 percent fewer disease-related hospital admissions than those hospitalized for CHF before the program started.

Those numbers are strong, even better than commercial disease management programs might produce, says Al Lewis, president of the Disease Management Association of America. He's not surprised. When a disease management program has its roots in a medical group or other provider organization that includes physicians, he says, the savings are almost always multiplied.

"It's possible to do disease management without physician involvement, but it is more successful if you do have physician involvement," Lewis says. "And the extreme of that is when the physician group is actually undertaking the program."

Disease management is growing fastest within provider organizations, consultants say. Some insurers, too, are turning over more disease management responsibilities to physicians and provider groups. It makes sense for providers to do disease management, experts say. Physicians see the patient as a whole and are able to apply protocols from hospitalization through home care. In addition, doctors and other providers can care for coexistent medical problems.

The biggest reason for provider groups to lead disease management efforts, though, is that doctors are much more likely to participate if the program is coming from within, Lewis says. "A decent disease management program will get physicians covering 50 percent of its patients to take an active role in the program. When the physician group does it, that figure is very close to 100 percent," he says.

Challenges exist whenever a medical group undertakes formation of a disease management program. Compensation is an issue, especially when physicians are providing services that aren't typically covered by a health plan, such as education.

But many organizations are forging ahead, and they say their patients will benefit.

"If you're going to change a system," says Tamara Lewis, M.D., medical director for community health and prevention at Intermountain Health Care in Salt Lake City, "you have to do it internally."

Charlotte's success

The Sanger Clinic in Charlotte, N.C., is one group practice giving disease management a go. The 60-member group of cardiovascular specialists has programs targeting several conditions, including adult cases of congenital heart disease, lipid management, and congestive heart failure.

Physicians designed protocols for the programs, and on designated clinic days they work with a team of nurses, physical therapists, and pharmacists to help patients get better control over their health problems, says Stephen L. Wagner, Ph.D., CEO of Sanger Clinic.

"The disease management programs tend to be multidisciplinary and include a lot of patient education," Wagner says. "We are trying to get patients to understand the issues related to their disease so that they can do the right things to keep from getting into trouble. We want to keep their quality of life up and keep them out of the emergency room."

Physicians take the lead in all of the disease management efforts, Wagner says. Physicians work within the protocols, but decide for each patient how much exercise, what types of therapy, and what medication changes he or she should have.

"We think it is best if the physicians are at the front of this and really directing traffic," Wagner says. "They have the best overall understanding of the patient's condition, so they can integrate all of the care."

Treating the whole patient

Such close physician involvement is what makes medical-group efforts stand out from those of independent companies, says Jon Mayer, R.N., a health care management consultant at Milliman & Robertson Inc., the actuarial and consulting company. "In provider-run disease management programs, physicians really know the patients. They understand all of the medical problems the patients are facing, and they can address them. In comparison, an outside company sometimes finds it difficult to define what it is and is not supposed to be managing."

Congestive heart failure patients in Harvard Vanguard's program often have primary care problems other than CHF, Gilworth says. Because she and the other program nurses communicate often with the primary care physicians, they can expedite all kinds of care for patients in the heart disease program.

"The most important reason medical groups should take on disease management is that outside companies don't have any inherent responsibility for the patient," she says. "We can actively manage a patient's multiple issues. We can help patients with their diabetes, their hypertension. That is something most outside programs do not provide."

Before Harvard Vanguard launched its heart failure program several years ago, it considered hiring a vendor to operate a disease management program for its patients. The group's decision to run the program in-house has proven to be less expensive, as well as more beneficial to patients, Gilworth says, encouraging other medical groups to do disease management themselves.

Executives at Intermountain Health Care also like to see physicians in charge of DM programs. As an integrated health system, Intermountain designed care management programs to cover all sites of care, from hospitals to patients' homes to outpatient settings.

Integrated delivery networks have a greater ability to control care in all settings, from inpatient to ambulatory to home-health care, says Mayer. "An outside company can really only educate patients and monitor their compliance. It is still up to providers to care for and manage the patient. That is where gaps begin to exist with outside programs."

At Intermountain, care management teams design interdisciplinary protocols that physicians, nurses, therapists, and others follow throughout all stages of care. Most diseases addressed have short- and long-term components, says Jill Hoggard-Green, assistant vice president of clinical support services. Patients with diabetes, for example, can have acute problems that land them in the hospital. But they also have to manage their condition on an everyday long-term basis.

"The only way to make significant behavior change is to work in an interdisciplinary way," she says. "You need to have all the players involved. For instance, you can have a protocol that covers what happens with a diabetes patient in the inpatient and outpatient settings in terms of medication management and treatment, but you'll find that you won't be able to make his blood sugar as stable as you would like it to be over the long term without a tremendous amount of coaching from educators."

Intermountain's own health care plans also have proven to be very helpful to the disease management process, says Intermountain's Tamara Lewis. "When we realized that patient coaching and education were critical components of our programs, we had the health plan representatives there to help put that together. They went back and added that component to the benefit structure."

Intermountain insures about 1 million people through its own health plans and affiliate contracts in which companies lease the Intermountain network. The provider organization has not yet priced its disease management programs for other insurers, Hoggard-Green says.

Reluctant to pay

Physician organizations say compensation for groups that do disease management is a tricky area that needs to be addressed.

Brown and Toland Medical Group in San Francisco scaled back its DM programs because insurers failed to compensate the 2,000-physician multispecialty group, says Michael E. Abel, M.D.

The group began implementing disease management programs in the early 1990s when it launched in-office risk assessments and education sessions for the elderly and a program for HIV patients. Programs for patients with asthma, diabetes, and other diseases followed.

But as the group reduced overall costs by shifting care from the hospital to the physician's office, pressure to reduce the group's capitation rates grew.

"Neither health plans nor employers rewarded us financially for these programs," says Abel. "As we managed these populations effectively and efficiently and our costs went down, the pressure increased to reduce the payments coming to us."

Brown and Toland has repeatedly been commended for the quality of care it provides, but that has not translated into financial support to keep disease management programs going, Abel says. All of the programs today are stripped-down versions of what they were.

"It is impossible to do what we believe is the right thing if we don't get compensated appropriately," Abel says.

Uncodable care

Insurers do not pay Sanger Clinic physicians for their disease management programs, either, Wagner says. Physicians are only compensated if the services they provide can be coded for payment. Education does not often fit that bill, Wagner says.

Some insurers, however, are trying to address the payment issue in hope of gaining the benefits of physician-led disease management.

Gregory Preston, M.D., chief medical officer for managed care at Blue Cross and Blue Shield of Tennessee, looked for medical groups that would provide disease management and found none. So the company is beginning to encourage physicians to provide educational and other pieces of the insurer's disease management programs and get paid for it.

When Blue Cross identifies a candidate for a disease management program, the insurer asks the patient's physician if he or she would like to provide a group of services, such as nutritional counseling sessions. Blue Cross provides all of the material necessary for the program and pays the physician a package fee. If the physician chooses not to provide all of the services, he or she still can get extra compensation for doing telephone consultations with nurses about the patient. Typically, this wouldn't be paid for, says Preston, who used to work for a large medical group that did disease management. "This isn't the same as a group practice doing disease management on its own, but we wanted to give physicians the choice."

Blue Cross and Blue Shield of Florida also is working in new ways with physicians to operate disease management programs. In one program, the insurer has authorized nephrologists to act as the primary care doctor for patients with end-stage renal disease. This way, the nephrologist can treat the main disease, as well as assess and either treat co-existing conditions or refer the patient to other specialists. Blue Cross has authorized additional treatments and medications for people in the program.

"Most people who have end-stage renal disease have more than one major condition that affects their overall health status," says Larry Reynolds, director of Blue Cross's Advanced Renal Options program. "Nephrologists can look at total body systems in a way that optimizes the renal care a patient receives, as well as other ongoing conditions."

Patients with end-stage renal disease often have diabetes, cardiovascular disease, and high blood pressure, says Robert P. Geronemus, president of South Florida Nephrology Associates and consultant medical director for the Advanced Renal Options program. "You need to have one person coordinate things, and the nephrologist is ideal, because the nephrologist is the person who is seeing the patient most frequently."

Physician involvement early on helped form the disease management program so that it would best benefit patients, Geronemus says. That's unusual, he adds.

"The practice of medicine has been very much influenced by what is paid for; rarely do physicians get asked what they really think ought to be done," he says. "But in this program, that's what happened. Blue Cross and Blue Shield wanted to get a high degree of physician involvement from the beginning."

Because nephrologists act as primary care physicians, that involvement has continued, Geronemus says. "The physician is in the middle of this on a day-to-day basis, managing care with the encouragement of the insurance company and for the benefit of the patient. Everybody wins."

