De-capitation Redux: Adventures of Rick, part 2

Hearing Health & Technology Matters
April 25, 2011

In the very first post (, we heard from Dr Rick Lazich and his partner, who were negotiating a contract for audiology services in state long-term care facilities. … and there were a bunch of dentists involved somehow.  At that point, his group had just ponied up big bucks to hire actuaries to help with the process. Today, he’s sent in an update as a comment to the first post. They are reporting a lot of progress but also a big obstacle having to do with how services are bundled into the hearing aid product.    Here’s what Rick said:

“We are working to finish the insurance product to submit to the state. I will fill in the details when they become clear to me and I can articulate them better. We have run into one big snag though. This policy will service patients only in a long term care setting. An insured patient could take this coverage to another provider to whom we would have to pay the claim amount. This would be for the hearing aids. We have built into our capitated rate many services that are connected with the hearing aid cost. Consequently if we have many outside claims to pay it would not be good. The underwriter wants protection from this and wants us to find a licensed PPO in the state to take a capitated payment to be the PPO if someone goes out of facility. My search has not revealed any PPO for audiology that are licensed with the state. The exposure is minimal but the underwriters are sticklers for details which is probably good.  Any information on this issue is appreciated.”

From what I can tell, the problem is one of “agency risk” in which one agency (the insurance company) assumes risk by underwriting insurance in return for premiums that are priced based on a capitated rate.  This is a bit like banks assuming risk in return for interest payments when they agree to finance housing mortgages.  But, the agency risk is popping up for Rick’s group because the insurer doesn’t really like having any risk, so it wants to find yet another agency that will “buy” the risks.  In this case, the insurer doesn’t want to lose money if patients see other providers, so it wants another agency to assume that level of risk in return for collecting any outside payments that pop up.  Rick’s view is that the risk is minimal; the agency’s view is that it doesn’t want even minimal risk.  This is not unlike the banks getting worried about mortgage holders taking second mortgages and/or defaulting.  The banks, as first agency, decide to spread the risk by packaging all their mortgages and selling them to a second agency at a discounted rate …  you may have heard the terms “derivatives” and “CDOs.”  You may recall that those babies supposedly carried “minimum risk” as well.

Rick’s group has progressed to the risk assessment stage by the insurer.  The insurer wants a second agency to transfer risk to a second agency.  Specifically,  it’s asking Rick to find a licensed Preferred Professional Organization (PPO of audiologists I think) in his state.  Rick’s problem is that there isn’t an audiology PPO in his state.  We have an Audiology PPO in Arizona, formed years ago by a couple of very forward-thinking audiologists, but I don’t know whether other states have similar entities.  Who knows whether the guys that formed the Arizona PPO would like Rick’s deal or not?  What should Rick et al do next?  Form their own PPO? See if PPOs in other states can/will expand to his state (is that even possible?). Negotiate away from the second risk agency? Unbundle services from product?  But what about the dentists?  I still can’t figure out how they fit into this.

Your thoughts for Rick?  Help for Rick? Stay tuned or chime in as we move to Part 3 of Adventures of Rick.

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