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Providers gain capitation ground

Collecting information is one thing; interpreting it is another. National Health Information polled 466 provider groups; among the questions was, “If you have renegotiated a contract in the last 12 months, has the capitation rate increased, decreased, or stayed the same?” Answers given by providers contracting with HMOs seem to indicate that those physicians are seeing better days, but you shouldn’t jump to conclusions.

“If a provider group rode the arbitrage to wild success one year and had massive profits, then its rate is going to go down the following year,” says NHI President David Schwartz. “Something’s going to change in that contract so that the HMO is not allowing the provider to win as big.

“On the other hand, if the provider group fails and loses money during the contract year, it’s going to come back and say ‘Look, if you want us to continue as an entity serving your members, we’re going to absolutely need this much money to make it work,'” he continues. “So, I think a lot of the increases reported in the 1999 survey are reactions to poor performance among provider groups.”

The only provider category that saw an overall decrease in its average capitation rate was hospitals — perhaps reflecting a growing perception among both providers and payers that hospital capitation may not be workable over the long run.



Among Medicare HMOs, Capitation’s the Way

Any way you cut the numbers, capitation is the most prevalent form of payment by Medicare HMOs for both primary care physicians and specialists. Almost 8 in 10 primary care physicians who contract with Medicare HMOs receive at least some compensation via capitation; as for HMOs, 85 percent pay primary care physicians either exclusively through capitation, or by a combination of capitation and other payment systems.



Capitation payments shrinking

HMOs seem to be tightening capitation payments to physicians in an effort to bolster sagging profits, according to a recent survey of 466 provider groups by National Health Information. The survey also suggests that primary care doctors are becoming more adept at protecting themselves in the capitation game, buying stop-loss insurance at a much greater rate than specialists. However, the authors did note that physician organizations in multiyear contracts “may find themselves obligated to purchase stop-loss from the contracting HMO,” a factor that may not be as compelling for specialists.

The survey’s publisher says that physicians should not panic, pointing out that cap rates are very often adjusted according to the realities of local markets.

“While profitability in some markets has dropped to the lowest point in four years, providers who stay the course are likely to find a more navigable road in the year 2000 than the pothole-strewn path they’ve maneuvered during the past year.”



Meet capitation at least halfway

That seems to be the message for primary care physicians in data collected by the Medical Group Management Association, in a survey of 1,600 practices representing 30,000 physicians. MGMA found that practices in 1998 that saw increases in capitation revenue also rode “predictable” compensation-level curves. Family practitioners who derived more than half their income from capitation had higher revenues than those who depended less on this form of payment, but for primary care in general, the differences were small. Specialists going through the same transformation saw a different dynamic: Their incomes, for the most part, continued to decline as their practices moved into higher levels of capitation.



Don’t Let a Fee-for-Service Mind Set Distort Your Approach to Capitation

Both fee-for-service and capitation arrangements can bring favorable compensation levels, but mixing the two poses problems.


Capitation versus fee-for-service payment: Which is better for physicians? Doing mostly one — either one — seems to work best. It’s trying to do a bit of both that causes problems.

This is a pocketbook issue, to be sure, but as Carol Kane, an economist at the AMA, points out, there are other considerations as well.

“The goal is not to have the highest physician income possible. It is to reward the physician fairly and appropriately for providing the correct care,” Kane asserts.

Richard E. Dixon, M.D., medical director for the National IPA Coalition, echoes those sentiments. “We physicians all share common, important values, and payment systems ought to reinforce those values — taking care of sick folks, not doing unnecessary things, but making sure you’re there to do the right things.”

We start our exploration of capitation versus fees (noting, of course, that there are other ways to pay physicians, too) with additional guidance from Kane: “Capitation isn’t the only form of financial risk physicians should be concerned about.”

Basic question

Every conversation about capitation versus fee for service eventually comes around to risk, and a good many of the conversations start there. The basic question any practicing physician is likely to ask is “Will I be able to make a living doing this or will I go under?” That could be called “bottom-line risk.” But there are at least two kinds of risk that have to be controlled for a healthy bottom line — business risk and insurance risk.

Business risk is the familiar one. You are committed to expenses and you hope you will have enough income to cover them. Example: You have rented office space and equipment, you have hired support staff. Your risk is that you won’t generate enough income to cover your expenses.

Insurance risk, however, is very different, because there you’re committed to the income. Example: You have agreed to receive $25 per patient per month for taking care of all your patients’ primary care needs. Your risk is that your expenses will grow to exceed your income.

Insurance risk is a whole new world with its own rules and ways of coping.

Here are some of the key ways of coping, as pointed out by Pamela Waymack of Phoenix Services Managed Care Consulting:

  • Cover enough patients so that the capitation rate is a good estimate of your exposure.
  • Make sure you have enough covered lives to spread the risk. Common risk factors include age, gender, diagnosis, and rates of referral to specialists.
  • Assess whether the services you are assuming risk for are areas you can control. The less control you have, the more the arrangement becomes an exercise in pure insurance and less an exercise in medical management.
  • Seek reinsurance or stop-loss insurance. Waymack suggests asking whether the network already has stop-loss. If it does, seek reimbursement in your contract if your experience falls within its stop-loss amounts.

Problems with FFS

That said, how do fee for service and capitation stack up?

“The first reaction from any physician is usually ‘I want fee for service: I know it, I understand it, my systems support it,'” says Waymack. True, physicians have done quite well under fee for service for several decades, even with its problems, including late payments, denied payments, and bad debts.

John R. Christiansen, a health care lawyer with the Seattle firm of Miller, Nash, Wiener, Hager, & Carlsen points out that the legal restrictions that apply to payment systems were, by and large, responses to problems with the fee-for-service system.

Dixon observes that although the old “you do it, you bill it, you get paid for it” system was great when there were no limits on medical costs, but when there are limits, the situation becomes a kind of “prisoner’s dilemma.” When each person does what is best for himself, the result is a situation in which everyone is worse off.