MargaretAnn Cross is a freelance writer based in Allentown, Pa. She specializes in health care.

MANAGED CARE November 1999. ©1999 MediMedia USA

Arthur L. Baldwin III, FSA, MAAA

Milliman & Robertson, Seattle, Wash.

This article also available in PDF

Abstract: Results for disease management [DM] programs have not been as positive as hoped because of clinical issues, lack of access to capital, and administrative issues. The financial experience of DM programs can be quite volatile. Financial projections that are protocol-based, rather than experience-based, may understate the revenue required and the range of possible costs for a DM program by understating the impact of complicating conditions and comorbidities.

This paper has been reviewed by peers on Managed Care's Editorial Advisory Board and within Milliman & Robertson.

Actuarial tools (risk analysis and risk projection models) support better understanding of DM contracts. In particular, these models can provide the ability to quantify the impact of the factors that drive costs of a contract and the volatility of those costs.

This analysis can assist DM companies in setting appropriate revenue and capital targets. Similar analysis by health plans can identify diseases that are good candidates for DM programs and can provide the basis for performance targets.

Successful disease management companies must address the clinical and administrative aspects of providing the required care to the identified population of patients, and the ultimate test of the success of a disease management contract must be an evaluation of its effect on the quality of care provided to the covered population. While it is critical for a disease management company to provide high-quality care, doing so does not ensure that the program will be successful. Another factor often crucial to the success of a DM company is its ability to evaluate the financial aspects of a proposed risk contract with a health plan. This presents a challenge because costs and utilization of health care services can fluctuate greatly, making it difficult to project costs and utilization. These fluctuations can threaten the financial viability of disease management arrangements. The actuarial tools of risk analysis and risk management can provide a basis for making sound management decisions for successful disease management contracts.

This paper introduces disease management risk concepts in general, along with a discussion of risk and financial evaluation considerations, and a brief case study illustrating these principles. The case study and examples used in this paper are taken from cancer disease management contracts, but the basic principles apply to other diseases as well.

Description of DM programs

Disease management programs direct and provide care to individuals with a given disease or set of symptoms, by establishing a group of providers and treatment protocols to ensure that the care required to treat the disease is provided effectively and efficiently. Some DM programs function as components of global health care service contracts. These programs are part of a larger risk management program. Other disease management programs are separate contractual agreements between two independent parties. Under such a disease management risk contract, the DM company will agree to provide some or all of the care that the health plan is obligated to provide to its members. These agreements are true transfers of risk. For simplicity, the remainder of this paper is written under the assumption that two separate entities are involved.

A disease management risk contract is fundamentally an insurance contract, because one party is accepting risk for financial outcomes of an unknown future event (in this case, providing care to a group of patients) in exchange for a financial consideration. As a result, the fluctuations in program costs are transferred to the disease management entity.

Financing arrangements

The two traditional forms of disease management contracts are capitation contracts and case rate contracts. Under a capitation contract, the health plan pays the DM company a fixed amount per member, per month. Under a case rate approach, the health plan pays the DM company a fixed amount per patient treated. Some case rate contracts present the rates on a stratified basis, with higher reimbursement for patients with more advanced disease or more complications.

The shared savings approach is increasingly popular. Here, the costs or revenues of the DM company are subject to performance conditions that usually are tailored specifically to meet the needs of the two parties.

Goals and objectives

The health plan and the DM company may have different goals and objectives. The objectives for a plan may include any or all of the following:

• To minimize financial risk associated with high-cost claims.
• To reduce aggregate health care costs by negotiating a capitation or case rate that is lower than the corresponding cost of care provided in its network.
• To simplify and reduce in size or scope the panel of physicians and other professionals, thus reducing administrative effort and the expenses associated with maintaining a physician panel.
• To improve the marketing position of the health plan or HMO by creating a strategic alliance with a regional center of excellence whose reputation for providing high-quality treatment will, in turn, enhance the reputation of the health plan by association.
• To improve its risk-based capital position by transferring risk to the DM company.

The goals and objectives of each DM company vary according to its approach to the market. The objectives of the DM company in negotiating a disease management risk contract can include any or all of the following:

• Maintain a flow of patients and revenue.
• Support treatment in core areas of expertise to improve outcomes.
• Support clinical trials to evaluate protocols or drugs.
• Improve market share by expanding its service area or potential referral network.
• Improve market share by enhancing reputation.

Disease management companies must pay meticulous attention to the clinical aspects of their business, including treatment protocols and provider panel design, because the program can be successful only if it provides good care. An analysis of a prospective disease management agreement should address not only the clinical issues regarding the screening, preventive care, and treatment of the disease in question and its common complications, but also risk issues.

Financial risk

The DM company is accepting financial responsibility for providing the specified care to the patients covered by the disease management contract, and faces the risk that the cost of care will exceed its resources. Fluctuations in utilization or cost of services can cause losses. The DM company should take steps to reduce the potential impact, including:

• Identifying the financial, contractual, and other factors affecting the level of financial risk and the volatility of the risk;
• Estimating the revenue and capital required to accept financial responsibility for the risk;
• Projecting the possible outcomes under different scenarios for factors that influence overall program costs; and
• Managing the risk effectively to ensure that clinical and financial goals are achieved.

Types of risk

The major sources of risk in disease management contracts include:

• Prevalence Risk: The risk that the population will include a greater than expected number of patients with the disease or condition.
• Patient-Severity Risk: The risk that the patients from the population will present at a more advanced stage of the disease than expected.
• Complication Risk: The risk that more patients from the population will present with more complicated conditions than expected.
• Cost Risk: The risk that the unit cost of services will be greater than expected.
• Protocol Risk: The risk that the accepted protocols for treating the disease will change over time toward more intensive or more expensive treatments.
• Duration Risk: The risk that the treatment will last longer than expected. Disease management companies may be victims of their own success. If they can improve survival in the patients they treat, those patients will be treated longer, on average, than patients not treated by the DM company.

These risks are to some extent interrelated. For example, an expensive new anti-nausea drug that allows more aggressive chemotherapy to be delivered to cancer patients with advanced cancer is initially an example of protocol risk. However, the more aggressive chemotherapy may be more expensive than the prior standard (cost risk), and may improve survival, increasing the average duration of treatment (duration risk).

All disease management contracts are subject to other risks as well as the usual risks inherent in providing patient care. These include asset risks (e.g. bond defaults), credit risks (e.g., that clients will be unable to pay bills) and general business risks (fire, theft, inappropriate management decisions, and the like). Although the primary focus of this paper is on the risks associated with patient care, the others should be evaluated as well.

Contracting considerations

Disease management contracts vary according to the needs of the parties. In addition to key clinical issues, the contracts should address the following risk issues:

• Which diseases or conditions are included? It is important to define clearly in clinical terms the criteria for the covered conditions.
• What is the financial nature of the contract? The financial structure of a disease management contract typically will be negotiated to reflect the unique situation of the parties involved. The most common financial options are capitation arrangements, case rate arrangements, and shared savings arrangements. Capitation contracts transfer the risk associated with utilization from the health plan to the DM company, while case rate contracts leave that risk with the health plan. An entity that accepts capitation, therefore, is subject to greater financial risk than a company that accepts case rates for the identical risks, and should be rewarded for accepting that risk. Shared savings contracts can be structured in different ways, and the degrees of risk sharing can vary significantly.
• What population is covered? Many diseases are more prevalent among older people than younger people. Similarly, some diseases are more prevalent in one gender or the other. The capitation rates for commercial (predominantly under age 65) populations generally are significantly lower than the corresponding rates for Medicare (over age 65) populations. The Medicaid population also differs from the commercial population in age and gender distribution and socioeconomic status.
• Which procedures are covered? A contract that includes services with low frequency and high cost (e.g. high-dose chemotherapy and stem cell replacement for cancer patients) will have higher risk of significant fluctuations in cost than will a contract that does not include such services. A contract covering only such services should be expected to have very volatile costs.
• What is the duration of coverage? The contract requires a clearly defined beginning and (if applicable) end of treatment for each individual. The criteria can be measured clinically or by time.
• What is the scope of the treatment provided under the terms of the contract? Some contracts cover only the treatment for the disease and its common complications. Others cover all care to those covered by the contract. If the contract covers only disease-related care, then the boundary between disease-related care and care that is not directly related to the disease, and therefore excluded from the contract, must be carefully delineated. Complicated boundaries may be difficult to administer, but boundaries that are too simple may lead to disagreements concerning responsibility for treatment.
• Is screening covered? Screening has advantages and risks for both parties. The health plan may want to increase the frequency and improve the scope of its regular screening, with greater involvement of clinicians specializing in the disease. This advantage could be partially offset by the need to integrate these clinicians and screening services into the health plan's existing provider network. A DM company specializing in a disease that presents serious health risks, such as cancer, may want to control the screening to ensure that cases are diagnosed as early as possible, when outcomes are generally more favorable and total costs of treatment are lower. This may lead to an increase in diagnosed cases in the first year of a contract. Under a case rate approach, this should be an advantage for the DM company, because the additional cases should be diagnosed earlier, and hence be less severe, than average. Under a capitation approach, however, this may be an advantage for the health plan, because the fixed price (per member per month) is independent of the number of cases treated. Because early detection of most conditions is in the best interest of the patients, it is advisable to attempt to create financial incentives to improve screening.
• What service categories are included within the contract? The contract may cover all service categories, or it may cover only some categories of care (e.g., inpatient services). It should reflect the expertise and efficiency of the two parties, and the responsibilities should be assigned in a manner that allows the best fit to the clinical needs of the patients. In general, good results are achieved when health care services are provided on an integrated basis, so wide coverage is best.
• What providers will give treatment? The DM company may seek to improve medical outcomes and operating margins by using its own network of facilities, clinicians, and other providers. As an alternative, it may use the providers from the health plan, improving medical outcomes and operating margins via disease management protocols and decision-support systems. The former has the advantage that the DM company has greater control over the care provided. The latter has the potential advantage that the patient's care is better coordinated across categories of care.

