While capitation hasn't gripped healthcare as strongly as once predicted, it is resurging in a new form, targeting specialists instead of primary-care physicians.
"Health plans and health systems are aligning themselves with specialists," says Brent Greenwood, a principal in the Atlanta office of management consulting company Towers Perrin. "They are realizing those who greatly influence the hospital are the specialists. Primary-care physician(s) can be paid fee-for-service. That gives them the incentive to keep the patient in the office, and you don't see as much variation in practice patterns in primary care as with specialists, which is one of the reasons for capitation."
Experts say they believe capitation, particularly forms aimed at specialists, will increase in coming months. With premiums rising 7% to 9% this year, and similar increases likely next year, many employers are expected to sign up with lower-cost health plans that offer fewer providers and, thus, less choice. This change will bring them smack up against the anti-managed-care passions that existing limitations on choice already have aroused.
As a result, employees desiring more choice may end up paying over and above their regular premiums for a higher-cost health plan with a larger provider network.
Under capitation, a group agrees to provide all covered services for a rate negotiated in advance. Fees can be paid through various arrangements, including per procedure, per diem and per member per month. Because physician groups and other provider organizations don't receive additional fees for delivering more services, capitation should reduce any incentive to provide unnecessary care.
Even under capitation, however, individual physicians within a group can be compensated in numerous ways, many of which reward them for delivering more complex care.
For health plans, the advantages of capitation are predictable expenditures and provider participation in reducing the cost of care. For provider organizations, the appeal is a set book of business, a predictable revenue stream and the opportunity to profit from improving the delivery of care.
Consumer demand for larger provider networks has inhibited capitation's growth. The broader the network, the less the influence of any single provider group on how care is provided. As a result, providers are less able to estimate and control the costs of care.
Still, interest in capitation persists, especially among medical organizations in markets with high managed-care penetration.
"We are interested in partnering with insurance companies," says Jean Abramson, director of contracting for the Dartmouth-Hitchcock Clinic's southern region, based in Bedford, N.H. "We are willing to take risk for services and costs that we can effectively manage."
Evergreen Re, a Minneapolis-based reinsurance brokerage, says it has seen a slowdown in capitation's spread as broad provider networks have grown in popularity. "There is certainly a flattening of capitation, but we think that's probably good business," says Charles Crispin, a vice president at Evergreen.
Even if provider groups can be assured that patients won't be treated by physicians outside the group, Crispin says, many can't accurately estimate costs. "We think providers want risk," he says. "But the key is better data. People have got to get a handle on making costs predictable."
In a 1998 survey of 161 physician groups and 161 hospitals in markets with more than 30% HMO penetration, Evergreen found that 65% of group practices and 47% of hospitals had capitated contracts. Most respondents expect capitated revenues will account for a growing percentage of their budgets. For example, multispecialty physician groups predicted capitated revenues would constitute 52% of total revenues within five years compared with 43% in 1998.
Clifford Frank, president of two Jacksonville, Fla.-based companies specializing in capitation, says he thinks capitation still has a bright future. That's partly because of rising premiums but also due to revisions in how capitated contracts are set up. The new capitation disbursement methods that target specialists do a better job than earlier structures of avoiding financial incentives to provide too little or too much care, Frank says.
Frank is a proponent of a type of capitation known as "contact cap." One of his two firms, Contact Cap Solutions, markets software to help providers manage this method. The other, Healthcare Management Solutions, helps set up contact cap deals and offers related consulting services.
Contact capitation is a payment system specifically designed for specialists. It pays physicians based on the percentage of patients whose care they manage within their specialty. Each specialty works out of a "cap pool," or a monthly allotment of funds.
Contact cap works like this: On a patient's first visit, the physician is credited with one contact, which typically is assigned to him for 12 months. He is paid monthly based on his share of total contacts within the specialty.
Generally, each patient counts as one contact each month, regardless of the follow-up care provided. If the patient requires extraordinary care, however, various adjustments can be made. For example, complicated procedures can trigger one-time extra contact points. Extra contacts also may be awarded for certain diagnoses. For example, leukemia patients may be counted as three times the standard oncology contact because of the huge expenses inherent to their care.
Frank says contact cap has advantages over other allocation methods, such as tying payments to patients instead of services provided. As a result, physicians don't gain by providing more services. And quality incentives can help assure adequate care.