“Even with a societal limit on health costs, the individual provider can still maximize her position by doing more,” says Dixon. “But if all providers do that, they all just work harder and harder and the reimbursement per encounter gets smaller. And what happens? Physicians are spending less time with patients, they’re working longer hours, and they’re running faster just to stay even.”

Professional satisfaction is also decreased by the paperwork and loss of control in a fee-for-service environment — what Timothy Dickman, vice president at Vivra Specialty Partners, a provider network management company, calls “1-800-Get-Permission-To-Do-Everything.” Spending-cap pressures have also led to such developments as the recent Medicare initiative to “turn in your doctor,” and the what Christiansen calls “a creeping criminalization of undesirable fee-for-service billing practices.”

Finally, the professional ethics question. Some see fee for service as the payment system that does not pose an ethical conflict. True, it isn’t the “order more, lose more” conflict that dogs capitation, but ordering too much in furthering the bottom line is not in the patient’s best interests, either. In some circumstances, it is fee for service, rather than capitation, that poses the more striking dilemma.

Despite the beating that capitation has taken in the press, there are indications that physicians who do capitation right can do very, very well. Urologist David Scanavino, M.D., president and CEO of Physician Health Partners, a Colorado company that helps provider organizations manage capitated arrangements, says that “capitation provides several significant advantages, both from a quality-of-care standpoint and a financial standpoint.”

Doing capitation right

If you want an example of a physician who is doing it right, it would be Scanavino, who has gone all the way to the deep end, managing global capitation for a population that includes commercial and Medicare-risk patients.

“We feel strongly that capitation is physicians’ last chance to control medical care delivery,” says Scanavino. “It allows them to take control of the population and manage those patients according to what they feel is a quality approach, and to move financial resources around to get that in a way that would never occur in a standard fee-for-service situation.”

Is capitation really about doing less or doing better?

“Initially when a physician group goes into a capitated system, they start a lot of inpatient review, which is valuable. But eventually, you have to avoid admissions, and the way to avoid admissions is to keep patients healthy,” says Scanavino. “So you encourage patients see their primary care physicians regularly.”

Which leads to empowering both the physician and the patient, he says. “For example, chronic diseases are best managed if patients really become empowered to understand their diseases and that, while they are never going to be cured, there are active, basic, and very practical things they can do to keep healthy and to keep up their quality of life.”

The biggest problem with capitation is that it’s uncharted territory. One can’t look at capitation as if it were just one more way to get paid for business as usual.

“We did a survey of capitated IPAs and medical groups in California,” Dixon recalls. “The thing that astounded me was that most of them had designed their computer systems and their rules as if they were doing fee for service — so their systems and their operations were totally incompatible with what they really needed to do and ought to be doing.”

For example, in fee for service, late claims are denied because you can’t just have those unknown claims hanging out there.

“In capitation, there is no financial consequence for a late submission, yet the majority of the physician organizations were rejecting late encounter forms!” says Dixon. “They were throwing away absolutely critical information — for HEDIS scores, for knowing how sick the patient population is, for doing disease management. Why? They were just doing things in the habitual fee-for-service way.”

Some of the other critical differences:

  • A shift from “what” to “who.” The money doesn’t follow procedures, it follows patients.
  • A shift from reactive, episodic care to physician-initiated, preventive care.
  • A shift from the rugged “Lone Ranger” culture to team players willing to have a group-think about what’s best for various patient conditions.
  • Significant increases in infrastructure. “You need a large amount of medical-management expertise that includes nurses, case managers, and referral processors,” Scanavino notes “You need systems capabilities for data analysis and optional claims payment.”
  • Significant changes in physician organizations, starting with size. The Medical Group Management Association’s survey of multispecialty groups showed that the median size of physician groups that reported receiving most of their income from capitation was three times the size of physician groups that reported having no capitation (59 physicians to 19 physicians respectively). There is also a shift in professional relationships. A loose affiliation of golfing buddies worked fine under fee for service; an organization prepared for capitation needs to monitor and coach its physicians — and deal with a physician who just isn’t getting it. There’s also the shift in the internal distribution of rewards. A physician organization that continues to distribute net income to its members based on billings is going to see the prisoner’s dilemma up close and personal.

Of course, capitation also has its own business risks. Despite the dream “If you build it, they will come,” a lot of money can be sunk into capitation infrastructure and then the market may not move to the same level of capitation as, say, California.

‘Torn apart’

Each form of payment has pluses and minuses. What happens if you try to do both?

“I think physicians who are the happiest are those who control the largest portion of the risk, and actually have good information to manage the patient’s case, and the few still in fee for service,” says Erica Drazen, vice president with First Consulting Group. “The rest are being torn apart.”

Scanavino gives this example: “When I was with a group of nine urologists, we said, ‘Look, we are going to do capitation now. We have to figure out how to efficiently take care of urologic problems and we all have to be working on the same page together or this is not going to work.’ It was amazing to me to see the significant differences in the way we were taking care of problems!”

They eventually developed a practice pattern they thought was best.

“And our practice patterns changed not just for the capitated patients but for the fee-for-service patients as well, because you can’t ask, ‘What’s the best quality way to take care of patients,’ come to an agreement about it, and then not do the same thing for everyone.”

So the group revenues went down, not because there was a problem with their capitation arrangement, but because the new style reduced fee-for-service revenues. (That is the ethical dilemma of fee for service in a mixed world: You can’t ask if this is a fee-for-service patient, and then do something different to increase revenue.)

Combinations may also pose their own legal risks. Adele Waller, head of the Health Law Practice Group with the Chicago law firm of Goldberg, Kohn cautions, “A physician network comprised of competitors cannot assume that, just because it shares risk on the capitation side, network physicians can freely share fee data or negotiate collectively on the fee-for-service side. If fee-for-service arrangements do not include sufficient elements of risk-sharing, such data sharing and negotiating may violate antitrust laws.”

So where does that leave us?

AMA economist Kane sums it up this way: “Hopefully, as markets evolve and as we continue to learn about payment mechanisms, we will tend toward those arrangements where physicians are fairly and appropriately compensated for focusing on patient needs.”

J.D., is author of a forthcoming guide to health care from the GL Group, which publishes strategic analyses of industries.

