How to minimize risk when taking on capitation

Success depends on knowing your costs

By Eric Resultan
Editor, Hospice Management Advisor

It has been said enough times that hospice has been a reimbursement pioneer, one of the first providers to receive payment that resembled capitation. Sure, a per diem payment can be considered risky — often it seems the money paid is barely enough to cover a day’s care. Yet, it is hardly as prospective as capitation.

With per diem payments, you are assured payment for every day a patient is under your care. No matter how many patients are admitted to your hospice, a steady stream of revenue to pay for their care continues to flow into your account.

Capitation, on the other hand, calls for a hospice to make do with a lump sum — the per member per month (PMPM) payment — each month. That’s great, if you are responsible for 1,000 covered lives and only one patient is admitted to your hospice this month. What if 50 patients were admitted in the same month, and the PMPM is only enough to cover 40 patients? That’s a scenario that hospices will have to consider if they want to venture into the risky world of capitation.

The simplest way to look at capitation is to use gambling as an analogy. The provider is wagering the PMPM payment. The bet is that the cost of care will not exceed the amount wagered. The return or loss on the wager is determined by the profit or deficit at the end of the month.

Unlike casino gaming, however, the odds of winning go up exponentially the more informed and prepared a hospice is before it enters into negotiations with the insurer to determine the amount of the PMPM payment and what services will be covered under the payment.

Some basic principles apply to preparing for capitation:

  • Know your costs.
  • Know the population you will be expected to cover.
  • Implement strong case management.
  • Pay attention to contract details.

Cost accounting

Ask yourself the following question: If I do not know how much it costs to care for a patient over the course of his or her stay, how do I know if the money being paid prospectively is going to be enough? The answer is that you won’t. At best, it will be an educated guess, an assumption. And we all know the cliché about what’s wrong with making assumptions.

Hospice providers going into capitation must know how much it costs to care for a dying patient from a number of different angles, such as average cost per patient and average cost per disease. More importantly, costs should be broken down into units. For instance, a large chunk of care comes from routine nursing care, so a hospice should know what costs are associated with routine nursing care. The same can be said about every other aspect of a hospice’s core services.

Knowing costs provides a piece of the puzzle that shapes your decision-making. During negotiations, the managed care organization (MCO) should describe which services are covered under the capitation arrangement. If you know your costs from a variety of perspectives, you will be able to determine whether the services the MCO is expecting you to cover fit comfortably within the proposed PMPM payment.

Most hospices have a rudimentary knowledge of cost accounting. The hospice cost report that must be submitted to the Centers for Medicare & Medicaid Services (CMS) is a starting point. To do sophisticated cost accounting, hospices will have invest in software and information systems that can link utilization data with cost data.

Medicare risk programs will require a hospice to cover a completely different population of beneficiaries than a commercial payer. The difference between the two is obvious, and hospice providers should expect more money to cover an elderly population than a group of non-Medicare beneficiaries.

But understanding the risk associated with a specific population does have its nuances. For example, in commercial populations, understanding the ratio of men to women and breakdowns by age group can help develop a picture of utilization.

Once patients are admitted to a hospice, it is important to have case managers keeping track of quality and utilization. Case managers are the link between providers, physicians, managed care organizations, and families. Case managers are both advocates and watchdogs. While they should work to ensure protocols are followed, they are not bean-counters. On the other hand, they have to be vigilant to keep unnecessary costs to a minimum.

Pay attention to details

Although hospice and managed care organizations may have a good working relationship, hospice providers must sweat out the details of contracting, understanding that a few outlier patients can mean the difference between profit and loss. Cooperation, respect, and the realization that the success of one organization is dependent on the success of the other is a starting point, not the desired end. Hospices should seek clauses in the contract that do one or more of the following:

  • seek fee-for-service arrangements for patients identified as outliers;
  • agree to a capitation rate that is tied to a limited number of service days;
  • seek carve-outs for expensive therapies and drug regimens;
  • ask for quarterly review of utilization data to adjust capitation rate.

Other aspects of a capitation contract include:

  • Compensation
    A key element of any capitation contract is the provider’s compensation for services. First, the contract should clearly state how and when the provider is to be paid. Similarly, the provider should clearly understand the administrative requirements of submitting claims and the timing of receiving payment. For example, the time period within which a provider must submit claims must be clearly stated.

    Second, the particular forms used to submit claims must be identified by name. Third, all arrangements with regard to the coordination of benefits and late payments must be carefully spelled out in the contract.

    Under a capitation arrangement, the provider is compensated for covered services based upon a fixed payment. Unlike the discounted fee-for-service or per case charge methods, capitation arrangements typically present a heightened case management or "gatekeeper" obligation and an increased financial risk to the provider.

    Finally, some contracts involve "withhold pools" that are funded by a deduction the MCO takes from each payment to the provider. These amounts are usually set aside in pools to pay for inpatient care or other unanticipated patient-related costs. The provider is at risk if the cost of services rendered to covered lives is higher than expected. When such costs exceed the MCO’s budget, part or all of the withhold pool may be forfeited by the provider. If the costs do not exceed this ceiling, part or all of the withhold pool may be returned to the provider at the close of the fiscal year.

  • Termination
    Sometimes, no matter how well both sides planned ahead, the arrangement just isn’t working. Worse, you’re losing money with every passing month. You need to make sure the contract allows your hospice to get out of the contract as painlessly as possible. There are three primary ways to terminate a contract prior to its natural expiration at the end of the contract’s term:

    — The contract may be terminated by a mutual agreement of the parties to the contract.

    — The contract may be terminated "without cause," which allows either party to walk away from the deal after the required notice has been given to the other party.

    Although each of these methods allows the parties flexibility in terminating the contract before its completion, one or both of the parties may be reluctant to include such provisions, depending on how much the parties may depend on one another for patients or services.

    — The contract should allow either party to terminate "with cause" in the event the other party fails to comply with its promises and obligations as set forth in the contract. A 30-day "cure" period is often included to encourage the parties to resolve a party’s breach or default prior to a termination with cause. However, an automatic termination provision may also be included to address those situations when a party becomes insolvent, is convicted of a health care crime, or loses insurance coverage or a regulatory license required by law.

  • Provider obligations
    A contract should state that the provider is not obligated to provide any services under the contract that it does not ordinarily and customarily provide to its patients who are not members of the contracting MCO. In addition, the parties may want to consider adding an addendum to the contract that specifically lists all services, or types of services, that are covered by the MCO and the plans.

    Finally, the hospice may want to add a paragraph providing that if, in the future, the provider elects to limit or discontinue certain services, the provider may do so without penalty, provided appropriate notice is given to the MCO according to the contract’s terms.

(Eric Resultan, the Editor of Hospice Management Advisor, has written extensively about health care financing issues.)