TITLE: CAPITATION PAYMENT IN MANAGED CARE SYSTEMS
SOURCE: Grand Rounds Presentation, UTMB
DATE: July 15, 1998
FACULTY PHYSICIAN: Francis B. Quinn, Jr., M.D.
SERIES EDITOR: Francis B. Quinn, Jr., M.D.
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Capitation is one of several forms of prepaid medical care. Prepayment for service as opposed to fee-for-service arrangements exist outside of the health care system. One example would be a Sears service contract, in which Sears is obliged to make all repairs required on all Sears appliances in a subscriber's residence. The level of service may vary, however: several years ago the man who came to service our furnace recognized me as the part-time deputy sheriff who had recently put him in jail on a charge of public intoxication.
Another example of prepaid service is the retainer paid by a business organization regularly to a firm of attorneys, for which the firm provides basic legal services and limited legal advice but which does not include commercial or tort litigation, criminal defense, or domestic litigation ("carve-outs") A law practice, however is different from a medical practice in that attorneys nominally charge by time spent on a client's affairs, and one can select among attorneys by demanding to know their "billing rates." (A useful tactic is to set up an agreed "account limit." This avoids your being hit by an unanticipated bill, and gives you the opportunity to bargain for additional increments of service. This option is not available in the usual physician-patient transaction, however.)
The US health-care system is evolving from one in which most providers have been paid on some variation of a fee-for-service basis to one in which many or most providers will be paid on a capitated basis. Although the evidence is equivocal and limited, two recent studies suggest that capitation and other global payment incentives may dramatically alter clinical practice patterns and substantially reduce costs. The studies targeted cardiovascular disease, and emphasized the implementation of evidence-based clinical practice guidelines. (The use of the term, evidence-based implies consistency of intervention and reliable assessment of outcome, a process easily done in financial accounting, but more difficult in the practice of clinical medicine.)
Although prepaid group practice arrangements have existed since the 1930's, only recently have these plans, now called managed care, begun to attract a large number of enrollees. Today, there is an alphabet soup of managed care arrangements, including traditional staff model HMOs, contractual arrangements in which health-care providers (e.g., physicians share the financial risk of providing health care to the health plan's members (e.g., Preferred Provider Organizations (PPO), Individual Practice Associations (IPA),) and new forms of integrated service networks.
No matter what the payment or organizational arrangement, all forms of managed care now work under a cloud of distrust caused by media reports of denied services, conflict of interest, and fraud. A number of States now mandate certain forms of care delivery (e.g., length of hospital stays for delivery,) and the federal government is now contemplating a broad set of standards, called the "health care bill of rights", designed to protect patients from their managed care insurers.
Capitated or salaried managed care systems (systems which pay the provider a flat fee per enrollee ("covered life") per time period, often termed per member per month) offer an important opportunity to provide high quality, cost-effective care. Capitated health-care delivery systems, however, have strong incentives to avoid patient populations in need of care. This is especially true in the case of patients who are disabled, aged or dying. These systems face great difficulty in arriving at an equitable payment scheme when variability within the population and across the natural history of different diseases offer little guidance in respect to anticipating service and resource needs of the population. This introduces an element of financial risk, risk familiar to insurance organizations, but novel and worrisome to hospitals and physicians, and it is the hospital and the physician to whom these risks are transferred under capitation payment schemes.
Nationally, nearly 80% of primary care physicians have at least one managed care contract, approximately 45% are employees of managed care organizations, and about half receive at least part of their reimbursement through capitation. Nowhere is the trend toward capitation more pervasive than in California, where approximately 60% of primary care services are capitated at the physician level, compared with 45% nationally.