The final test must be an evaluation of the likely impact of the agreement on the quality of care provided. For many diseases, timely screening and treatment are essential. Successful disease management contracts provide required care quickly and efficiently and avoid creating barriers to care. A contract that creates barriers to care is likely to have poor outcomes, high administrative costs, and potential public relations problems.

Benchmarks

An important element of managing the risk is the projection of results required for success. These performance indicators, or benchmarks, serve as the basis for evaluating the success of the contract. Benchmarks allow for comparison of actual results to expected results. The benchmarks should reflect clinical requirements, financial elements, and administrative elements, such as the following:

• Proportion of target population screened (e.g., proportion of eligible women given mammography for breast cancer);
• Utilization by major service category, particularly for those categories of services whose utilization will be reduced if the program is effective (e.g., emergency room visits by asthmatics);
• Cost of care (e.g., cost of chemotherapy per cancer patient treated, by type and stage of cancer); and
• Administrative effectiveness (e.g., cost of administrative functions per patient or per dollar of revenue).

The key to managing risk in disease management contracts is knowledge. By understanding the dynamics of the disease and the associated treatment costs, the DM company can make appropriate management decisions.

Evaluating the contract

Any disease management contract presents challenges to both the DM company and the health plan. The challenges can be financial and administrative as well as clinical. Some diseases (e.g., cancer) with many different treatment pathways and volatile costs present significant challenges. Prospectively, the plan and the DM company should evaluate the risk associated with the contract. This evaluation should demonstrate the potential financial impact of the program under different scenarios.

Information technology

Information technology is necessary for risk evaluation. Both the health plan and DM company should build the capability to assess both clinical measures of success (e.g., percent of diabetics receiving annual retinal exams) and financial measures of success (e.g., costs per patient by risk level).The evaluation of the results also should involve clinicians, since the payback for some preventive services, such as retinal exams for people with diabetes, may be deferred beyond the observation period.

Financial risk models

One mechanism for measuring and managing risk is a financial model. These models permit the evaluation of the potential impact of key risk factors on the overall cost of a program or on the range of reasonably expected results. Volatility analysis can show the effect of risk factors separately and in conjunction with other factors. Financial models can be simple or quite complicated, and the additional work to create complicated models usually permits more sophisticated evaluations that include more factors that influence program costs.

As an example, a financial model for a cancer management program could reflect the following factors:

• Distribution of covered members or patients by age, gender, geography, or other factors important to the disease in question (smoker/ nonsmoker for lung cancer, e.g.);
• Prevalence of cancer in each population cell;
• Distribution of newly-diagnosed cancers by tumor/node/metastasis (TNM) stage;
• Survival rates by stage and population cell;
• Treatment protocols and frequencies of service by cancer stage;
• Provider delivery system composition;
• Reimbursement methodology;
• Presence of complications and their treatment costs;
• Baseline benchmarks for utilization and costs;
• Technology shifts and evolution of treatment protocols; and
• Changes in duration of treatment.

Such a model could estimate the potential volatility caused by secular changes (e.g. cost inflation, population aging, etc.), specific combinations of adverse assumptions, or random fluctuations.

Reinsurance

Another mechanism for managing risk is reinsurance, which can limit the potential adverse financial effect of the risks associated with a DM contract. The DM company may negotiate a reinsurance contract with the health plan or a reinsurance company that limits the effect of a single patient, or a contract that limits the effect of all patients combined. Either approach can help a company manage the amount of risk it assumes, keeping the level of potential losses within manageable levels. Note that the presence of a DM contract should reduce the potential need for (and cost of) reinsurance for the health plan, since the volatility associated with these patients has been transferred to the DM company.

Regarding revenue

General formula

Evaluating the revenue requirements (excluding administrative costs) of health risk contracts in general can be summarized by this formula:

Estimated revenue requirement
= frequency x intensity x cost

Frequency describes the number of times an event will occur per unit of population, usually expressed as an annual frequency per thousand. For hospital inpatient, frequency can be the number of hospitalizations per thousand persons per year. Intensity refers to the complexity or volume of services per episode. For hospital inpatient, intensity can be the length of stay (LOS). Cost refers to the per-unit cost for the health care service. For hospital inpatients, this can be the per-diem charge.

The DM company should ensure that its prices reflect not only the historical costs associated with providing care, but also reflect trends in the expected cost for current treatment, and margin to cover unexpected increases described above. Margin for administrative and overhead expenses should also be included.

General considerations

The process of estimating revenue requirements to support negotiations for a particular contract requires that the DM company develop assumptions for each component of the revenue formula. Those assumptions quantify the projected levels of prevalence of each type of patient, and the frequency, intensity and unit cost for providing health care services to those patients. These assumptions generally are made separately for each pricing factor (e.g., hospital admits and length of stay), for each service category of care (e.g., hospital inpatient, physician office visits, pharmacy) and then summed across service categories and patient types to determine the total cost.

The price that emerges from the process described above may or may not be acceptable to the potential client. If the negotiated price required to "close the deal" is less than the rate based on the experience-based rate, then the DM company needs to reevaluate the assumptions that led to its development. These may include:

• Scope of contract;
• Provider reimbursement rates;
• Impact of protocols;
• Levels of, and trends in, costs and utilization;
• Changes in treatment protocols over time;
• Utilization of services; and
• Administration and profit charges.

Case rate contracts

The above formula works well for developing case rates for many disease management contracts. In estimating the revenue requirements of a disease management contract, the elements of the calculation should reflect the specifics of the disease, the delivery system, and the population covered. For example, the formula used to estimate the costs associated with a case rate cancer risk contract should be specific to cancer patients for the frequency, intensity, and cost-per-service assumptions in the pricing formula.

Each specific disease presents unique challenges. Cancer case rate contracts are guarantees that the DM company will provide required health care to cancer patients for a specific price. This type of contract transfers the risk of increases in treatment costs from the health plan to the DM company. This risk transfer deserves careful analysis, because cancer-care costs have tended to increase faster than costs for health care in general.

Capitation contracts

Capitation contracts guarantee not only the price per patient, but also the prevalence of the disease in the covered population. Even common diseases covered by disease management contracts can be expected to produce varying levels of prevalence, caused only by chance statistical fluctuations. Relatively uncommon diseases will produce greater fluctuations.

For capitation contracts, where the required revenue is calculated per member per month rather than per patient, it is helpful to express the formula as:

Estimated revenue requirement =
prevalence x frequency x intensity x cost

As used above, prevalence refers to the proportion of the membership receiving treatment for a particular condition.

In developing a capitation rate for a cancer disease management contract, it is important to recognize some factors that will affect the assumptions used in calculating the capitation rates:

Prevalence (people having the disease and being treated for it) and incidence (people diagnosed with the disease) are not interchangeable, because of the time required to provide treatment. For example, consider a cancer that requires six months of treatment. The patients treated under a contract spanning a calendar year will include not only those diagnosed during the year (i.e., 100 percent of those who are counted to determine the incidence rate), but also those diagnosed during the last six months of the prior year (approximately half of those counted to determine the prior year's incidence rate, recognizing mortality and migrations in and out of plan).

Thus, the prevalence rate would be approximately 150 percent of the incidence rate, if treatments require six months and the population were stable.

