Percent-of-premium capitation yields mixed results in a Rhode Island case study

Healthcare Financial Management, May, 1998 by Beverly-Jane Perry

A relatively new type of capitation model bases provider payments on a percentage of premiums rather than on medical costs. Early in 1996, Harvard Pilgrim Health Care of New England (HPHC-NE) established such arrangements with five Rhode Island PHOs.

HPHC-NE is a Rhode Island-based, not-for-profit, mixed-model HMO whose 140,000 members receive care through five staff-model health centers, 14 capitated group practice sites, and 1,950 IPA physicians. HPHC-NE is a wholly owned subsidiary of Harvard Pilgrim Health Care, an entity formed in 1995 by the merger of Harvard Community Health Plan and Pilgrim Health Care. Although Pilgrim Health Care had experience with percent-of-premium risk arrangements with more than 60 joint venture risk partners by 1996, none were in Rhode Island.

HPHC-NE entered into six percent-of-premium capitation joint ventures with PHOs based at five facilities within Rhode Island. (One PHO established two specialty joint ventures with HPHC-NE - one in pediatrics and one in obstetrics/gynecology.) The PHOs were to care for fully insured, commercial members in primary-care-based managed care products.

Program Goals

One of the goals of the HPHC-NE joint ventures included increased provider satisfaction. Toward this end, each hospital involved in a percent-of-premium risk arrangement had representatives on the HPHC-NE board of directors, creating a closer relationship between the risk partners than is typically realized.

In addition, HPHC-NE sought to increase local physician and hospital involvement in, and influence over, the management of medical care, in part, through collaborative development of guidelines and policies specific to significant medical utilization areas. It also was thought that the provider community would benefit from the opportunity to learn and develop managed care processes with a limited population, and the potential for increased revenue through gain sharing, that is, receiving a portion of the savings realized through the more cost-effective use of resources in accordance with established treatment protocols.

Finally, the HMO hoped to achieve administrative efficiencies through education and management efforts directed toward key physician practices and hospitals.

Payment Model

The payment model for the risk arrangement allocated a percentage of the regional earned premium amounts to each PHO for HPHC-NE members who selected a primary care physician affiliated with it (see Exhibit 1). The premium was adjusted for member demographics as well as benefit differences and group size. Each joint venture also was allocated a per-member-per-month capitation fee. The remainder of the premium was retained by the HMO for its portion of risk and administrative expenses, including marketing, sales, member enrollment, medical management support, and claims processing.

HPHC-NE's not-for-profit status allowed it to make higher-than-average premium allocations to the PHOs for medical care, in part because shareholder dividends did not have to be paid. Each PHO's capitation revenue was allocated for coverage of all medical expenses associated with the members within its joint venture, including physician, ancillary, and facility expenses, but excluding mental health and substance abuse services. Mental health and substance abuse were carved out and absorbed by the HMO. None of the five PHOs had the capability to accept and distribute direct capitation, so the plan retained the capitation amounts and made payments on submitted claims based on each organization's physician fee schedules or negotiated rates.

A risk pool equal to 11 percent of the premium revenue allocated to each joint venture was established to offset potential losses. These risk pools were established through payment withholds of 10 percent for office-based physician services and 20 percent of hospital-based physician services, and through a contribution from each PHO's sponsoring hospital once a year, when revenues were distributed. The sponsoring hospital in each risk arrangement calculated a booked liability available to offset losses by subtracting the physicians' withhold amounts from 11 percent of PHO revenue.

Risk also was mitigated by mandatory participation of the PHOs in a reinsurance program offered through Harvard Pilgrim Health Care. Each PHO selects from a variety of separate or combined attachment points for hospital and physician services, and premiums are paid through deductions from the monthly capitation revenue by the plan. Reinsurance coverage is 90 percent of the excess liability beyond the attachment point for all policies. Recoveries are added back into revenue on the PHO's monthly financial statements.

The joint ventures were settled annually by comparing the PHO's revenue, including capitation and reinsurance recoveries, to the actual payments made to all in-network and out-of-network providers for services rendered to members affiliated with that PHO. In each joint venture arrangement, any surplus was shared equally by the plan and the PHO. Distribution within each PHO was left to the organization's own discretion.