Each month HBN will post information on a new or hot topic pertaining to contract negotiations or payor relationships.  Check back with us regularly or sign up for immediate notification when a new advisory is published. These are free tips that are intended to help healthcare providers to understand and analyze relationships with managed care organizations (MCOs), insurance companies and other parties involved in the industry.  The more educated you are, the more likely you will understand your contract terms and ability to improve your bottom line.

HBN Advisory—April 2006

Connecting the dots regarding the definitions of MCO, Insurance Company, TPA and ASO

When you finish this article, we hope that you, as a practice manger, practitioner or physician, have a better understanding of the roles of various players and products in the health plan industry and can safeguard your practice with the tips provided.  The industry can be very confusing because sometimes the same entity has numerous functions in the role of administering an employer’s health plan, while other plans’ administration may be extremely fragmented.  We’ll start by defining some of the terms and end with some tips on how to use the information to protect your practice’s bottom line.

MCO:

Typically an MCO is an entity that specializes in provider network development, provider credentialing, provider contracting, ongoing network management, claims pre-processing (to ensure the contracted rate is applied) and utilization management programs.  An MCO usually does not provide insurance products or claim adjudication.  Instead an MCO generally rents or leases its networks and services to the ultimate “payor” or “payer,” the party financially responsible for claims to be paid, including:

• Insurance companies that are too small to afford their own network development or have certain markets where development would cost them more than to rent from an MCO
• Third Party Administrators (TPAs) that process claim for self-insured employers and health & welfare (union) group plans called Administrative Services Only (ASO) plans
• Self-insured employers that administer their own claims processing

Examples of MCOs are Private Healthcare Systems (PHCS), First Health, Beech Street, and many more regional organizations. Typically an MCO rents its network for a per-member-per-month fee or a percent of savings.  Most MCOs include all types of health care providers while some MCOs focus on a particular specialty such as psychiatric services.  When these specialty MCOs are rented by payors, they might also offer capitation or case rate options to the payor.

Over the past few decades many MCOs have merged with or rented/leased their networks to other MCOs.  This allows MCOs to expand and offer broader geographic coverage to payor clients without development costs.  However, sometimes a process called “stacking” can occur and work against physician practices and other providers.  How?  Most contracts that practices sign allow “assignment” of the MCO contract to other entities by the MCO at the MCO’s discretion and without the need for permission from the provider.  The party that is the “payor” (insurance company, employer, health and welfare fund) or the TPA may have access to numerous MCO agreements in that geographic area, and sometimes even has their own negotiated contract in addition to leased networks.  When a claim from the provider is processed, the payor “stacks” all the available fee schedules and pays the lowest one they can find. Although stacking may seem unfair, it is legitimate. You probably have some old contracts that have evergreen clauses that renew the contracts automatically unless you send written termination a certain period before the anniversary of the agreement.  Your best defense is to review all contracts and terminate or renegotiate any that do not meet your minimum acceptable reimbursement and other terms. It is not uncommon for a practice to not know the whereabouts of the contracts…in this case, you can detect them through your posting staff who should flag low payments that do not match a known contract amount.  Send a notice to the payor requesting the source of their contractual or allowed amount used for the claim payment.

This is perfectly legitimate and it is up to the provider to more cautiously negotiate current agreements and terminate old, unfavorable agreements. In another Monthly Advisory, HBN will spend more time on “assignment provisions” and how providers can improve contract language to protect against stacking in the future.

Insurance Company:

Over the past few decades it has not been uncommon for an insurance company to also be or have affiliates that are MCOs and/or TPAs. This makes it difficult to distinguish and define the roles, especially when they operate under the parent company name. But, for discussion purposes, let’s break down the key functions that an insurance company may provide, or contracts for, and very simply define them.  These functions are: insurer/payer, MCO, utilization manager and TPA. 

The majority of insurance companies do not build their own networks, but instead rent them from MCOs for a monthly member fee or percent of savings.  A few larger insurers that represent a very large market share of non-government plans in most markets, are big enough to warrant building and managing their own networks and utilization management programs. Among these larger players are Anthem - Blue Cross Blue Shield, Aetna, CIGNA, and United Healthcare. For smaller insurance companies, there is just not enough business in a given market to spread the overhead to build and maintain a network and there are reasonable options for them to rent. Even the large insurance companies might, on occasion, rent an independent network in a remote area to service a multilocation client that wants all of their employees to have network access.  And when a payor/TPA/insurance company finds itself without a contract with a certain provider in a certain market, it might seek the services of yet another party, like Multiplan, through which the a one time contract rate is requested on a specific claim. 

The insurance company offer two basic types of types of funding arrangements to their group clients which consist of employers, health and welfare funds and associations….the two being insured and self-insured arrangements. It is not uncommon today for more than half of an insurance companies’ clients to be self-insured and the client simply uses the insurance company expertise to get claims processed.

When an insurance company offers a group client an “insured” plan, the payer (the party responsible for funding or the financial underwriting of the plan) is the insurance company because the client group buys a plan for which the insurance company accepts the financial risk in return for a set prepaid premium.  For self-insured plans, the payor is the group client that has agreed to take on the financial risk of underwriting the plan and guaranteeing payments. These self-insured clients fund an account from which the TPA pays claims.  Self-insured clients sign an Administrative Services (ASO) agreement with the TPA (either an independent TPA or an insurance company’s self-insured TPA division) to purchase claims processing services and network use and/or utilization management, but not the financial risk. 