Which system is best for patients?

One theme that came up again and again in the interviews for this article is that health care delivery should first be organized around what works for patients, and then a payment system that supports it. We seem to be doing it backwards: experimenting with payment systems. Is anyone experimenting with delivery systems?

Enter the Institute of Healthcare Improvement under Donald M. Berwick, M.D., M.P.P. As Charles M. Kilo, M.D., M.P.H., its director of idealized design, notes, “The historical way is to look at the system and say, ‘Where can we put Band-Aids?’ We’re putting Band-Aids on top of Band-Aids now; we’ve got a great overlying skin of Band-Aids on a dysfunctional underlying system. It’s time to step back, lay out all the processes of office-based ambulatory care, and rethink the whole thing. Our focus is on improving clinical outcomes, patient and family satisfaction, staff satisfaction, and financial performance. We’re looking to design win-win-win-win situations.”

The early results are very encouraging. A study of patient access found that when backlog is eliminated and patients are offered the opportunity to see their doctor on the same day they call, patient satisfaction goes up, quality of care goes up, and the number of office visits goes down. Why? One: The patient is being treated sooner and, hence, more effectively. Two: The patient is using only one visit instead of having to see the urgent-care doctor and then make a follow-up visit to the primary care physician. Three: Patients are more willing to try self-care or watchful waiting if they have confidence that they will really see their physician if they need to.


Determine a Comfortable Capitation To Effectively Negotiate Contracts

The ability of a physician or medical group to determine an affordable fee payment level is a cornerstone of effective managed care contract negotiation. Last month, we focused on an easy way for a practice to identify its current profit margin for clinical services. From this information, the effect of managed care discounts can be evaluated.

This same information is a starting point for calculating a target capitation rate or global budget for risk-assuming managed care services. Even if you do not have capitated or budgeted contracts, it makes good sense to become familiar with this approach because you can use this information to help negotiate other contract issues.

To figure a target capitation rate, the first step is to determine your target earnings. In other words, what profit margin do you want? It is foolish to peg a capitation rate without first identifying the profit you expect to get from it. Since the calculations we discussed last month can help physicians identify the profit consequences of various levels of managed care discounting, it is fairly easy to use that same information to figure a profit margin in a risk-based contract.

Know your customers

Step two: Determine annual visits from patients who receive the types of services included in your profit calculations. If you focus only on certain services in the profit analysis, include only visits for those services.

The third step enables you to identify how many of your “active” patients are needed to support the total office visit calculation determined in step two. For our purposes, active patients means those with whom your practice has enough contact for you to consider them loyal to the practice. This will differ from physician to physician. For many physicians, this will mean activity every six months; for others, every three years may be appropriate. Divide gross revenues by your active patient population, which gives you base revenue per active patient, per year.

How much do you need?

Step four is to determine gross revenues needed to support your target profit margin. Let’s assume for the moment that all future revenues will be derived from capitated or budgeted managed care relationships. Divide your nonowner related overhead by existing gross revenues to determine your overhead percentage, excluding overhead items which may be considered as “disguised income” to the owners (car rentals, telephones and certain continuing education expenses, to name a few.) If you subtract this figure from 100%, you will identify the practice’s profit percentage. The profit percentage includes compensation and benefits for the practice’s physician owners. Then, by dividing your target profit level by this profit percentage amount, you reveal total gross revenues necessary to support your profit target, assuming that patient volume remains constant.

Finally, by dividing target gross revenues by your active patient base, you can determine annual revenues per patient. Dividing that amount by 12 yields your target per-member, per-month capitation rate. Compare this to your existing rate (determined in step three) to assess whether your target profit is reasonable.

Step five is the most difficult: forecasting how many patients you may expect to receive by signing a managed care contract. This figure comes from discussion with plan representatives and colleagues. Remember that because your profit margins are premised on the rough accuracy of projected member volume, you need to know about the plan’s ability to deliver patients. This means that you will want the plan to assume some of the risk for inaccurate projections.

If you are negotiating a capitation rate, for example, based on 1,000 covered lives, you should not be bound to the negotiated rate if the plan only delivers 200 lives. This can be handled any number of ways: Negotiating a higher rate for lesser enrollment; starting with a higher rate and lowering it if anticipated volume levels are achieved; working for discounted fee-for-service payments until you hit that volume, or shifting from a capitation/global budget arrangement to discounted fee-for-service practice if the plan does not deliver the patients.

This suggests that a plan that imposes procedural burdens or slow payments should be offered a capitated rate higher than the target amount because of increased overhead. A plan that brings incremental growth to the practice may warrant a lower rate, since increased volume means greater profits — as long as the practice can handle the influx of patients.

Avoid adverse selection

To make this work, patients offered by a managed care plan should be compatible with your existing patient base — age, sex, location or whatever criteria are important to your practice. For negotiation purposes, the suggestions regarding patient volume can be applied to ensure an appropriate patient mix.

The covered lives analysis is a bit misleading. A managed care company will pay a capitated rate based on patients who name a particular physician as their primary provider. Not all of those patients would be considered active as defined above. If a significant percentage of plan members are not likely to use your services on a regular basis, you can afford to discount your target capitation/budgeted rate to some extent.

There is one issue that dramatically complicates this risk assessment analysis: outliers! We will address this problem and its resolution next month.

Neil Caesar is president of The Health Law Center (Neil B. Caesar Law Associates, PA), a national health law consulting practice in Greenville, S.C.


The March of Capitation: Reversed or Just Delayed?

Part I of Three Part Series. See Also:

Contrary to many experts’ predictions, per-member, per-month prepayment of managed care physicians isn’t sweeping the nation. But it can’t be counted out, either.

Wasn’t the march of capitation supposed to have crossed the country by now? The idea of physicians assuming risk for their patients’ health is central to managed care, and payment “by head” — a prepaid amount per member, per month for an agreed-upon range of services — was widely heralded just a few years ago as the coming thing, the thing to get used to — or else.

