Capitation may be looming, but are emergency providers up to speed?

Risk contracts are feasible in EDs, yet proof seems lacking

If your emergency physicians are considering enlarging their volume of capitation business, you might consider doing it slowly. Managed health plans are giving lots of lip service to globalizing their capitation contracts by placing whole systems of providers on risk contracts. But these health plans aren't necessarily including emergency providers in the mix, and certainly not hospital emergency departments (EDs), say some experts.

The reason? Insurers feel skittish about the emergency sector. They don't consider emergency medicine an attractive risk for capitation. It's "the unpredictable, unplanned nature of emergency visits that makes health plans skeptical," says Brent Fisher, MBA, administrative director of emergency medicine at the 797-bed Loma Linda (CA) University Medical Center.

Health plans have a poor understanding of the nature of emergency medicine to begin with, Fisher notes. They aren't sure how to set feasible capitated payment rates and they're concerned about the ability of physicians to effectively manage patient utilization. They are also concerned about the effect of uncompensated care on cost containment, Fisher says.

MCOs purposely exclude hospitals from risk

But they do have an agenda, he observes. "It's no accident that payers are attracting physicians into capitation but excluding most hospitals," Fisher states. In this way, physicians are given incentives to keep patients out of hospitals without the added up-front expense of capping the facility. "It's a cheaper deal for MCOs," Fisher adds.

Now, some advocates for capitation in emergency medicine are trying to change perceptions. "Capitation will inevitably be one mode of reimbursement common to emergency medicine," says J. Stephan Stapczynski, MD, chairman of emergency medical services at University of Kentucky Hospital in Lexington.

"Emergency physicians are one of the last groups of providers who have not been incorporated under capitation to any significant degree," Stapczynski wrote in a 1996 article, in which he argued the feasibility of capitating emergency medicine.1

But, risk contracts aren't likely to completely replace other forms of reimbursements; they will, however, become part of a mixed portfolio of payment arrangements, Stapczynski concluded. "Providers should not expose themselves completely to risk; that's unwise," he adds

Largely because of this uncertainty about capitation, some authorities believe there's a considerable fear factor about it in emergency medicine that has clouded the issue, sometimes to an exaggerated degree.

The problem with capitation, notes consultant Michael Williams, MPA, president of The Abaris Group, an emergency medicine consulting firm in Walnut Creek, CA, is that it has become the latest whipping boy for justifying a misplaced hostility toward managed care. Often, that hostility is unfounded, he says.

And nowhere is the tendency more evident than in emergency medicine, where, in fact, there is very little capitation, says Williams. In 1998, most contracts with emergency providers are still based on a discounted fee-for-service, he states.

There's little capitation among ED physicians

In California, undoubtedly one of the nation's leading managed care markets, capitated revenue among emergency physicians falls below the bottom 25th percentile, Williams estimates. He doubts if the amount is even that large. A lack of national data hampers any firm conclusions, but less than 20% of most medical groups' revenue in the state comes from risk-based capitated contracts, he says.

And some large provider networks, such as the 850-member Alta Bates Medical Group in Emeryville, CA, are considering scaling back or getting out of capitation. Alta Bates was among the first in the state to enter the capitation market in primary care. Other MCOs, such as the financially troubled Oxford Health Plans, based in Norwalk, CT, are reportedly considering reducing capitation contracts in certain physician specialties.

So why all the debate about capitation in emergency medicine? Here are a few reasons:

Economic reality. Despite the problems it presents, "capitation still creates strong opportunities to increase patient volume. If you don't get these contracts and their patients, the threat looms that someone else will," says managed care expert Bruce A. Kobritz, a principal in Crossroads Capital Partners, LLC, a health care investment banking firm in Newport Beach, CA. In a contracting environment, hospitals and physicians are in no position to ignore competitive threats, Kobritz adds.

Capitation growth. While the emergency medical sector may be deemed unattractive to capitated payers, government-funded risk programs such as Medicare and Medicaid aren't, say industry analysts.

For more than a year, the U.S. Department of Health and Human Services, which oversees Medicare and Medicaid has moved aggressively to enroll millions of beneficiaries in commercial health plans. Many of these government contracts with managed health plans are based on capitated rates, which are often passed on to providers in risk plans.

Lack of choice. Emergency physicians may not have a choice about whether to capitate. Most of these decisions are made at the network level, says Fisher. "Emergency physicians don't usually contract directly with MCOs but through an independent practice association (IPA) or at a medical group level.

It's one of the reasons payers have not looked at emergency medicine separately, Fisher says. Providers have to speak up on their own behalf, but they need to know what to say, Williams observes.

Capitation can work for hospitals too

But the complexities of individual contracts can be bewildering, especially to novices. There are numerous variations in capitation contracts from global caps to specialty sub-capping, says Fisher. A current trend is to capitate primary care physicians (PCPs) even for home care and skilled-nursing services. Emergency medicine has been discussed as part of that mix, Fisher says.

Each variation has its own set of complexities and implications on financial outcomes, says Kobritz, who believes that hospital capitation can work if contracts are carefully negotiated. "You can negotiate decent rates in emergency medicine," Kobritz says. In fact, providers have much more pull than they believe.

"If capitation is your preference, there's always a secondary market of smaller, regional health plans willing to listen, even if you want to capitate both the medical group and a hospital together. It can work," Kobritz says.

Payers are eager to lower their costs and beat the competition, Stapczynski says. The key for providers is knowing how capitation itself works, Kobritz adds.

