AccuReports® makes it easy to identify opportunities to improve financial performance of risk, shared savings and incentive contracts. This begins with the concept of the medical cost budget, from which all related analysis of performance derives.
The medical cost budget is by definition the fraction of premium available for providing medical care to a panel of patients. That fraction is expressly the premium available to the plan multiplied by the target medical loss ratio for the provider group, and in AccuReports® by FRG, it is called Funding. The equation is below.
Premium x Medical Loss Ratio Target = Funding
When a panel consumes more resources than are available for its care, we begin to observe the formation of a deficit. If the pattern continues over time, the deficit accumulates. On the other hand, if the panel consumes less resources than are available, a savings is created. No savings, no incentive. Focusing on creating a savings means focusing on the medical cost budget.
Each month of data provides new information about prior period expenses (which we refer to as restatement), and a first look at the new month of data. The aggregate panel performance over any period of time can change due to events present and the engagement of the primary care providers managing the risk adjustment, unit cost and utilization trends for the panel. These dynamics are complex, and panel managers (i.e. primary care providers in a risk or shared savings arrangement) should focus on those. Premium is upstream from this analysis.
Premium represents the funds available to the health plan for administration of care delivery to its enrolled membership. Premium changes due to risk adjustment, which requires a coordinated effort between the plan and provider group, but relates to the medical cost budget in a linear way.
Premium, therefore, is excluded from most reports in AccuReports® by FRG to be sure that users focus on their medical cost budget performance. Of course, risk adjustment initiatives can change the value of premium over time, but due to the linear relationship based on the medical loss ratio target, Funding moves predictably and should be sufficient to measure the effects of those efforts.
The provider group need only understand the magnitude and direction of the changes in Funding to understand how it will affect their performance against the realized Medical Loss Ratio (MLR), which can be improved by managing the many cost levers visible in the reports like inpatient spend, pharmacy costs, specialty trends and emergency department frequency through consistent, thorough and timely review of the related reports.
In value-based contracts, the performance of a panel is measured first by whether a savings is created and second by any measure of quality of care improvement. The first measure (savings or loss) is presented in AccuReports® as both a residual after medical costs are removed from the funding to the risk pool (i.e. balance) and also as a ratio of the total expense divided by the risk pool funding, named thusly the Expense to Funding Ratio (EFR).
EFR = Total Expense / Funding
AccuReports® presents EFR consistently throughout the application for two reasons: the first, following from the previous explanation, to focus the user on the performance against the medical cost budget, and second, to allow comparison across groups by individuals responsible for multiple panels with different incentive targets. EFR is always measured against 100%, which simplifies comparative analysis. A higher EFR, means a higher resource consumption of the medical cost budget.
The Medical Loss Ratio Target in incentive contracts offered to different groups will vary based on the market in which those groups perform and other network performance management strategies. In AccuReports® by FRG, because these contracted rates are often confidential, the user is focused on performance against budget. However, in those cases where a network manager or provider group finance manager is privileged to know the Target Medical Loss Ratio, or Target Loss Ratio (TLR) for short, of multiple groups and would like to estimate premium and overall Medical Loss Ratio (MLR) performance, he or she can simply apply what they know about each contract’s target to the presented Expense to Funding Ratio (EFR), according to this simple formula:
EFR x TLR = MLR
A simple example will make it clear. For 10,000 Medicare Advantage members, if the plan’s average per member per month Premium for the population is $915, then the plan receives $9.15 MM in revenue from CMS each month. If the plan contracts with a primary care Medical Services Organization (MSO) to manage those members under a risk contract with a TLR of 84%, the medical cost budget for a month of services is: $7.686 MM. If the panel consumes $7.225 MM in resources in one month, the EFR for that month is 94%. Following the equation above, substitute the values:
(0.94) EFR x (0.84) TLR = MLR = 78.96%
The proof is found through application of the MLR definition: Total Medical Expense divided by Total Premium. In this case, $7.225 MM (Total resources consumed, i.e. expense) / $9.15MM (Panel Premium) is 0.7896. When expressed as a percent, the MLR.
MLR = Total Expense / Premium
For more information, check out our article on how to set MLR Targets Effectively.