Shared-savings contracts

For shared-savings contracts, estimating revenue and projecting costs becomes more difficult, and should be tailored to the specifics of the contract. First, the performance criteria and the other key features of the contract should be negotiated. Once these are agreed on, they are the basis for measuring "savings."

Shared-savings contracts present additional challenges. The very name implies a belief that savings will occur. If the DM company can deliver care of equal quality more efficiently than the health plan, there will be savings, compared to what the health plan would have been able to achieve. The risks associated with DM contracts (prevalence, utilization, cost, et al.) still exist, and are borne by one or both entities.

Practical considerations

Evaluating the revenue required to support a DM contract frequently reflects the historical clinical and financial results of both the health plan and the DM company. Evaluating the prior financial experience of the health plan will help to quantify the impact of the population on the utilization and cost per service (e.g., geographic and behavioral factors, such as smoking, diet, and exercise).

Evaluating the historical financial and clinical experience of the DM company is important if the protocols, reimbursement basis, or provider network will be different from the health plan. The DM company should estimate the effect of changes in protocols, provider panels, reimbursement and incentive methodology, and other factors on the experience of the health plan.

Case Study: Cancer DM

Issue 1: Estimating a Case Rate for a Disease Management Contract

Consider a proposed cancer carveout contract between a health plan and a cancer-management company. For simplicity, we will restrict this example to the following:

• Medicare population only (>65), 25,000 members;
• Colorectal cancer only;
• Calendar year case rate basis (one year renewable), with no incentive provisions;
• One location only (New Haven/ Bridgeport, Conn.);
• Effective date Jan. 1, 2000;
• Cancer care only (i.e., excluding care for non-cancer treatment);
• Covered services based on a typical Medicare risk contract;
• Charges based on Medicare's allowed reimbursement levels;

As described above, the calculation for a case rate includes:

• Frequency (F): the utilization of each type of service per thousand patients;
• Intensity (I): the relative cost for each type of service; and
• Cost ($): the absolute unit cost.

For simplicity, this analysis ignores administrative and profit charges.

It is important to reflect the expected utilization and cost per service of the contract. In this example, the unit costs for services should be revised to reflect Medicare reimbursement levels for the network providers in the New Haven/Bridgeport area for calendar year 2000. Other contracts will have different reimbursement and incentive methodologies, and the unit costs and utilization of services should reflect the characteristics of those systems.

The prevalence of patients actively treated for colorectal cancer in the Medicare population is approximately 6 per 1,000 members. Therefore, the expected value for the number of colorectal cancer patients in our population is 150 (= 25,000 members x 6/1,000). If the group of recent colorectal cancer patients were a homogeneous population, this would be a large enough sample size to evaluate the revenue requirements of this contract. However, differences in stage at diagnosis, treatment protocols, survival, duration since diagnosis, underlying comorbidities, and other factors will cause fluctuations and uncertainties in actual experience and in projections based on that experience, so supplemental data should be considered.

The development of the projected case rate for this contract was based on data from the Health Care Financing Administration's 5-percent sample of Medicare claims. The process used was as follows:

1. Identify patients in the sample with colorectal cancer, based on diagnosis codes and procedure codes.
2. Analyze the care provided to those patients to identify cancer treatment.
3. Evaluate the completeness and accuracy of the care and cost data against external sources.
4. Assign the care to service category (e.g., hospital inpatient).
5. Summarize the care by service category and patient.
6. Adjust the utilization and unit costs to reflect changes in treatment protocols (such as new radiation therapy techniques or chemotherapeutic agents), changes in duration of treatment, changes in distribution of diagnosed cases by TNM stage, or other secular trends or differences between the source data and the intended population.
7. Calculate utilization, resource-based relative value units (RBRVS) and per-unit costs by service category, based on the number of patients.
8. Adjust the case rates to be appropriate for the New Haven/ Bridgeport area, using the appropriate conversion factors.
9. Adjust the case rates to reflect the specifics of the contract and the population covered.

For this contract, the actuarial cost model in Table 1, reflects the "best estimate" of the utilization and average cost per service, and the per patient per year (PPPY) claim costs.

Issue 2: Projecting the range

The model described in Table 1 presents the expected costs associated with treating colorectal cancer in a Medicare population in the New Haven/Bridgeport area, $17,263 per patient per year. However, there can be significant variations in the costs per patient. These can be evaluated by creating a financial model that reflects the important risk factors described earlier.

As described above, the expected number of patients from the 25,000 covered members is approximately 150. The average calendar year cost per case is $17,263, so the total expected cost is $2,589,441 per year (150 cases per year times $17,263 per case). A range of outcomes is possible for both the number of patients and the annual cost of treating those patients. Based on the prevalence of 6 patients per 1,000 members, for example, we can project that 90 percent of the time, the number of patients out of 25,000 members will fall between 130 and 170, with the expected value being 150. This interval (130 patients to 170 patients) is referred to as the 90-percent confidence interval, because 90 percent of the results are expected to fall within it. This suggests that once in every 10 years the number of patients will fall outside this interval, either more than 170 or fewer than 130. Because this contract is on a case rate, rather than a capitation rate, the carveout company is not at risk for fluctuations in the number of colorectal cancer cases. The HMO should recognize that the number of patients treated would directly affect its costs.

The distribution of patients being treated for colorectal cancer by their annual cost of treatment is shown in Chart 1.

Both the HMO and the cancer carveout company may use an "average" case rate to evaluate the contract, but they also should consider the fluctuations that are possible under the new contract. For the health plan, this should be a positive, because it is passing along the risk for high-cost treatment. For the DM company, this is a source of financial risk. Table 1 shows an "average" rate of $17,263. Based on this distribution of costs, it is possible to determine confidence intervals for the case rate. These confidence intervals are illustrated in Table 2.

As shown in Table 2, the expected annual cost for treating 150 cancer patients is $2.6 million (= 150 patients x $17,263 per patient per year). The 90-percent confidence interval for the annual cost is $2.2 million (86 percent of $2.6 million) to $3 million (114 percent of $2.6 million). That is, for a population of 150 patients whose claims distribution matches the distribution shown above, the average claims per member will fall between $2.2 million and $3 million 90 percent of the time, or 9 calendar years out of 10 on average. The other 10 percent of the time the costs will be below $2.2 million or above $3 million. This is the amount of fluctuation caused only by random variation in annual treatment costs per patient.

The DM company may not have the capital to withstand fluctuations of this magnitude. This problem can be addressed by different approaches, including:

• Growth: Adding lives reduces the random fluctuation of risk, relative to revenue, as shown in Table 2. Note, however, that additional capital is required to fund growth in risk. The advantage of growth is that the required capital increases less rapidly than revenue should increase.
• Contracting: Some of the cost risk can be transferred from the DM company to providers by case rate or similar arrangements.
• Reinsurance: Ceding the risk to another entity reduces the range of potential losses, but also the expected profits for the DM company.

Note that there are additional sources of fluctuations in total annual costs. Some of the fluctuation is caused by patient characteristics (i.e., TNM stage at diagnosis); some of it is caused by treatment choices. Complications and outcomes also cause some of the differential (since treatment is ended at death). Thus, while a calendar year case rate approach to cancer carveouts eliminates some financial risk for the DM company, it does not eliminate all financial risk associated with the negotiated contracts.

The carveout company may not be subject to financial risk caused by the number of patients, but fluctuations in the cost of treating each patient may still cause adverse financial results.

Conclusion

Disease management programs offer health plans the potential for improved return on invested assets by reducing required risk capital and by improving the efficiency of the delivery of care, while at the same time improving outcomes for patients.

In addition, a disease management contract provides health plans with the opportunity to link their company name to that of a regional center of excellence, recognized for its current expertise in treating the disease. The DM company has the opportunity to increase its market exposure and patient base, ensuring a flow of patients.

The contract also creates the opportunity to improve earnings for both parties, by allowing each to focus on providing care that each does best. As may be seen from this discussion, however, there are significant issues regarding the scope of the negotiated agreement, and both parties should conduct a thorough evaluation of the expected health care financial experience before entering into a disease management contract.

Evaluation criteria

Both the health plan and the DM company also should periodically evaluate the emerging results of the contract. Health plans should evaluate the results under several criteria:

• Are the outcomes under the capitated contract consistent with clinical goals for patient treatment?
• Has the delivery of care been consistent with best-observed practice?
• Are the costs of the program meeting the financial targets?
• Are patients satisfied with the program?

