Capitation: The Once and Future King


Of all the “value-based” provider payment methodologies, this one’s the classic. And it may be mounting a comeback.


The Macarena has yielded the dance floor, the TV hospital show E.R. is long gone, and the president is no longer named Clinton—for the moment, anyway. But the payment methodology that was white-hot in health care in 1996 seems to be warming up once more. Of course, it’s capitation.

Capitation—paying providers upfront on a per-member, per-month basis to give their covered panel of patients all necessary medical services to make and keep them well—lost ground when the public came to believe it was too stingy with needed care and many providers blamed it for a hemorrhage of red ink. But it hasn’t disappeared. And some in the industry say the problem then wasn’t that capitation was a faulty tool but that doctors, hospitals, and consumers simply weren’t ready for managed care’s prime time.

Now, two decades later, perhaps they are.

Gaining currency

Capitation reached its high-water mark in 1996, according to Dave Gans, senior fellow for industry affairs at the Medical Group Management Association (MGMA). That year, 68.3% of multispecialty medical groups reported that they had capitated contracts. By 2013, that proportion had fallen to 27.4%.

The difference between 1990s capitation and now is that care is managed rather than rationed, says David Gans of the Medical Group Management Association.

In the ’90s, capitation was seen as a way of controlling utilization through the use of a primary care gatekeeper to, in effect, ration care, says Gans. Today, the primary care physician is supposed to coordinate the care, not gainsay it, he explains. Patients may self-refer to a specialist, but that specialist, if the system is running right, sends information back to the primary care doctor to complete the medical record.

Of course, capitation can apply at different levels. It can mean the way a hospital or medical group is paid by an insurer, or the way that hospital or group in turn remunerates individual physicians, either primary care doctors or specialists. Partial capitation is used to describe an arrangement whereby the provider takes on financial responsibility for just part of the patient care—for example, just outpatient care.

Certainly the capitation tide has receded—and not just because of misunderstanding. Writing in the Journal of General Internal Medicine back in 2001, Thomas Bodenheimer, MD, a member of Managed Care’s editorial board, noted with regret that “capitation has been sorely misused to the benefit of for-profit plans and physician entrepreneurs.” He decried “embarrassing” studies showing that, just as capitation’s critics charged, mechanisms of payment to individual doctors sometimes influenced their clinical decisions. “Capitation payment is waning, [and] fee-for-service is enjoying a resurgence,” Bodenheimer wrote. But he still saw a future for capitation as a system for paying institutions, which would then turn around and remunerate individual physicians and other providers with whatever mixture of capitation and fee for service worked best.

That future still exists mostly in prospect but is gaining currency. The Catalyst for Payment Reform, an employer group campaigning for value-based health care, said in its 2013 National Scorecard on Payment Reform that just 1.6% of payments are made through contracts that call for “full capitation with quality”—that is, capitation contracts that allow for what Executive Director Suzanne Delbanco calls “payment adjustments based on measured performance and payment risk.” The group’s 2014 scorecard said 15% of commercial in-network payments were through full capitation and 1.6% through partial or condition-specific capitation.

The role of IBNR

“The difference between the 1990s and today is that back then there was essentially only capitation, while today there’s a broad continuum of value-based methodologies,” says Gary Greensweig, DO, vice president and chief physician executive for physician integration at Dignity Health in San Francisco, the nation’s fifth largest health care delivery system. The ’90s version was all about lowering costs, he adds. “There’s nothing wrong with that,” says Greensweig “but today our focus is more broad, and it includes building substantial infrastructure around population health management.”

By about 2000, he says, more than 90% of the California medical groups that had accepted capitation were insolvent—partly because they’d failed to allocate sufficiently for a financial category called IBNR—“incurred but not reported” expenses.

“Groups that were taking capitation thought, ‘Boy, we’re doing great!’” says Greensweig. “But when a patient is in the hospital, you might not get the bill for six months. Six, eight, 12, 24 months later, they realized they were out of money because they hadn’t reserved enough for the downstream price.”

Of Dignity Health’s $9.5 billion in patient revenue last year, as Modern Healthcare has reported, 15% came under value-based contracts such as ACOs and bundled-payment systems, but only 3% was capitation. Still, the magazine said, “Dignity’s capitation contracts let the system hedge by allowing it to default to fee-for-service rates if there is ‘material deterioration’ in financial performance.”

