A surprising number of healthcare providers are in over their heads regarding the subtleties of capitation.
That's the central finding of a recent survey of 322 hospitals and medical groups in markets with significant managed-care penetration. The study found that 30% of the administrators at the hospitals and medical groups surveyed had little understanding of their level of exposure to financial risk through their capitated contracts.
The 30% included survey respondents who weren't sure whether they were protected against catastrophic claims or what type of reinsurance coverage they carried. The providers surveyed were reasonably savvy: All the hospitals contacted had at least 200 beds and were located in markets with at least 30% HMO penetration. Seven of 10 of the medical groups were multispecialty groups.
In risk contracting, "there is an enormous need for information among providers to fully understand and protect themselves," says Charles Crispin, vice president of Evergreen Re, the
5-year-old reinsurance consultant and brokerage firm in Stuart, Fla., that sponsored the survey.
Prange & O'Hearn, a Florida market-research company, conducted the telephone survey.
In many cases, Crispin says, providers apparently don't understand the full underlying costs of specialty services for which capitated agreements may hold them accountable. For example, care for a badly burned patient in a burn unit can cost as much as $9,000 per day, and in some cases the treatment lasts 100 days, Crispin says. That's $900,000 for one catastrophic claim.
To protect against such losses, providers need to reserve sufficient capital to cover unexpected losses or create a risk-transfer or reinsurance program or a combination of the two. "One or two catastrophic claims can turn what seemed to be a fairly profitable contract into a red tide of financial losses," Crispin says.
Despite the risks, the survey found that two-thirds of the organizations that accepted capitated risk expected to sign more at-risk contracts. More than half the total-56%-are involved in capitation, with 65% of medical groups participating and 47% of hospitals.
Providers in California are much more involved in capitation than those in other parts of the country, the survey found. Nearly 80% of California pro-viders reported some involvement. But of those, only four in 10 plan to sign new capitated agreements this year-signaling that capitation's momentum may have slowed in the Golden State.
Overall, responding hospitals and medical groups reported that 36% of their total revenues came from capitated contracts. That figure is expected to rise to 39% within two years and to 47% within five years, the survey found.
Those figures are much higher than data from a survey released late last year by the West Coast division of VHA, a not-for-profit hospital alliance (Dec. 7, 1998, p. 20). That survey of 48 California hospitals found that capitated contracts generated just 19% of their revenues-a much lower percentage than many healthcare observers expected.
The average hospital in the VHA survey had seven capitated contracts covering about 35,000 enrollees and generating average annual capitated revenues of $36 million.
In the Evergreen Re survey, the average provider organization had capitated agreements with five HMOs. Ninety-one percent of provider organizations had capitated commercial contracts-many more than their counterparts with comparable Medicare or Medicaid agreements, at 69% and 50%, respectively. The average commercial contract covered about 16,700 enrollees.
Most contracts included primary-care services, specialty physician services and hospital care. But far fewer extended to out-of-area services, severe burn treatment or transplants, for example (See chart).
To protect themselves against the expensive claims Crispin warns about, many organizations bought reinsurance or stop-loss coverage through their health plan, self-insured or bought stop-loss insurance on the commercial market. But 20% of the administrators surveyed-including 13% from hospitals and a disturbing 25% from medical groups-didn't know how they were protected against catastrophic losses. Another 16% weren't sure what type of reinsurance protection they had.
By combining the figures and eliminating duplication, the survey's authors discovered that 30%, or nearly one in three administrators surveyed, were unclear about the level of financial risk their organizations were bearing.
"There's a lot of confusion out there," Crispin says.
As a result, many providers simply aren't adequately protected against catastrophic risk-and don't even know it.