PSD leaps into unknown with experimental contracts

FORT COLLINS – Earlier this summer, the Poudre School District, Poudre Valley Hospital and two Fort Collins physician groups, United Physicians of Northern Colorado and Fort Collins IPA, inked a landmark agreement to contract among themselves to deliver health-care benefits to school-district employees.

Landmark because it is the first such agreement among a self-insured employer, the hospital and local providers in Fort Collins, the agreement is the subject of intense speculation and scrutiny. Some suggest it is destined to fail, and some believe it could reshape the way in which health care is managed and delivered in Northern Colorado.

Under the agreement, PSD employees’ choice of health-care plans remains much the same: Employees can choose either an exclusive-provider organization, which is basically a self-funded version of an HMO, or a preferred-provider organization. A hospital indemnity plan is also available for employees who receive benefits through a spouse’s plan.

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The difference is that rather than contract with an insurance company for access to a network of providers and claims-processing services, the school district has contracted directly with Fort Collins physicians and PVH to use not only their medical services but also their medical-management services, effectively taking the insurance company out of the picture.

Most recently, the school district offered employees an HMO product through PacifiCare of Colorado and a PPO plan through Sloans Lake. PSD paid PacifiCare for use of the HMO’s network of physicians and management services. For its PPO plan, the district contracted with Sloans Lake for use of its PPO network and held a separate contract with National Health Systems, a Denver-based medical-management company, to administrate that plan.

In addition to contracting changes that eliminate the insurance companies, PSD’s new benefits package features an increase in deductibles, a decrease in co-pays and an increase in the level at which stop-loss insurance kicks in to cover large claims.

The district’s decision to abandon its traditional relationship with a commercial insurer in favor of a relatively experimental arrangement with entities closer to home was prompted by soaring claims costs that were draining the general fund from which all employee benefits and salaries are drawn, said Julie Taylor, PSD benefits manager.

“Last year, we began to see claims figures that were much higher than we had projected,” Taylor said. “We couldn’t identify one particular cause for the increase, but every month, costs were $100,000 or more over projections.”

The district attacked the problem from several angles.

One option was to look at a fully insured product. PSD has been self-insured since 1986. The district pays health-insurance claims from district funds rather than through a commercial insurer, thereby assuming responsibility and risk for the medical care of 2,700 employees and their dependents.

PSD went out to bid on fully insured products and also took new bids on all administrative services associated with its health-care plans.

The district also looked at the Colorado Educational Benefits Trust, a statewide organization that serves as a health-insurance broker and claims administrator for school districts. And because it has had a long-standing relationship with Poudre Valley Hospital and local health-care providers, PSD consulted with them as well.

PVH officials and local providers, frustrated by what they feel is a heavy-handed approach by insurers to control health-care delivery and costs, were eager to work with the school district.

For providers, a direct contract with the self-insured organization means that school-district employees get their health care exclusively from local providers, the hospital and physicians are more closely partnered, and, if management is handled locally, health-care dollars stay in the local system instead of being funneled into large for-profit corporations headquartered outside the region or outside the state.

“This is a watershed opportunity for us to work jointly with the community to provide health care,´ said Carl Smith, director of managed care at PVH. “We’ve offered to provide them with the best rates we could, if they would design their benefit package to include an incentive for their employees to use our services. We all benefit from the arrangement.”

For the district, Taylor said that substantial discounts providers have offered PSD in exchange for market share as well as definitive changes in benefit package design should bring costs under control.

In fact, the option to contract directly with local providers proved so appealing that the district made some concessions to make it work.

For the first year, PSD will divide claims-management duties among National Health Systems, UPNC and Fort Collins IPA. Fort Collins IPA intends to transfer its management duties to Paragon Medical Management, the management service organization recently formed by the IPA and Poudre Valley Health System, as soon as it is up and running.

Though the arrangement is somewhat cumbersome, PSD has agreed to give each physician group the opportunity to manage its own claims, handle precertifications and perform utilization review for the district’s EPO plan. National Health Systems will continue to administrate the PPO plan.