Capitation provides incentives that are diametrically opposed to those of fee-for-service. Under a full capitation, i.e. full-risk, system, physicians receive a fixed amount of money for providing services to a patient for a particular period of time, including the cost associated with referrals to hospitals or specialists, as well as the ordering of tests. Although it is sometimes claimed that this results in an economic incentive to provide as little care as possible per patient, and to maximize the number of patients under the physician's care, it turns out again that the incentives are somewhat more complicated. Although it is true that under-providing services will lead to more money for the physician in the short run, it may be a counterproductive strategy over time. This is because patients are likely to gravitate away from physicians whom they believe are not giving them the attention that they deserve.
Relatively few physicians are paid on a fully capitated basis. It is important to understand, however, that the HMOs themselves ARE paid on such a manner (although many do purchase re-insurance to protect themselves against higher-than-anticipated expenses.) Because of this, there is often tension between HMOs themselves and their physician panel. The successful operation of an HMO depends, then, to a large degree on whether the HMO can transfer some of its financial incentive to conserve resources to its physician panel, while at the same time not generating enmity from members of the panel.
The tension between the HMO's incentive to reduce its costs, on the one hand, and the physician's incentive both to derive sufficient revenues from the practice of medicine and to provide good quality care to patients, on the other, has resulted in the development of numerous "mixed model" or "partial capitation" payments within HMOs. Some examples include:
For primary care physicians, almost all group and staff model HMOs (97%) and the vast majority of network/IPA model HMOs (88%) AVOID paying physicians on a fee-for-service basis coupled with no withhold or bonus; in other words, they DO provide financial incentives to physicians to conserve resources. Group/staff models are much more likely to pay a salary than are network/IPAs (28% vs. 2%). The remainder are paid on a mixed model basis- either capitation or fee-for-service with incentives to control resource utilization and/or referrals. Interestingly, an increasing majority of HMOs indicate that financial rewards are based in part on the quality of services provided and/or satisfaction ratings from patient surveys.
The amount of risk-sharing with specialists, although lower, is still substantial. Seventy-six percent of group/staff models, and 58% of network/IPAs, avoid fee-for-service without withholds or bonuses. Not surprisingly, salary is much more common in group/staff models, but so is capitation.
It should be clear that there is yet no one established method of paying physicians who are HMO panel members. Because the market is still evolving, it is especially important for researchers to determine the impact of alternative physician payment methods on utilization, costs, quality, and satisfaction.
A managed care company contracts with an employer to provide all medical care to the his employees and their dependants ("covered lives") for a set fee. The managed care company then enters into contracts with hospitals and physicians in which the hospitals agree to provide hospital care and the physicians to provide medical/surgical care, to the employees and dependants as a group, for an agreed-upon sum of money. Exceptions are negotiated for rare disorders ("carve-outs") for which the hospital/medical/surgical care can be expected to be very expensive, for example, acquired immune deficiency syndrome.
In many areas the development of managed care plans is the leading response to cost-containment pressure. A critical feature of these plans is the shift of financial risk from payers to providers. It is imperative that physicians be familiar with service arrangements commonly used to transfer risk to physicians. Fee schedules can incorporate a "hold back" or "withhold" in which a portion of fees is withheld and is not paid to the physicians unless utilization is within a budgeted target. Total health plan expenditures, however, can continue to increase with such arrangements. Holdback arrangements have been common for many years in California as well as elsewhere. Plans using this approach have virtually always operated over budgeted expenses because of excess utilization, and physicians have never seen a return of the withheld fee. Thus, they regard the holdback as nothing more than a discount. The failure to effectively control service volume has led health plans to use other methods to control costs. One alternative is to bundle physician services that cover either a period of time or an episode of illness. For example, a surgeon's pre- and postoperative care can be covered by a global fee for the surgery. Nonetheless, such arrangements may still lack incentives to reduce utilization, because the surgeon still benefits from doing more surgery.