Disease management companies should evaluate the programs that they negotiate under other criteria:

• Did the membership and revenue meet or exceed the projected levels?
• Was the contract profitable?
• Was utilization by service category consistent with treatment protocols?
• If it was a capitation contract, was the number of cases consistent with the levels assumed in setting the price? Was the distribution of cases by severity level consistent with the distribution assumed in setting the price?
• Under either a capitated or case rate contract, was the cost per case treated consistent with pricing assumptions?
• Under a shared savings contract, were the savings as measured under the terms of the contract consistent with the expected levels? With independent assessments?

The author is a consulting actuary, specializing in health care, in the Seattle office of Milliman & Robertson Inc. His assignments have included evaluations of costs, risk models, and provider reimbursement for global risk contracts and disease-specific risk contracts. He has a BS in mathematics from Trinity College, Hartford, Conn.

MANAGED CARE February 1999. ©1999 Stezzi Communications

A disease management program by any other name might go belly up — pronto. But there are ways to avoid the quick fizzle.

Frank Diamond

Senior Editor

The best-laid plans of HMO executives can fizzle — especially if those plans involve disease management. Every year DM programs are launched and quickly die. Nobody knows just how many go belly-up, but anecdotal evidence abounds that it happens a lot. Even diehard DM advocates admit that many programs are erroneously slapped with a DM label and have the shelf life of a celebrity marriage.

"The reason that many so-called disease management programs fail is that they are not true disease management programs to start with," says Stan Bernard, M.D., M.B.A., principal for health care industry consulting at A.T. Kearney. "They are what I call intervention management programs, such as clinical guideline or patient education programs, instead of a coordinated set of interventions seen in most successful disease management initiatives. When true disease management programs fail, it is usually the result of poor physician buy-in and ineffective execution."

However you define disease management, implementing a program can be difficult, notes Al Lewis, president of the Disease Management Purchasing Consortium, who adds that quick fizzles happen all the time.

"The people who contract for the program at the health plans do so under pressure to get the job done quickly, or without a budget, or they contract with a vendor they've used for some other purpose and that vendor has offered to give them three months for free," says Lewis.

One health care consultant says that the bidding process can be tricky and suggests that HMO executives closely review the data on which the vendors set their benchmarks. "What happens is the vendor will make predictions based on clinical trials or on programs that were launched in highly controlled managed care environments," the consultant says.

Most experts contacted agree that problems can arise in the bidding process. The notable exception is Lewis, who says that he's "never seen a program fail because a competitive bidding process was done wrong."

Vince Kuraitis, J.D., M.B.A., a principal in Better Health Technologies, a consulting firm, says that it is during bidding that a vendor may be tempted to say that he can deliver measurable results in one year, when it may actually take two or three.

"We advise our clients to look for a three-year contract," says Kuraitis. "The vendors need this time because much of the cost of DM program implementation is front-loaded. The plans need to have a longer perspective, too. Disease management should not be viewed as a quick fix."

And how fast can the programs fizzle? "I've seen it where they can't even get off the ground," says Lewis. "They can't enroll the patients."

Of course there are the usual suspects: lack of physician buy-in, patient compliance, and information technology.

"The most likely scenario for a quick failure is one of passive resistance in which the local doctors say the program is just nonsense," says Kuraitis.

Regarding patient compliance, Kuraitis holds out some hope that technology may provide assistance. He talks about three-button telephones developed by SOS Wireless that can be used by patients with congestive heart failure who don't want to be too far from help. "Heart patients want some way to access the specialist 24 hours a day," says Kuraitis. "Technologies are under development that will allow them to carry around a combination telephone, pager, and Internet access device."

Make sure the vendor has a good track record in managing the specific disease you're interested in managing. And make sure he has all the tools to do the job.

"A lot of times vendors that are good at one aspect of disease management direct all their resources into that one aspect to the exclusion of everything else," says Lewis.

Louise Kier Zirretta, M.B.A., group vice president at Isis Research, and author of the Disease Management Strategic Research Study & Resource Guide, says that if quick fizzles do occur — and she hasn't seen any numbers that would identify a trend — "it might be because you have a disease management program in place for a population you don't serve any longer."

Kier Zirretta notes that about 20 percent of the 367 HMOs that participate in Medicare bailed out of the program at the end of last year. "Anything they were doing in the area of congestive heart failure is not going to have the same emphasis," she says.

From scratch

When Peter Katona, M.D., medical director for Apria Healthcare, is asked to give advice about launching DM programs, he says simply, "Do your homework." He should know. Several of Apria's DM programs died last year. (See "Home Health Care Company's Experience Shows How Easily DM Programs Can Fizzle".)

Janine Evans, M.D., medical director for Yale-New Haven Hospital IPA-PHO in Connecticut, has been doing a lot of homework recently. Evans hopes to spin DM programs out of Yale-New Haven's ambulatory case management program, which was created four months ago. Using mailings, phone calls, and physician feedback, Evans's team is gathering and reviewing clinical and pharmacy data to determine what groups to target.

The case management program at the 45,000-member IPA-PHO was put in place to address some resource-use concerns immediately. Creating the official DM programs will come later — within the next year. But some form of disease management is already under way. "We want to reduce the requirement or need for high resource use in our patient population," says Evans.

She has not yet chosen which diseases to manage in the official programs but the main candidates — not surprisingly — are coronary heart disease, congestive heart failure, diabetes, asthma, and obstetrics. She wants to remain flexible.

"We have Medicare and Medicaid members, and we have members who are part of commercial plans," says Evans, who points out that about 1,000 physicians belong to the IPA-PHO. "We want to structure our programs around the many variables in each of these populations."

Evans says another way her team is trying to avoid the quick fizzle is by devising easily recognizable and agreed-on measurements for success. "Those measurements will reflect the financial realities as well as patient and physician satisfaction," Evans says. "The results will help us prove that we're achieving the goals we promised when we presented the program to our board of directors."

Diane Collins, R.N., one of Evans's ambulatory case managers, notes that the team has traveled far in a short time. "We started with a piece of paper and a pencil," says Collins. "We put together the entire database — the backbone. Our biggest stumbling block was identifying the patients. It was a large number of patients and only four of us. We contact them by phone and we also go and visit them. We call them up right after they go home. We're just really feeling our way through."

Despite the danger of a quick fizzle, there is some margin for error, Kuraitis suggests. He relates a story of a vendor who admits privately to "totally screwing up the implementation but the program still showed a 50-percent decline in readmissions."

"It is representative of the power of disease management," he says.

"This stuff really works."

MANAGED CARE September 1998. ©1998 Stezzi Communications

Though health plans preach it, the phrase doesn't resonate with many physicians. But practicing it is not as difficult as many fear.

Michael D. Dalzell

Senior Editor

Population-based care" is the managed care mantra. But ask physicians what it means, and most grope for a definition. "If you find out, let me know," jokes Peter Juhn, M.D., executive director of Kaiser Permanente's Care Management Institute.

Actually, Juhn has his own take on population-based care, which we will explore, but his jest makes the point: Physicians have difficulty squaring an abstract concept with daily responsibilities.

"It's not an easy fit with the traditional physician's ethic of working for one's individual patient," says John La Puma, M.D., an internist at Alexian Brothers Medical Center in suburban Chicago and Managed Care's ethics columnist. "Doctors don't have it in their heads that they're responsible for 2,000 or 3,000 patients."

It doesn't help that most health plans haven't done a brilliant job of articulating population-based care to their physician panels, either.

"We have to enunciate a vision of 'What the heck is it?'" says psychiatrist Mark Vanelli, M.D., M.B.A., a Harvard Medical School psychiatry instructor. "HMOs need an educational strategy."

Though perceptions and definitions of population-based care differ, many outstanding examples, large and small, exist. Vignettes of population-based care reveal common traits: education (such as teaching patients self-care), delegation (e.g., use of midlevel providers) and, when possible, intelligent use of information systems that turns grass-roots activity into a scientific endeavor.

Care management

Kaiser built a reputation on population-based care by stressing early detection and disease management. Now, Kaiser is taking that a step further with a concept it calls care management.

Under care management, members are grouped into disease-specific populations. Prevention and "health maintenance" are the goals. Care is coordinated so that physicians provide clinical interventions when needed, while other health care professionals aggressively educate those in each group about their conditions or risks — enabling members to understand how to care for themselves and when to call the HMO.

This national effort is led by Kaiser's Care Management Institute. Each of Kaiser's geographic regions selected care management priorities (such as diabetes, asthma, heart disease or depression) based on the health needs of its members. CMI develops tools each region can use to develop care management strategies, then ships them to local implementation teams, which tailor care management programs to their populations.