The district contracted with both Fort Collins IPA and UPNC in order to gain access to a full complement of local physicians, Taylor said. In addition, UPNC has attached some Greeley physicians to its contract, and the district has contracted separately with a few Loveland-based physicians and a handful of chiropractors.

PSD plans to have administrative functions for its health plans centralized at some point, she said. But it may take a year or more to evaluate each group’s performance and choose a single administrator.

The district’s plan to ultimately choose one third-party administrator heightens competition between Fort Collins IPA and UPNC. On the one hand, the IPA has the advantage of an MSO formed in partnership with the hospital, and on the other, UPNC is strengthened by its management contract with PhyCor Corp., a nationally recognized physician-practice management company.

While the new benefit-management structure looks convoluted on paper, employees shouldn’t be affected by the change, Smith said. What does affect many of them, however, is the fact that they have access to fewer doctors.

Employees who were once able to choose from a large network of physicians and hospitals along the Front Range now, in most cases, must choose a Fort Collins-based physician and use the local hospital.

“We’ve done a better job than ever before of educating employees on their choices in this matter,” Taylor said. “They knew that either health-care costs would go up 30 percent like they’re expected to elsewhere and cut into funds available for salaries, or the benefit plan would have to change.”

Still, some employees have voiced negative reaction.

“We’ve heard from some employees who live in Loveland and have had to find a new doctor in Fort Collins, but, through the PPO, they have greater choice if they’re willing to pay more,” Taylor said.

Employees unhappy with any aspect of the new system do have recourse, Taylor said. They can register a complaint with the IPAs’ appeals board or through the district’s benefits committee, which has been available to employees since the district became self-funded.

However, those who doubt the feasibility of direct contracting cite customer service as one stumbling block.

“Our biggest challenge at PacifiCare is to keep people happy, and I’m not sure the IPA and the hospital are set up to provide adequate customer service needed to do that,´ said Dr. Michael Paddack, regional medical director for PacifiCare of Colorado.

Paddack also questions the wisdom of contracting directly with a hospital he said is recognized as one of the costliest in the state.

“I’m sure they got a better deal than we did,” he said. “But the school district is well aware of the high cost of care here, and I wonder how long a group that size can negotiate better deals than an insurer with 18,000 members.

“I’m not saying that what the school district is doing is wrong, but it’s risky,” he added. “The IPAs have been handling utilization management only for a short time, and the hospital doesn’t have a track record in that area, so it will be interesting to see if they can provide care, make a profit and save the school district money at the same time.”

Such arrangements, however, are not completely untried in the region. Weld County School District 6 and Greeley’s physician-hospital organization have engaged in direct contracting since October 1996.

Medical management for the district’s HMO and PPO plans is handled by the PHO according to criteria set by the physicians, explained Jim Humphrey, director of PHO operations, while claims payment is handled by Fringe Benefit Service in Denver.

“Our philosophy has been not to go out in search of direct contracts, but we’ll work with any self-funded company interested in doing it,” Humphrey said. “We are working toward full capability to handle claims, but until we have that we’re not being aggressive in that area.”

Fort Collins providers, on the other hand, are already in negotiations with several other self-funded companies. In spite of naysayers’ predictions, at least six other groups have approached the hospital and physicians, Smith said.

“We look forward to forming similar agreements with other self-funded groups,” he said. “It’s a good opportunity for us from an altruistic standpoint because we’re a community-based hospital with an allegiance to Fort Collins employers, and it’s a good business decision, because it keeps patients here.”

Taylor has also heard that others are considering direct contracting, but she thinks most will watch to see how the school district fares before taking the plunge.

“This is an ongoing experiment that will change throughout the year,” she said. “Our concern is that our claims estimates have always been accurate until lately, and now were going in a different direction with no history to tell us what to expect. It’s critical that every month we sit down and look at the data to see how we’re doing.”

The district should have an idea of how things are going by January, Taylor said.