The greatest risk transfer occurs with capitation, in which the maximum bundling is achieved by paying the physician a fixed amount per patient per month. Because it offers the health plan the maximum risk reduction and is administratively simple, capitation has recently become one of the most common prospective methods of contracting for primary care services in some areas of the country. Although it can be more difficult to assign patients to some types of specialists for capitation-based payment, capitation pools and specialty-specific budget limits are used at times to accomplish the same thing. Capitation pools and budget limits for specialists are a means of distributing a capitation payment. Fees are distributed on a fee-for-service basis up to the capitation fee or the specialty budget target. As the allowable expenditure limit is approached or reached, further specialist payments are reduced or eliminated. Since the health plan's total physician expenditures will be limited, and physicians are still obligated to provide services even if additional payments are eliminated, the capitation risk is distributed to multiple specialists or groups even when patients are not assigned by the plan to a particular physician.
The managed care company sees itself as a broker of services with responsibility to insure that these services are accessible and of reasonable quality. It enjoys a much lower overhead arising from the absence of claims-processing (except for fee-for service carve-outs) and a greater degree of reliability on its expense forecasting, since its purveyors have agreed each to a single fee for the entire services package. It benefits from the risk of unforeseen excessive demand for services now having been shifted to the purveyors (hospitals and physicians.) Its principal concerns are that it may be under-bid by another managed care company or that its negotiations with purveyors may not be such as to allow it to show substantial profit, adversely affecting the price of its stock.
The employer feels unjustly burdened by the cost of the health benefits package which the union has forced upon it ($500 per manufactured automobile at General Motors) and readily agrees to a contract which offers to provide health insurance at considerably less cost, and with less administrative overhead with regard to claims processing.
The physician, (or more likely, the group administrator with the concurrence of the physician executive committee) sees an opportunity to negotiate and collect a substantial single fee for providing care to the "covered lives" population, and looks forward to reduced payroll expense in the area of pre-certification and claims-processing. It is unsure what the contract will do to physician remuneration, but is confident that physician supply will grow to exceed demand, thus minimizing recruiting expense and enhancing retention of physician- employees/associates. It is less confident of its ability to fulfill its obligations in the case of a natural disaster or a pandemic, but finds the risk acceptable and hopes for the best.
The individual physician may feel relieved that he no longer must compete primarily on the basis of amenities and personal attentiveness. He is happy to have his administrator/executive committee or his IPA negotiate the commercial aspects of his medical practice.
The patient relies on his union to negotiate the best benefits it can get, and is pleased by the prospect of having what appears to be adequate health coverage, perhaps without even the obligation of copayment for services.
The managed care company enjoys a predictable cash flow derived from the employer's capitation contract covering a defined population and capitation contracts negotiated with hospitals and physician IPAs or groups. Until passage of the "Patient Bill of Rights" legislation, it was not liable for professional malpractice, and its duty to its "covered lives" extended only to the exercise of reasonable diligence in securing services of properly credentialed hospitals and physicians. Its success is judged almost entirely by its profitability.
As long as the union expresses no significant dissatisfaction with the health care benefits package, and if the absentee/sickness rate is nominal, the employer has no reason to be unhappy with the managed care capitation contract, especially since it reduces processing of individual claims and offers incentives to maximize employee health rather than simply to provide treatment for sickness and injury. The employer may have reason to expect that the managed care company as well as the care providers will have a more than passing interest in maintaining a safe workplace and that they would support efforts to enroll employees and management in health maintenance and safety programs, addressed, for example, to the problem of Monday sickness.
It may find itself at a disadvantage in negotiating for capitated health coverage, however, if its "defined population" includes large numbers of retirees, whose utilization of health care services is predictably greater than the average. This has been cited as one reason that the General Motors subsidiary, Saturn, elected to set up its manufacturing facility in a State where younger employees could be recruited, and where its health benefits expenses would not be burdened immediately by a population of retirees.
The individual physician in solo or single specialty practice may find himself at a disadvantage when competing against multispecialty physician groups, at least in urban areas. In rural settings, however managed care organizations may be reluctant to enter the health care market because annual changes in adjusted average per capita cost rates for health care vary dramatically in undeveloped counties. As health maintenance organizations shift towards capitation payment for physicians' services, physicians will experience progressive reduction of professional income as managed care companies learn to drive harder and harder bargains.
