Key provisions strengthen hospital capitation contracts

Healthcare Financial Management, Nov, 1996 by Michael A. Duncheon, Dana B. Wolf

Hospitals that accept capitation payments can protect themselves from risk by including key provisions in their contracts.

Hospitals that accept capitation payments can expect both risks and rewards. The rewards include a dependable revenue stream and economic incentives aligned with those of physicians. The risks are related to payment issues, provision of services, utilization projections, and contract disputes. By ensuring that capitation contracts adequately address these and other issues, hospitals can minimize their exposure to risk.

With increasing frequency, hospitals are assuming risk by accepting capitation payments. Capitation enables a hospital to maintain a steady revenue stream and to align its economic incentives with those of its physicians so that they are working toward the same financial goals. But capitated contracting also creates new concerns for hospitals, both from a business and a legal perspective.

One of the chief dangers faced by hospitals that enter into capitation contracts is that they will be responsible for unanticipated costs or obligations. As a protective measure, therefore, hospitals must carefully determine beforehand what services will be covered by the capitation fee and what services will be carved out and paid for on a fee-for-service basis. This is especially critical for hospitals in states whose laws limit the services for which a hospital may accept capitation.

In addition, the hospital's contract with the health plan should reference an exhibit that carefully details the services for which the hospital and its affiliated physician groups will accept risk and those for which the health plan will accept risk. The exhibit also should list any service payments that will be the responsibility of the plan. Failure to define the scope of capitated services may result in the hospital bearing undue risk.

Hospitals can protect themselves from many other potential risks by incorporating several key provisions into their capitation contracts. These provisions pertain to the capitation payment, service area, arrangements with other providers, the health plan's obligations, risk-sharing arrangements, stop-loss and reinsurance, exclusivity and most favored nation status, alternative dispute resolution, corporate successorship, utilization management and quality assurance, and contract termination.

Capitation Payment

If a hospital is to manage the risks that accompany capitation, the contract must contain specific provisions relating to the capitation payment. Such provisions pertain to fee amount, member assignment, timeliness of payments, rate adjustments, payment corrections, percent of premium payments, coordination of benefits and third-party recoveries, bridge rate, and renegotiation.

Fee amount. The hospital's contract with the health plan should ensure that the capitation fee is based on sound actuarial assessments and is reasonable in light of market conditions.

Member assignment. The contract should specify how the number of members assigned to the hospital will be determined. Under most capitation arrangements, the hospital will receive a monthly capitation payment for each member who is assigned to a physician group affiliated with the hospital. But the number of capitated members a hospital is responsible for may not be clear when its affiliated physician groups can refer patients to more than one hospital, each of which may have a separate capitation contract. Therefore, the methodology for determining membership should take into account the historical referral patterns of affiliated physician groups and should address the possibility that referral patterns could change, resulting in either an addition or reduction in the number of assigned members.

Timeliness of payment. The contract should require the health plan to make payments according to a specific schedule. For example, it could stipulate that payments must be made by the 10th day of the month and that a penalty will be assessed if payments are late.

Rate adjustments. The contract should contain a provision for adjustments to the capitation rate. Adjustments may be based on the age and sex of members, the number of the members, the members' benefit plans (for instance, the capitation rate can be reduced for benefits plans that require higher copayments), and other relevant considerations.

Payment corrections. The contract should limit retroactive payment corrections to a reasonable time period and provide for a method of payment when services have been rendered to a member who is retroactively dropped from the plan. For instance, a provision in the contract might prohibit the plan from recouping the capitation payment or require the plan to pay for services that were provided prior to notification that the member had been dropped.

Percent of premium arrangements. Some health plans pay a hospital a percentage of the premiums they receive for members assigned to the hospital. The hospital should be aware that premiums for many health plans are decreasing and that a hospital's capitation fee could decrease during the contract term. Hospitals that enter into percent of premium arrangements can protect themselves against a decline in fees by ensuring that the contract provides for a minimum monthly payment.