How does capitation work? Fundamentally, capitated contracts place medical providers at risk by giving them a fixed, agreed-on monthly fee for each member enrolled in the benefit plan. Theoretically, the provider accepts the responsibility of providing the right amount of services for each enrollee under the monthly cap rate, Stapczynski observes.

The surpluses left after services are rendered comprise the group's net earnings under the contract. But capitation isn't so simple when it comes to emergency medicine, notes Ellen H. Taliaferro, MD, associate professor of surgery in the division of emergency medicine at the University of Texas Southwestern Medical School in Dallas.

Is there a PM/PM rate model for EDs?

How do you set a cap rate that accurately covers the cost of real emergencies in your particular ED from your non-emergent cases? Taliaferro asks. What do you do about extremely costly trauma and frequent domestic violence cases, which can eat up your capitation budget immediately?

How do you calculate the cost of observation units? Are they covered by the ED's per member/per month (PM/PM) rate? Or are they carved out as part of an inpatient department's budget? And, how do you predict demand for ED utilization when setting rates or explain the difference to payers between presenting complaints and final diagnosis in contract negotiations, Stapczynski asks.

Stapczynski set out to formulate a PM/PM rate for emergency physicians. This is how he did it:

He calculated that a rate ranging between $0.81 and $1.50 PM/PM would be considered reasonable for a department seeing an average of between 0.2 visits per member per year and 0.37 per member per year.1

The first figure reflects the approximate national average for patients enrolled in commercial indemnity-type insurance plans. The second represents the approximate national average for all patients.

He then set a hypothetical figure of 25,000 ED visits per year and assumed an annual operating budget for the medical group of $1.10 million, including compensation, malpractice insurance costs, and overhead for a group of seven emergency practitioners and an office staff.

He also calculated a gross income of $1.47 million from conventional fee-for-service claims based on an average collection of $44 per patient visit.

To set a PM/PM rate, Stapczynski first deducted the cost of claims processing and billing because these costs would be unnecessary under a capitation plan. The result was a projected collection of $1.22 million compared with the $1.47 million under a fee-for-service plan. He then did the following:

He divided the $1.22 million in income by the size of a membership in an MCO necessary to provide 25,000 ED visits. Using the national ED usage figure of 0.37 visits per member per year, he estimated a necessary membership size of 67,000 enrollees to predictably generate 25,000 visits.

Dividing $1.22 million (annual income) by 67,000 (enrollees) yielded a figure of $18.05 per year or a PM/PM rate of $1.50.

Model is marred by false assumptions

However, this projected rate depends heavily on the actual utilization rate of the MCO's members. In fact, a change in one variable will change each of the others, Stapczynski conceded.

Therefore, a use rate of 0.2 per member per year, the average for indemnity beneficiaries "would translate into an MCO of 125,000 members and a PMPM rate of $.81." Stapczynski wrote.1

Providers also need to account for how some capitated programs are structured. "Capitation may have several components," that can alter a provider's income, Stapczynski observes. For example, a base component is usually calculated for expected services on the basis of predicted use.

But, the contract may also have an incentive component that rewards providers for using fewer specified resources. Or it may have a risk component, which triggers higher payments for catastrophic care or when patient volume exceeds a specific threshold.

Like Stapczynski, other analysts have emphasized the importance of statistical data in calculating an approximate PMPM rate. "An accurate determination of the history of ED usage and other clinical cost factors is paramount to setting a workable rate structure," Kobritz says. But not everyone is convinced about how this gets done. Fisher questioned many of Stapczynski's assumptions in creating a ED rate-setting model. The calculated rate, Fisher says, doesn't adequately account for the increased cost of treating a more acute injury or illness, plans that don't pay or go bankrupt ,or losses incurred over members no longer covered by the plan.

Consider the life cycle of managed care market

The model also wrongly assumes that "all patients are covered for and pay equally for care," which, in effect, omits the cost of providing indigent care, Fisher notes. Finally, the Stapczynski rate model doesn't account for price opportunities that correspond to "the life cycle" of the local managed care industry. (For a life cycle illustration, see the chart on p. 39.)

According to Fisher, prices vary according to the maturity of a given market. Therefore, providers can foreseeably negotiate higher rates in early capitated markets as enrollments rise and payers want to achieve market share and strong penetration. Conversely, rates reach a lower price ceiling in mature or declining markets where enrollment volume peaks or begins to decline.

Stapczynski acknowledged the shortcomings of his rate-setting model. But he stated that his purpose was to initiate a discussion of capitation in emergency medicine, not to create a universal rate-setting formula for EDs.

But the two did agree on the worrisome ethical dilemma posed under any risk contracting. As noted in the article by Stapczynski, in a response to Fisher, "there are perverse incentives under any reimbursement plan. With capitation, the incentive is to pass on the care and the cost to someone else."

However, the ethical concerns run deeper than cost-shifting. Capitation potentially increases a practice's patient volume. It also turns over greater patient management control to providers. But it doesn't reconcile the inherent requirement of reducing patient utilization, which poses a serious ethical dilemma for emergency providers, says Fisher.

One solution has been to capitate only low-acuity cases, those falling within levels one and two of the Evaluation and Management codes of the Physicians' Current Procedural Terminology (CPT) coding language. Another has underscored the importance of urgent care centers and capitating them as primary-care providers.

"Can we capitate emergency medicine? Yes, as long as we can maintain access, quality, and contain costs," says Taliaferro who also serves on the attending faculty at Parkland Health and Hospital System in Dallas. "If done right," she adds, "capitation is workable, even desirable, because it ultimately gives us the choice and incentive to truly manage quality under managed care."


    1. Stapczynski JS. Capitation for emergency physicians. Ann Emerg Med 1996;27:501-505.