There is no longer any financial incentive for "unnecessary" surgery. He feels he has reason to believe that his union has selected a reputable managed care company, and that the company has contracted with reputable physicians and hospitals. He no longer must cope with pre-certification although he may still need a formal referral to consult with a specialist. He believes (probably correctly) that the managed care company as well as the hospitals and physicians now have an incentive to keep him as healthy as possible, if only to reduce their own costs, but he worries that they may be inclined to "stint" on medical care which is not absolutely critical to his well-being.
He recognizes that he no longer enjoys any special consideration based upon his social or financial status, and he may have to share a bus station-style waiting room with other patients whom he regards as undesirable.
If he suffers from a chronic disorder which requires regular and frequent treatment he may feel himself viewed more as a problem patient rather than as an opportunity for service, for he realizes that the cost of his care is now born by the physician or the physician group instead of the managed care organization. In this same fashion, he may from time to time experience delay in obtaining access to care which he considers necessary for his health and well-being.
A recent study of physicians practicing in California indicated that the degree of professional satisfaction depended to a significant extent on the style of practice. Physicians working in Independent Practice Associations (IPAs) were less satisfied than physicians working in medical group practices. In medical group practices, physicians share business and clinical facilities, records, and personnel, and they care for both managed and non-managed care patients. They generally practice together in one site but may have more than one site of practice. Physicians in IPAs, on the other hand, join together to offer professional services to patients covered under capitated contracts, but care for all their patients in their own individual practice offices. Both medical groups and IPAs have established capitated contracts with health plans through which they are paid a set fee for all patients in the plans who enroll in their group or association. The group or associations use this set fee to pay for all services covered by the contract. In addition, the groups and associations retain control over how they reimburse their own physicians (e.g., through salary, capitation, or fee for service) and assume the primary responsibility for utilization management and quality monitoring.
Despite the growing importance of capitation payments, there is still very little evidence on how different HMO payment schemes affect physicians- either the quantity or quality of services provided. Although there is a rather substantial literature in the impact of HMO versus fee-for-service, it is not terribly relevant to a world in which capitated health plans are becoming the norm. Within HMOs it is vital to learn the effect of the different types of physician risk sharing (salary or fee-for-service, withholding or bonus, discounted physician productivity, utilization or cost measures, capitation across pooled specialties, competitive bidding...)
One study from 1987 examined the impact of various physician compensation methods in HMOs on service utilization. Compared to fee-for-service, salaried physicians had 13% lower hospitalization rates; capitation further lowered these rates by 8%. Two incentives- putting individual physicians at risk for deficits in referral funds, and having the level of risk exceed the amount of the withhold- reduced visits per enrollee by about 10%.
Another study examined Wisconsin State employees enrolled in an HMO. In 1983 this IPA paid its primary care physicians on a fee-for-service basis. The following year, it altered its payment of primary care physicians to a capitated payment, with risk-sharing for hospital and specialist services. The authors report that primary care visits increased 18% in the second year while referrals to specialists outside the group declined by 45%. Hospital admissions declined by 16%, and length of stay by 12%. The authors did not examine the effect of the change in payment on quality of care.
A final US study reports results from a natural experiment where physicians from the Rockford, Illinois, area (who formed an organization that contracted with an IPA) changed the method of payment for member physicians. In 1987, physicians were paid on a fee-for-service basis, with a 15% withhold. In 1988, payment was on a capitation basis for primary care doctors, with shared risk for specialists services, and a bonus if hospitalization rates were held below a threshold level. The authors found that specialist costs increased 2% in 1988, after increasing 12% in previous years. The cost of hospital outpatient services declined 7%, after increasing 12% in previous years. Hospital utilization was largely unaffected by the change in payment for primary care physician services. The authors did not assess the impact of payment change on the quality of care, such as medical outcomes and patient satisfaction.
