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What is in a reasonable capitation agreement?

From the January 1996 ACP Observer, copyright 1996 by the American College of Physicians.

Editor's note: This article is part of ACP Observer's occasional column dealing with questions about managed care. This month's respondent is Fred Spong, FACP, MBA, a senior consultant with Milliman & Robertson Inc. in San Diego, Calif. He is clinical professor of medicine at the University of California, San Diego. Dr. Spong is one of more than 50 consultants working with ACP's Managed Care Resource Center.

Q. My independent practice association (IPA) has asked me to accept capitation for my primary care patients. The proposal looks appealing and the IPA has a good track record. What should I look for before signing an agreement for capitation with the IPA?

A. Generally, I recommend accepting capitation if the proposed capitation rate and the contract are reasonable. Rejecting it may reduce the chances of being asked again or mean you will be permanently removed from the network. Usually, such a contract allows termination with 90 days notice or at renewal time if things do not work out. Before signing, check to see what the termination clause allows.

Capitation rates for non-Medicare and non-Medicaid patients will differ from rates for Medicare or Medicaid patients. The per-member per-month (pmpm) rate you are paid varies depending on the age and sex of your patients. Find out now what constitutes good rates for the lives considered. Generally, the total capitation for an internist will run between $11 and $14 pmpm for a commercial population patient.

Further, the agreement should outline the services you are to provide to members--ordinarily services you already provide to primary care patients or feel you are able to provide. These should be listed by CPT code and by descriptor.

It is not uncommon for the agreement to provide a fee-for-service payment until you have acquired 50 to 100 patients under the capitated contract. This agreement shields you against the risk of having one or a few sick patients who require extensive care. In addition, you will need to be covered by the IPA's "stop-loss" coverage. This coverage will reimburse, on a fee-for-service basis, for care rendered over a certain dollar amount, for example, $7,500 a year. This protects you if you have patients with catastrophic illnesses who require a lot of care.

Usually, a capitation agreement provides some mechanism (a shared risk pool) for sharing hospital and pharmacy savings with the physicians. You should be aware that losses also would be shared, thus decreasing future earnings. Losses from the hospital and pharmacy pools may be used to decrease future capitation payments in subsequent years.

Moreover, the IPA's capability to manage its business needs to be considered before you accept its offer. Some organizations have not been able to provide the services, financial capabilities and stability necessary to be successful in health care. Make sure to ask other physicians in the IPA or its management about these important components.

Also look at the IPA's ability to become cost efficient in a competitive marketplace. Utilization management with appropriate pre-authorization, referral criteria and practice guidelines are essential to provide efficiency. The IPA should be willing to provide information about its policies and procedures. It may be helpful to compare this information with your past experience or with that of your colleagues. However, you may need to seek the advice of a consultant.

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