American College of Physicians: Internal Medicine — Doctors for Adults ®


Is it all hype?

Capitation still an illusion for many

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

By Deborah Gesensway

Capitation was supposed to be managed care's future. And the future was supposed to be now. So where is all the capitation predicted by managed care advocates and health reform proponents?

If you are still waiting for capitation to come to your community, or if it has already come and you want it, have prepared your practice for it and still have not gotten it, you are not alone. Welcome to 1996.

These scenarios may sound even more familiar if your interest is in full--also called total or global--capitation. This kind of capitation allows integrated providers to accept close to all of the health care premium in return for caring for all the health care needs of a panel of patients.

Health care consultants from coast to coast say they would have thought the shift from fee-for-service to capitation as the primary way of reimbursing physicians in the '90s should have happened quicker and to a greater extent than they have seen so far.

"The perception is that 60% of all [physician group] revenues come from capitated payments. It's a big myth out there," said David Gans, director of survey operations for the Medical Group Management Association (MGMA), which represents more than 6,500 medical group practices nationwide. "The interesting thing, however, is that the whole system, people everywhere, are making decisions based on [the assumption that health care is now being delivered in] a capitated environment."

According to MGMA's latest research, however, only about one-third of the nation's multispecialty groups--those most likely to receive capitation contracts from health plans--reported earning any revenue from capitation. And of those, capitation accounted for only 20.5% of their revenue. Even large groups (more than 150 physicians) earned only about one-third of their income from capitation in 1994, according to MGMA.

And even these numbers can be deceiving because most physicians' capitated business is something less than full capitation. Primary care caps, for example, are becoming more widespread; thus, general internists, like family physicians and pediatricians, report that about 22% of their managed care revenue comes from capitation, compared to 15% of all physicians' managed care income. Overall, however, since managed care revenue is only a fraction of a practice's total medical revenue, that still means that only 7% to 8% of a primary care physician's total practice revenues on average was capitated in 1994, according to the MGMA's analysis.

It takes two

Conventional wisdom may attribute these lower-than-expected proportions to physicians' eschewing capitation, defensively choosing to cling as long as possible to discounted fee-for-service reimbursement. But it takes two parties to make a contract. Recent research has found that managed care organizations themselves have not rushed to capitate the providers of medical services, some because they have not found physician group partners with whom they want to do capitated business, others because capitation is not part of their business strategy.

The theory is this: Think of a capitation as the yearly health care budget for a particular patient population. The entity that controls how that budget is spent gets to keep any unspent funds at the end (or has to cope with any losses). A health plan can, through a capitation agreement, choose to take its profit off the top of the premium paid and then give the rest to the provider to figure out how to spend prudently on that patient population. The providers get to keep any excess as profit.

On the other hand, health plans can--and frequently do--opt to control the premium themselves, sharing neither the responsibility nor the rewards with providers. Since today's U.S. health care system is proving to contain great waste and excess, almost anyone who endeavors to "manage" care--be they an HMO or a physician group--is finding great profit awaits, particularly if they control money saved by cutting hospital utilization.

"It might be called financial risk-sharing with providers, but right now it's not risk-sharing that HMOs are resisting. It's profit-sharing," said Robert A. Berenson, FACP, medical director of the National Capital PPO in Washington, D.C. "When the easy savings are washed out and everybody is down to 200 [hospital] days per 1,000 [enrollees], suddenly HMOs will say, 'Now that there's not that much more profit to be made, let's do risk-sharing.' "

According to a recent study by Mathematica Policy Research for the congressional Physician Payment Review Commission and co-authored by Dr. Berenson, only slightly more than a third of managed care plans used capitation as a "predominant method" of paying primary care physicians; less than a fifth of the plans paid specialists predominately by capitation (The New England Journal of Medicine, Dec. 21, 1995). Risk-sharing with provider physicians and hospitals was particularly "rare" if the managed care plan was a PPO, rather than a staff- or group-model HMO or independent practice association-type of health plan. State insurance laws prohibit many PPOs from participating in capitation agreements because they are not licensed as HMOs.

