Experts say capitation is the keystone of managed care and is here to stay.
However, they also warn that too much faith is being placed in the practice, which pays providers a set amount of money per enrollee no matter how many or how few services are rendered.
Capitation can be successful when providers go in with their eyes wide open, have plenty of information on costs and enough reinsurance coverage, which kicks in when losses reach a certain point, said Stephanie Byrne, a healthcare actuary for Cigna Reinsurance.
But it has to evolve or some providers will go under, said Peter Boland, a Berkeley, Calif.-based consultant. "As it is used now, it's a blunt instrument, not a scalpel" to hold down provider costs, he said. Casualties of capitation already are being reported.
"I have seen a couple of hospitals that have accepted capitation just because it's being done in the market, but they were not performing managed care. Because they bought large levels of (reinsurance) coverage, they were able to survive, but it caused large losses in the reinsurance market," Byrne said. Once they incur large losses, providers can't get coverage again, she said.
Before Cigna writes reinsurance for capitated providers, it wants to know how long they have been practicing managed care-starting with per-diem contracts- and how many HMOs have chosen them for networks. Cigna also wants to see data showing how the providers conduct utilization reviews and follow clinical pathways, and how they integrate such services as rehabilitation and home care.
Lack of experience in those areas can spell trouble. Last month, the California district attorney's office announced it was investigating the $43 million loss San Jose-based Good Samaritan Health System posted for the year ended June 30, 1995. The loss-almost half Good Samaritan's net worth-appears to be related to difficulties the system experienced when it began buying physician groups that accept capitation contracts, said James Schwartz, a deputy attorney general.
Proponents of capitation-including James Hillman, director of the Seal Beach, Calif.-based Unified Medical Group Association, which represents physician groups accepting capitation-say it is the "magic" that spurs providers to give the appropriate amount of care.
But not everyone is a believer. Lifeguard, a not-for-profit regional HMO based in Milpitas, Calif., pays its physicians on a fee-for-service basis. Lifeguard officials say they don't intend to use capitation to compensate providers in their commercial business. Lifeguard uses capitation only in its Medicare business because it wants to maintain relations with the large medical groups that serve that population.
Lifeguard doesn't believe capitation
is the ultimate managed-care tool. "Unsophisticated HMOs can easily capitate because they (transfer risk to providers) and their job is done," providing little support to providers in the way of crucial information, said S. Joseph Aita, Lifeguard executive vice president and medical director.
Because all its enrollees' medical claims are submitted to Lifeguard, the HMO captures 100% of the healthcare data. It analyzes and regularly shares the data with its network of 10,000 doctors so they can measure their performance against the market, Aita said.
Lifeguard also uses a mechanism to determine which practices care for sicker patients. "If they are caring for sicker people, we expect them to spend more money," Aita said. As an incentive to hold down costs and improve quality, the HMO withholds 15% of physician fees and pays them a year later, based on the performance of the practice and the region, Aita said.
The HMO's system is working. Three years ago, Lifeguard premiums were 30% higher than competitors in the state. Now they're about "in the middle of the pack," Aita said. Five years ago, its inpatient days per 1,000 enrollees were 200; now they are 150. Enrollment is growing rapidly-by about 50,000 this year, to 170,000-and it ranks high in quality surveys.
Lifeguard believes it will continue to do well, especially because of the growing public backlash against capitation, which may result in legislation limiting the practice, Aita said.
Boland, who wrote The Capitation Handbook, to be published soon, agrees that capitated systems don't collect as much information as fee-for-service firms. But for both to be successful in the future, they should be investing "tens of millions" on not just information but on the technology that will impact "literally every single facet of their delivery system," Boland said.
With the proper technology, capitation can be used to drive the redesign of delivery systems toward a focus on keeping people well. "The real power of capitation is if you retool the business assumptions it has the potential to generate far more cost savings than the blunt financial tool being used right now," Boland said.*