How to apply capitation to discounted FFS proposals

Just because you’re not in a capitation contract right now doesn’t mean you can’t use its principles with savvy to arrive at some very useful information about your other contracts, say consultants with Expert Systems Applications Inc. (ESAI), a Solon, OH-based medical software company.

Here is ESAI’s example: A primary care physician opts to enter into a contract with an HMO that has agreed to reimburse on a contracted fee-for-service basis. The physician estimates that he or she will immediately obtain 50 to 100 patients from the HMO contract, and your task is to project both the range of additional revenue and the operational impact upon the practice.

Your practice data indicate that among your active patients, the average annual number of visits is three times a year. The new HMO contract agrees to pay 70% of your office visit fee of \$70. This means the doctors average discounted payment under the new contract would be \$49 (70% X \$70 = \$49). You then multiply \$49 times the average of three visits a year, which amounts to an average of \$147 per patient. This would equate to a per member per month rate of \$12.25 (by dividing \$147 by 12 months). Monthly revenue will then range from \$12.25 X 50 = \$612.50 for 50 patients, to \$12.25 X 100 = \$1,225 for 100 patients. The impact on operations can be similarly calculated by projecting the total visits for the patient population.

From these calculations, the cost factor is not apparent, so the questions become (1) whether the additional patients will noticeably drive up costs, and (2) whether opting instead for an actual capitation approach, in which all enrollees provide a PMPM fee, would pay off better. Also, utilization rates and costs per unit can often stray from the average. Thus, more refined estimations based on gender, age, and disease status, can be important if you want a more precise picture. (See "Brigham and Women’s tackles global cap pitfalls," in this issue. The story explains how a women’s specialty health system is dealing with global capitation by developing variations on the standard per-member per-month capitation methodology described here.)

Regardless of your next steps, however, you’re well on your way to applying basic capitation methodologies toward assessing a wide range of contract arrangements.