Even the nation's largest multi-specialty groups are reporting some difficulty getting the global caps they want, particularly if they are trying to deal with managed care plans or insurance companies currently reaping millions in profit off the current system, said James Hillman, executive director of the California-based Unified Medical Group Association (UMGA). UMGA represents about 90 of the nation's largest medical groups.

"Capitation returns control of health care to physicians," Mr. Hillman said. "Insurers are concerned that they are going to lose their power in the system if they give this control, through a cap, to physicians or integrated delivery systems."

After all, said Jay Levine, a health care consultant with ECG Management Consultants of Wakefield, Mass., "the insurance companies realized a few years ago that whoever controls the bulk of the capitation has the greatest profit-earning potential."

Internist Michael C. Tooke, FACP, learned this lesson when he started his integrated physician organization, HelixCare. "We got all scrubbed up, put on our nice clothes and went downtown to talk to payers and ran into the same thing," Dr. Tooke said. "They are making plenty of money and have no interest in transferring some of that premium to another organization."

To date, he can report success with only one plan. Other plans Dr. Tooke talked to were not interested, he said, because they do not understand why giving global capitation to a physician organization is not the same as helping the competition. "They are wondering if we aren't just going to become an HMO," he said.

On the other hand, John Seitz, a consultant with Cornerstone Physicians Corp. in Irvine, Calif., said his experience has been that HMOs, including some very large ones, are generally willing to give global caps to groups. The problem, he said, is that doctors who are not ready for global capitation are asking for it anyway. "They haven't invested in the systems or the expertise that is required to take on global or even professional component caps," he said.

Preparation can make a difference. For example, a 17-physician primary-care group in Tucson, Ariz., just got its first global capitation contract with Humana. But first it had to invest tens of thousands of dollars in information systems, in hiring consultants with managed care expertise and in living with low primary care caps. "We had to show them that we could walk before we could run," Mr. Seitz said.

"The HMOs have a fiduciary duty in how they use the managed care dollar," Mr. Seitz said. "If they give 85% of it to Dr. Smith's medical group, they've got to make sure that they've done their homework that Dr. Smith's medical group can spend that dollar correctly. If Dr. Smith is still tracking patient encounters with index cards, how comfortable are they going to be with giving him risk?"

In Seattle, according to Dan Merlino, a Washington state-based consultant with ECG Management Consultants, the experience has been that the smaller HMOs have been more willing to try full-risk caps with provider groups in the hope of winning market share.

"It has to do with who has the power in a market," Mr. Merlino said. "If you've got a fractious employer environment and a fractious provider environment, the payers are just going to lick their chops and say, 'Why offer risk to anybody? I can raise premiums and keep the lid on provider payments at the same time.' "

In a community like Minneapolis full capitation is also notably rare, but here due to the power of the employers, who have not wanted to share the risk/profit-making potential with providers, said Peter R. Kongstvedt, FACP, a Washington, D.C.-based consultant with Ernst & Young. But more recently employers there, who have joined together in a strong health insurance purchasing coalition, have begun talking about cutting the HMOs out and contracting directly with provider groups, largely on a non-capitated basis.

"Many of the large self-insured employers don't want to capitate," Dr. Kongstvedt said. "The Honeywells and Pillsburys of the world want to pay fee-for-service so that they know exactly what their medical costs are. They say, 'If utilization is low, good. We'll give you our business. But we are not going to give you extra profit for it.' "

More roadblocks

It is primarily in communities like Los Angeles, San Diego and San Francisco that provider groups have become large enough and powerful enough to get the global caps they demand. But they are running into problems with new interpretations of state insurance law. California's insurance commissioner, like the National Association of Insurance Commissions, has concluded that provider groups cannot take global capitation and assume the full risk of caring for a population of patients without first getting HMO licenses.

