Skip to main content

Capitation is at the Door; Will You Be The One Who Knocks?

 |  By Philip Betbeze  
   November 22, 2013

There's a pretty fair divide among organizations that operate comfortably under a capitation reimbursement arrangement—and those that don't. Which one are you?

Opportunity knocks, or so the saying goes. Perhaps, like me over the years, you've also noticed that the focus is always on whether you will be the one who answers that knock. But could greater opportunity lurk within the one who is doing the knocking?

If that sounds Confucian, (or makes you think of Breaking Bad) I apologize, but I think it fits the state healthcare today. For instance, if you're talking about being ready for capitation—and it's coming, regardless of the current payer environment in your local area or region—perhaps your hospital or health system could be in the position of doing the knocking. That is, being ready for it before your payer demands it. That puts you in the position of being the one who knocks.

Commercial insurers are certainly getting fond of various structures that feature capitation. Under such strategies, the health plan pays the administrator, whether it's a physician practice, a hospital or a health system, to manage all the care needs for a particular patient or group of patients, for one price per member. If what is spent on patients over the course of the year is less than the capitated payment, the provider of healthcare services keeps the difference.

Capitation has one important feature above all others—cost certainty for the purchaser.

The strategy is seen as a strong, and relatively simple, motivator for hospitals and health systems to really dive into population health-focused management strategies and features the ultimate cudgel—the margin motive. The risk of capitation, as you've no doubt been hearing, falls on you and your organization.

That's basically how it works, but there are many nuances to consider under a capitated arrangement. Let's take a look at some of the structures gaining traction discussed during our annual CFO Exchange in Colorado Springs last August. For more of this discussion, see one of three special reports on this event.

Gain Share, Upside Only
One health system in the upper Midwest has a partnership with a group of physicians that will be charged with managing the health of about 40,000 lives. This plan is a gainshare arrangement under which the health plan will review the health system's attributed population for per-member, per-month cost compared to its competitors in the market.

If the health system performs better than the statewide average, the health plan will share that gain with the health system, 50/50. That represents only upside risk for the provider so far, so they're pretty excited about it, knowing they are lower cost than most of their competition. However, a potential drawback to such a plan is that early returns may seldom be duplicated as costs and efficiencies introduced experience the law of diminishing returns. Such a structure may not last, long term.

Narrow Network Exchange Product
The same system is currently submitting a bid at the request of a statewide Blue Cross health plan that represents 50,000 lives or so. This would be a narrow-network-type arrangement through the health insurance exchange under which the health system is expected to compete with other systems under a per-member, per-month payment system. The winning bidder and the health plan would share both upside and downside risk, but given the fact that there are a lot of unknowns with this population consisting of many previously uninsured individuals, the system sees the plan as potentially high risk.

Not so high risk as to preclude competing for the contract, however. Again, capitation is at the heart of both plans, but despite the risk, the health system is competing for the contract in order to gain valuable experience at the management of population health.

Capped, and Tied to MLR
Another health system in the Northeast will get the chance to see how it does with the health of 200,000 covered lives as it begins a risk deal that caps both upside gains and downside losses tied to the medical loss ratio.

The health system can't lose more than $30 million on the plan, but can't make more than that either. It's a three-year deal where the caps move based on the MLR, but it represents a big risk for a system used to receiving fee-for-service payment for the majority of its commercial contracts.

Again, the idea is that by using its network and its full-time physicians to manage care and coordinate it better, this health system will be able to limit any revenue drain. But it's still a risk based on how well they manage that population's health. The details are different, but do the incentives and disincentives sound familiar?

What all of the CFOs expressed in our discussions regarding capitation-based reimbursement is the need for either a system-owned owned health plan or a long-term partnership with an existing payer that evolves based on changing benchmarks.

It goes without saying that such organizations would have to have excellent clinical integration—and that means not just on the inpatient side—but with physician practices, skilled nursing facilities, and even federally qualified health centers.

Even with shared risk programs, capitation will be the vehicle to eventually move providers, whether they're a physician practice, a hospital or health system, or some combination of the three, into a contract that forces them to take on more risk for outcomes.

Commercial insurers can come knocking on your door, or you could be the one who knocks. Which position would you rather take?

Pages

Philip Betbeze is the senior leadership editor at HealthLeaders.

Tagged Under:


Get the latest on healthcare leadership in your inbox.