Preparing for Capitation

24 Jun 2016
Unlike traditional insurance, which is based upon services provided, capitated payment systems are based on a set payment per person. According to the American Medical Association, there are several different types of capitation such as per member per month (pmpm) case management payments to primary care physicians involved in patient centered medical homes, pmpm payments covering all professional services and pmpm payments covering the total risk for all services including professional, facility, pharmaceutical, clinical laboratory and durable medical equipment, among others. In addition, there are numerous variations on these basic capitation types that depend on the particular services the parties decide to “carve out” and either handle on a fee-for-service basis or delegate to a separate benefit management company. To put it simply, capitation is like a gym membership; doctors make money if they can limit the amount of services their members receive and they lose money if their members receive a high level of service.
Back in the early 1990’s capitation was on the rise. It was seen as the future of managed care. By the mid 1990’s, it only played a minor role in the managed care spectrum since it was not accepted on the east coast. Today, capitation is once again on the rise and it represents between 10% and 15% of what healthcare insurers spend. Blue Shield will be looking to more than double its capitated contracts by 2018. The recent up-tick in capitation is an attempt by insurance carriers to change behavior since the limited incentives to doctors and hospitals, which allow them to keep some of the savings from cost-control efforts or impose penalties for low performance on quality measures, have not had the impact that they were looking for. Capitation provides for risk sharing by managed care companies which creates more predictable costs and profit margins. For providers, capitation provides a greater level of risk, but it also provides a greater level of reward.
With capitation making a resurgence, it is important for providers to properly understand the risks that capitation presents:
  1. Providers need to gain an understanding of the demographics of the members that will be part of their network so they can evaluate the cost of delivering service. In the world of capitation, the goal is to control costs. You, as the provider, bear the risk if the capitated payments are not sufficient to cover the cost of service provision.
  2. Providers need to project costs they will incur. By understanding your cost structure, you are in a better position to determine if the capitated rates that you are being offered are appropriate.
  3. Providers need to make sure they have in place strong accrual-based accounting records to be able to track incurred, but not yet recorded claims based upon actuarial calculations so that they can monitor actual costs against capitated revenue.
  4. Providers need to make sure their capitated contract provides a regular, predictable payment stream so they have the funds necessary to cover costs.
  5. Providers need to make sure they properly consider carveouts and mitigate risk through stop-loss coverage.
  6. Providers should understand what services are included in the capitated agreement. Are they only services offered by the provider, or will the provider also be responsible for services rendered by others?
  7. Providers need to understand the time-frame of the coverage period. Are they responsible for services after an employee’s termination?

All of this requires access to information. Take the time to understand your practice and the frequency at which patients visit you. Make sure you have in place accurate accrual-based accounting systems (most physicians maintain their records on the cash basis) to ensure you truly understand practice costs. Determine what level of care is too much for you to provide to one patient so you can mitigate the risk through stop-loss insurance coverage. Assess your internal expertise and capabilities and consider bringing on additional external support where internal expertise does not exist (budgeting and forecasting, cost accounting, contract reviews, etc.). Providers need to take the time to fully understand the contract they are entering into and how the services they provide compare to the services they are required to provide.

Physicians are, once again, receiving invitations from commercial payers to enter into capitated arrangements. Governmental payers and federal policymakers are also reconsidering the possibilities of capitation as a means of controlling the growth of health care costs. In order to make capitation work, providers need to properly plan and prepare for it. If they do not, the consequences can be drastic.