A part of the rationale is that in the earlier days of capitated managed care, there were some highly publicized "disasters" of medical groups and clinics taking full capitation and then going under financially "because they didn't understand the difference between revenue and income," Dr. Kongstevdt said. "While providers may have forgotten the lessons from the late '70s and early '80s, a lot of insurance departments haven't--because they had to clean up the mess."

Those memories, and a lingering distrust of physicians' ability to manage utilization, costs and care, also have been guiding some HMOs now being approached by provider groups requesting capitated contracts. And in some cases, consultants said, the groups are probably right to be wary.

"Some of the [insurers] look at these groups and PHOs and say, 'We're not 100% sure that they can manage that. What's going to happen when the money runs out?' " said Anthony M. Kotin, ACP Member, a health care consultant with Towers Perrin in Chicago. "Some of the reluctance is due to a laudable reason, which is that there is some potential for failure on the part of the PHO."

Just recently, for example, Dr. Kotin said he received a letter from a cardiology group demonstrating how unrealistic and unprepared some physician groups may be in handling a capitated contract. The letter, from a four-physician cardiology group, asked to hire his firm to develop a capitation rate. The group wanted to negotiate specialty capitation contracts with health plans. "They are being completely unrealistic," Dr. Kotin said. "No one in their right mind would give them such a cap because they are not big enough and not ready."

In addition, several trends emerging as the U.S. health care delivery system undergoes rapid change may be contributing to the slower spread of capitation. Consider the popularity of point-of-service style managed care plans. HMOs encounter actuarial problems in calculating cap rates for point-of-service plans because their design allows patients to see physicians out of the network of potentially capitated providers.

The rise of for-profit health plans means Wall Street investors' demands must be taken into account when HMOs make decisions about how to design their products and reimburse their providers. "The way they are measured on Wall Street is revenue and membership," explained Brent Greenwood, a consultant and actuary with Towers Perrin in Atlanta. "If they capitate, then they are potentially capitating away their future profit, because once utilization comes down, they are not the ones who will be reaping the profits. The providers will."

Marketing demands also are playing a role. For capitation to work financially, networks of specialists must be shrunk; it does not pay to have a large pool of specialists to cover a small population of patients. Dr. Kongstevdt recently spoke with one HMO executive who wanted to capitate specialty care and was getting requests daily from specialty groups that would like the capitation. "But he is not ready to drastically reduce the size of the specialty network because of marketing reasons," he said. The HMO fears patients will not join it if the choice of specialists is limited.

Staying alive

Does all this mean that capitation is fading out of the managed care picture? Consultants unanimously answer, "No." Capitation may not turn out to be the inevitable end awaiting physicians when the health care system finishes reinventing itself, but there are plenty of circumstances keeping it alive, starting with the political activity around Medicare and Medicaid. Both the Republican Congress and Democratic administration would like to encourage more prepaid managed care for the two public health insurance programs (see "Battle brews over fixing Medicare capitation rates").

Around the country, consultants said, they see health plans expressing greater interest in offering provider groups capitation for Medicare patients than commercially insured groups of patients, in part because the risk is somewhat greater.

Dr. Tooke in Baltimore, for example, found that some insurance companies have recently expressed more interest in talking to HelixCare about global capitation. He can correlate this awakening directly to news out of Washington and Annapolis about "physician-sponsored networks" and their potential for direct contracting with HCFA and the state of Maryland for Medicare and Medicaid patients.

"The insurance companies see this and say, 'We may get cut out of [the market] altogether if we don't sit down with the providers and work something out,' " Dr. Tooke said. "Now we have to convince them they don't want to be in the business of managing care just like we don't want to be in the business of insurance."

In addition to the imminent growth of Medicare managed care, the reasons why managed care proponents liked the idea of capitation several years ago are still valid. "Capitation is not the only way of reimbursing for services, but it is one of them and it happens to align the financial incentives with the goals of managed care," Dr. Kongstvedt said.

Dr. Kotin added, "It certainly is an effective way of getting people to manage themselves more effectively. It is a great transitional phase, if not the be all and end all."

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