Positioning for capitation by redesigning internal processes - capitated payment systems

Healthcare Financial Management, July, 1995 by Jerome R. Gardner, Roxy Maroney

CAPITATION

Now that healthcare reform is no longer at the forefront of President Clinton's agenda, competition among providers, practitioners, and health systems will become more common as they ready themselves for capitation. In addition, mergers, consolidations, acquisitions, alliances, and partnerships will continue to reshape the healthcare industry.

In order for the parties to be successful in a capitated environment, providers, practitioners, and healthcare systems must manage and adapt to consolidation, capitation, communication, control, cost, customer, capital, and culture.

Purchasing physician group practices is a large part of healthcare industry consolidation. In such purchases, a healthcare system acquires physicians, and physicians acquire security and freedom from office-management and regulatory-compliance burdens. Physicians join other healthcare partners, and the healthcare system consequently becomes stronger and better able to serve the needs of its patients. This basic principle of partnership should be a "shared" strategy and should align incentives properly. If this incentive alignment is not mutually understood and developed, certain acquisitions or transaction models could create "them and us" scenarios, carrying significant political and financial risks that could divide a healthcare organization, medical staff, and new partners into groups of "insiders" and "outsiders." Therefore, the need for a variety of physician/hospital systems and other partner-linking opportunities becomes important.

Capitation and communication

Capitated care populations will be a large part of future healthcare systems' patient bases. In a capitated environment, a healthcare organization, and at least part of its medical staff and other providers, will provide care for a fixed premium. Healthcare systems that develop in the future will have to accommodate capitated arrangements based on predetermined rates for long-term liability.

Capitated payment systems work by:

* Placing delivery systems at risk for total healthcare services of their "covered" lives;

* Eliminating economic incentives to perform unnecessary procedures;

* Providing economic incentives to improve the health status of covered lives;

* Supporting the shift from expensive inpatient care to appropriate, but less costly, settings; and

* Tracking under- and over-utilization of services.

A capitated payment system could jeopardize strategic and financial plans of healthcare providers, especially if the covered population requires more healthcare services than anticipated. To help improve the long-term health status of their covered lives, healthcare systems will need sophisticated information systems, methods of instant communication, accurate actuarial assumptions, and precise cost assessments to determine appropriate prices.

Control, cost, customer, and capital

Vendors also will be affected by a shift to a capitated environment. Vendors should be paid, where possible, based on covered lives and should be held responsible for understanding a healthcare organization's usage patterns.

Healthcare organizations should stop paying for supplies and services on a fee-for-service basis - the more supplies used, the more they cost. Vendors should share risks with healthcare organizations, help reduce costs, be more efficient with limited funds, and exceed customer expectations.

Healthcare organizations should implement innovative solutions for decentralizing inventories. Remote healthcare system locations should maintain up-to-the-minute controls to optimize inventory levels and to maximize cash flow in a capitated environment.

The importance of cost reduction will replace revenue enhancement in a capitated environment. As a result, material management will be a critical component under a restructured capitated environment because it is a major cost. Capitation will force parties in a healthcare delivery system to change past practice patterns, reduce process flows, and redirect risk factors.

Resources will be shared and alternate products and services will be scrutinized for appropriateness. Adding value and meeting customer expectations will be key. Closer working relationships between vendors and physicians should result in the use of cost-effective products that will improve patients' clinical outcomes, reduce patients' lengths of stay, and improve performance related to other indicators of efficiency and productivity.

Case study

The move to a capitated environment will force many healthcare organizations to employ total quality management (TQM) techniques to design new services or redesign existing services to better meet customer expectations.

One organization that employed TQM to succeed under capitation is Baptist Medical Center, Oklahoma City, Oklahoma. Before entering into a capitated contract with an instrument-repair vendor, the medical center's TQM team began a project to improve its instrument repair process. The team began work by creating a problem and mission statement.