Physician's Capitation Trend-Capitation falls upon hard times for Medicare

Maybe capitation is 'not all that'

A hard rain is falling on Medicare's capitation program, Medicare+Choice (M+C), according to federal analysts, who say the program is failing to meet many of Congress' goals.1

"Since the passage of the Balanced Budget Act [BBA] of 1997, progress toward these goals has been halting," says the most recent analysis of Medicare's many programs, including the country's largest capitation system.

A similar storm is looming in private sector capitation circles, where recent trends show that the growth rate in HMO enrollment and the actual numbers of operating HMOs are both declining, says Tammy Lauer, lead analyst with InterStudy, a Minneapolis-based managed care research organization.

Further, a recent mega-study of global capitation shows that physician-hospital risk sharing — while helping hospitals and physician groups to better integrate their services — is not holding down costs, says Gloria Bazzoli, PhD, lead author of the study and a professor of health policy at Northwest University in Evanston, IL. (See related story, p. 74.) The study looked at 665 global capitation sites.

From Medicare's corner of the world, the BBA was the tool by which Congress set out to lower costs, increase benefits, and overall make managed care the silver bullet of health care reform. Instead, Medicare Payment Advisory Committee's (MedPAC) March 2000 documents show some financial success but some troublesome, highly nonglamorous results as well, including:

• Availability of plan options has not increased.

• Most beneficiaries in rural areas still cannot enroll in M+C plans.

• Benefit packages have become less generous while premium costs have increased.

One goal was achieved, however, MedPAC officials report: reducing Medicare's expenditures. In government parlance, Medicare has been able to "reduce the rate of increase in spending" in program payments per beneficiaries for both fee-for-service and M+C programs. Thus, officials are facing some financial success but at the cost of some unpopular political fallout.

Here are the key trends MedPAC analysts say now characterize Medicare's capitation efforts:

• Success at cutting back Medicare's expenditures. No question the business community made it loud and clear that it wanted control over private sector health care spending. And with concerns of Social Security's demise looming amid the private sector's complaints about its problems, little wonder Congress placed so much focus on lowering costs. Managed care — for both public and private sector — showed the most promise. Medicare was successful at decreasing per capita spending as well as slowing the growth rate overall, MedPAC reports.

Here is how much specific sectors of health care are slowing their growth rates, based on MedPAC's analysis:

Service Area Annual Growth Rate
1992-1997 1997-1999
Inpatient hospital 5.8% -0.5%
Home health 21.9% -26.9%
Skilled nursing facility 30.9% 0.4%
Physician fee schedule 4.8% 3.7%
Outpatient hospital 6.7% -5.1%
Medicare+Choice 7.9% 6.5%
Total Medicare (per beneficiary) 8.0% -0.7%

To achieve these reductions, Health Care Financing Administration used several tactics, including the following:

• A reduction in the national update of 0.8% in 1998 and 0.5% cut in 1999.

• An assessment (paid by insurers) for education charges to inform beneficiaries about the M+C program.

• Gradual removal of payments for graduate medical education, which had at first been part of capitation's base payment amounts.

• A new capitation floor provision for M+C payment rates increased payments in some localities and lowered it for others; but, overall, the new payment blend (now in transition) generally redistributes payments from higher to lower levels.

• Cuts in payments to physicians and hospitals in the traditional fee-for-service plans.

• Less success at keeping insurers committed to Medicare capitation — i.e., "the big bail out" by business. Despite the government's efforts to woo insurers to adopt capitation and to keep it, the statistics aren't looking good. (See charts, above and p. 73, bottom.) In January 1999, 45 insurance plans dropped out, and as of January 2000, 41 more terminated their relationship with Medicare.

At the same time, contractors are reducing their scope of service areas by withdrawing from at least one county they previously served, MedPAC officials report. As a result, in 1999, 405,000 beneficiaries could not remain in the risk plan they had enrolled in as of July 1998; at the beginning of 2000, some 327,000 M+C enrollees faced the same situation.

Overall, the shifting and/or terminating of risk contracting reflects declining ability of Medicare to reach beneficiaries via risk-based plans, MedPAC officials report. When the BBA was enacted, insurers were still signing up; in 1998, 74% of Medicare beneficiaries had access to a Medicare risk option. Access dropped to 71% in 1999, to 69% in 2000. In actual numbers, that means about 1 million fewer elders had access to M+C plans in 2000 than in 1999, and 2 million fewer than had access in 1998. (See chart, p. 73, top.)

• Minimal success at developing additional capitation products via more flexible, innovative insurance products and providers. While Congress set up the legal infrastructure for varied M+C plans, "almost no progress has been made toward the availability of these new types of M+C plans," MedPAC officials report. The BBA created these options for Medicare risk structures:

— Provider-sponsored organizations (PSOs). The BBA established a waiver process for encouraging the development of PSO plans, but PSO potential candidates (physician groups) said the process was still too bogged down in regulatory burdens. Also, several PSOs in Medicare pilot projects withdrew.

— Preferred provider organizations (PPOs). No existing PPOs have opted to accept M+C plans, arguing that they can't meet the quality standards established by HCFA.

— Private fee-for-service plans. Congress offered an option for fee-for-service to add on a managed care option, but so far none have taken that option.

— Plans attached to medical savings accounts (MSAs). The budget law also offered an option for MSAs to include a capitation plan, but so far no MSA applications for capitation have been made.

— Increased premiums and decreased benefits. MedPAC probably didn't need to tell Congress this, given the public outcry over this trend. On average, according to MedPAC analysis, beneficiaries enrolled in a Medicare capitation contract in 1999 who could get the same benefits and carrier the next year faced a premium increase of $11 per month from their own pocketbooks. This premium increase represents a 68% hike and benefits would not be improved. In other cases, the availability of zero-premium plans and zero-premium plans with drug coverage has declined. Beneficiaries willing to switch to a new insurer saw their premiums increase on average from $6 in 1999 to $9 in 2000.

In looking at the future of Medicare capitation, MedPAC officials warn that to a large extent, Congress' dual objectives of lower costs and richer benefits are in conflict. Nevertheless, some regulatory tweaking in the future will help with increasing payments to providers, officials say. These tweaks include a reduction in the education assessment, an increase in 2002 in payments, and a provision to allow providers to charge more to certain service areas.

Also, lawmakers are hoping that their recent repeal of major regulatory requirements for PPOs to step into capitation will expand commercial interest in Medicare capitation.

In summary, MedPAC said, it "believes that the Congress' attempt to increase plan participation and availability through several [recent regulatory] provisions has the potential to succeed in providing Medicare beneficiaries with more coverage choices."

Yet, much depends, too, on commercial market forces. In some markets, capitation is going strong, but in others, hospitals and physicians have defended themselves rather strongly against having to assume capitation, MedPAC says. "The pattern of managed care plan withdrawals suggests that in some markets, providers have regained leverage and do not find it in their interest to contract with managed care plans," they write.

Also, in some markets, Medicare payments account for a major piece of a hospital or physician group's revenue, while in others it does not. "For many providers, Medicare is the 800-pound gorilla in the market, significantly outweighing commercial payers. For others, however, Medicare payments may be a much smaller factor."


1. Medicare Payment Advisory Commission. "Medicare +Choice: Trends since the Balanced Budget Act." Report to Congress: Medicare Payment Policy. Washington, DC; March 2000.