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Paying and Charging for Health Management 1. Four Options

by Scott MacStravic

Whether health care organizations (HCOs) purchase health management (HM) services from outside sources, or choose to be outside suppliers of such services for others, the question of how to pay or charge, as well as how much, is a major factor in achieving success.  How much to pay, compared to how much economic benefit HM yields for payors or employers, will largely determine whether it makes any sense to invest in HM in the first place, and in which specific HM challenges.

How much it would cost to choose one provider of HM services over another is equally a function of what competing providers charge and what they deliver in terms of economic benefit.  While HCOs or their clients may focus on effects of HM services on the health and life quality of the people affected, but few will consider HM services or providers that do not also yield a positive return on investment (ROI) as well, in terms of financial performance.  And since ROI is a function of what has to be paid compared to what financial amounts have to be invested, the paying/charging question is often paramount.

There are essentially four different approaches to charging and paying for health management (HM) services:

  1.    Flat fees or per population member charges
  2.    Charges based on the numbers of people “eligible” for specific HM services
  3.    Charges based on the numbers of people who participate in specific HM programs
  4.    Results-based charges

The choice of charging approach can make a dramatic difference in how HM providers and clients behave with respect to HM investments, and to the level of success achieved.  And this choice is greatly affected by the type of HM intervention that will be applied.

A Flat fee or a charge per member of an employee or insurance plan population, is the simplest, and the only one that can be quoted by HM providers, or predicted by HM clients, in advance of an HM intervention.  To employ a fee system based on the numbers eligible for HM services, or the number who participate in a given HM initiative, and certainly to base charges on the results achieved requires the kind of health risk assessment (HRA) of the population that is normally the first step of an HM intervention.  By contrast, a flat fee may be set regardless of the number of people in the population, or be affected by that number, and be set before there is any more information available than the number of its members.

The flat fee or per member approach makes sense only when the cost of the HM intervention to the provider thereof is more or less independent of the number of members of the population at risk who have the risk behavior, condition, or disease that particular HM interventions address.  It can also make sense when the HM program is a general health/well-being effort that everyone in that population will benefit from.

The fee per eligible member – per person found to have a particular risk behavior, risk condition, or chronic disease – makes sense in that only such people are logical prospects for HM interventions that address them, and can therefore become sources of related economic benefits to the HCO as payor, or to its client.  Of course, not all eligibles will participate in a given HM intervention, so not all will yield such a benefit, but the potential, at least, is there.

A fee per participant can make the most up front sense, but it may cause the HCO or its client to be far too conservative in its investment, seeking to enroll only those members who have the highest probability of returning a positive ROI and the highest ROI possible.  This can result in enrolling far fewer members than is the optimal number in terms of total economic impact, and merely the members that deliver the highest ROI ratio.

A charge or payment scheme that is based on the results achieved, whether through a warranty, a guarantee, or a risk/reward contract, is easily the riskiest for the HM provider, though may be the most popular among HCOs or outside clients investing in HM for the first time.  All three of the other payment/charge methods put the risk on the client, though HM providers that do not deliver the expected or at least an acceptable ROI should not usually expect to retain their clients.

Each of the four methods involves slightly different effects in terms of the HM investment decision.  Each of the four will be discussed in detail in a series of blog entries that will follow this one

Paying a flat fee for a particular HM program, or one that is based on the number of people in the population at risk, is the simplest of all charge methods.  It enables HM providers to predict their revenue, and HM prospects/clients to know what their costs will be before the HM program is purchased or implemented.  This means HM purchasers can compare the costs of competing options, as long as they use the same flat or per member fee approach.  It makes budgeting for clients simple as far as costs are concerned.

The predictability of costs is often what makes this approach attractive to clients, whether insurance plans or employers, and the predictability of revenue is attractive to providers, as well.  But the predictability of costs comes with an almost total unpredictability of results. Since these are definitely important in budget planning for clients, it can complicate the budget process overall.  In order to predict results, clients must be able to predict: 1) what the effects of participation in specific HM interventions will be; 2) how many individuals in the population might benefit from each intervention; and 3) how many of these will participate in each.

HM providers should be able to describe what the average effects of each of their interventions has been in the past, perhaps even promise or guarantee some minimum