Capitation Contracts: Time for a New Attitude

By Jeffrey J. Denning
Contributing Editor

Managed care organizations are now part of the fabric of every metropolitan area and many less populous areas. No matter where doctors reside, I hear them wrestling with concepts and practices such as capitation, utilization review and credentialing. Some are trying to adapt their practices and their thinking as they go; others are stuck in neutral, unsure whether to turn right or left. My advice is that physicians adopt new approaches that will allow them to exploit capitation and become more attractive to health plans.

Old thinking: “Under capitation, I’ll lose money. You can’t do much for people when you’re paid only $9.17 per person, per month.”

New thinking: “With capitation, I can get paid for more than just providing care; I’ll get paid for managing it.”

Many physicians are quite skilled in the conservative treatment of patients. They know how to get good results without incurring excess costs; they have learned shortcuts that circumvent exotic diagnostic testing and therapies that keep patients out of the hospital.

Unfortunately, this know-how has never been rewarded under the fee-for-service payment system. It’s valuable, and when it is encouraged under a risk contract, there may be new money in the system for the physician. Accepting capitation payment, which factors in all those traditional costs, becomes an opportunity for physicians to participate in the savings their case management brings.

Old thinking: “Patients in capitated or deeply discounted plans are not entitled to good service; if you buy a Chevy, you shouldn’t expect Ferrari performance.”

New thinking: “These patients aren’t signing up for second-class care. If they leave our practice thinking that’s what they got, we won’t last long on the plan.”

Patients are more demanding than ever before. Many know at least a bit about managed care and are on guard against being shortchanged. So the practices that treat managed care patients like second-class citizens run the risk of generating complaints that will go back to the employers who pay the bills and the managed care organizations that contract for the care.

Old thinking: “We make the most money if the capitation patients don’t come in at all; let’s make our practice unattractive and ‘hard to get’ for these managed care patients.”

New thinking: “The more attractive my practice is to patients and their plans, the more plans I can sign with and the more capitation dollars I can bargain for.”

Smart practices are honing service levels as a way of sending the signal to managed care organizations that “ours is the only logical practice to contract with.” When you have the best doctors and the best staff and give the best care, you’re likely to attract more than your fair share of capitation enrollments. And you’re more likely to negotiate a higher capitation premium if the plan sees your service as essential to its continued success. If you’re ordinary, expect to be treated as a replaceable resource and priced accordingly.

Old thinking: “Maybe I’ll try a little capitation with only a few patients to see how it goes.”

New thinking: “Capitation means accepting insurance risk. If the number of members is too small, the risk is unacceptably high. I need to commit myself to the concept and take on a significant number of patients to justify the risk.”

If a physician isn’t willing to dedicate at least a third of his or her productive capacity to capitation patients, it might be a mistake to enter risk contracting. It takes about 2,100 people to keep a single family physician busy. A third of one FP practice is about 700 people. But why lose sleep over capitation contracting if there are only 3,900 patients available from the HMO and they will be shared among 21 primary care physicians?

Old thinking: “If they’re managed care patients, I just give them medication for six months and let them monitor themselves.”

New thinking: “Deep discounting or capitation payment is not license to deny needed care. We agreed to provide the care and we’ll do it.”

The whole “denial of care” clamor is a tempest in a teapot. There are plaintiffs’ attorneys out there just waiting for doctors to give substandard care resulting in poor outcomes. And that’s just the civil exposure. In most states, abandonment is a criminal violation of the health and safety code. It’s probably not too far a stretch to consider denial of needed care a partial abandonment of the patient.

Managed care means still getting a good result, just at the lowest possible cost.

The author, a practice management consultant in Long Beach, Calif., edits Uncommon Sense, a monthly newsletter for physicians.

When your capitation check is overdue

There’s one kind of receivable you cannot allow to go into the delinquent category–even a little. Here’s a time line for capitation payments, showing both a commendably rapid process and a more typical one. Use it to help you keep track of when it’s time to call the health plan’s management.

Best-case scenario

  • 1-1    New employee reports for first day of work and completes all paper work, including selection of plan and primary care physician practice.
  • 4-1    New employee becomes eligible for health insurance.
  • 4-10    Employer reports new employee to insurance carrier.
  • 4-25    Insurance carrier updates eligibility system with new, transferred and deleted numbers; sends new employee’s name and April and May premium to independent practice association with May premium check.
  • 4-28    IPA receives monthly update of “adds, deletes and transfers” from insurer with payment for May.
  • 5-8    IPA completes audit of payment and computer updates.
  • 5-9    Your eligibility listing is printed by IPA, your capitation check is cut and both are sent by overnight delivery to you.
  • 5-10    You audit the payment and deposit the check.


More common scenario

  • 1-1    New employee reports for first day of work.
  • 4-1    New employee becomes eligible for health insurance.
  • 4-8    New employee is given health plan paper work.
  • 4-15    New employee completes paper work, including plan selection and choice of primary care physician, after consultation with spouse.
  • 5-10    Employer reports new employee to insurance carrier with following month’s invoice.
  • 6-25    Backlogged insurance carrier updates eligibility system with new, transferred and deleted members from May submissions.
  • 6-28    IPA receives monthly update of “adds, deletes and transfers” from insurance carrier with payment for May. Check deposited.
  • 7-20    Backlogged IPA completes audit of payment and eligibility computer updates.
  • 7-21    Your eligibility listing is printed by IPA, your capitation check is cut, but it is held until sufficient funds are received from insurers and HMOs to cover the check.
  • ??    You audit the payment and deposit the check.