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Capitation: how not to lose your shirt

From the November 1995 ACP Observer, copyright 1995 by the American College of Physicians.

By Deborah Gesensway

Nagging most physicians new to capitated practice is a lurking fear of an AIDS patient, a victim of a horrific car crash, a very premature baby—the kind of patient whose medical needs could bankrupt their practice.

Even the most adept doctors, doing their best to manage care, can be at risk financially when they accept a set amount of money to care for a defined population of patients. One patient's medical needs could conceivably consume all their assets.

Physicians who accept capitation, therefore, need some strategies for preventing a potentially catastrophic economic loss. The two most common tactics are to avoid it by passing the risk on to someone else or by insuring against it.

Avoidance is largely accomplished through "carve-outs," the elimination of high-cost services from an HMO contract. Usually, if a service is carved out, it either will be done by someone else, or it will be paid for on a fee-for-service basis, following a designated fee schedule. Common carve-outs in primary care are AIDS care and emergency room care. Obtaining insurance through "provider stop-loss" policies is the other means of staving off severe economic loss. Both strategies have their benefits, but they also come with costs.

Controlling costs

According to medical practice consultants and group practice administrators contacted for this article, physicians' biggest mistake is overreacting to their fear. Physicians seem to be looking to insure their profit margin rather than to insure against a disastrous loss. Buying an income guarantee may be possible, but it is extremely expensive and probably not necessary. Some physicians are so intent on avoiding risk that they are carving out all kinds of services, procedures and diagnoses from their HMO contracts. This may reduce risk, but at what cost to coordinated care?

"I think there is some confusion, even among the people writing capitation reinsurance, about what constitutes economic loss," said Douglas Ley, vice president and director of the employee benefits division at Willis Corroon Corp., a large brokerage firm with about 30 offices nationwide. "What you didn't get paid is not necessarily what you lost."

James Hillman, executive director of the Unified Medical Group Association (UMGA), a California-based organization representing 90 of the largest medical groups in 14 states, argues that doctors should avoid asking for carve-outs if they want to control how care is delivered to their patients. Other practice advisers maintain the opposite: Because stop-loss insurance tends to be expensive, a physician group should opt out of potentially financially risky services, such as the treatment of AIDS or trauma, when negotiating their capitation agreements.

"Part of the basic problem is that stop-loss insurance is not that readily available yet at affordable rates, so what you want to do first of all is typically shift it back to the managed care company to the extent possible," said Neil Caesar, JD, president of the Health Law Center, a national health law and consulting firm in Greenville, S.C. "Outliers are the name of the game in capitation, and volume is an issue," he said, adding that his strategy is best recommended to smaller groups. "If you have four outliers, it's going to have much less impact if you have 1,500 covered lives per doctor than if you have 200 covered lives per doctor from that particular plan."

Despite their disparate views on how to handle risk, both Mr. Caesar and Mr. Hillman agree on some points. First, no one would recommend that physicians forgo some type of stop-loss strategy. And secondly, these advisers agree, occurrences of financial ruin are far less prevalent than most physicians fear.

Contrary to conventional wisdom, physicians can control the costs involved in caring for a catastrophically sick patient. In fact, Mr. Hillman said, the outlier patient is the one who really needs "to have someone monitoring care and eyeing it." As an example, he cites the UCLA teaching system, which he said used to be called "the black hole" by Los Angeles-based medical groups because it was where these groups would send their sickest patients, who would "emerge three months later with an $800,000 bill." But when the groups started monitoring what transpired and managing the care, the economic loss decreased dramatically, he said.

"You can do several things with risk," said Willis Corroon's Mr. Ley. "One is insure it, and the other is to control it. That's what physicians need to do. They need to say to themselves, How do I need to clinically manage the delivery of care in such a way that this is not risky?'"

Moreover, a group's experience in managing care, as measured by its claims history, will make a big difference in how much it has to pay to get or renew its stop-loss insurance, said several brokers.

Most doctors are introduced to this arcane subject when they prepare to sign their HMO contracts. Most HMOs offering doctors capitation provide some level of stop-loss insurance as a contract rider. Generally speaking, accepting that rider costs the physician 1% to 4% of total capitation, said George Conomikes, president of Conomikes Associates Inc., Los Angeles-based practice management consultants.

That premium buys physicians protection in this way: For every one of their patients whose doctor bills (not hospital or other health care bills) for that one year exceeded $5,000 (or $7,500 or $10,000, depending on the terms of the policy), the insurance will pay 90% (or 80% or 100%) of the bills accrued after that deductible has been met.

A problem for primary care physicians, Mr. Conomikes said, is that one patient rarely runs up a $5,000 bill with one internist in one year. What a primary care physician would prefer is something called "aggregate" stop-loss insurance, in which the deductible does not apply to each individual patient but to all the patients added together. Only the largest of medical groups, like the 400-doctor group at Dean Medical Center in Madison, Wis., however, have been able to purchase that kind of policy.

Dean basically self-insures against excessive losses, said Michael A. Wilson, the center's president and chief administrative officer. But since "we don't want to go totally bare," it buys insurance to cover an aggregate loss of above $1 million, calculated by adding up only the individual cases that cost more than $50,000 apiece. A smaller group would never be able to afford this insurance nor would it be able to spread the risk out over enough patients to make the numbers work, he said.

