Is your capitation rate right?

I have recently been to several markets assisting physicians and IPAs in evaluating their capitation rates, and regret to report that I have been astounded and disturbed at what I have found.

When I asked how the capitation rates were determined, invariably the answer was, "I don’t know, it is what the HMO gave us." This answer was the same whether the entity with which I was working was a single or multispecialty IPA, or a specialist or primary care physician. Moreover, in one market, it wasn’t the HMO that set the capitation rates, it was the physicians themselves. In this particular market, the capitation rates had no basis in reality and were even further off than those set by the various payers.

What is going on here? The answer is simple: Physicians — whether as a group or as individuals — are entering into contracts where they have not adequately evaluated the appropriateness of their reimbursement schedule. I would like to explore some common problems in this area.

Physicians often don’t read contracts

One of the most common ways physician are exposed to and accept inappropriate capitation rates is when they are presented the rates by an HMO. As I have stated in previous columns, one of the big problems with physicians and managed care contracts is that the physicians don’t read them.

Even when they read proposed contracts, many physicians don’t understand how to evaluate the cap rate they are presented. In many cases, the physician will simply compare the cap rate presented with capitation rates of other HMOs. While this is a good start, it is not a complete evaluation.

When evaluating a capitation rate, the first item to analyze is the services covered under the capitation fee. These services can vary widely among plans. There are plans that are known as physician-friendly plans, which capitate only a bare minimum of services and pay fee for service to the physician providing the services not under the cap.

There are other plans that include virtually everything under the capitation rate, at least from the primary care physician’s perspective. If both plans offer the same capitation rate, then the physician is probably getting a good deal from the former plan and a dismal deal from the latter. Yet the capitation rate is the same, and many physicians would have failed to evaluate the rate any further, assuming that both plans paid for the same services.

Another danger area is a contract in which the capitation rate includes the bare minimum of services and allows the physician to charge fee for service for other services. The fee schedule for these other services may be below market rate, however. What typically occurs in this situation is that the physician looks at the cap rate and the scope of services and no further, not realizing that he or she is being short-changed on the fee schedule.

In another case I am familiar with, the HMO in question asked competing groups of specialists to give the HMO a capitation rate they would find acceptable and agree to provide services for. In effect, this HMO was starting a bidding war between the specialists.

The HMO then developed its panel based on which specialist or group in each specialty area submitted the lowest rate. When I evaluated these rates, they were so low in some areas that no amount of patient volume could make up for the losses these physicians were about to incur.

When I asked the physicians involved how they came up with the rates they submitted, the answer varied from "we guessed" to "we called other physicians in our specialty in other areas of the country to get comparative rates." The latter is a good starting point; unfortunately, the former occurs with more frequency.

When it comes to capitation rates, no physician in any specialty area can afford to guess. If you think about it, when it came to setting fee schedules, most physicians did not guess. They analyzed their practice costs, the costs of equipment, and then added on an appropriate markup and came out with a fee schedule. Setting or accepting an appropriate capitation rate is no less critical to the success of a practice.