As healthcare costs continue to increase, organizations that pay these costs are looking for opportunities to offload the risk of cost increases on to other organizations. Many states have turned to capitation in the Medicaid programs, moving their utilization and price risk onto the Medicaid HMOs that participate in their programs. In Massachusetts, insurance companies whose rates are forced down by state regulators are apparently also considering use of capitation to reduce a rate of increase of their costs. In these circumstances, moving to capitation simply kicks the cost risk down the road to the entity that is capitated. Some entity has to take the risk for increases in utilization-the only question is which entity it will be. And in today’s environment, entities that are already taking capitation risk, such as states and insurance companies, are trying to offload that risk to someone else because of the ever-increasing costs. While there are opportunities to succeed under capitation, the chances for failure are similarly high.
What is capitation risk?
Many healthcare providers already assume a certain level of risk for the services is that they provide to their patients. Hospitals that are paid based on DRGs already assume the risk for length of stay and costs associated with the patient admission. Some specialists are paid a single fee for all preoperative and postoperative services in addition to the cost of the surgical procedure. In these cases the provider assumes the risk of the costs of treating a patient with a particular condition. And in some cases, providers are paid on an episode of care, or “contact capitation” basis, in which they bear the cost of all services provided to the patient for that episode of care. The risk that they haven’t assumed, however, is the risk of a person becoming a patient in the first place. Health insurance plans and government entities like Medicare and Medicaid generally bear that risk. If a larger portion of the covered population utilizes healthcare services, the entity that holds this “incidence risk” bears that cost. That entity also generally bears the “severity” risk that involved patients utilizing a more costly mix of services. For example, if the number of births in a population remains constant, but the percent that are premature increases, the insurer bears this increase in cost.
A “capitatable” entity?
But what types of entities can be capitated? Primary care physicians are already capitated by some payers. Can a hospital be capitated? How about an orthopedist? To explore this question, we need to understand the basic concept of capitation. “Capitation” refers to making any payment to an entity on a per capita basis; that is, based on the number of members for whom that entity is responsible for their medical care. For this to occur, the entity must have “members”. Insurance companies obviously have members who are the individuals who have purchased insurance. Capitated primary care physicians have HMO members who selected that PCP. In some cases, laboratories, radiology providers, and physical therapists become capitated by inheriting the capitation of a PCP. In those cases patients of the PCP are restricted the use of those capitated providers. Those providers get paid a small payment each month for each of their inherited members, whether or not those members receive any services from those providers. But how would this work for a hospital? Does a hospital have “members”? Generally not –even in most HMOs patients can choose from any hospital within their network. Unless all of these hospitals belong to a single entity that would receive the capitation payment, capitation wouldn’t work since the hospital providing the service might not be the hospital that received the capitation payment for that patient. The same situation holds true for most specialists, since providers can choose any specialist within the network. Obviously, extremely large provider organizations, or those that predominate a local market, could be capitated for all members living in a local area; however in a fragmented healthcare market this is not likely to occur. For a provider organization to be capitated, it must include the vast majority of providers who provide services to the covered population. Those providers must have agreed upon a compensation formula that’s tied to the capitated payment that the organization receives. Obviously, the compensation for all providers cannot exceed the capitation payment received by the organization; therefore if the number or severity of services increases the provider payment rates must have a corresponding decrease. Most primary care providers didn’t choose to become capitated. The payers simply announced the change in the payment methodology and the PCPs were stuck with it. But payers couldn’t capitate other types of providers because those providers didn’t have “members”. This means that most providers today are insulated from becoming capitated because they aren’t part of a coordinated network that provides comprehensive care to a group of people who seek care within the network.
ACOs change the game
Of course, that changes when providers form ACOs, which are presumably organized to provide comprehensive services to an entire population, and to distribute payments to the providers based on a single payment that itself is related to the number of members of the population. Medicare ACOs structure the shared savings payments that they may receive on a capitated basis, with limited risk and reward corridors. However, Medicaid plans and commercial payers could establish any type of payment structure that transfers some or all of the incidence and severity risk to the providers. Theoretically, provider organizations should prosper under capitated payment arrangements since they’re the ones in control of the care received by the patient. However, with the increasing financial pressures on health insurance premium levels and the rising Medicaid cost burden on states, the capitation payments made by these payers may not be sufficient for even advanced organizations to manage the care while maintaining reasonable provider payment rates. While an ACO may be a convenient vehicle to participate in the Medicare project, it may also be target to allow other payers to force capitation payments onto providers who otherwise could not be capitated. Providers should consider this possibility in their decision process when forming an ACO.