The reality has turned out to be a bit more complex than the prophecy. Today, capitation has a sizeable role in some regions but not in others; it affects some levels of the health care delivery “food chain” more than others, and different physicians differently. In California, for example, capitation is hot. But in Minnesota, that other managed care bastion, it’s not. Physicians in large groups are more likely to be paid by capitation than those in small ones. And capitation is more prominent in primary care than in other specialties.

Nationally, all this regional and practice variation averages out so that only about one in three physicians reports having a capitated contract, according to a 1996 AMA survey of physicians. And only 9 percent of physician practice revenue is earned through capitation, the same survey found.

Capitation is a “meat cleaver approach” to paying physicians that needs refinement, says Richard Hamer, director of InterStudy Publications, the Twin Cities-based health information company. As such, he suggests, it hasn’t lived up to its onetime wave-of-the-future billing. “Capitation’s penetration of the market has been a fairly stable figure, contrary to what many people have been predicting.”

There are places, too, where capitation’s march has become a retreat. Keith Bakke, M.D., president of the 106-physician Aspen Medical Group in St. Paul, Minn., says that several years ago his group’s patient enrollment was 100-percent capitated. Now it is split, 50—50, between capitation and discounted fee-for-service.

Oxford Health Plans’ early-October announcement that it would pay specialists on a flat, per-case “episodic” basis is hardly a feather in capitation’s cap. “We think we have come up with the antidote to capitation,” boasts Todd Farha, M.B.A., the CEO of Oxford Specialty Management, the Oxford subsidiary that handles the program.

But if capitation isn’t ubiquitous, it isn’t small potatoes, either. Consider its popularity with physician practice management companies. One PPM, Birmingham, Ala.-based MedPartners, boasts in its latest Securities and Exchange Commission filing that it brought 225,000 lives under global capitation contracts during the first six months of this year.

Maurice Penner, a professor of health administration at the University of San Francisco and the author of Capitation in California, typifies his state’s bullish attitude toward capitation, which he insists is “spreading to other states.”

What’s capitation?

Meanwhile, just what is meant by capitation is getting harder than ever to pin down. Its basic idea, of course, is the shifting of risk, and therefore medical management responsibility, to physicians in exchange for a flat, per-member payment, usually in monthly allotments. But from there variations have sprouted and filigreed in scores of idiosyncratic ways. The two main branches are familiar enough: global capitation, which means the providers are responsible for all medical costs, and professional (sometimes called outpatient) capitation, which means providers are responsible only for nonhospital costs and services, with the hospital risks split in any number of ingenious ways.

Some global capitation contracts are written so that money for all services flows through the primary care group, which doles out funds to specialists on a fee-for-service or subcapitation basis. “The primary care doctor becomes the payer, in essence,” says David Schwartz, president of National Health Information, a Marietta, Ga.-based publisher of capitation newsletters. Other contracts call for a certain amount of money to be placed in a referral risk pool as a buffer against overutilization. If there’s a surplus at the end of the year (or quarter), primary care physicians share in that surplus.

Who’s capitated?

Then there is the question of at what level providers are capitated: The independent practice association might very well be capitated by the HMO, but the IPA may turn around and pay its physicians on a discounted fee-for-service or a salary basis. “The further downstream you go, the less capitation you see,” says David N. Gans, director of survey operations for the Medical Group Management Association (MGMA) in Englewood, Colo.

Further complicating matters are new wrinkles in capitation. Many health plans adjust capitation payments according to the covered population’s perceived or assumed risk characteristics. Others jigger payment levels if certain performance standards are met. The plot thickens when carve-outs are thrown in. Though technically separate from capitation, carve-outs have a direct bearing on capitation systems because they narrow the set of medical services capitated physicians are expected to provide, thus narrowing their risk. Finally, capitation doesn’t really stop with that per-member, per month payment, because accompanying that is a witches’ brew of systems for setting physician withholds and bonuses, measuring quality and calculating adherence to practice guidelines.

“I have seen programs that have 30 people working just on how to pay out the 10-percent withhold,” says Linda Lyons, M.D., senior vice president for health services and senior medical officer for PacifiCare Health Systems. “It can get quite elaborate weighting things one way or another.”

Alan Hillman, M.D., M.B.A., associate dean for health services research at the University of Pennsylvania School of Medicine and director of the Center for Health Policy at Penn’s Leonard Davis Institute of Health Economics, says there is just no generalizing about capitated payment schemes these days: “If you have seen one of them, you have seen one of them.”

How much is there?

To some extent, the same could be said about capitation surveys. Their results depend, Gans explains, on “the unit of observation” — that is, whether HMO administrators, physicians or group practice managers answer the questions. There is also often a lag of a year or more between when a survey is conducted and when the results are made public. As fast as the health care market changes, conclusions about current reality based on questions answered 12 months ago can sometimes be shaky.

InterStudy does some of the best research at the HMO level. Using data collected through July of last year, InterStudy’s most recent Competitive Edge report says that 50 percent of the 636 HMOs surveyed used capitation to pay some primary care physicians. Of course, that doesn’t mean half of all primary care physicians were capitated, though it sometimes gets interpreted that way. It also says 31 percent of HMOs use fee systems, discounted or otherwise, to pay primary care doctors.

InterStudy’s Hamer believes the capitation wildfire some were predicting has not happened partly because HMOs are organized with a specific relationship to providers in mind. “That relationship is not something that is changed lightly,” he says. “Outside of a few pockets, except among primary care physicians, capitation is not that common.”

A similar conclusion emerges from the MGMA’s 1997 survey of its members, which is also based on data collected in 1996. The association found that 58.6 percent, or 656 of 1,119 practices responding to the survey, had no capitation contracts. And of the 41.3 percent that did, most told the association’s questioners that capitation contracts accounted for a relatively small share — 10 percent or less — of their revenue.

“Capitation is just not that prevalent,” says Gans, who notes that despite some tentative steps in the direction of capitation, the two huge government payers, Medicare and Medicaid, still pay mainly on a fee-for-service basis. A year ago, MGMA reported that 61.5 percent of the practices it surveyed had no capitation contracts, so this year’s 58.6 percent does suggest that capitation is on the rise.

