And those two often don’t match up very well.
Example. Work comp insurance companies benefit when medical and indemnity costs are lower than expected. So, lower medical costs = better “outcome” for the company.
Many – if not most – managed care executives are evaluated in part based on “network penetration” and “discount below fee schedule”. Thus, the more dollars that flow thru their network, and the deeper the discount those providers give the network, the “better” the executive’s performance is.
Superficially, this makes sense – more care thru lower cost providers equals lower medical cost, which benefits the insurance company.
“Superficially” being the key word. Here’s the problem with this model.
Insurers contract with PPOs, which in turn contract with providers to deliver services at a discount. Most PPOs get paid a percentage of the savings that is delivered by that discount, typically 15 to 22 percent of the savings. So, the more the PPO ‘saves’ the more it makes. On the surface, this sounds good: the system rewards the PPO for saving money and does not pay it when it delivers no savings.
Under a percentage-of-savings arrangement, reducing total medical cost is ignored in favor of saving money on unit costs. The PPO gets paid for savings on individual bills. Therefore, the more services that are delivered and the more bills generated, the greater the ‘savings’ and the more money the PPO makes.
The system encourages over utilization because it is in the PPO’s best interest financially to have numerous providers generate lots of bills for lots of services. Also, the providers, squeezed by a per-unit fee schedule that is lower than fee schedule/Usual and Customary Rates (UCR), have a perverse incentive to make up for that discount by performing more services.
The fact is few carriers, TPAs, or employers have realized that per-bill ‘savings’ is the wrong way to assess a managed care program – or the executive running medical management. And unless senior management changes their evaluation methodology, their managed care departments will have no incentive to change their program to one that actually does reduce total costs.
This is by no means the only example out there; I’m quite sure you can come up with more than a couple off the top of your head.
What does this mean for you?
Take the time to understand – really understand – what success is, and what drives success. You may be unpleasantly surprised to learn your execs’ motivations are diabolically opposed to your company’s success.