Lessons learned from capitation's heartland

Is California dreamin' a nightmare - or a vision?

"Play for more than you can afford to lose and you learn to play the game."

- Winston Churchill, as quoted by Ed Berger, vice president of managed care, Sutter Health System

"It is essential that we work and that we skin our knees. You have to determine what the problem is, work with your partners, and try to find solutions."

- Ed Berger

In the life cycle of capitation, Ed Berger has seen it all, from capitation's infancy to its current adolescence in California. Berger, vice president of managed care at one of California's largest integrated delivery systems, shared his war stories based on his 10 years of experience with capitation at the recent National Managed Health Care Congress in Atlanta.

The key messages that emerged: More hospital-physician partnerships are emerging, and HMO variations of standard capitation concepts should be eyed carefully.

In the world of managed care, Berger is the negotiator of all negotiators. He sits atop the behemoth organization called Sutter Health System, based in Sacramento.

At this writing, Sutter is represented in 100 northern California communities through an astounding 26 hospitals; more than 5,000 physicians; 3,000 independent practice associations; its own HMO; and a potential market of 3 million people under its purview.

Whether California will be the prototype for all managed care and capitation remains to be seen, but no one disputes the value of lessons learned in the trenches of California, where competition and capitation are virtually one and the same.

Here are some highlights of key buzzwords, phrases, and strategies that Berger shared with attendees of the managed care meeting, which drew 11,000 participants to Atlanta in late April, to make sense of the burgeoning phenomenon of managed care:

· Repatriation.

This is the transfer process that needs to occur when one of your capitated members goes to another hospital. When the patient is stable for transfer, you bring him or her to the hospital he or she is assigned to. This is particularly difficult when the patient is a Medicare enrollee, but doing it effectively means a major cost savings for your group and better ability to monitor quality of care.

· Subcapitation.

This is an arrangement in which a physician group accepts full capitation and then pays other groups for services the capitated group doesn't perform. This can be for services such as ambulance care and even transplants. It is important to arrange for this, however, even in rare services. For example, Sutter allocates 18 cents per member per month for pediatric liver transplants. "This is very rare, but when it is done it is very expensive," he points out. "You'll have less than one for every 200,000 members."

· "Flat dollar" vs. "age/sex adjusted" vs. "percentage of premium" per member per month (PMPM) arrangements.

Berger is quite blunt on this issue. "I don't trust the HMOs. They have five actuaries sitting in the back room who are trying to dream up ways to convince me that percentage of premium is a good thing. In the early '90s, when I was asking for percentage of premium, no HMO would give it to me. When we hit 1995 and premiums dropped, all the HMOs came running back asking me if I was still interested in percentage of premium. You figure it out."

Here is his less-than-comforting view of HMO-derived PMPM adjustments based on age and sex factors: "You have to understand HMO language," he says. "When an HMO says, `We value you as a partner,' the translation is, `We want to pay you less money.' So what they do is you negotiate an $85 global cap and they run it through their machine. The tables they use in that processing can be two inches thick and you can't really understand what they say. And, they say, `OK, your payment won't actually be $85.'

"I've seen situations in which it was actually reduced by $5-$6 PMPM. And I have rarely seen it where the capitation payment is higher than the negotiated amount. When it is higher, it's only pennies, and it goes back down the next year."

Some physician capitation experts, however, say age/sex adjustments can be a viable option for physician groups, particularly if the insurer will provide you the age and sex data on the proposed enrollees, says Kevin M. Kennedy, MBA, manager at ECG Management Consultants in Seattle. If you can get those simple data, you can run a much more simplified adjustment process that can actually help you better predict resource use, Kennedy says. He recommends assigning indices (or weights) to age and sex factors, and then plugging these rates into your proposed PMPM rate.

Berger is less convinced, however. "I fight against age/sex benefit plan adjustment, and I never accept percentage of premium," he says. "Flat dollar means you negotiate an $85 capitation, and you get an $85 capitation. You don't get a long, sad story from your HMO's team of actuaries. And you multiply the $85 times your 21,000 members and you know exactly what your monthly payment should be." Medicare officials are working now on a risk-adjustment methodology for capitation which may at some point standardize this process and improve risk forecasting.

In addition, some private-sector researchers are refining risk-adjustment methodologies. One of the best-recognized is the ambulatory care group (ACG) system developed by Jonathan Weiner, PhD, an associate professor of health, policy, and management at Johns Hopkins School of Public Health in Baltimore. ACGs assign risk based on last year's resource use and clinical "DRG-like" assignments.

· "Personal" HMO members.

Steer clear of this odd phenomenon, he warns. "One of our HMOs started selling their plans on an individual basis," he says. "They went into a deficit position. Our response to the HMO was, either you carve out those personal HMO members, or you give us a separate capitated rate for that population based on their utilization."

· "Cap split," or "65 miles-per-hour speed limit."

In this case, cap split refers to splitting a global capitation between a physician group and a hospital (or hospital groups). "This is where you divide the responsibilities," says Berger. He's not sure where the term came from, but this is how the doctors refer to it, he says. Generally, physicians agree to 55% of the capitation payment and hospitals agree to 45%. "Doctors are telling hospital officials that the speed limit has been changed to 65, and that's the split they are going to want," Berger says.

In negotiating that shift, physicians are accepting more responsibility for areas such as emergency care and home health. "Every time a responsibility shifts over, money shifts over to it," he points out.

· Be ever cautious to head off the "per diem vs. carpe diem" decision.

This is Berger's warning for doctors who are in closed PHOs or other tightly bound relationships with particular hospitals. "I have seen a medical group switch loyalty overnight from one facility to another."

Admission days a moving target

A hospital's ability to demonstrate efficiency can strongly influence a physician group's loyalty to one hospital over another. "Five or six years ago, a physician group would switch to global capitation with a specific hospital when admission days per 1,000 enrollees dropped to 280; then it was 220. Most capitated providers are down to well below 200 now." Before HMOs took hold, admissions were about 350/1,000 enrollees. It went down to as low as 150 to 160/1,000, and then it bounced back up to 170. Many actuaries predicted it would get as low as 60/1,000. "Imagine our surprise when it started to go back up," he said. So, the "right" level of admission days per 1,000 is likely to always be a moving target, making it wise to be cautious about what you agree to in a contract.