Medicare Health Support (MHS) Claims Another Victim: LifeMasters Files for Chapter 11

Updated 6:10 pm, September 14, 2009

One bad deal can ruin your day.

Today, LifeMasters filed for Chapter 11 bankruptcy protection.  According to its press release:

“The Chapter 11 filing is the most efficient path for the company to restructure liabilities that are a result of Demonstration Projects previously performed under contracts with the Centers for Medicare and Medicaid Services (CMS), ” said George D. Pillari, President of LifeMasters. Mr. Pillari, named President of LifeMasters today, is a Managing Director of Alvarez & Marsal Healthcare Industry Group, LLC and had been working with the company and its board as a restructuring advisor prior to the filing.

During the last four years, LifeMasters participated in three CMS Demonstration Projects aimed at testing certain disease-management techniques in fee-for-service Medicare and Medicare/Medicaid dually eligible populations. Eight other disease management, health insurance and pharmaceutical companies also participated in these projects. LifeMasters’ involvement in the CMS projects ended earlier this year.

CMS contends that LifeMasters, like other participating organizations, was unable to demonstrate success based on CMS’ study design and measurement methodologies. Similar to its claims against other Demonstration Project contractors, CMS contends that LifeMasters is required to repay to CMS any fees earned in excess of savings generated during the multi-year projects. “Rather than endure a costly and time-consuming legal path to challenge CMS, we have chosen to restructure our CMS and other liabilities through the Chapter 11 process,” Mr. Pillari added.

LifeMasters expects no disruptions in its services to clients and believes it has ample cash on hand to emerge from Chapter 11 as a viable health improvement company.

A Modern Healthcare article contains a link to the bankruptcy filing:

• In one checkbox, the company estimates it has $10 to $50 million of assets
• In another checkbox, the company estimates it has $100 to $500 million of liabilities (to all creditors, not just CMS)
• It lists CMS as it’s largest creditor — $125 million

What happened? First let me acknowledge that I don’t have first-hand specifics of the current bankruptcy filing.  However, many bread crumbs have been dropped along the trail…

 Source of the Problem — MHS Contract Structure

About two years ago, Tom Wilson and I wrote a widely read article dissecting problems with the MHS program:  Disease Management and the Medicare Health Support (MHS) Project: “Houston, we have a problem.”.  We noted that the MHS contract model was a relic:

In a nutshell, MHS is an adaptation of the commercial disease management contracting model prevalent circa 2002 (”Commercial DM 2002)….

…many people disliked the “Commercial DM 2002 contracting model when it was prevalent.

• The power in this model was concentrated in the hands of the buyers, primarily large health plans.
• The process required pledges of guaranteed savings by vendors. If vendors didn’t produce specified results, they were required to pay back “fees” that had been advanced by purchasers, sometimes as much as 100% of fees. Chief Financial Officers of DM vendors hated the guaranteed savings model because they couldn’t recognize revenues on their income statements; early stage DM companies could meet the requirements of guaranteed savings contracts only by securing 3^rd party reinsurance to provide the financial guarantee; this reinsurance process added significant costs to providing DM services and resulted in more squeeze on margins.
• The guaranteed savings contracts also required a reconciliation process at the end of the contract – a process to measure whether savings and other metrics had actually been achieved by the vendors. Reconciliations often resulted in disputes, holdbacks of funds, and unfriendly spitting contests.
• Finally, the industry standard contracts used in “Commercial DM 2002 have been recognized as methodologically flawed and are being replaced with more rigorous models.

LifeMasters’ MHS Contract

LifeMasters was quick to recognize that it could not succeed (financially) with its MHS project —  it withdrew only months after the start date in 2006. I wrote about CEO Chris Selecky’s announcement at an industry event:   

Bottom line:  LifeMasters concluded that they would not be able to meet program goals of a 5% cost reduction.

As measured against a control group, MHS contractors have guaranteed a 5% savings to Medicare; contractors that don’t achieve savings are at-risk of having to pay back up to 100% of the fees that Medicare paid them.

Selecky’s candid presentation highlighted lessons learned by Life Masters during the short life of the project. A central factor in their decision was the unexpected medical needs of the Oklahoma project population.  These are “really, really sick patients.  It takes a lot more to get them under control.” She explained that the Oklahoma population included many patients with five or more comorbidities.

She pointed out that the rural nature of the population led to unexpected results. LifeMasters found that the population was significantly medically underserved — people had not been receiving appropriate medical care in the past.  Arranging for needed care would lead to higher medical costs for Medicare and would prevent LifeMasters from achieving required cost savings.[Commentary — LifeMasters Pulls the Plug on Oklahoma Medicare Health Support Project e-CareManagement News; October 25, 2006]

Now What?

The part that’s puzzling to me is the statement that Lifemasters owes $125 M to CMS.  That’s hard to figure…the company only participated in MHS for a few months, and to my knowledge MHS is the only Medicare demo that required guaranteed savings (i.e., payback if targets aren’t hit).  

I’m wondering if CMS is claiming that LifeMasters didn’t have option of ending the contract; MHS was structured to have a control group, and savings must be calculated by making comparisons between the intervention group and control group.

What we don’t know today:

• The details of the contract between CMS and Life Masters
• Is CMS flexible?  will they negotiate a settlement?

Perhaps some of these questions will be answered in the coming weeks.

Back to where we started — except for this one bad deal, Life Masters has a good reputation as a sound and innovative company. I wish them every success in turning things around.