A study from Denmark provides an interesting view on the power of incentive reimbursement. In October 1987, general practitioners (GPs) in Copenhagen changed from a fully capitated payment basis to one that was based partly on capitation and partly on fee-for-service, so as to conform with physicians in the rest of the country. This new system resulted in the ability of GPs to make extra money for consultations, prescriptions, certain procedures, and tests. There was a substantial increase in provision of services that generated extra fees and a large decrease in referrals to specialists and hospitals. From this, one of the authors concludes that "there clearly is considerable discretion on the part of GPs in how they act and remuneration systems can push them to go one way or another in how they treat their patients and whether they treat them themselves or refer them on in the system."
Managed care organizations and the emerging integrated delivery systems select from several basic financial arrangements when contracting with physicians, but two are most important: salary and capitation. Salary was the traditional payment method used by staff-model health maintenance organizations. Salaries have long been supplemented by bonus arrangements intended to encourage greater productivity among physicians.
Capitation-based payment to physicians in managed care organizations is the alternative and increasingly prevalent method for structuring the financial arrangements between physicians and the managed care organization. Within capitation, various sub-arrangements can exist. In the simplest arrangement, an individual physician receives a certain mount of money per month for each member of the managed care organization who designates the physician as his or her primary care physician. In a variation on this arrangement, a group of physicians might contract with the managed care organization and receive a certain amount of money per month for each member of the managed care organization who designates the group as his or her site for receiving medical care.
Capitation payments for specialists and in-patient hospital care are managed in various ways. In some contracts, the managed care organization retains percentages of the premium that are used to pay for specialists, prescription drugs, and in-patient hospital use. Alternatively, the managed care organization may pay a higher percentage of the premium as the base capitation payment to the primary care physician, forcing the primary care physician, in turn, to pay for specialists, prescription drugs, and hospital care. Specialists may be paid on reduced fee schedules or may receive flat consultancy retainers (equivalent to a salary for being on call for a certain number of hours per month.) They may even be paid capitated amounts for being available for a panel of insured lives.
Regulation of managed care organizations by State governments is generally intended to protect patients by providing them with information and by ensuring the fiscal integrity of the organizations. Most States have required traditional managed care organizations to obtain specific licenses. The licensing authority, often the insurance commissioner, can regulate in all areas not preempted by federal law. States vary considerably in their regulatory approach, however. The Maryland provisions are an example of an approach that encourages managed care organizations to provide high-quality care. Maryland requires managed care organizations to have regular hours; to provide for 24-hour access to a physician; to ensure that each member seen for a medical problem is evaluated under the direction of a physician; and to give each member an opportunity to select a primary care physician. Maryland also insists that managed care organizations provide appropriate preventive services and periodic health education.
Maryland law also mandates that each managed care organization 1) have a written plan about its implementation of these standards of quality of care and 2) review statistics on the health care needs of its patients. Each organization must have an internal, professional peer review system that in many ways is modeled on peer review in hospitals. The systematic collection of data on performance and patient results is also required, and managed care organizations must provide all members with information on available services and on potential responsibility for payment of services by members.
California, which may have the most advanced managed care industry, also has the most advanced regulation. In addition to having rules similar to those in Maryland, the California State health authorities may do on-site surveys of plans to evaluate peer review and referral mechanisms, internal procedures for oversight of quality of care, and overall performance. Recently, California fined a managed care organization $500,000 for failing to follow its own procedures in a patient's referral for expensive oncologic care.
Some States are antagonistic toward managed care organizations. Their regulations generally reflect this antagonism, often in part because of the interests of local medical societies. For example, in Texas, protections against insolvency are much more thorough than those in other States.
Texas also has a strong "any-willing-provider" law. The prototypical any-willing-provider statute requires that managed care organizations allow any individual or institutional providers who are willing to meet a plan's financial and educational criteria into their provider networks. Such laws make it more difficult for managed care organizations to maintain the cohesive panel of practitioners that is central to reducing utilization, and they reduce the organization's bargaining power in negotiations with providers.