CMI melds emerging best practices with Kaiser's experience of 100,000 visits per week. "We synthesize this information into a bite-sized morsel, package it and link it to the relevancy of practice," says CMI's Juhn. Physicians receive outcomes data comparing them with peers ("We need to get physicians to pay attention to why they, personally, should learn something new," says Juhn) and tools for improvement — guidelines, case studies and access to Kaiser's massive database. A state-of-the-art information system allows for professional exchange, prompts for preventive and follow-up care and offers continuing education credit for physicians working in the priority areas.

It would be easy for a cynical outsider to dismiss this as "cookie-cutter medicine." But Juhn says the Kaiser culture values education and accordingly, its physicians are free to evaluate generalized bodies of knowledge in the context of individual cases. "That's the rub in population-based medicine: You derive the best things to do for your individual patients from an assessment of experience with that population."

As for that freedom to discover, Juhn likes to say, "We're not the Care Mandating Institute."

It's one thing for a staff-model HMO to roll out an organization-wide strategy. But most physicians aren't blessed with such resources to meet plans' population mandates. How now?

Think of one of the common threads of population-based care: education.

"We're very good at developing high-powered science, which often filters down into substantial treatments," says Vanelli, the Harvard psychiatrist. "But we're not very good at making sure that people get that treatment effectively."

He says it's easy to think, "'Once I write a prescription, the patient is cured.' But if the patient doesn't pick up the medication and take it as prescribed, that scientific knowledge is for naught."

'Person-to-Person'

Vanelli participates in a program called Person-to-Person, a telephone support system that educates patients with schizophrenia and bipolar disorders about their illnesses and reminds them to take their medications. Sponsored by Janssen Pharmaceutica, Person-to-Person, he says, recognizes a nagging problem in American health care delivery: poor medication-compliance rates.

Most of the patients Vanelli admits to hospitals fail to comply with their medication regimens. "If we can increase compliance rates of 50 to 60 percent to 80 to 90 percent, patients with major mental illnesses are likely to avoid rehospitalization and annual treatment costs are likely to go down dramatically."

But programs such as Person-to-Person are a hard sell to most physicians; when telling one colleague about Person-to-Person, the response Vanelli heard was, "That's very interesting, but I didn't go through ten years of training to remind patients to take their medicine." True, but Vanelli thinks of compliance programs as the health care equivalent of seat belts and child safety seats: "They aren't what attract your attention, but do you really want to go without them? Such programs have the potential to add more years to your life than dramatic acute-care interventions that come too late in the disease process."

At the core of Person-to-Person is a simple, powerful practice that every physician can use to boost compliance. "I don't think a lot of doctors do it," says Vanelli: "Tell your patients, 'You're going to feel better, and when you do, you're probably going to forget your medication. But chronic illnesses don't get better when you stop taking your medication. You'll get sicker.'"

Public health

Person-to-Person uses the tools of public health: information, education and communication. Vanelli, who trained in public health and once designed health care programs in Peru on a budget of $5 per person per year, appreciates the connection. But "public health" makes most physicians recoil.

Until the early 1900s, public health was intertwined closely with medicine. After that, though, says David George, M.D., associate director of medicine at Reading Hospital and Medical Center in Reading, Pa., "Public health went one way, and medical schools went another. Only recently have their paths again begun to converge."

Such a merger may prompt much wailing and gnashing of teeth. In an essay last February in the Journal of the American Medical Association, Henry Greenberg, M.D., predicted a conflict between "Hippocratic medicine and population-based medicine." The latter, he wrote, would force physicians to think more like public health specialists. "An understanding will emerge," he wrote, "but the adaptation process will disconcert the transition generation of physicians."

Greenberg's crystal-ball world triggered angst-ridden letters to the editor. No surprise to Vanelli.

"There's an immediacy to the ER or doing a procedure that's invigorating to people who are attracted to medicine, so to get them into teams and systems that make for good population-based care is difficult. It may be different from what they wanted to do when they entered medicine," he says. "The questions are, can these things interest providers, and can physicians bring along the energy of their clinical colleagues?"

They might soon have to try. The man in line as the next head of the U.S. Centers for Disease Control, Jeffrey Koplan, M.D., is an epidemiologist who has led many high-profile public health projects. He is expected to press managed care to be more of an element of public health, in terms of achieving community health objectives.

Behavior modification

The link between behavior and pathology strongly interests George at Reading Hospital. Noting suggestions that slight changes in Americans' cholesterol levels have prompted a decline in the incidence of coronary disease, George believes incremental changes in behavior can dramatically affect population health. And physicians, he says, can encourage that change.

George enlisted four physicians to participate in a grant-funded pilot project involving 80 patients. Adapted from a behavioral change model developed by psychologist James Prochaska, the project helps doctors to help patients change their own destructive behaviors.

"One of the problems [of past attempts] is that behavioral-change models add another thing for the physician to do," says George.

In the Prochaska model, people's readiness to implement lifestyle changes occurs in stages. In George's study, physicians ask patients a few quick questions to determine their willingness to, in this case, stop smoking or be more active. "If a smoker comes in with an upper respiratory infection," says George, "trying to help him see the relationship between his smoking and catching repetitive colds helps the physician to personalize risk." Helping patients understand the personal benefits, he says, is more effective than a physician commanding, "You're killing yourself and I want you to stop."

If the patient doesn't appear motivated to change, the doctor doesn't push it. "There's no sense wasting time talking about why smoking is bad — especially if a patient already knows why — if that person isn't ready to quit," says George.

But if the patient seems receptive, the physician may ask him to enroll in a telephone counseling and case management system. Nurses at nearby Lancaster Health Alliance's Wellness Center take over, calling enrollees periodically to check progress, offer support and education and, if necessary, refer to community resources. Their findings are entered into the medical record, and after a year, summary reports will be generated.

But choosing the right physicians for this is as important as choosing the right patients, says George, who used the Prochaska model on colleagues to select them. Otherwise, he says, "After the money from the study goes away, the instructional papers that the physicians used become lost, and they go back to their old ways."

Health plans' role

George hopes that if the results are promising, he can persuade Health Central, an HMO owned by Reading Hospital and several other hospitals, to fund a larger, controlled study.

In other words, putting money in the vicinity of one's mouth. "In general," George says, "HMOs make a lot of statements about preventive health, but a lot of that — and this is supported in the literature — is more of a promotional thing than a true belief that this stuff works."

La Puma, the ethicist, thinks that most managed care organizations have abandoned "the lofty goals of population-based care in the pursuit of profit." But he thinks that some HMOs — he specifically names Kaiser — are truly interested in practicing what they preach. "Disease management programs," he offers as an example. "We're just starting to play with them and see whether they can be economically viable and improve quality of life."

Farming out management of specific populations to DM organizations could help HMOs bridge what George says is one barrier to population-based care: "There is not a lot of reward for the physician to practice it."

Of course, physicians can aid the cause by staying current, an effort with which HMOs can help. "You would be shocked at how little of medicine is actually based on evidence," says Kaiser's Juhn. A recent Journal of the American Medical Association article suggested that "80 percent of medicine is of unknown benefit."

In 1991, the National Asthma Education and Prevention Program of the National Heart, Lung and Blood Institute recommended inhaled corticosteroids as front-line therapy for asthma. Today, says Juhn, fewer than 30 percent of asthmatics who should receive inhaled corticosteroids are prescribed them. The institute said last year that inappropriate therapy is a major contributor to asthma morbidity and mortality.

"The evidence is clear that inhaled corticosteroids improve asthmatics' outcomes," says Juhn. "What's also clear is that this piece of knowledge has not been communicated to all physicians."

Stepping back from the day-to-day grind to develop a perspective is yet another strategy for practicing the mantra. "For me," says Vanelli, "population-based care starts with thinking, 'What can I do with communication strategies for large numbers of patients to address problems I saw in my practice this morning?'"

MANAGED CARE August 1998. ©1998 Stezzi Communications

Health plans can position themselves even before talks begin by getting all the information they can on the population they wish to target.

Frank Diamond

Senior Editor

The saying that the three most important things to consider when buying a house are location, location and location can be tweaked a bit and applied to the process of purchasing a disease management program. The three most important tools health plan representatives need when sitting down at the bargaining table with a vendor are information, information and information — allowing you to shape your expectations and bargaining position. Without such information, shopping for a disease management program is akin to walking into a car showroom and saying aloud that you don't quite know what you want. Gathering data should begin even before the initial contact.

"All of the vendors are more than willing to put your data through their buffing system but they charge you a considerable amount of money for that," says Thomas Morrow, M.D., vice president and medical director for One Health Plan of Georgia. "The more you know about your population and your expectations, the better prepared you are going into the talks."

