Until recently, the managed care system has been characterized by HMOs reducing payments to providers in order to maximize profits. In the last several years, however, providers have begun to reverse this trend by organizing into groups to negotiate better contracts with HMOs and to deliver care in a more cost effective manner. These groups are Integrated Delivery Systems (IDS). Additionally, large employers and coalitions of employers are discovering that they can reduce their healthcare costs by contracting directly with these provider organizations, thus avoiding the administrative and marketing costs associated with an HMO. A catalyst for this trend is Medicare's Provider Service Organizations (PSOs) plan, which is currently in trial stages at six sites around the country. PSOs contract directly with provider networks on a capitated (or "fixed") basis, removing HMOs from the Medicare world.

While there is still considerable debate regarding the effectiveness of capitated contracts, the healthcare industry appears to be moving steadily in that direction. As providers learn to profit from the Medicare PSO and commercial HMO contracts, their fear and aversion to "at-risk" contracts will decline and capitated contracts will gain greater acceptance. As capitated contracts begin to dominate the industry, payers and providers alike will realize the importance of managing these contracts effectively. Whether it be employers that wish to monitor their healthcare costs, or providers forming groups to take a risk and control their destiny, sophisticated information systems are absolutely vital to their success.

The IDS Evolution

The most popular form of an IDS is the Physician Hospital Organization (PHO). A PHO is a collection of independent physicians, typically over 100, who join with a local hospital to bid for healthcare delivery on a capitated basis. An Independent Practice Association (IPA) is a less integrated provider organization in which the hospital is not included in the capitated arrangement. Management Service Organizations (MSOs) are organizations that provide management services to providers. Because MSOs do not accept risk for medical services, they are not technically an IDS. However, their information requirements to manage capitated contracts are identical to those of an IDS.

Is Capitation a Risk or a Reward?

IDSs and HMOs negotiate capitated contracts in order to limit risk. An IDS that negotiates such a contract is accepting the risk because it feels that with proper management, it can earn a profit based on the capitated payments received. Because providers can no longer collect the balance of their costs from the patient, they are forced to absorb any losses. The ability of an IDS to manage costs carefully will determine whether that IDS is profitable. With the increasing complexity and size of the patient population, a sophisticated data processing solution is required to help manage these costs.

Many smaller IDSs use the HMOs to provide their data processing needs. However, these IDSs are discovering that as they become profitable, the HMOs often reduce their capitation amounts. In other words, risk-taking providers must use discretion and control their operating data or risk losing negotiating leverage with payers. This fear provides an added impetus for providers to own and control their information.

Cost Effectiveness

To balance cost against quality is the challenge of every IDS. Financial modeling and data analysis are vital to manage costs and maintain quality of care. Unfortunately databases, even relational ones, are not ideal for rapid extraction and analysis of data. A new breed of applications has evolved to convert the relational data into a multi-dimensional structure, for rapid slicing and dicing of data called OLAPs (On Line Analytical Processors).

Health Care Finance Administration (HCFA) compliance requirements for IDS who contract for Medicare risk contracts are quite onerous. Clean claims must be processed within a set period or the IDS will incur financial penalties, with repeat offenses disqualify them from the entire program. Providers submitting disputed claims must be advised of problems rapidly and followed up, as per HCFA's structures. Patients denied services must be notified promptly and be given the right to appeal the denial. In all these cases non-compliance can result in adverse financial penalties against the IDS. An automated tickler system can monitor efficiency and performance of the claims processing operations.

It is becoming increasingly evident that a good hedge against these risks is a comprehensive and flexible information system which enables a provider to avoid making mistakes, catch problems at an early stage and take corrective actions to avert losses.

Jacob G. Kuriyan is CEO and founder of Physmark Inc., a provider of managed care software and solutions. He has over 20 years experience in healthcare and management information systems. Dr. Kuriyan is a regular speaker at many managed healthcare conferences. He can be contacted by e-mail at jkuriyan@physmark.com.