It won’t surprise many that when only single-specialty groups are considered, capitation’s minority status as a payment methodology is even more pronounced. MGMA’s 1997 report found that 70 percent of the specialty practices responding to the association’s survey had no capitation contracts. A year earlier, it was 74 percent. The MGMA survey finds the capitation hot spots right where one might expect to find them. In California, 50 percent of multispecialty groups reported earning more than half of their revenue from capitation contracts, and in Massachusetts, the comparable figure was 63 percent. Among specialty groups, 62 percent of the 81 family practice groups responding to the survey had capitation contracts.

But MGMA’s survey also makes clear that capitation is not the only kind of payment contract that involves risk. In fact, when the association asked about risk contracts more generally — including the fee-for-service contracts — a majority, 60 percent, of the practices responding had some kind of risk managed care contract.

Who answers the questions?

Gans says MGMA sends its survey to practice administrators, who are presumably familiar with payment methods that apply to a practice. One problem with the AMA survey of physicians, he says, is that physicians are not always up-to-date on the business aspects of their practices. When it comes to capitation and payment methodology surveys, Gans says, a major issue is “the accuracy of the information presented by the person being asked the question.”

But he is quick to concede that MGMA’s numbers, too, have limitations. For one thing, MGMA surveys only its members, not a random sample of medical practices; thus its surveys can only show the prevalence of capitation among practice groups that choose to join MGMA. At the large-group level, MGMA membership matches up well with the total picture of large medical groups, Gans reports, but at the small-group level the association’s membership is a less reliable reflection of reality.

That leaves the AMA’s Socioeconomic Monitoring System. An annual survey of about 4,000 physicians, it is probably the best way of getting a handle on capitation from the physician’s perspective. Moreover, it is expressly designed to be a representative sample of all American physicians, not just AMA members or some other self-selected group. The 1996 results, the latest available, show that only 36 percent of physicians had one or more capitation contracts. (See “Not Spreading Fast, but Taking Hold”. [below])

“I always get people who are surprised it isn’t 100 percent or something,” says David Emmons, director of policy research at the AMA’s Center for Health Policy Research and co-author of an article based on the survey in Health Affairs earlier this year.

The AMA survey also suggests that the proportion of physicians with capitation contracts hasn’t changed much over the last few years. Last year’s 36 percent was preceded by 33 percent in 1995 and 34 percent in 1994.

Gans says part of the reason capitation hasn’t taken off, at least at the physician level, is that most medical practices are just too small to take on the insurance risk successfully — and to pay for the powerful data collection and management services necessary to gauge that risk. And most American physicians still work in relatively small group practices. “We just don’t have the organizational systems necessary for a large amount of capitation,” he says.

In mature HMO markets like Minnesota, he believes, capitation may be losing its attractiveness to health plans, too. “Why would you want to capitate a physician? The reason most HMOs do so is to give the physicians an incentive for better utilization. But once physicians have established a conservative utilization pattern, by capitating them you may in effect just be passing along the potential insurance dollars to them.”

What started the myth?

So where did this idea that capitation is sweeping the nation come from? It may have developed partly because the clarion call came from a few disproportionately affected submarkets, such as primary care physicians in California.

“The squeaky wheel gets noticed,” says Carol Simon, an associate professor at the University of Illinois School of Public Health and co-author with Emmons of the Health Affairs article. Also, as Gans points out, the amount of capitation you see depends very much on what level you are looking at. IPAs and large multispecialty groups may be negotiating capitation contracts like crazy, but paying their physicians on some other basis. So, for example, at Bakke’s Aspen Medical Group, the physicians are salaried even though the group is a whole has capitation contracts. The same is true of most of the Permanente medical groups, says Gans: the Kaiser health plans pay the medical groups on a capitated basis, but the physicians are salaried.

Is it really capitation if the doctors are shielded from it? Some say yes, because the crucial factor is that the dollars flow on a capitated basis. Others say no, that capitation is best understood as a direct payment methodology for physicians.

In any event, the AMA survey results hint at another possible explanation for the capitation hue and cry. While the number of physicians with capitation contracts hasn’t changed much, the physicians who do have capitation contracts seem to be earning more of their living from them. In 1994, physicians with capitation contracts earned only 5 percent of their revenue from them, according to the AMA survey. Two years later, that number had jumped to 25 percent. It seems that once a physician starts to accept capitation contracts, reluctantly or not, capitation starts to become a bigger part of his or her practice.

Surveys conducted by newsletter publisher NHI support the AMA finding that once capitation gets a foothold in a physician’s practice, it is apt to grow. According to NHI’s 1997 survey of 417 subscribers, capitation contracts accounted for close to one half of the revenues for multispecialty groups, primary care groups and integrated delivery systems and in each category the revenues from capitation contracts were higher in 1997 than in 1996. (See “Capitation’s Growing Role in Paying Physician Groups,” below.) However, even in this skewed population of capitation newsletter subscribers, specialists are not big on capitation. They told surveyors this year that only 16.2 percent of their revenue this year came from capitation contracts.

In most parts of the country, capitation’s march probably has not been reversed. How far it will yet go — and how fast — may differ greatly from one region to the next. It will also depend on what alternatives to capitation are available. Turn the page to read more about some of these — and about what the future may hold.

Peter Wehrwein is a Boston-based health and science journalist and a senior writer at the Harvard School of Public Health.

Key capitation query: How is risk ‘pooled’?

One of the crucial issues with capitation is exactly how the risk is “pooled.” Is it done at the individual physician level, so that if, for example, a physician orders a lot of blood tests, the costs of those blood tests come more or less directly out of his per-member, per-month compensation? Or is the risk pooled at the group level, so that the cost of all the blood tests ordered by all the physicians is spread across the entire group, be it a multispecialty or a primary care group?

Individual risk pools are on the way out, says Alan Hillman, M.D., of the University of Pennsylvania, partly because federal regulators have limited their use for Medicare and Medicaid contracts. Group risk pools are generally viewed more favorably by health policy experts because they dilute the individual doctor’s incentive to undertreat. They also arguably encourage development of practice guidelines and coordination of care because each group member has a stake in groupwide referral patterns and utilization rates.


