Assessing the Financial Solvency of a Managed Care Organization
by Patrick C. Alguire, MD, FACP
Director, Education and Career Development
When starting out in practice, one of the important decisions is whether to become a participating physician with a managed care organization (MCO). In previous years, the decision was easy; expert opinion favored joining as many MCOs as were available. This strategy was believed to be sound because it diminished the ability of any one MCO to control reimbursement fees and thereby put you at increased financial risk. However, in recent years, many MCOs have gone bankrupt, and the strategy of indiscriminately joining all MCOs is no longer tenable. The purpose of this article is to summarize a few easy steps that can be taken to analyze the financial health of an MCO, allowing you to make informed decisions about whether to become a participating MCO physician.
Before beginning, let us review the possible ways a bankrupt MCO can put you at financial risk. If your MCO contract stipulates a capitated reimbursement arrangement, the impact of an MCO bankruptcy on your practice will be relatively small. This is because a capitated contract pays you in advance of actually delivering service, and the withhold amount is generally small. On the other hand, if the MCO contract specifies a fee-for-service arrangement, payment withholds are generally large, and payments are made some time after the service is rendered; therefore, the financial risk of an MCO bankruptcy is greater.
How should you begin to assess the financial strength of an MCO? The first step is to obtain the annual report. Like any financial report, analyze the bottom line. Do profits exceed expenditures? By what percent, and for how many years? Is there a trend of decreasing profitability? What is the potential for growth in your community?
Next, determine the ratio of dollars allocated to administration and profit to the total premium dollars. If this ratio exceeds 20%, there may be, and usually is, a significant problem. One explanation for ratios that exceed 20% is a "top-heavy" or inefficient administrative staff. Another explanation might be too much money allocated to profit, and not enough allocated to patient services or physician reimbursement. Finally, the denominator of the ratio may be too low, representing either insufficient members, or a premium that is too low to support the offered services.
Next, look at the Medical Loss Ratio (MLR). The MLR is the percent of the premium dollar that is spent on medical care. The MLR varies inversely with the administration/profit to premium ratio; as the administration/profit ratio increases, the MLR decreases. The ideal target for the MLR is between 80% and 88%. The numerator of the MLR is affected by the actual cost of care, that is, the number of dollars per month per member that is needed to provide the promised medical care to the members. The number of members and adequacy of the premium, once again, affect the denominator. As for the administration/profit to premium ratio, an MLR that appears to be too large or too small may reflect problems in either the cost of services provided or the number of members and premium cost.
Take the time to compare the MCO premiums with other organizations. Do they seem in line, too high, or too low? Analysis of the MLR, the ratio of administration/profits to premium ratio, and relative premium cost per member can often pinpoint whether a MCO is in financial trouble and suggest the nature of the difficulty.
The obvious take-home message is to avoid participating with MCOs that are fiscally unsound. This financial analysis exercise should be repeated annually, and you should exercise your right to decline continued participation with an MCO that is showing signs of financial weakness.
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