The Smart Way To Take ‘The Capitation Plunge’

Think you know everything physicians should consider when they take on a capitated contract? You may be surprised by what you learn from this practice-management consultant’s succinct advice.

Whether you’re ready or not, capitation is coming to your neighborhood — if it hasn’t already moved in. Under capitation, of course, an HMO or other managed care organization pays you a fixed amount of money for each member enrolled in the health insurance plan each month. You are then responsible for any of the plan’s members who may need health care or medical services during that month.

In essence, you become a mini-insurance company under capitation by taking on the financial risk of service and resource utilization: You agree to accept a premium payment, and you provide the services when required. Why would any sane medical provider agree to such a thing? In many cases today, you may have no choice but to embrace capitation because many managed care organizations require it.

An improved cash flow

Although capitation can mean significant changes to your practice, they’re not all bad. In fact, capitation may prove to be quite beneficial to you if you’re a cost-effective provider. The reason? Under capitation you benefit financially from your own efficiencies and efforts to reduce resource utilization.

In addition, capitation can improve your cash flow. You get your payments up front at the beginning of the month, and you get them whether or not patients come through your door. Because of that you have no collection costs for this population, either.

Before you dive in, however, acquire a basic understanding of capitation agreements. They typically come in three forms.

Three kinds of capitation

The first is fixed-rate per-member, per-month (PMPM). For example, ABC HMO may come to you and say it has 7,500 members in its plan and that it will pay you $10.20 PMPM to provide services to this population. Under this agreement, ABC HMO will pay you $76,500 per month, and you will assume the risk of providing whatever care you agree to provide to ABC’s 7,500 members whenever they need it.

If ABC’s membership increases, your monthly payments will also increase. If the plan’s membership decreases, so will your monthly payments. Otherwise, your payments are fixed each month.

The second type of capitation agreement bases the PMPM payment on the sex and age of the covered population. For example, for male members aged 65 — 70, the PMPM payment may be $7; for females aged 65 — 70, $6; for males aged 70 — 85, $21; for females 70 — 85, $10.50, and for both sexes aged 85 and over, $15.

Under the third type of capitation agreement, the payer offers you a percentage of the insurance premiums it charges its members and their employers. For example, ABC HMO may offer to pay you 9.4 percent of the $108 premium it charges each enrollee for membership in its health plan. That means you would get $10.20 PMPM under this agreement.

This third type poses additional risk to you. For example, if the ABC HMO decides to lower its premium charges by 20 percent as a marketing tactic, your payments will also be cut by 20 percent. So if you encounter this type of agreement, be sure to ask the HMO what its marketing plans are and what it expects its rates to be in the year after you sign the agreement. To protect yourself further, negotiate firm percentage-of-premium contracts that are unaffected by the HMO’s marketing tactics.

Determining whether PMPM payments are adequate is certainly among the most important considerations when weighing capitation agreements. To calculate whether a PMPM payment will be adequate, answer three crucial questions:

  • How many members were in the health plans last year?
  • What was their utilization history?
  • What will it cost you to meet that demand of resource utilization?

Of course, there’s no guarantee that historical resource utilization patterns will match those in future years. But an analysis of historical utilization trends can paint a somewhat reliable picture of what you can expect to encounter as the service provider for a covered population.

Still not ready to take the capitation plunge? Approach a local HMO and suggest working together for a six-month trial period on a fee-for-service basis. Then control utilization as if you were capitated. Use the time to gain experience in operating under a capitated arrangement and gather data on actual utilization patterns. A trial arrangement like this may also benefit the HMO because it can allow the plan to gather and analyze data that can help it set more accurate capitation payments.

Another strategy to consider is asking the HMO to share financial risk with you. Under a shared-risk capitation contract, the HMO will reimburse you an agreed-upon percentage of your losses if your expenses exceed your capitation payments. For example, if your annual capitation payments totaled $950,000 for a year and the value of the services you provided to the HMO was $1 million, the shared loss would be $50,000. If the HMO agreed to a 50/50 shared risk, it would have to pay you $25,000 for that year in addition to the monthly capitated payments you would receive.