‘Contact Capitation’ and its Cousins

Part II of Three Part Series. See Also:

Between fee-for-service payment and pure capitation, health plans are developing several alternative means of paying specialists. So-called “contact capitation” is one of them.

Why hasn’t pure capitation swept the country? One reason is that some health plans are developing variations on it — especially for paying specialists — that are intended to exploit its power to limit utilization without imposing some of its perverse incentives. One of the most promising new variations is “contact capitation.” In its most basic form, this system credits a physician with one “contact” for a specified time period — often a full year — for each patient who is referred by the primary care doctor. At the end of this period, the patient’s name is removed from the physician’s panel and, if necessary, another referral can start the process again.

The plan’s monthly per-member payment to the pool is a firm, actuarially determined amount, but the total allocation from the health plan to the provider organization, and thus to the specialty pools, varies by membership, i.e., the number of lives covered by the provider organization each month — classic capitation for a defined population. But the pool pays the specialty physician each month only for each patient referred to that physician’s panel, regardless of whether any services have been provided and, in some cases, regardless of how much care has been rendered.

For example, Mission Health, an integrated delivery organization in Jacksonville, Fla., pays the physician for the percentage of contacts made in that specialty in that month. If a physician made 12 percent of the contacts, he or she is paid 12 percent of the specialty pool.

The method employed by Plantation, Fla.-based Vivra Specialty Partners in its Florida region achieves a similar effect. Vivra assigns relative value units to each contact. A physician’s monthly RVU totals are multiplied by a factor based on the available specialty pool dollars to arrive at the monthly payment amount. Provider organizations are coming up with other variations on this basic theme.

Beware of ‘gaming’

Some method of utilization review is often required to keep physicians from “gaming” the system. For example, UR could reveal that a cardiologist is seeing an unusually high number of hypertensive patients and an unusually low number of coronary artery bypass graft patients.

Contact capitation works best when the physicians in a specialty all do about the same kinds of work. On the other hand, if all orthopedic surgery contacts are valued equally, the orthopod who performs spinal cord surgery is likely to be undercompensated. A common solution is to allow the orthopods in that group to weight their top 20 DRGs on a one-to-five scale.

In most parts of the country, contact cap is still in the exploratory stages, but several organizations have been using their own home-grown versions successfully. One is Mission Health, which consists of a 675-physician independent practice association and the five-hospital Baptist St. Vincent Health System. It contracts with HMOs for a percentage of the premium, which it splits into a physician services fund (60 percent) and a hospital fund (40 percent).

Mission Health creates a separate pool for each of its 25 specialties. Since January 1997, the organization has been paying its specialty physicians from their respective pools on a contact capitation basis. Specialists are chosen by patients and their primary care physicians, who make the referrals that build specialists’ patient panels. Starting with the month of a contact, and for 11 months thereafter, a specialist is paid a percentage of the specialty pool equivalent to the contacts he or she made divided by the total contacts made in the specialty that month.

“So far, it’s working,” says Timothy M. Davlantes, M.D., Mission Health vice president and medical director. “We used 100-percent Medicare reimbursement as a benchmark to fund our pools and, compared with what they would have received under fee-for-service, the physicians in aggregate are running probably 130 percent of Medicare, with some doing more and some less.”

Needed: physician ‘buy-in’

Contact cap was a relatively easy sell at Mission Health, according to Davlantes, because physicians had already been through single-specialty capitation from HMOs and had seen their reimbursement rates ratcheted down year after year. Another factor in physician buy-in was that physicians themselves ironed out the details of the contact cap methodology at Mission Health through their IPA governance structure.

The main reason for implementing contact cap at Mission Health was to assure the fiscal viability of the organization, but Davlantes now sees a number of other benefits. The most obvious is that physicians have to see the patient to get the contact, whereas the incentive under prospective capitation is exactly the reverse. Because patients are free to go to another specialist (and take the relatively long-term “contact” with them), specialists now also have a strong financial incentive to provide good customer service.

Interspecialty communication and collaboration are also enhanced. Cardiologists, for example, are now eager to share their expertise in managing hypertension with their primary care colleagues in order to save their pool for conditions they really do need to see. All physicians now potentially benefit from improved member health status and support initiatives such as disease management clinics.

“We want to break the whole notion of physicians thinking in terms of unit cost reimbursement,” says Davlantes. “We want to get them thinking about caring for a population. Contact cap is a natural for that.”

To achieve better outcomes and higher quality at lower cost, some health plans are implementing coordinated team approaches. One such initiative is Oxford Specialty Management in Norwalk, Conn., a wholly-owned subsidiary of Oxford Health Plans that emphasizes that it does not capitate any of its doctors.

Since its launch in April 1996, Oxford Specialty Management has developed more than 30 requests for proposals and has signed approximately 70 contracts with specialty teams in 10 specialties. Each RFP defines a different clinical entity or case. In cardiology, for example, a “case” would be a CABG or a percutaneous transluminal coronary angioplasty.

Specialty teams come together as a result of existing relationships or through OSM’s efforts. These teams are designed to provide the full spectrum of care for clinical cases. A breast cancer team, for example, might include an oncologist, a surgeon, a radiation therapist, a plastic surgeon, physical rehabilitation specialists and ancillary providers.

Each team is paid a negotiated case rate, depending on its historical experience. The payment is made in two or three installments. A CABG team, for example, could receive approximately 80 percent of its case rate immediately after surgery, with the balance paid over six months to a year, depending on the length of the case. These interim payments are conditional on the team’s achieving certain clinical milestones, or minimum quality standards and outcomes. Each case also has a defined stop-loss and each team is protected by an aggregate stop-loss for all its cases. Team members decide how to divide the case rate among themselves, based on historical data or individual contributions to care.

Different kinds of risk

Is this capitation? Aran Ron, M.D., M.P.H., M.B.A., medical director of Oxford Specialty Management, says no. Ron prefers the term “case rate” to describe OSM’s reimbursement methodology. The difference, he explains, is that OSM, in its capacity as an insurer, assumes the “population-based” risk (i.e., getting a lot of very sick patients) of capitation, leaving specialty teams with only the “technical” risk (i.e., providing the most cost-effective care).