At least 27 States have now passed some species of the any-willing-provider statute. Some statutes require notice to all providers of the opportunity to become network participants, creating large expenses for managed care organizations. Other statutes create due process-based appeals structures. Some States insist that patients be able to see out-of-network providers.
The American Medical Association has endorsed the federal Patient Protection Act. This proposed legislation incorporates much of what is found in any-willing-provider laws at the State level; it would require contracting between managed care organizations and any licensed provider who meets reasonable predetermined standards. Further, under this legislation, managed care organizations would be required to provide members with all terms and conditions of the health plan in easily understood, truthful, and objective terms. Physician credentialing within the health plans, particularly credentialing issues based on economic factors, such as the physician's past expenditure per patient, would also be subject to oversight. Case mix, severity of patient illness, and patient age adjustments, must be incorporated into such credentialing. Finally, the proposed Patient Protection Act States that all enrollees of health benefit plans are to be offered a selection of plans, including at least one traditional fee-for-service plan. The Patient Protection Act and the any-willing-provider laws of various States can be characterized as important efforts to ensure that cost-quality tradeoffs under managed care programs are not detrimental to patient care.
To encourage the movement of seniors to Medicare capitation contracts, the Balanced Budget Act of 1997 created new choices for Medicare beneficiaries under its Medicare+Choice program. One of these provisions allows Provider-Sponsored Organizations (PSOs) to contract directly with Medicare for risk-based contracts, thereby encouraging providers to form PSOs. The intent of the legislation is to broaden the provider networks available to Medicare beneficiaries and to eliminate the commercial HMO as the necessary middlman, placing the medical management responsibility in the hands of the providers, potentially doing away with the HMO's profit, and reducing the cost to the Medicare program.
A PSO is defined by the ACT as a public or private entity:
A PSO is, in reality, a provider-sponsored HMO that meets the criteria of the Act; however, PSOs that contract directly with Medicare must meet criteria that re less stringent than the federal qualifications for commercial HMOs. For example, a PSO is not required to limit its Medicare enrollment to 50% of its total enrollment. Additional federal standards, including those on financial solvency, are now being developed and are scheduled for publication during the summer of 1998.
Perhaps the most important provision of the Act for PSOs is the ability of a PSO to obtain a waiver from State licensure if the State: (1) does not respond to an application by the PSO within 90 days; or (2) denies appropriate licensure because the PSO does not meet criteria that are more stringent than federal standards. The federal waiver will be granted for a three-year period after which the PSO must have the apppropriate State licensure to continue to contract for Medicare enrollees. The intent of the waiver is to allow PSOs time to develop to meet State licensure requirements and give the States time to conform their requirements to federal standards.
The Medicare population represents the most important group of covered lives to most providers. Medicare is now pushing seniors to join risk-based plans, and is encouraging providers to form Provider Service Organizations (PSO) to contract directly with Medicare for risk-based contracts. By eliminating the commercial HMOs as the middlemen, PSOs can not only control their own destiny as providers, they can retain the "risk profit" in the community for enhancing services or higher payments to providers. To be successful, however, PSOs must have in place the key elements to manage the organization in a managed care environment. While the task of creating a PSO can appear daunting and the risk can be real and substantial, every provider organization should examine the potential of starting or joining a PSO. The greatest risk could be the risk of doing nothing, which could lead to loss of control the the Medicare population, decreased utilization, declining payment for services, the loss of patients being directed to other providers, and the loss of the "risk premium" from Medicare capitation.
Capitation payment arrangements are changing and expanding. The private sector is paying increasing attention to capitating not only primary care physicians, but also specialty services and dental care. The federal government has plans to experiment with global purchasing and competitive bidding to establish capitation rates for Medicare beneficiaries.The greatest risk could be the risk of doing nothing, which could lead to loss of control the the Medicare population, decreased utilization, declining payment for services, the loss of patients being directed to other providers, and the loss of the "risk premium" from Medicare capitation.
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