Study shows capitation lessons learned from key markets

Where is Dr. Laura when we need her?

If there were a "Dr. Laura" for capitation, here is what she would advise: "What's the bottom line as to what makes capitation work? Relationships." And add "core competencies" of insurance, too.

Those two elements together — good relationships and competence — form the magic potion of success, according to an in-depth recent study of capitation.1 (See related story on core competencies, p. 136.)

And if you thought capitation contracts can be as varied as the fish in the sea, that's pretty close to reality.

Four researchers, under the sponsorship of the Robert Wood Johnson Foundation in Princeton, NJ, recently set out to determine what's "real" or at least somewhat common in terms of contracting methods in different kinds of markets. Lead scientist Gloria J. Bazzoli, PhD, professor of health care policy at Northwestern University in Evanston, IL, and colleagues reported a wide variety of capitation hybrids.

Rather than relying only on a series of quantitative measures such as financial ratios or membership figures, researchers also used open-ended questions to gather a qualitative understanding of the capitation landscape.

Their database stemmed from market profiles developed by the Center for Studying Health System Change, a Washington, DC-based private research organization.

They selected these markets, or metropolitan statistical areas (MSAs):

Portland, OR — high capitation market share; substantial medical practice development, including a large group-model HMO;

San Diego — high capitation market share;

St. Louis — lower capitation market penetration and less consolidation of physicians into practices.

Each of these areas had experienced significant declines in total hospital inpatient days between 1990 and 1995, and each had gone through a virtually complete consolidation of hospitals in their locality into health networks or systems.

In those three markets, these are the four most common types of capitation contracts, starting in order of highest volume:

"Professional service" or physician capitation.

In each of the three markets, physicians led the way in capitation contracting — by either forming their own HMOs, by forming independent practice associations, or by affiliating with specific health networks or systems in their markets. Hospitals were typically paid on a negotiated per diem basis.

Global contracts.

Portland and San Diego had significant levels of global capitation, and in those two areas that was well-received by physicians. Both systems are large and their leadership reported significant experience with physician capitation prior to entering any global arrangements. (In both MSAs, hospital and physician responsibilities are combined and covered by a single per-member per-month payment, with physicians controlling the contract.)

Separate but related professional and institutional contracts.

Each of the areas reported that hybrid as well. HMOs owned and operated by health networks often had this type of contract, not only with their affiliated physicians but also with others outside their official physician panel.

That was especially prominent in Medicare managed care contracting. Typically, these involved hospital risk pools in which medical groups, hospitals, and, in some cases, HMOs shared efficiency gains in reductions of hospital expenditures.

Global capitation for hospital-led health networks or systems.

Many experts have said that this would be the ultimate end point or evolution for the mature or sophisticated capitation market. But Bazzoli and her team found this not to be the case. "Instead, we observed global capitation arrangements only in instances where the physician market was too fragmented or physicians were previously ineffective at managing risk," they reported.

For example, in St. Louis, physicians were reluctant to enter into capitation at all due to poor experiences with it at the primary care level, the study said. "Capitation of the health care system was viewed as the only vehicle available for pooling these risk-averse physicians and buffering them from potential financial losses from capitation," Bazzoli and her team explained.

Given this wealth of experience, what were the lessons learned from all this effort? Key themes included the following:

Don't give up your core competencies and the accompanying name recognition.

If your practice or health system already has a "centralized capacity" to managed capitated contracts, that's not an asset to take lightly, participants advised. Centralization minimizes duplication of effort. It also offers something equally if not more valuable, they advised: visibility or branding. That is vital for member relations "because it provides enrollees with an identifiable focal point among affiliated health providers than spanned numerous practices and geographic locations," participants said in the survey.

If you can, steer clear of shared risk with health plans; instead, share the risk with other physician or hospital groups.

"Shared risk arrangements, which involve withholds and risk pools, were often described as 'black boxes' over which health providers had limited control or ability to monitor," Bazzoli wrote. When health plans were holding these funds, any important information about them often was especially difficult to access, they warned. If the information was accessible, rarely was it made available in any timely enough fashion to make a difference.

Percent of premium capitation is working well.

These types of contracts, in which per-member per-month payments vary based on the amount of premium paid by the enrollee are actually proving favorable and they are predictable and controllable.

Utilization management is the No. 1 critical competence to be successful.

One participant expressed it this way: "Utiliza-tion management is the new business that we are in." Overall, capitation experts recommend nurses and physician-run review committees as the best ways to manage utilization — backed up information systems that can crank out well-prepared monthly reports, researchers said.

Continue to enhance your core business competencies.

Organization officials in the study emphasized that "above all, development of utiliza-tion management capacity was most important to the successful management of capitation," researchers noted. Nurse and physician staff need to work together on that mission, they

"Fill remaining gaps by hiring talent from the health insurance industry," researchers said their participants advised. "This is especially important for developing capabilities outside the normal purview of health delivery organizations.

Also, they advised offering these competencies to other hospital or physician groups in your community to build possible new relationships down the road. By building skills, you're building bridges to form relationships that can carry you through capitation for the long term.


1. Bazzoli GJ, et al. Capitated contracting roles and relationships in health care/practitioner application. Journal of Healthcare Management May/June 2000; 170-187.