However, under a shared-risk agreement, the HMO also gets to share in your profit. So if the annual capitation payment you received was $950,000, but the value of services you provided to the HMO’s members was $850,000, you would have to give half of your $100,000 profit to the HMO for that year.

When to share

Shared-risk arrangements often are desirable in the first few years of a contract, because you will probably be learning how to operate under a capitated system. Having some “deep pockets” behind you in your early years of operating under capitation can provide some comfort. However, once you learn what you’re doing under capitation, shared-risk arrangements may become less desirable, because you may not want the HMO to share in the benefits of your own efficiency.

When you first embrace capitation you also should consider embracing a reinsurance policy. These policies, which are available from either the HMO or a commercial insurer, help you handle the expenses of catastrophic cases. Reinsurers will help you pay for these cases, but don’t expect to make any money from them. All they do is help you flatten out the financial peaks and valleys of providing care under capitation.

Another risk-management strategy is to avoid placing all of your eggs in one payer basket. Maintain a mix of payer sources — some capitated, some noncapitated. Noncapitated payer sources can help you offset any revenue losses you may experience by having to discount fees in capitated arrangements.

In addition to that capitation pitfall, there are others to avoid, and there are areas you should clarify before you sign a capitation contract. For example, find out if the HMO expects you to provide services that you do not provide yourself. If that’s the expectation, you’ll have to contract for these services yourself.

It’s also important for the capitation contract to spell out clearly the criteria to be used in determining when a member should receive services from you. When all of the providers in a continuum of care are capitated, game playing can occur, where providers accuse one another of “dumping” patients to keep from incurring the expense of caring for them. You need to be extremely clear about the criteria that will be used to determine when patients should come to you for care.

Also be sure to investigate the financial incentives the HMO offers to other providers to use your practice appropriately. Under some capitation plans physicians receive financial incentives to discharge their patients as soon as possible from the hospital. This kind of incentive could increase utilization in your practice, so it’s important to make sure that patients are sent to you appropriately.

Know eligible services

Another area to attend to is the particulars of the HMO’s benefit plan. You’ll need to know the services that members are eligible to receive. You’ll also need to know how to determine member eligibility. This is critical, because it’s the basis upon which you will be paid. Many HMOs can’t give you good information on eligibility, so you may find yourself in a situation where you discover three months after the fact that you treated someone who was no longer enrolled in the HMO.

On a related note, be sure to find out who is entitled to the copayments that HMO members may be required to pay. Generally, providers own the copayments, but some managed care organizations say they are entitled to them. You should also be entitled to any money received from coordination of benefits from any third-party payers. In their initial offers to you, many HMOs will claim the money obtained from coordination of benefits, but you should object to that during negotiation.

Clarify payment timing

The timing of your capitation payments — when you’ll be paid each month — is another area to clarify. You may think that timely payments won’t be a problem, but you could experience a cash-flow crunch if a capitation check floats in the mail for too long. During contract negotiations, it is reasonable to ask that your payments be delivered on the same day each month.

Also ascertain what “risk withholds,” if any, will be made from your monthly payment. Managed care arrangements typically include withholds, another form of risk sharing, which they use to provide physicians with incentives to reach certain utilization goals. Under a risk withhold, you will receive a fixed percentage of the reimbursement due, such as 85 percent of a fee schedule amount, with the remaining percentage withheld by the payer. If at the end of the plan’s fiscal year pre-established utilization and cost savings goals are satisfied, you are eligible for the payment of all or a pro rata share of the withheld amount.

Make sure you fully understand what the withhold money will be used for and how much of the withhold pool you own. Also find out whether you have recourse to those funds if you terminate your contract.

In embracing capitation, the most important thing to do is change your beliefs about your medical delivery system and how you view yourself in that system. Under capitation you need to stop focusing on revenues and believing, consciously or not, that you’re making money when your daily schedule is full. Instead, you need to attend to your costs, managing care and keeping people healthy. Everybody in your practice must passionately adopt this new attitude.

The author is president of The PM Group, a practice-management consulting group based in Battle Creek, Mich.