Undercaptilization undermines managed care

Patients and health-care providers bear the brunt of managed care?s financial troubles.

By Rebecca A. Clay

For Michael K. West, PsyD, the managed-care nightmare began in 1994. That?s when he joined the provider panel of a managed-care company that had been hired by an insurance company to provide behavioral-health services for the state?s Medicaid beneficiaries. Months-long delays in payment were the first sign of trouble. Then came denials for claims that had been previously authorized. And suddenly the U.S. Postal Service seemed to be losing reimbursement checks that the company had supposedly sent.

All that was nothing compared with the news that the company had gone bankrupt, leaving behind an estimated $300,000 to $500,000 in unpaid claims to mental-health providers across the state. So far, neither the insurance company that subcontracted to the failed company nor the state will accept responsibility for the unmet obligations. That means West?s group practice is out $18,000. ?When the situation first started, what I wanted was my money,? says West, president of Community Psychological Associates in Clarksville, Tenn. ?But there are more far-reaching implications. If managed-care companies can subcontract away their responsibility and just say they?re sorry when the subcontractor goes belly up, what?s to stop them from intentionally underfunding the subcontractor and increasing their own profit margins??

Situations like West?s don?t surprise financial analysts who specialize in the volatile managed-care field. As West and other psychologists in Tennessee, Colorado and Pennsylvania are discovering, undercapitalization is starting to catch up with managed-care companies. Struggling to balance the health of their enrollees and their bottom lines, managed-care companies are watching their profit margins disappear. Stock prices are plummeting. Bankruptcies are becoming more common. Fewer than half of insurance plans even earned a profit last year, according to InterStudy Publications, a research group that tracks managed-care trends.

The trend toward undercapitalization is inviting heightened legal scrutiny by organized psychology, says Russ Newman, PhD, JD, APA?s executive director for practice.

?We?ve been concerned for some time about providers? rates being ratcheted down, but the situation hasn?t always been legally actionable,? Newman says. But by linking falling provider rates to an inadequately capitalized managed-care organization?one that is intentionally and patently unable to provide services promised by a health plan?provides grounds for a legal challenge, he says.

Mounting pressures

A look at the history of managed care reveals that financial problems were probably inevitable once the industry matured, says health-care analyst John G. Salek, vice president of the international financial consulting firm REL Consultancy Group in Purchase, N.Y.

When managed care first took off, he explains, the industry was Wall Street?s darling as reported revenues and stock prices soared along with enrollments. Eager to build and maintain their market share, managed-care companies soon started promising better and better deals to employers and other health-care purchasers. The problem, says Salek, is that the companies tended to cut prices without really knowing what their costs would be.

?Increasing enrollments and premiums let the companies stay two steps ahead,? says Salek, adding that in managed care?s early days huge numbers of people shifted?or were shifted?into this exciting new option. ?The true test will come now that enrollment has leveled off.

The signs don?t look good, he warns. Patients? growing sophistication makes them more likely to appeal treatment denials or even sue their health plans, for instance. The demand for expensive, new treatments, such as the impotence drug Viagra, has boosted costs. The recent influx of Medicare beneficiaries into managed-care programs is especially worrisome, says Salek.

?A company might agree to take on 10,000 Medicare beneficiaries at $300 per person per month and think, ?Great! That?s $3 million a month,?? he says. ?But what are the costs of covering those older people over a period of time? I don?t think anybody really knows.?

Unpaid claims

With purchasers fighting premium increases and consumers fighting care restrictions, says Salek, managed-care organizations are seeking ways to lower their costs. And providers represent a tempting target, he says, reeling off the names of several well-known insurance companies that have admitted to delaying payments or skipping out on their bills altogether.

The APA Practice Directorate?s Shirley Higuchi agrees.

?Our Legal and Regulatory Affairs Office has received complaints from members regarding inappropriate cost-containment mechanisms emplyed by MCOs,? says Higuchi, the directorate?s executive assistant executive director for legal and regulatory affairs. ?These cost-containment measures include unreasonable restrictions on benefits as well as the unilateral reduction of fees.?

In West?s case, the financially troubled company paid just $45 an hour for his work with Medicaid patients?down from the $68 an hour he was accustomed to receiving. Of course, reduced fees don?t really matter if you?re not getting paid at all.

West isn?t the only psychologist who has turned to APA for help after being victimized by managed care?s quest for profits. Jeffrey Zimmerman, PhD, president and managing partner of Connecticut Psychological Group PC in Avon, wasn?t surprised when claims to a behavioral-health company that his practice worked with went unpaid for a long time.

The real surprise came with a letter announcing the company?s bankruptcy. Although the letter contained a check, the amount was about $9,000 shy of the sum owed to the practice?s 18 clinicians. According to the letter, Zimmerman and his colleagues had to decide whether to take the settlement within three days. They decided to take it, fearing that legal costs would eat up any money they might be able to recover.

?If our practice is typical, no one clinician was impacted very severely by this,? says Zimmerman, past president of the Connecticut Psychological Association. ?If you take the $500 that?s owed to each of us and multiply that by the number of providers in the network, however, that?s a considerable amount of money.?

Implications

But the financial impact on providers is only secondary, Zimmerman emphasizes. What?s more important is the impact on patients. Managed care initially made access to care easier for patients by dropping the price of seeing a provider to $10 a session, says Zimmerman. In the long run, however, managed care could make it harder for patients to get high-quality services.

?Think about what ultimately happens to the quality of care when reimbursement for professional services keeps dropping,? he says, noting that many professionals in Connecticut are being reimbursed at half their customary rates. ?Who will go into the profession? What will the choices of experienced professionals be??

That scenario is already playing out in Tennessee, says West, who has told his story to the Tennessee Senate Oversight Committee. The combination of decreased rates and the increased overhead involved in following up on missing claims, filing claims repeatedly and absorbing unpaid claims makes psychologists and other providers reluctant to work with the state?s Medicaid managed-care program, he told legislators.

?It?s unfortunate, because there are a lot of people who need psychologists? services and won?t be able to get them,? he says. ?You?ve got a real reduction in the availability of high-quality providers.?

Rebecca A. Clay is a writer in Washington, D.C.