Administrative Services Only (ASO) and Third Party Administrators:

When the employer or health and welfare fund takes on the financial risk of funding the claims of its employees or members, they usually need to purchase the services of an independent Third Party Administrator (TPA) or an insurance company’s administrative arm. In this scenario they are buying administrative services only (ASO), and not insurance. On rare occasions an employer is large enough and expert enough to have an in-house administrative unit to process claims and apply utilization management programs, but most employers stick to their core competency and let an expert do the work for them.

Among the benefits of self-insuring for an employer or union group are:

• Elimination of premium tax paid,
• Flexibility to design the benefit plan and programs that do not have to meet State benefit requirements for insured plans,
• Reduced administrative fee for the insurance and other admin fees included on an insured premium.
• Initial Cash flow improvement because claims are funded as they are processed rather than prefunded through an insured premium arrangement

The greatest disadvantage of an employer or health and welfare fund self-insuring is the potential financial risk that is placed on the employer or fund. This financial risk can be and is often reduced through the purchase of reinsurance…the employer or health and welfare fund purchases “specific” or “aggregate stop-loss” insurance on a specific person’s claims or the whole group’s aggregate claims, respectively, that exceed some dollar amount that the client knows it can bear.

A little history on how the self-insured industry has evolved…  Back in 1974 the Employee Retirement Income Security Act (ERISA) was passed and set standards for health and pension plans in private industry to protect the individuals in those plans.  With the ERISA parameters better defined through its governing agency, the Department of Labor, in the late 1970s and early 1980s employers were seeking ways to reduce their benefit costs and improve related cash flow and found the vehicle through ERISA.   Independent TPAs with bare bones overhead and administrative services started offering ASO arrangements at a very low cost with this flurry of employer interest.  Insurance companies initially resisted because the lion’s share of profits were made on the investment of clients’ prepaid premiums that were not yet needed to pay claims, and although some profit could be made on claims administration and “risk” charges in the insurance premium, the real money was in investment of available funds.  This shift in cash flow caused insurance companies to pare down overhead, create cost accounting to know what overhead costs were by service, and  to compete with the stand alone TPAs in a whole new industry. 

Some insurance companies saw the light earlier than others and wisely reconfigured their organizations to reduce overhead, offered only those services the clients’ needed and became, or found, reinsurers for the specific and aggregate stop loss that their clients would need for catastrophic claims.  These organizations met the market challenges and found a new way to make money, often taking no insurance risk at all.  Those who ran these operations efficiently quickly learned how to estimate the cost to do business and set admin charges with their needed margin to ensure handsome ASO profits. Over the years, TPAs and insurance companies with ASO business also learned that they still needed to do “underwriting” of their clients to be sure that they were financially stable enough to handle the up and down cycles of claims funding, catastrophic losses that can occur without much warning and the required money due to pay claims lag if the client terminates the arrangement.

So, now that you understand better how MCOs, insurance companies, TPAs and ASO groups operate, what should you do as a practice manager?

If you take two ideas from this article, for most practices they should be:

• Be aware that your State insurance department is not likely to have any jurisdiction over self-insured, ASO employers and health and welfare funds.  For example, the timely payment and mandated benefits in the State do not apply.  The Department of Labor overseeing ERISA or ASO plans is appropriately interested in protecting individuals in plans and does not act as an advocate for providers like many state insurance departments do for insured plans. So it is up to you to make sure your agreements with MCOs and insurance companies that rent or use their networks for ASO clients includes language in the contract body or in their administrative manuals that allows you to manage claims that are not paid promptly. For timely payments, be sure you know how and when you can bill the patient when an ASO group does not fund their account for the TPA to pay claims.  Don’t let your MCO contracting contact tell you that this scenario rarely happens…it does and you need to know when it happens and how and when to go about billing the responsible party. Ask what denial or pend codes you might see on an EOB so you can flag these for collection from the patient if appropriate. Although most ASO groups follow State mandated benefits in designing their benefit plans, they do not have to, and so be sure to have a responsible party’s signature on all services you provide so that you have the authority to bill the patient or their responsible party if the claim is denied because it is not a covered service.
  
  
• Avoid being a victim of “stacking.”  Review all of your known contracts to be sure you do not have old, unfavorable rates lingering out there for an MCO or insurance company to assign to a payer that you did not intend to have access to your discounted rates.. Sometimes when you add a provider to your practice, he or she comes unknowingly with the baggage of some old agreements tagged to them from their previous practice.  If you are noticing contractual/allowable payments from certain payers that are low and that just do not make sense, investigate with that payer to find out which contract was applied to that claim.  If you are not familiar with the contract that is being applied to the claim(s), ask the payer for a copy, expect it to take awhile but keep hounding, and get it terminated or modified as soon as possible. 

A Few Qualifying Notes:

1. Some very large self-insured employers actually have their own claims processing units, but this is quite rare…most hire an insurance company or independent TPA to process for them and pay an ASO fee for this service. 
   
   
2. There are many variations in the amount of financial risk an employer or health and welfare fund may accept.  This article addresses simplistic scenarios in order to provide an easy-to-understand explanation of how the industry works.
   
   
3. State insurance regulations and State insurance departments vary regarding requirements of “insured” plans.  Federal regulations under ERISA are overseen by the Department of Labor and govern how a self-insured plan is administered.  

 Watch throughout 2006 for contracting advisories on timely payment, assignment provisions, analyzing fee schedules that are proprietary or based on a certain year for Medicare RBRVS, and many more topics.  If you would like to learn more about a topic already covered, contact us with your specific question and we will do our best to answer or steer you in the right direction. If you want us to cover a particular topic in an upcoming advisory, send us your question or topic and we’ll add it to our list of subjects to cover soon. 

This article prepared by Penny Noyes, President of Health Business Navigators.

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