For more than 1,000 years Ptolemy's theory that the earth was the center of the universe dominated thinking about the heavens. Capitation has similarly dominated healthcare thinking since 1973. It is central to prepaid HMOs, medical savings accounts, Medicare+Choice HMOs and individual-purchased health insurance, an idea supported by the American Medical Association. Underlying those options is the assumption of a workable risk adjustment formula.
But the best formulas are "crude," according to the Congressional Budget Office, and "primitive," according to Harvard's Joseph Newhouse.
The failure to develop workable formulas is not from a lack of trying. "Hundreds of the world's best health economists have been trying for years" to come up with the right formula, but all have failed, according to the Wall Street Journal.
The primary problem is clear from this example: If a health plan covers 1,000 people for $1 million, the average cost per person is $1,000. But it doesn't make sense for insurance costs to be $1,000 for a 20-year-old and $1,000 for a 55-year-old. Nor should the same $1,000 be allocated to cover a pregnant, disabled or dying individual.
HMOs get a capitated amount per enrollee that has been adjusted for age and gender. But that amount has not been adjusted for other factors such as medical history. When you consider that 50 million to 60 million people are enrolled in HMOs, that flawed methodology can have a tremendous impact.
People assume that we can find the right risk adjustment formula if we use enough ingenuity, determination and money. But thanks to a mathematics breakthrough, I've realized there is no solution.
In 1995 Andrew Wiles solved a problem called Fermat's Last Theorem-by not solving it. Mathematicians had worked on the problem for 350 years, and Wiles finally proved there was no solution to a certain equation.
Similarly, there is no risk adjustment solution. That's because of the 80-20 reality and wrong incentives.
The 80-20 reality stems from the fact that healthcare costs are not linear. We've known for decades that about 80% of healthcare costs for insured individuals-whether Medicare beneficiaries or employees in health plans-are spent on the 20% of the group's members who get really sick.
How can a prospective risk adjustment formula be developed at the individual capitation level to accurately compensate for the dramatic cost swings of the 80-20 reality? Consider a bone marrow transplant. The billed charge is about $200,000-40 times the $5,000 capitation payment per person per year to Medicare risk plans. But health plans can't factor such expenses into their risk adjustment formulas.
The second incurable problem for capitation is wrong incentives. There is simply too much money to be made by not enrolling, disenrolling or undertreating the 20% of the people who account for 80% of the costs.
Those two problems explain the horror stories and the backlash against HMOs, even with a total of 51 state and federal government regulators in place to protect HMO enrollees. Despite what many Americans think, regulation governing HMOs is already in place. The federal HMO Act of 1973 mandates appeals and grievance procedures and access for federally qualified HMOs. State laws have also been in place since the 1970s, but like the federal law, they try to regulate too much. Some of the state laws are an unwieldy 1,000 pages long. With insufficient funding and staffing, regulators don't have the resources to handle the big problems, so they focus on the little ones.
In addition, there is the complication of the regulatory revolving door. Regulators of today know they may eventually join the ranks of those who are regulated, so they don't want to be too heavy-handed. So, regulation is not the answer to wrong incentives.
The problems with capitation point to a new approach-one that centers on groups such as employee health plans, not capitation, and applies science to the group as a whole. From a patient's perspective, quality of care equals science.
Instead of denying that physicians and hospitals are interested in healthier patients and making money, we should combine the two: If providers do better with their patients, we should pay them more to improve quality of care and outcomes.
For example, third-party administrators of large national corporations could assemble science teams of doctors and hospitals and reward them for producing better results for the 10 most prevalent diseases in their group.
The science team approach would link physicians with other doctors who are getting better results. The team members would evaluate treatments applied to such diseases as cancer. They would collaborate on the most successful and cost-effective treatments, working to eliminate geographic and cost variations.
The teams would develop treatment options, but not benchmarks or protocols, which can't be updated frequently enough. It's unlikely there would be one best treatment plan. Instead, there would be a menu of options from which patients would choose.
Patients want a choice of health plans, but it's when they get sick that they really want choice.
Capitation-based systems could be replaced. One option might be groups of employees represented by third-party administrators who would contract directly with doctors and hospitals, which would form the science teams.
It's true that not every company could set up such a system, but only 15% would need to do it for everyone to benefit.
Harvard Business School professor Regina Herzlinger pointed out that with computer technology, 15% of the information systems professionals who are innovators and early adopters drive the rest of the market so that every purchaser of a personal computer benefits.
In healthcare, the effects of that 15% multiplier have been seen since the early 1990s. A small group of employers switched from indemnity insurance to selective contracting. The economic benefit rippled through the whole population. Today we have the lowest rate of medical inflation in years.
If patient well-being is the goal-and it should be- capitation is doomed. Why shouldn't patients get the same level of quality and value when they buy healthcare that they have as purchasers of PCs?
Weller is an attorney specializing in healthcare and antitrust at Baker & Hostetler in Cleveland.
