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Provider Payment Arrangements, Provider Risk, and Their Relationship with the Cost of Health Care

October 2015 ?2015 Society of Actuaries, All Rights Reserved

Milliman

Provider Payment Arrangements, Provider Risk, and Their Relationship with the Cost of Health Care

SPONSOR

Society of Actuaries

AUTHORS

Juliet M. Spector, FSA, MAAA Brian Studebaker, MA Ethan J. Menges

Caveat and Disclaimer The opinions expressed and conclusions reached by the authors are their own and do not represent any official position or opinion of the Society of Actuaries or its members. The Society of Actuaries makes no representation or warranty to the accuracy of the information.

Copyright ?2015 All rights reserved by the Society of Actuaries

?2015 Society of Actuaries, All Rights Reserved

Milliman

TABLE OF CONTENTS

GLOSSARY OF TERMS AND ABBREVIATIONS

I. EXECUTIVE SUMMARY ....................................................................................................... 1 II. INTRODUCTION .................................................................................................................... 3 III. PAYMENT MODELS AND RISK ........................................................................................... 6 IV. POPULATION PRICING IMPLICATIONS .......................................................................... 15 V. CONCLUSIONS AND BEST PRACTICES ......................................................................... 47 VI. LIMITATIONS AND RELIANCE .......................................................................................... 52

Appendix A--Methodology and Assumptions..............................................................................A-1 Appendix B--The Role of the Affordable Care Act in Payment Reform ......................................B-1 Appendix C--Hospital and Physician Organizations ...................................................................C-1 Appendix D--Types of Other Provider Organizations .................................................................D-1 Appendix E--Data Tools..............................................................................................................E-1

ENDNOTES

This report was prepared by Milliman exclusively for the use or benefit of the SOA for a specific and limited purpose. The report uses data from various sources, which Milliman has not audited. Any third party recipient of this report who desires professional guidance should not rely upon Milliman's report, but should engage qualified professionals for advice appropriate to its own specific needs.

?2015 Society of Actuaries, All Rights Reserved

Milliman

ACKNOWLEDGEMENTS The authors wish to thank the Society of Actuaries for sponsoring this paper. In particular, the authors thank the Project Oversight Group for their assistance in preparing this paper. The Project Oversight Group comprised Daniel Bailey, Christopher Coulter, Patrick Kinney, Stephen Poor, Daniel Pribe, Brandy Sneed, and Coleen Young. In addition, the authors gratefully acknowledge the assistance of Rebecca Owen, SOA Health Research Actuary, throughout the course of the writing of this paper, and Amanda Holland of Milliman for additional review of the material. Thanks also to Steven Siegel, SOA Research Actuary, and Barb Scott, SOA Research Administrator, for managing this effort and helping to bring it to completion.

?2015 Society of Actuaries, All Rights Reserved

Milliman

GLOSSARY OF TERMS AND ABBREVIATIONS

Abbreviations ACA/PPACA: Patient Protection and Affordable

Care Act ACE: Acute Care Episode Demonstration ACO: Accountable care organization AHRQ: Agency for Healthcare Research and

Quality AMA: American Medical Association APC: Ambulatory Payment Classification APR-DRG: 3MTM All Patient Refined DRG (APR DRG) Classification System BPCI: Bundled Payments for Care Improvement CABG: Coronary artery bypass graft surgery CBO: Congressional Budget Office CC: Complication or comorbidity CCE: Care coordination entity CCF: Care coordination fee CCHG: Milliman Chronic Conditions Hierarchical

Groups CDPS: Chronic Illness and Disability Payment

System CMMI/Innovation Center: Center for Medicare

and Medicaid Innovation CMS: Centers for Medicare and Medicaid

Services CPI: Consumer price index CPT: Current Procedural Terminology CT: Computed tomography scan (i.e., CT scan) DME: Durable medical equipment DOJ: U.S. Department of Justice DRG: Diagnosis-related group DSH: Disproportionate share hospital EAPG: 3MTM Enhanced Ambulatory Patient

Grouping System EHR: Electronic health record ETG: Symmetry? Episode Treatment Group

FFS: Fee-for-service FQHC: Federally Qualified Health Center FTC: Federal Trade Commission GME: Graduate medical education GPCI: Geographic Practice Cost Index HAC: Hospital-Acquired Condition HCG: Milliman Health Cost GuidelinesTM HCPCS: Healthcare Common Procedure Coding

System HHI: Herfindahl-Hirschman Indices HHS: U.S. Department of Health and Human

Services HMO: Health maintenance organization HQID: Premier Hospital Quality Incentive

Demonstration ICD: International Classification of Diseases

(i.e., diagnosis codes) IHA: Integrated Healthcare Association IME: Indirect medical education IP: Inpatient hospital setting IPA: Independent practice association or

independent physician association IPAB: Independent Payment Advisory Board IPPS: Medicare Hospital Inpatient Prospective

Payment System MAC: Medicare Administrative Contractor MCC: Major complication or comorbidity MCCN: Managed Care Community Network MedPAC: Medicare Payment Advisory

Commission MEG: Medical Episode Grouper? MLR: Medical loss ratio MPFS: Medicare Physician Fee Schedule MRI: Magnetic resonance imaging

?2015 Society of Actuaries, All Rights Reserved

Milliman

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