“We feel that physicians should not have to bear the population risk. They should bear the technical risk because they control the technical components of care,” says Ron. “If they do a good job on the technical end, teams can benefit substantially.”

But the real payoff for providers in this arrangement is potentially increased volume: Specialty teams with high patient satisfaction will presumably attract more patients. Primary care doctors help patients choose a specialty team using information and performance data provided by OSM, and they make the initial referral.

Another variation on the capitation theme is “shadow” capitation, which uses historical data to estimate how many RVUs each specialty can expect to generate for a defined population during a certain period and pays physicians for that number of RVUs, however many they actually generate. According to Susan Cejka, president of Cejka & Company, a health care recruitment and consulting company in St. Louis, shadow capitation is being considered as a payment methodology by the Henry Ford Health System in Michigan.

The old standby

One more substitute for pure capitation doesn’t require a lengthy introduction. It’s called fee-for-service. Alta Bates Medical Group in northern California made news in September by switching its primary care physicians from capitation back to fee-for-service. And Lifeguard Inc., the 20-year-old, San Jose-based HMO, never left fee-for-service in the first place.

How does Lifeguard control costs without capitation? “Utilization management,” says Joseph Aita, M.D., the company’s executive vice president and medical director. “Since we pay all the claims, we get 100-percent data capture, which fuels our quality improvement initiatives. Under capitation, the quality of the encounter data is either not detailed enough or not timely enough.”

Other health plans capitate because utilization review is more costly and more difficult to do, Aita asserts. He points out that provider organizations that assume the risk end up having to invest in an expensive, second-layer infrastructure to process claims, provide customer service and do internal utilization management. Paying physicians fee-for-service also positions Lifeguard to take advantage of consumer demand for broad access, he says. All of Lifeguard’s commercial HMO business is on a fee-for-service basis, allowing members and their primary care physicians to see any specialists in the Lifeguard network.

“Managed care doesn’t equal capitation,” says Aita. “In fact, we feel capitation impedes management of a member’s health care needs. We like to do it fee-for-service with a feedback loop to the docs. I see our system as a real crucible of experimentation to demonstrate that this more open model fee-for-service HMO can work.”

Capitation may not be the only way to go for big health plans, but contact capitation can be helpful for provider organizations such as IPAs, physician-hospital organizations and integrated delivery networks in accepting and managing risk, especially now that the pressure is on to broaden access to specialty care. “Contact cap does all the right things,” says Cejka. “It gives the doctor an incentive to provide access and care for the patient without encouraging the use of tests and procedures. Conversely, it does not give any negative incentive to tests and procedures. Its biggest minus is that it’s very hard to administer.”

What’s hard is figuring out how to divide the money, first among the specialties, then within each specialty. To fund its individual specialty pools, Davlantes says, Mission Health used national and local actuarial data. For most specialties, he says, the data turned out to be reliable.

“Intraspecialty equity is always a point of controversy,” says Clifford R. Frank, president of Health Care Management Solutions, a capitation consulting firm in Jacksonville, Fla. “The first rule is that the practitioners within the specialty in a particular locale have to settle it. Orthopedists in Knoxville may decide it differently than the ones in San Antonio. But they’ll think it’s fair because they came up with it themselves.”

Mixing and matching

As promising as contact cap looks, it may end up as just another ingredient in the payment pot. Right now, provider organizations are mixing and matching contact capitation, geographic capitation, weighting, carve-outs, fee-for-service, relative value units and whatever else it takes to keep physicians happy and help make specialty care accessible.

Cejka believes that is as it should be, because some methodologies are more appropriate for certain specialties. She says, for example, that specialists who treat chronic illness should be given primary care coordination responsibility for their patients and paid an appropriate capitation rate. For other specialties such as obstetrics, an equal share of the specialty pool may be most appropriate.

Vivra Specialty Partners, which represents all specialties other than mental health and primary care, is a case in point. Its Florida region has contracts with eight HMOs and covers 900,000 lives. According to Richard Pozen, M.D., head of Vivra’s Florida region, the most common payment methodology for Vivra specialists is fee-for-service based on a sliding RVU scale. The scale is adjusted monthly for utilization in each specialty network. If utilization is high in a particular month, the dollar value for a relative value unit is lower than it would be in a month with lower utilization. But some items, such as hysterectomies, C-sections and normal deliveries, are reimbursed at fixed dollar amounts. Fixed expenses are deducted from the respective specialty pool before the worth of a relative value unit is determined.

“Compensating specialists is definitely a moving target,” says Pozen. “It’s continually changing. In general, we’re moving away from the relative value unit adjusted for utilization and more toward either contact capitation adjusted for utilization or some form of capitation that is either based on geography or on the number of members seen. One form of contact capitation says if you see a member for this disease, you get $500. The other end of the contact cap spectrum says if you see five percent of the members that are being seen, you receive five percent of the dollars we have to distribute.”

Capitation in 2002

Most specialists are still being paid either discounted fee-for-service or straight salary, according to Cejka. Capitating specialists is much more complicated than capitating primary care physicians. That may be why it has taken this long for specialty capitation at the provider organization level to emerge. At a minimum, it’s going to require sophisticated information infrastructures, data on which to base specialty pool allocations, competent management, leadership and physicians are willing to change.

Meanwhile, primary care physicians look at broad access to specialty care — the logical accompaniment of many of these payment systems — with mixed feelings. Some see little, if any, potential fallout. Others are convinced that it will narrow their scope of practice and reduce demand for their services.

Proponents of contact capitation in its various flavors claim that it can hasten not only broader but open access to specialty care. “I think providers, particularly specialist providers, will ultimately embrace contact cap as a way to obtain risk contracts and successfully manage them while preserving broad physician access in the market,” says Frank. “By 2002, we’ll see open-access models at competitive premiums, with most doctors functioning under contact cap. Contact cap will be the great liberator.”

Bob Carlson writes exclusively about health care. He lives in Indianapolis.


