Can capitation save the world? - capitated payment systems - includes related information

Business & Health, June, 1996 by Steven Findlay

Hailed as a superpower that could restructure utilization and delivery of health care, capitation is far from invulnerable.

The mandate in health care today is to realign economic incentives to produce fair prices, real value, reasonable profits and predictable cost growth The delivery system that will take us into the 21st century must be heavy on accountability--reducing inappropriate care, constantly improving quality and promoting optimal health.

A heroic task, to be sure. Little wonder, then, that the driving force of this new order--capitation--is under increasing scrutiny. Is it the bright and shining successor to an outmoded fee-for-service system? Or a ruse designed by greedy managed care companies and Wall Street financiers?

In the past year, the very premise of capitation has been attacked, with many arguing that it gives doctors and hospitals financial incentives to shortchange patients and deny needed care. The debate has produced a backlash against managed care and spawned a rash of legislation at the state level. All this has occurred amid an escalating struggle for control of health care's purse strings Managed care plans and provider groups are vying to take on the bulk of the insurance risk--read: capitation--and consequently reap the biggest financial rewards.

One thing's for sure: The relatively simple notion of a prepaid per-person charge for health care has become an enormously complex undertaking Envisioned as a way to reverse provider incentives and squeeze unnecessary services out of the system, it is turning into a high stakes gamble for providers and insurers alike

What follows is an account of how capitation is evolving, what battles are brewing and what employers need to know about capitated contracts.

RECKONING WITH A NEW FORCE

First off, capitation is not nearly as common as press coverage and heated debate might lead you to believe. Less than half of the nation's physicians say they get some revenue from capitated contracts (see the map on page 48), and only about 15 percent of the money that flows into their offices comes from capitation. For hospitals, the proportion is around 10 percent. While capitated revenue is up sharply from just a few years ago and will no doubt rise in coming years, most doctors still get most of their money from discounted and full fee-for-service payments from HMOs, PPOs and indemnity insurers.

The penetration of managed care and capitation also varies widely across the country. In California, Oregon and Minnesota, some primary care group practices get 50 to 70 percent of their revenue from capitation. In the Southeast and Northeast, the majority of family medical groups and clinics get less than 10 percent.

The primary reason capitation hasn't kept abreast of managed care growth is that most doctors--especially those in solo practice or small groups--have been reluctant to engage in risk sharing. Says Princeton health economist Uwe Reinhardt, "they aren't stupid. They know capitation is a dangerous game, and many know they don't understand the rules yet."

That has suited HMOs: They've been happy to accommodate doctors by paying discounted fees, especially in competitive markets where they can drive prices quite low (as much as a 50 percent discount in some cases). Despite their rhetoric, HMOs have only reluctantly begun to move to full risk sharing with physician groups, which transfers opportunity for financial gain as well as clinical and administrative responsibility.

"It's giving up control," says James Touse, vice president of Blue Cross/Blue Shield of Tennessee. "Most plans believe they should retain the risk because they have years of experience handling it, and many providers aren't ready to."

Russell Coile, a health market analyst based in Santa Clarita, Calif., cites another reason for HMOs' reluctance: "They fear they are training future competitors with full-risk capitation. But their refusal to share capitation amounts to a divide-and-conquer strategy that could backfire and accelerate the development of provider-sponsored HMOs," he predicts.

Health plans and providers have been content, then, with a pastiche of partial risk-sharing arrangements. A study of the contractual relationships between 108 large managed care organizations (collectively enrolling 33.5 million) and their doctors, released last December, found that 60 percent of the HMOs had partial risk-sharing arrangements with primary care doctors. But only 37 percent used capitation as the main method of payment. More than half (54 percent) of the plans used some form of risk-sharing with specialists, but only 20 percent relied primarily on capitation. Among PPOs, only 10 percent had any risk-sharing arrangements with primary care providers, and just 7 percent gave them capitated contracts.

The study, by Mathematica Policy Research in Washington, D.C., found that most HMOs adjusted payments--whether capitated or discounted fee-for-service--to create performance incentives. For example, 57 percent based payments on a physician's utilization or expenditure profile.