Capitation will be just one tool in the value-based toolbox, says Gary Greensweig, DO, vice president at Dignity Health. Some of those tools are being built now.

Greensweig foresees growth for capitation, but says it won’t become “the be-all and the end-all,” just one tool in the value-based toolbox. His group is preparing to succeed with capitation not only by putting enough aside for IBNR, but also with the investments it’s making in population health management. These include care and case management, “health information exchanges,” electronic data systems with data warehouses and portals for patients and physicians, and analytics.

“If you’re managing half a million or a million patients,” he says, “you need special tools that can comb through the data and help pull out those people who need our attention so that we can focus on them in a systematic way. Those kinds of tools we didn’t have in the 1990s [when Dignity’s predecessor organization was known as Catholic Healthcare West]. We have some of them now, but not all of them, and we are building them as we speak.”

Old letterhead

Mention capitation’s possible comeback to Ruth Benton, and you may elicit a barely suppressed chuckle. She’s the CEO of the Denver-area group New West Physicians. “I signed a capitated Medicare Advantage contract with Pacificare out of California in 1995, and we’ve managed that downside risk ever since,” she says. “I still have the same contract—it has 25 amendments. And it’s still on Pacificare paper, even though United bought that company more than 10 years ago!”

How has this physician owned and governed group thrived where others stumbled? Benton cites “great” doctors and board members and a “brilliant” medical director and president. But she adds that she “grew up in the insurance industry” and knew, when she started the group two decades ago, two things about signing a risk contract that many similar groups didn’t grasp: “First, you need to reinsure it,” she says. “Second, you need to create your own stop-loss protection for IBNR. And I set that up from day one. So when the bottom fell out in 1998 with many of these HMOs and all the risk they’d let out to providers, many physician organizations went out of business. But we didn’t. We did incur expenses, but we burned through our internal reserves and claimed everything we could on our reinsurance, so we never lost any money.”

In the ’90s, she recalls, capitation accounted for 60% of the group’s revenue—if you include primary care capitation. But then “the managed care companies just stopped doing capitation,” she says.

Today, Benton’s group has 70 primary care physicians (about a 3–2 mix in favor of family practice over internal medicine) and 33 midlevel providers. It doesn’t accept traditional Medicare; its capitated Medicare Advantage contract has continued to generate incremental revenue for the group practice. There are 13 to 35 “quality gates” that New West Physicians must clear, but that has been true since the beginning, and the group is used to it, says Benton.

“There’s no quality withhold,” she explains. “The plan takes the professional fee part of the Medicare premium and pays that in a calculation to us. They withhold an IBNR calculation for claims runout. And because we’ve been doing it for so long, between their financial people and my financial people, we predict it pretty damn closely. We’re paid a capitation amount monthly, and we capitate our primary care physicians and pay fee for service to our specialists.”

“There isn’t a consumer out there who’s really sick” who wouldn’t benefit from a good relationship with a PCP, says Ruth Benton, CEO of New West Physicians. Capitation rules.

Like Greensweig, Benton attributes much of her group’s success to applying methods of population health—she calls them “a managed care engine of clinical people who know how to do population management.” She is bullish about capitation being the most promising value-based payment method and regards a capitated medical group as the best answer to the consumer’s need for connection. “There isn’t a consumer out there who’s really sick who wouldn’t greatly benefit from a long-term relationship with a primary care physician advocate who can help him or her with the right access to care in the scary health care system,” she says.

Benton adds: “I want the commercial ACOs to evolve into capitation. The insurers have this many covered lives and need someone to manage their health care risk, and I’m willing and able to take that on,” she says. “As far as jumping over quality gates, that’s not a new idea—we’ve been doing it for 20 years. It’s just coming back around the mulberry bush.”

Whether or not every medical group is ready to embrace this once-unpopular payment mechanism quite that wholeheartedly, it seems clear that capitation’s story isn’t finished. “There are opportunities for practices through capitation,” says the MGMA’s Gans.

To work successfully with capitated payments, he warns, a practice needs to “have enough patients to be sure to avoid adverse selection and to capitalize the cost of the information systems necessary to manage capitation patients.” He notes a recent report that a central New York State multispecialty group created its own insurance company. “That’s essentially what happened back in the ’90s, when many of the larger multispecialty groups created their own HMOs,” he says. “The HMO would be a separate corporation and it would contract with the medical group for care—usually under a capitation contract.”