The Future of Capitation In a World of Shared Risk

Part III of Three Part Series. See Also:

  • PART I : The March of Capitation: Reversed or Just Delayed?
  • PART II: ‘Contact Capitation’ and its Cousins

Will global capitation be the means of reducing HMOs to the status of third-party administrators? Experts differ on that one. But they agree that capitation, in its various forms, is here to stay.

Contributing Editor

How big a future does capitation have? One thing seems sure: Despite variations such as “contact capitation” that borrow its name while seeking to mitigate some of its blunt effects, capitation itself will be an enduring feature of the landscape.

“Oh, no, it has not run its course,” exclaims Gary Scott Davis, co-chair of the health care group of Steel Hector & Davis, a law firm in Miami. “Specialty carve-out networks, negotiated fee-for-service, contact cap, cap plus — they’re all variations on the theme of capitation. But,” he adds, “we have set out to sea without charting a course.”

Says Maurice J. Penner, Ph.D., associate professor and program director of the health services administration program at the University of San Francisco and author of Capitation in California: “In our state, 80 percent of patients are covered either by Kaiser or by capitated physician groups. HMOs no longer have much in the way of risk. Say the consumer pays $105 per member, per month. The HMO will take 20 percent off the top, with very little exposure except for transplants, perhaps, or outpatient pharmacy. If HMOs can keep costs down and contract with stable physician groups, they’ll get a guaranteed profit.”

Different managed care administrators may have different reactions to the spectacle of that so-called “California model” taking over the country. Under the California model, it is sometimes those physician groups that are signing up HMOs, instead of the other way around. San Diego-based FPA Medical Management recently acquired Norwalk, Conn.-based Health Partners, a practice management company started by two HMOs. In effect, under the California model, the physicians are now signing up the HMOs. In coming into the juicy New York area, FPA will cut deals with such payers as Aetna U.S. Healthcare, Foundation Health Systems and Oxford Health Plans.

“The HMOs love this,” Penner says. “They do not have to negotiate with doctors.”

Transferring functions to physicians

In many places, the trend now is for HMOs and other payers to transfer as much work to the physicians as possible — including claims payment, physician credentialing, quality improvement, preventive measures, satisfaction polling, utilization review — even pharmacy. As physician groups grow stronger, some want more control of their fate and many agree to assume these tasks for a bigger ante. FPA, for one, will take on many of these chores under its new contracts. Patients will actually call the physicians’ organization to get information on the payer’s policies and procedures.

Significantly, such large physician organizations also handle payment of physicians — often distributing the capitation payments they receive by means of a modified fee-for-service system. Added in will be leftover portions of the hospital risk pool, thus providing an incentive to limit hospitalizations. Sometimes primary care doctors also share the remains of referral risk pools.

Giving primaries the payroll

Another model, according to Bradford Kirkman-Liff, M.B.A., Dr.P.H., professor of health administration and policy at Arizona State University in Tempe, is to pay primary care physicians on a fee-for-service basis, but give them a pool to pay specialists and the specialists a pool to pay the hospital bills. This amounts to a cap for the next person in the “food chain.”

Penner notes that even before the market crash of Oct. 27, stock prices for many leading HMOs were falling. He sees a trend on the part of such formerly all-powerful companies to return to providing insurance instead of micromanaging care. But others say the fortunes of HMOs have traditionally risen and fallen in cycles.

“They will come back,” predicts Jonathan Weiner, Ph.D., professor of health policy and management at the Johns Hopkins School of Public Health. “HMOs have gotten a bad rap, but they are doing what the government and some employers haven’t had the guts to do — cut costs. In most cases, their profits are not obscene, far from it.” With some analysts pointing to costs on the rise once again, it’s just possible that provider groups now feeling their muscle are in for a harsh reminder that HMOs did contribute some real management of care after all.

‘A base cap times quality’

The exact extent of capitation’s prevalence in the next millennium? Crystal balls are cloudy on that one. But they offer some new factors likely to become more prominent in the mix. One of them is outcome-based incentives. David Rearick, D.O., M.B.A., is the network medical director of Aetna U.S. Healthcare in Atlanta. “Capitation will increase,” he predicts, “but managed care companies and other vertically integrated entities will move toward some type of quality-based system — and pay physicians based on how well they do.”

Aetna U.S. Healthcare claims to have a 10-year jump on the rest of the industry in tracking outcomes. “We pay a base cap times quality,” Rearick says. “Quality is the key factor we’re looking for. We don’t tell doctors how to practice,” he insists. “We just show them the data comparing them to their peers.”

Getting the ‘global’

“Global capitation.” What other term sounds so rich, so rounded, so large? Often managed care companies prefer to take their 20 percent of premium and give someone else the rest of the money — and the risk and the chores — to manage. Many hospitals and physician-hospital organizations angle to receive the global cap and parcel it out to everyone involved in delivering care.

Hospitals desperately want the “global,” Penner says. That way, they can give physicians an incentive to bring patients into their facility.

“Doctors get excited about global caps,” adds Weiner. “‘Give me that. I can do better,’ they say. They should be careful. There is only so much fat that can be cut. This system has already been squeezed. It used to take 30,000 lives to make a go of it. Now it takes 100,000.”

Aetna’s Rearick also signals caution. “Most organizations that wish to take on the global cap are so immature it’s questionable whether they can handle the risk,” he says. “It’s better to form partnerships with the other people in the chain, and share risk. There is a big difference,” he adds, “between delivering care and managing risk.”

ASU professor Kirkman-Liff doubts the contention that HMOs are looking to hand over the global cap and return to the insurance instead of the health care business. “Why would they give away their profit?” he asks.

Jean Lawrence has written numerous articles for MANAGED CARE, including “Fraud and Abuse Find a Home in Managed Care” in the October issue.


Most physicians flourish under capitation, despite declining commercial payments

Capitation rates are falling, but physicians are nonetheless profiting under capitation. Data released by newsletter publisher National Health Information indicate that despite an overall decline in average per-member, per-month payments in the last year, most physicians report higher profits from commercial capitation contracts.