Physician's Capitation Trends

Capitation skills undergird practice, insurer operations

10 reasons to stay up to date

Like Dr. Jekyll and Mr. Hyde, capitation has a changing image that tends to morph from savior to pariah and back again. Once called a modern-day version of the California Gold Rush, capitation rocketed to the spotlight in the mid-1990s as a smart new way to contain costs and improve health. But in time, its reputation tarnished as many physicians and patients found it to be too cost-conscious and simply too chintzy.

Amid capitation’s checkered past, news accounts have featured stories of its demise, as well as accounts of its return to the spotlight. "Everyone is going back to fee for service," some headlines report. Yet a few days later, reverse predictions surface, asserting that "Capitation is here to stay." So what’s reality?

Reality is that the best strategy for practice administrators is to stay on top of capitation and its methodologies, whether the practice is currently swamped in risk, or is shifting back toward more fee-for-service contracts, say consultants with Expert System Applications Inc. (ESAI). ESAI is a practice management software company based in Solon, OH.

ESAI officials offer these 10 reasons to stay up to date on capitation:

1. The principles for calculating capitation rates can and should be used for projecting medical revenue and costs — regardless of the method of reimbursement. If you think about it, revenue and cost levels are not so much a function of your contracting methodology but rather how you run your practice overall. Capitation is one way to predict what you need to provide services, cover costs, and make a profit.

2. Capitation offers useful benchmarks for evaluating both discounted and traditional fee-for-service contracts. It is common business practice to compare the profitability of one contract against another. Typically, you compare how one fee-for-service contract stands against another, or how a discounted fee-for-service contract is doing relative to other contracts. It is just as sensible to compare performance with capitation contracts, or with "shadow capitation" numbers, i.e., developing some "what if" scenarios as if the contract had been capitated. For example, evaluate how the practice would have fared had a particular fee-for-service contract actually been capitated with X,Y, Z rates and coverage requirements. (For a basic example of this kind of computation, see "How to apply capitation to discounted FFS proposals," in this issue.)

What drives managed care?

3. Discerning the drivers of capitation enables you to understand what drives managed care overall. "To understand the core of the capitation concept, the focus should not be on the rates but rather on the driver of a capitation rate," ESAI officials say. The key drivers are (1) utilization rates (and what affects utilization rates), (2) medical services covered under the plan and the fee-for-service equivalent fees per unit of service, and (3) required co-payments.

4. If you understand the drivers of a capitation contract, you are equipped to analyze a health plan’s cost components. Cost can be the toughest part of your analysis, and capitation expertise really hones in on cost analysis that you can apply across your practice.

5. Capitation places a significant emphasis on monitoring quality performance. This is an ever-evolving skill that can do nothing but improve your bottom line and your patient care across the board.

6. Capitation’s focus on efficiency also can benefit every patient and physician who walks in your doors each day. You can measure efficiency in all your contract arrangements on a per-case or alternative basis.

7. Many fee-for-service arrangements still have additional partial risk sharing arrangements that require capitation analysis. For example, many contracts have payment thresholds which, if they are exceeded, provide additional payments on a capitated basis.

8. "If a competitor is capitated, you might want to monitor their performance," ESAI officials note. For example, you may know that Practice X in your city entered a major capitation contract with a large insurer. In your professional networking circles, this competitor may be willing to share some of its experiences with you and others in the network. Or, the insurer may be willing to share some parts of the experience to entice your practice. Either way, you can’t grasp the merits or demerits without up-to-date expertise in capitation itself.

9. "If a future [capitation] proposal is made to you, you might want to be able to adequately evaluate it," officials point out. If capitation is out of fashion in your market, that doesn’t mean it always will be, or that insurers won’t take steps to make their proposals more palatable. Also, some practices have had huge success with capitation. Don’t get too rigid in viewing your possibilities, ESAI consultants recommend.

10. "Health plans continue to use capitation principles to actuarially project medical costs so that a premium rate for those services can be determined, even when their reimbursement is on a fee-for-service basis," ESAI consultants say. Your practice may be disillusioned with capitation, but that does not mean it’s going away entirely. Throughout the indemnity profession, it is alive and well in the practice of health insurance methods.