Once you have the data, there are things you should insist upon, says Al Lewis, president of the Disease Management Purchasing Consortium, a company that has helped 22 health plans negotiate contracts. "I hugely prefer that the program use savings as a performance measurement," says Lewis. "You can't guarantee savings without guaranteeing outcomes because you can't get savings without keeping people healthy."

Morrow says health plans should also seek:

• A deadline for promised improvements;
• A schedule for progress reports;
• A plan for continuing improvements beyond what's promised; and
• A guarantee that the contract can be modified later.

Morrow also likes to see patient satisfaction measures of some kind. "They're talking to our members and I don't know if they're being polite or rude." You'll want assurances that the vendor will be invisible, seamlessly integrating the program with other services you offer.

"There is no vendor that has so much credibility in disease management that patients will feel more comfortable talking to him than they are talking to their own doctor," says Louise Kier Zirretta, M.B.A., group vice president for Isis Research and author of the Disease Management Strategic Research Study & Resource Guide, which she prepared when she was at Migliara/Kaplan Associates, a market research company.

Insist on significant, measurable outcomes, says Lewis. "For instance, with diabetes, there should be far fewer amputations in the out years of a contract and lower hemoglobin A1Cs in the early years. With asthma, there should be a guarantee of X percent fewer nighttime awakenings or missed school or work days. A surprising number of health plans don't insist on guarantees of quality and costs. The program has to cover the entire population of people with the disease. Who gets counted? I'm quite adamant that everybody should get counted."

Peter Smith, CEO of Ralin Medical, a DM vendor in Buffalo Grove, Ill., has "no problem" with Lewis's assertion, but says the term "population-based disease management" can be interpreted in different ways. He points out that many plans, in the beginning, identify the acutely ill "who are clearly costing them money." That might be a way to go, at first. And even well into the program, he says, different services should be allotted to different subgroups that are defined by the severity of their symptoms. "I think you need to separate acute and nonacute patients. You don't want active management of your nonacute patients because you'll wind up paying more than it's costing you today."

You'll want a contract in which the vendor shares the risk for savings when the particular disease lends itself to such a system, says Harry L. Leider, M.D., vice president of health services and corporate medical director at HealthNet, with 450,000 members in Kansas and Missouri.

"Nobody assumes risk management for things like hypertension and high cholesterol because the payback is too long," says Leider. Asthma, end-stage renal disease and congestive heart failure make excellent candidates for risk contracting. "The big issue is, 'Is this a fee-for-service arrangement or a risk arrangement?" I'd want a risk arrangement. It shows our financial people that we're serious about saving money. Risk agreements separate the wanna-be vendors from the ones that really have competence."

Despite the advantages of risk-sharing arrangements, statistical data indicate that many health plans do not insist on such contracts. Kier Zirretta's guide reports that 48 percent of over 100 managed care organizations surveyed said that contracts "currently in place with vendors are on a fee-for-service basis, although [managed care organizations] expressed a clear preference for risk-sharing arrangements that provide for evaluating the program at the end of a defined period and sharing the savings or loss from disease management services with the vendor."

Says Kier Zirretta: "Vendors, taking their cues from managed care organizations, would like to see the programs capitated."

Lewis says the point where much of this often gets ironed out is not in the contract, but in the letter of intent. (See "Reading between the lines") "Cost and quality guarantees and who gets counted should be 80 percent of the value of the contract," says Lewis. "Twenty percent of the bargaining time goes to 80 percent of the value. All the issues of who counts in the program, what gets counted and when — if you get those key points in the letter of intent, you can literally start implementation."

Gathering data

Negotiations involve more than demands. There's a "give" as well as a "take." Says Leider, "What are they going to expect you to do? Do they want you to do patient identification?"

The question brings us back to data-gathering concerns. Vendors, for the most part, want to sell you something that fits your need, says Ralin's Smith. "The more information the plan can provide, the better," he says, pointing out that most disease management contracts are based on historical baseline costs. How much has the plan had to pay to provide services for the population being targeted for disease management? Answering that question is crucial, says Smith. "We have found that once we've been able to agree on the historical data, the process tends to speed up. The biggest problem is just getting the data."

If the whole data-gathering process leaves you frustrated, you are not alone. Here, again, is the Disease Management Strategic Research Study & Resource Guide, saying that managed care organizations "cited the lack of adequate information technology as the most challenging obstacle to overcome in the implementation of a disease management program. Information technology is expensive and time-consuming to develop, and thus a ripe market exists for vendors who can satisfy this need."

Morrow reports that "the biggest thing we've come across is system limitations. If you can't get information that you can give to the vendor that he can use and feed back to you, then you're dead in the water." For instance, one vendor Morrow negotiated with needed the phone numbers for patients with asthma. "We don't have the numbers for many patients," he says. "We had to pay another vendor to find those numbers. Also, you can call any household in Atlanta during the workday and there's nobody there. The problem is identifying your population. If Jane Doe needs to belong to a diabetes program, you've got to identify exactly who Jane Doe is, including her medical history. Most insurance companies can't aggregate all the information needed."

Claims information

Drew Palin, M.D., would agree with that. Palin is CEO of ThinkMed, a Milwaukee company that sells software that's intended to help HMOs gather and stratify claims information. "If you have a population of 100,000 members, 800 to 900 of them are going to be diabetics. But all diabetics aren't the same."

Sound like a pitch? Companies like ThinkMed, while not DM vendors, could help plans during the prenegotiation stage. In fact, says Palin, ThinkMed provides that service for some of the plans that use its software.

But "claims data don't necessarily give you clinical data," Smith notes. "Claims data may not be that difficult to pull, but trying to track back to the clinical data isn't always easy." Do vendor and plan sometimes read different things from the same data? "It's not so much that we would disagree," says Smith. "It's just that the whole process is quite complicated."

Palin admits that claims data aren't always translatable into clinical data, but points out that "the advantage of using claims information is that it's universal. It is a very good starting point and, with appropriate interpretation, it can serve as a proxy for clinical information."

Lewis says the steps leading to negotiations work like this: "Typically, there's a proposal from several vendors and then presentations are made and then, usually that same day, health plan officials vote on who they want to do this with. Then draft letters of intent go back and forth five or six times before the letter works for both sides."

Of course, he says, "There are presentations that wind up going nowhere. Often, the health plan was just being polite. Often the plan didn't have a process in place for working up a letter of intent. After the presentation, the plan has every intention of getting a letter to the vendor but it often doesn't happen."

Morrow agrees that the letter of intent is vital. "It's sort of like the engagement," he says. "It's a serious component for the whole process." After the letter comes another trouble spot, says Morrow. "There's often sticker shock because then the vendor is going to come back with a proposal and it's going to have a dollar sign attached to it."

But Leider says sticker shock can be avoided if you prepare for negotiations. "You need to know what the competitive deals are out there," says Leider. For instance, say a vendor tells you he can save you ten percent. "How do I know if ten percent is good or bad for most health plans?"

NCQA-style reports?

Morrow points out that knowing what you're trying to accomplish helps. Some disease management programs are no more than public relations efforts so that "the plan can tell employers it has something in place." More intensive programs delve into how to utilize services to reduce costs. Morrow says, "A third way is to set up a National Committee for Quality Assurance-type report to help you with quality improvements."

Can a disease management program help a plan meet NCQA standards? It depends on whom you ask but the answer seems to be, "Yes, in a roundabout way."

Morrow warns: If a vendor begins talking about how he can help you with NCQA data, listen carefully, because much of what NCQA requires can't be done by a vendor. "The adaptation of guidelines has to be a plan function," says Morrow. "They can tell you what NCQA requires and provide you with some of the outcomes material, but you still have to do it. You need to ask them to clearly define what they mean when they say that they can help with NCQA. There are a whole lot of things NCQA would like you to do that are usually not part of any program you can buy."

However, Leider of HealthNet asserts that a well-run DM program will impress NCQA officials. "NCQA wants to see you improving the care of populations of people. A good program will help you attain NCQA accreditation."

This sounds all too familiar to Jody Barish, director of clinical program development at Highmark Blue Cross Blue Shield. She recently completed negotiations with three different vendors. "The vendors will say 'We can help you get NCQA accreditation,' but it's really the health plan's responsibility to measure its own improvement activities," says Barish.

Kier Zirretta points out that "The NCQA measurements, even with the new HEDIS, have not really been disease-specific. They've really been process-specific. Having a well-run disease management program in place will definitely add to the quality of a plan. But nothing in the NCQA accreditation process says you have to have a disease management program."

All of which comes down to the practical wisdom that you should understand what you're buying, says Ralin's Smith. Most plans dealing with prospective vendors go onsite to see how programs work where they're already functioning. "We let the health plan officials come in and actually look over the shoulders of our nurses doing their jobs," says Smith.

