Medicare Risk Adjustment (MRA) creates complex arithmetic. For those not in the know of how it affects the business of Independent Physician Associations (IPA) or practices, estimating the budget is like shooting in the dark with blindfolds on. And yet, in this season for buying, we are seeing Private Equity (PE) paying obscene amounts for primary care practices (at least in Florida) without understanding all the nuances of the business and assessing all the variables involved in their funding.
The basic principle that must be understood is that Medicare funds the premium for the care of patients depending on their sickness, or more accurately if they have certain conditions outlined in the Hierarchical Conditions Categories (HCC) in the previous year. Some of these conditions are perhaps ambiguous and not clearly defined, even clinically. Some of them do not describe the severity of the illness.
Be that as it may, it is akin to you going shopping at a grocery store and at the cashier’s desk being asked to pay the price listed for the item last year. And then being informed that in six months a reconciliation will be done based on newer inputs when you may be refunded some money or asked to pay more. And that another reconciliation may be done in twelve months and again in eighteen months.
How does one project premiums in such a manner? The Insurers might not find this difficult (even though many of them struggle) since they are blessed with an army of actuaries with detailed data on patients with their HCCs and the newest calculations being used by the Center for Medicare and Medicaid Services (CMS) to estimate the MRA score. But I have seldom found an IPA sophisticated enough to estimate their funding next year per patient per diagnosis. And yet, that is the only way it can be correctly calculated.
And that is where unsophisticated private equity often misses the boat along with the river. Estimates of business value without reviewing the MMR (Monthly Member Report) with payment and the MOR report (Model Output Report with member HCC and diagnoses according to an international classification of diseases) can be misleading.
Private Equity must needs also review patient retention, benefit designs, benchmark, county-specific details, and characteristics of patient population such as dual eligibility and special needs plans, etc. The whole process of documentation, provider education, the process of auditing, billing, and submission of codes needs to be assessed along with denials and any codes received by CMS for which funding is not being allocated.
Without such metrics, valuations of IPAs and provider practices, and Medicare Advantage insurers will always be suspect and prone to significant error. The author recommends that every private equity interested in these lines of business should have subject matter experts in RAPS and EDPS, MMR and MOR, operations, coding, and auditing of encounters in their team of financial analysts.