Physician's Capitation Trends-Like the weather, capitation is everywhere

HMO use of it tops 75%

Survey after survey tries to determine just where and how capitation fits into the overall financial scheme of managed care — many with little success at pinning it down. A recent survey of the 25 largest and fastest-growing HMOs does an excellent job of documenting capitation's presence.

The study, released by the Minneapolis-based research group InterStudy Publications, finds capitation is virtually everywhere that large and growing HMOs exist, and it has pretty much equal footing with other, more conventional payment schemes.

Capitation as a provider payment model has experienced erratic growth trends, typically growing from 1993-1995, taking a dip in 1997, and climbing back up in 1998. Currently, data indicate you'll see about as much capitation as you'll see fee-for-service schemes, and you'll see Medicare's relative value scale (RVS) covering most of the Medicare population. Salaried doctors — those hired as full-time HMO physicians — remain the smallest portion of the payment pie.

As of July 1998, 78.7% of HMOs use capitation and 69.7% use fee-for service for primary care physicians, while 27.2% offer RVS. (See chart on p. 136.)

The totals are higher than 100% because they represent all the plans in each HMO that use any form of the payment method indicated, explains Tammy Lauer, the study's co-author. For example, one HMO may have both fee-for-service and capitation arrangements in a single contract.

"The numbers are showing there is a great deal of mixing and matching of payment methods," Lauer says. "And, there is more capitation overall this year than last year."

In the domain of primary care physicians, the new ratios reflect substantial increases over the year before, where the ratios were 56.6% capitation, 32.7% fee for service, and 7.1% RVS.

Specialty care physicians are similarly involved in multiple payment arrangements, with capitation on the upswing after a dip in 1997. Data show that 56.4% of HMOs are engaged in capitation with specialists, compared with 75.5% fee for service and 32.2% RVS. Those numbers are up from 1997, when respective ratios were 32.8%, 48.6%, and 17.6%.

Surprisingly, hospitals are relying strongly on per diem rates (86.2% of HMOs using these with hospitals) and less on capitation (32.5% of HMOs offering them cap payments).

Here are other key findings relative to capitation trends:

• Since InterStudy began tracking reimbursement data, the industry has split into two groups — those that use capitation for a large portion of services, and those that predominantly use fee schedules. The two reimbursement methods may be used by the same plan, but usually they are substitutes for one another.

• More than half of all HMOs reimburse more than 60% of primary care services through capitation contracts. Many HMOs use capitation for primary care, but in many cases it is used for a small portion of all primary care provider services.

Data indicate a sharp increase in the numbers of HMOs using multiple methods for provider reimbursement. "This can be viewed as a renewed willingness by HMOs to investigate and experiment with new arrangements that yield better financial results," the report suggests.

Of all HMOs, 72% use two or three methods to reimburse hospitals, while 69% use two or three methods to reimburse primary care physicians. In contrast, specialty care reimbursement is most unified, with 93% of HMOs using one or two methods.

Overall, HMO enrollment is slowing significantly, the InterStudy report shows. If HMOs were graded on a bell curve, you'd see their highest growth scores mid-range, and a lowering effect on the beginning and ending poles of the curve.

As of July 1, 1998, there were 652 HMOs servicing a total of 78.7 million HMO enrollees, the InterStudy report states. The current HMO growth rate is 7.9%, which is pretty low compared to the 15.5% rate in 1997 and the 18.5% rate in 1996. "This represents a significant decline in the [past] growth rates," the study says.

"The slowdown in growth is associated with an increase in commercial premiums and a lack of growth among the largest health plans," the InterStudy report postulates.

"The sharpest slowdown is in the growth of traditional commercial products," InterStudy researchers say. "During this decade, traditional [pure] HMO products have been the driver of growth. Other products have been added as competition spurred diversification and as infrastructure developed for commercial plans was transferred to new products. With HMOs seeking to restore financial health with increased commercial premiums and a demonstrated link between growth and price inflation, it is likely that industry enrollment growth will continue to slow."

Here are a few other interesting growth trends:

Big guys are still winning. HMO enrollment continues to be concentrated in the largest and oldest plans. Over 80% of all HMO enrollment is in plans that are at least 10 years old and have at least 100,000 members. Less than 1% of all HMO enrollment is in plans with fewer than 10,000 members.

Staff model HMOs are declining. Once the icon of the gatekeeper model, pure staff model HMOs compose only 1% of total enrollment, and half the plans offering the option in 1998 quit offering it that year.

West is still best in capitation presence. The Pacific region accounts for one-fourth of all HMO enrollment, followed by the mid-Atlantic and South Atlantic regions, each with 16% of all HMO enrollment.

Medicare HMO enrollment is declining, but not nose-diving. Erratic is the word for Medicare HMO growth rates since 1991, too. InterStudy shows growth from 1990 to 1991 at 6.7%, compared with 25.0% in 1992, 10.0% in 1993, 35.5% in 1996, and down to 18.6% in 1998. The most recent flap from the industry was Congress' Balance Budget Act of 1997. The Act varied Medicare capitation rates, and it will be phased out over the next four years and replaced by a risk-adjusted system.