Says Leider: "You need to find out if the vendor has ever achieved real outcomes. If the outcomes data the vendor offers during his presentation come from one site, you've got to ask yourself, 'Would the same system work here?'"

It's a question worth answering because, as Smith points out, a good disease management program will produce "enough savings so that everyone will come out ahead."

Reading between the lines

Al Lewis, president of the Disease Management Purchasing Consortium, says the most sensitive stage in negotiations between health plans and vendors negotiating a disease management agreement involves a letter of intent. Here's where the big issues — guarantees for cost, quality and performance — get hammered out.

The letter is usually the first step undertaken by health plans after deciding to work with a specific vendor — a decision usually made after vendor presentations.

Here are highlights from a generic letter of intent that Lewis uses as a template for actual letters leading to disease management agreements. Lewis explains the meaning and relevance of many of the items listed. (The letter is copyrighted and may not be reproduced without his permission.)

MANAGED CARE June 1998. ©1998 Stezzi Communications

Some HMOs have created a third way when confronted with the question of building or buying a disease management program.

Frank Diamond

Senior Editor

"Some combination of both" is often perceived as the first refuge of the wishy-washy, the answer given when bets are hedged. But when "some combination of both" is how many health care experts respond to the build-it-or-buy-it question regarding disease management programs, suddenly it gains stature.

Build a disease management program or buy from a vendor? In many instances, hybrid programs are the answer.

"It's really very complex," says Lorraine Donagher, product manager for disease management at ConnectiCare, an independent practice association-model HMO covering about 200,000 members. "A combination of building, buying and partnering — including partnering with physician groups, hospitals, pharmaceutical companies, home-health agencies and other medical associations — results in innovative programs. Elements of two of ConnectiCare's disease management programs, for asthma and congestive heart failure, have involved a vendor relationship."

Donagher cites the plethora of information in trade, medical and even consumer publications regarding the numerous academic centers, pharmaceutical manufacturers, information technology companies and independent disease management companies that claim proficiency in developing and implementing disease management programs. "However, I have not found one vendor that can provide a comprehensive, all- inclusive disease management program and that understands the particular nuances of the managed care industry."

In some instances, the weed growing throughout the managed care garden — insufficient information technology — forces health plans to take this third route. While they want to keep their hands firmly on the reins of any disease management program, they lack access to a database that will point them to at-risk members and help them collect outcomes information. In the past, some plans answered the build-it-or-buy-it question by not answering. But delay is becoming less of an option. With the ever-increasing emphasis on outcomes, plans must begin to show numbers to back up stated concerns about quality of care.

One of the problems with weighing the build-it-or-buy-it question is that people often mean different things when discussing disease management, says John Wallendjack, M.D., vice president of HealthAmerica, a for-profit HMO covering about 560,000 members in Pennsylvania, Ohio and West Virginia. "The term has been overused by a lot of people," says Wallendjack. "I'm very skeptical. I'm willing to look at a program if it fits into the utilization process that we've already developed. The plans that are using disease case management want to see demonstrated outcomes and, basically, you don't leave that to the vendor."

Especially when obtaining such information means interacting with patients. An InterStudy report says that one of the more noteworthy recent occurrences in disease management involves using patient satisfaction measures as an evaluative tool. "Patient satisfaction is the area that HMOs measured the second most frequently in 1997, yet it was the seventh most frequently reported evaluation tool in 1996," states InterStudy Competitive Edge (7.2): HMO Disease Management Initiatives.

Many levels

Paula Filler, vice president in charge of product development at the Sachs Group, a company that provides business advice to hospitals, group practices and managed care organizations, says what you need to buy from vendors will become evident as you construct a program. "Maybe you already have a pretty good program but there's just one component that you need, such as home health care. A disease management program can have many levels."

Many plan executives don't decide on a hybrid program until after they're well into the construction phase, says Harry L. Leider, M.D., vice president of health services and corporate medical director at HealthNet, with 450,000 members in Kansas and Missouri.

Plans often wind up turning to vendors for help in dealing with some unforeseen problem. "Most people underestimate how complex it is to build a disease management program," Leider says. "There are components that are not easy to obtain, like how to reach people who normally don't come in to doctors' offices. It can take a year to build a disease management program from scratch."

Thomas Morrow, M.D., vice president and medical director of One Health Plan of Georgia, a for-profit preferred provider organization and HMO covering about 280,000 lives, says there are three general types of disease management programs.

The first involves sending educational material to patients. "There's no audit to see if the patient actually needs it," Morrow says. The second type is more interactive and usually involves installation of a 24-hour hot line to nurse practitioners. The educational material sent out with this type includes surveys that help care providers pinpoint at-risk members. "This second type is very popular," Morrow says. "More involvement, such as regularly calling to encourage compliance with the physician's orders, might also be needed in specific cases. Coordinating the advanced education with the primary care or specialty care physician is a necessity to avoid alienating the physician."

The third type is a program in which a medical group or hospital plays an active role. "The best example of this is a staff-model HMO," says Morrow.

Buying pieces

PCS Health Systems, the giant pharmacy benefit manager owned by Eli Lilly and Co., supplies educational material used in One Health Plan's diabetes and asthma management efforts. Morrow uses the educational material as components of programs he's constructed.

"We bought the material from PCS, but we're doing the case management," says Morrow, adding that another component PCS supplies is an updated database. "PCS has drug sales data and one of the big things you need to do is identify the patients. Most HMOs don't have modern ways to mail things to members."

One Health Plan supplies nurses to make follow-up calls to ascertain how much at-risk patients know about their condition. The health plan also sponsors one-day educational seminars at hospitals for those patients.

Wallendjack of HealthAmerica says his plan hired Cardiac Solutions to provide a 24-hour hot line for members with congestive heart failure. Why did he buy that component? "It is the kind of partnership that allows us to maintain shared responsibilities, and make the best use of our existing resources," he says.

Plans should make sure they're guaranteed a certain level of satisfaction. For instance, Wallendjack says he recently canceled a deal with a vendor who offered a prenatal care program. "The vendor just never measured up," Wallendjack says. "Now, we're doing it internally." The sticking point was the lack of response to a questionnaire the vendor sent out to identify at-risk patients. The form asked, among other things, if the woman smoked, took drugs or had ever given birth preterm. The response rate was 20 percent, says Wallendjack.

Since taking over, HealthAmerica gets an 80-percent response on a similar survey. Data like that help when health plans seek accreditation from the National Committee for Quality Assurance. "Health plans want to demonstrate to the marketplace that they're doing something about quality," Wallendjack says. "The National Committee for Quality Assurance is saying, 'Show us what you've done in the last year to improve the quality of care for your membership,' and this is something plans can show NCQA."

Morrow chimes in that, based on his experience as an NCQA surveyor, just saying you have a disease management program isn't enough. He's seen many home-grown disease management programs that did not produce desired results. "It is incredibly difficult to develop, warehouse, mail and update educational material," says Morrow.

Whole or part?

Hold everything, says Peter Smith, CEO of Ralin Medical, the company that owns Cardiac Solutions. Smith strongly contends that HMOs typically do not buy only components of disease management programs — they buy the entire thing. He describes the HealthAmerica-Cardiac Solutions relationship as an anomaly. "Almost every one of our 30 clients uses the full range of our services," says Smith. "At the end of the day, we find very few customers wanting to buy just pieces of the program." Smith does acknowledge that many HMOs keep a firm grip on how the program operates. He likes the analogy of someone who hires a plumber and then hovers about while the job is being done.

But Jeffrey Kaplan, M.D., chief medical information officer for Heritage NY Medical Group, a management services organization in Garden City, N.Y., that covers about 30,000 patients, contends that hybrids predominate.

"Even with large carriers, disease management is not a niche business yet," Kaplan says. "They do not have specialized expertise and so, therefore, disease management programs are often outsourced. Health plan executives don't want to lose control and they don't want to buy something off the shelf. There's also the fear that there's going to be some pressure down the line from the pharmacy companies to sell some of their products"--pressure, Kaplan says, that must be mollified with ground rules or eliminated by using nothing more from pharmaceutical companies than educational materials.

Wallendjack echoes that concern. "Somehow, I have a hard time unlinking the fact that many disease management programs were created by pharmaceutical companies from the business of selling pharmaceutical products," he says.

The Disease Management Strategic Research Study & Resource Guide foresees a "major shift in the future toward reliance upon external vendors/providers to assist [emphasis added] in the development of disease management programs. We believe this shift will be caused by growing resource constraints."

Exactly, says Donagher of ConnectiCare. "The debate over the value or cost-effectiveness of disease management programs is almost nonexistent," she says. "The real question is the value of partnering, purchasing or developing the components of a disease management program."