Another advantage of contact cap is that it can be adjusted for complexity. The key to getting the advantage adjustments can bring is making certain the physicians involved determine those adjustments, Frank says. "Contact cap puts doctors back in charge, because they are the ones making the decisions about it," he says. He estimates 100 to 200 organizations use contact capitation in some form.
Initially health plans targeted primary-care physicians for capitation. They saw the combination of primary-care physicians and capitation as a good fit with the "gatekeeper" concept of healthcare, under which doctors act as gatekeepers to higher-level specialty care. The theory was that capitating physician payments would give doctors a pool of funds out of which to provide preventive as well as primary care.
Now, Frank and other observers say health plans are backing off capitating primary-care physicians. Anecdotal evidence suggests primary-care doctors are making more money than health plans expected under capitation, and that the gatekeeper system might work just as well without capitating them.
"Plan administrators are feeling that they are paying a lot for primary care under capitation," Frank says. "In many areas of the country, they are coming back and hammering the primary-care physicians, either pulling out of the cap or putting in dramatically lower rates."
Specialists also have been capitated, though not to the same degree as primary-care physicians. And many methods of distributing the cap pool among specialists are production-based, which Frank and others say provides the same incentives as fee-for-service. For example, one popular method pays specialists according to the relative percentage of claims each submits.
Still, nationally, capitation is more common within primary care than specialty care, though statistics show the use of capitation is growing in both.
InterStudy, a Minneapolis-based research firm, says 78.7% of 652 HMOs surveyed used capitation with primary-care physicians in 1998, up from 64.3% in 1993. In comparison, 56.4% of the plans said they capitated specialty-care physicians, up from 47.4% in 1993.
The firm surveyed 322 metropolitan areas. In 49 of them, HMOs did not capitate specialists. In contrast, only 18 markets had no primary-care capitation.
As payers back away from primary-care capitation, some are wondering how the face of capitation will change in the future.
Towers Perrin's Greenwood says capitation can succeed if payment disbursement is tied to patient populations instead of physician production levels. One system he likes is called market-share capitation. Like contact cap, it links a physician's payments to the number of patients under his care instead of the volume of services rendered. Rather than counting visits, however, market-share cap relies on historical data to determine a particular physician's share of a given patient pool, because referral patterns tend to be fairly constant, he says.
The method works particularly well in specialties, such as ophthalmology, where most practitioners offer a similar set of procedures. In other specialties, such as cardiology, where there is great variety in the services offered, Greenwood says contact cap might be better suited, because it allows more adjustments.
Dartmouth-Hitchcock's Abramson thinks contact cap or a similarly structured arrangement might be useful in distributing subcapitation between providers.
Dartmouth-Hitchcock is a multispecialty group practice operating throughout New Hampshire and Vermont. The southern region provides primary and secondary care.
The northern region includes a tertiary-care center, the Dartmouth-Hitchcock Medical Center in Lebanon, N.H.
The southern region's share of patients with managed-care insurance varies by market, ranging from a low of about 35% to as high as 60%: Most of those patients are part of capitated arrangements, Abramson says.
Because of its structure, the clinic does not take on financial risk for providing specialty care independent of risk for primary care.
The push to broaden provider networks isn't the only force slowing capitation.
In addition, the legislative backlash against limits HMOs put on patient choice has made capitation less attractive to providers by eroding their ability to influence the cost of care, Abramson says. Specifically, she pointed to recent New Hampshire legislation that curtails providers' ability to direct routine gynecological and obstetrical care within their preferred networks. It also guarantees a minimum length of stay following deliveries. Many states have enacted similar laws in the past few years.
Regardless of the merits of the New Hampshire law, it will make it harder for providers to control the costs of those services, Abramson says, because they can't ensure that doctors outside the network will use cost-effective practices.
At Dartmouth-Hitchcock, physicians are employees. So rather than seeking the best way to distribute a pool of capitation dollars, the clinic must instead identify appropriate ways to set physician salaries.
Though one key determinant of a physician's salary is productivity, the clinic also looks at quality of care, patient satisfaction, overall clinic performance and market salaries, Abramson says.
Productivity is measured differently for primary-care and speciality physicians. For primary-care doctors, the measure of their productivity is based on the number of patients under their care, weighted by age, sex and other factors. Specialists' productivity is measured by the number of patients they care for, regardless of age and sex, and the complexity of the procedures they deliver. This method is similar to contact cap, Abramson says, in that it treats each patient as unique.
"We see managing care as physicians and other providers working together with patients to make cost-effective decisions that ensure resources are used wisely," Abramson says.