Individual stop-loss insurance

According to most consultants, buying individual stop-loss insurance through an HMO is probably the best—and only—option for most small groups. But as a group grows, the time will come to canvass the commercial insurance market for a better deal.

Therese Carder, vice president at Sullivan, Kelly Managed Care, an insurance broker in Irvine, Calif., said she recently helped a 20-doctor group responsible for 13,000 covered lives drop its eight different HMO stop-loss policies and switch to one it is now buying directly from an insurance company. For their new policy, the physicians will be paying 35 cents per member per month, she said, compared to their previous cost of $2.25.

For those groups not yet experienced in managing capitation, stop-loss insurance alone might not be enough to ensure peace of mind. Many consultants recommend that in such cases, physicians carve out specific, high-cost services from their HMO contracts.

Remember, however, everything carved out of a contract reduces the capitated payment by some amount. The HMOs will have their actuaries telling them how much each carve-out is worth; it can be worthwhile for the physicians to spend some money themselves on an actuarial analysis of their market.

Philip L. Beard, president of ProSTAT Resource Group, Kansas City-based consultants, said that during one recent contract negotiation he was involved with, the HMO had argued the carve-outs wanted by the doctors would cost them 19 cents per member per month. The doctors hired their own actuary who calculated the carve-outs were only worth 5 cents per member per month.

"I recommend doctors look for the unpredictable train wreck patients, and then carve them out," he said. "I say, any patient who hits any one of these 12 ICD-9 codes are carved out immediately and default to fee-for-service."

In some markets, Mr. Beard said, doctors have the power to negotiate a default stop-loss guarantee right into their contracts. In such cases, the HMO will agree to pay the doctors a lump sum at the end of the year if their capitation payments total more than 25% below what they would have been paid for the same patients under a discounted fee-for-service fee schedule. The doctors, in exchange, generally have to agree to a "stop gain" provision, which means that if they make a certain percentage more with capitation than they would have under fee-for-service, they must share some of that gain with the HMO.

No matter which of these stop-loss strategies a group decides to adopt, consultants say groups accepting capitation need to think differently about their income. Instead of looking only at the here and now, they need to plan for a rainy day.

"Even if there is only a 1% chance of a [catastrophic loss], doctors still need to put something away out of today's income for the day when that 1% chance happens," said Henry W. Osowski, executive vice president of Medical Dynamics, a consulting firm in Los Angeles. "Doing this is a huge cultural change for most physicians."


How to be a savvy stop-loss insurance consumer

It is a business that did not even exist six years ago. But today about 25 companies are writing stop-loss insurance policies for health care providers.

Because the industry is in the process of battling for market share, brokers say premiums and benefits vary widely. Using a broker to help sort through options is a good idea for most physicians, but make sure the broker chosen has had experience in this very specialized market. Sometimes, a good place to start will be with a medical malpractice insurance carrier, some of which are getting into the business of writing stop-loss insurance themselves. Or ask a nearby hospital or large group practice administrator for recommendations.

The following are some questions to ask and information to have to shop wisely for stop-loss insurance:

  • Know the market. The companies that have written this kind of insurance for HMOs and employers are not necessarily the ones with the most experience in the physician market. According to several brokers contacted for this article, the following are the largest and most experienced of those companies writing provider excess-loss insurance: Lloyds of London, John Alden, Fortis, CNA, Lexington, Northwestern National Life, Reliance, Lincoln National, North American Life & Casualty and TransAmerica. Another dozen or so companies have entered the business in the last year.

    Brokers said the older, more experienced firms are charging the higher rates, at least at the moment.

  • Ask about claim-paying policies and experiences. The main thing a physician needs to know is how quickly claims will be paid and what the reimbursement will be based on, for example, an RBRVS-based fee schedule. These also vary widely from company to company, brokers said. Ask the company to outline its claims process and show you the forms it uses. It is always helpful to ask for a reference list of current clients.
  • Heed some rules of thumb. Typically, brokers say, most policies being written today will have stop-loss insurance that kicks in after an individual patient has run up a physicians' services bill of $7,500. The insurance typically will pay the physician 90% of the charges after that deductible is met. Some policies start at $5,000 of loss, but those cost much more; some pay 80%, which is a way to save money on the premium. The best policies, which larger groups are now able to get, include something called a "profit commission," which is basically a provision for refunding the doctor if their experience was better than expected.
  • Know how rates vary. Stop-loss policies for Medicaid managed care tend to cost 30% to 40% more than those for commercial populations, brokers said. There is not that much experience with provider stop-loss for Medicare managed care yet. Otherwise, the cost of this protection depends on the practice's location, the demographics of its patient population and its claims history.
  • Understand who is really at risk. You might find you are less at risk or more at risk than you thought. Just because your IPA or PHO negotiates HMO contracts for you, including their provisions about stop-loss insurance, it does not necessarily follow that the larger entity is the one now at risk. The buck might still stop with you. In fact, in some states, a PHO cannot legally accept risk.

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