IPAs and medical groups in California are learning they can't bake that perfect cake--profit--without the key ingredient of capitation. It's just a matter of figuring out the right recipe. A pinch of this, a dash of that, throw it in the oven and taste. Maybe this time things will work out.
After all, the last few times they tried this dish, it was a disaster. The most recent effort was from 1998 through 2000, when physician organizations up and down the state went bankrupt or came close to it. (Exact numbers are a matter of dispute. The California Medical Association's widely repeated figure of 90% has been hotly contested; a new study by the California HealthCare Foundation is under way.)
When the IPA "chefs" tried to figure out why their cake collapsed, they were fairly unified in identifying the culprit: inadequate capitation rates. And they had solid evidence on their side. The CMA said capitation rates in California declined from $45 per member per month in 1993 to $29 PMPM in 1999, even as the cost of living in California soared.
The New England Journal of Medicine similarly reported that capitation rates in California declined by as much as 25% during the 1990s. The HMOs, IPA executives cried, weren't giving them enough money to stay in business. They were being asked to bake a cake without flour.
That led to the perception, especially among physicians, that capitation in California was doomed. A payment mechanism of such dubious efficacy and harmful impact, some believed, could not possibly be allowed to continue.
Certainly, in other states, capitation has been reported to be waning. Insider Michael Stroud, a vice president at United HealthCare, says "physicians make lousy insurance companies and should not accept financial risk." Even in California, some experts are urging physicians to avoid capitation like the plague.
"Full-risk contracts (have) been an absolute disaster in California," says Thomas Mayer, M.D., and he should know. He was chief medical officer at Friendly Hills HealthCare Network, which was 95% capitated when it was absorbed into MedPartners.
But with apologies to Mark Twain, reports of the death of capitation in California are highly exaggerated. Full-risk may be an endangered species, but not capitation itself. And with each new tale of IPAs that are achieving financial turnarounds, optimism rises that capitation finally can be made to work.
Ironically, the demise of a few score of medical groups and IPAs strengthens this conviction. Now that the weaker groups have fallen, people are saying, the survivors will get even stronger. And being stronger, they will be able to offload more risk (pharmacy, durable medical equipment, hospital radiology and so on) back onto HMOs, who will be forced to accept them if they want access to those networks.
The resuscitation of capitation in California, however, doesn't mean all physicians now believe that rates are adequate. Nor does it mean that any one physician compensation model will work for every group. And it certainly doesn't mean that the painful era of medical group and IPA failures has come to an end.
But it does mean that capitation for the foreseeable future will remain the bedrock foundation of the California delegated model of managed care.
Those chefs are feeling more confident they can bake their cake because of at least two developments that were long anticipated but slow to materialize: higher capitation rates and new methods of physician payment.
With healthcare premiums again on the rise, HMOs are sharing some of their money in the form of higher capitation rates.
National Health Information, an Atlanta-based healthcare research and publishing company that puts outs an annual capitation study, in its 2000 survey declares that with capitation rates improving, "78% of (national) respondents (including IPAs and medical groups) . . . are either seeking more capitation or are maintaining their current level of risk agreements."
NHI reported 2000 PMPM rates up nationally by an average of 7.4% over 1999. A Milliman & Robertson survey suggests that in the Pacific states, including California, where health insurance premiums went up 13.8% from 1998 to 1999, capitation rates have gone up even higher.
Says David Schwartz, NHI's president, "Clearly, the oft-reported demise of capitation has been based primarily on high-profile anecdotes, not data." And in California, there has been no shortage of high-profile anecdotes, including MedPartners, FPA and KPC Medical Management.
In fact, from KPC's wreckage emerged a clue: In its final weeks of negotiations with HMOs, the beleaguered company wrangled up to 30% higher capitation rates. But by then the damage had been done, and KPC went bankrupt last November.
The fact of higher rates also is attested to by Michael Eberhard, chairman and CEO of Medical Pathways, a Cerritos, Calif.-based turnaround firm that manages 24 California IPAs. Stating that capitation rates are "headed north, not south," he estimates rates in California went up by around 6% in 1999 and between 7% and 9% in 2000, numbers that square with NHI's findings.
With the hope and promise of higher capitation rates, California IPA and medical group leaders are taking a second look at how to take advantage of the situation.
New forms of individual physician payment by capitated organizations are being dreamed up, forms that combine capitation and its built-in cost controls with incentives to the doctor for increased productivity. "Modified fee-for-service" is the phrase some people use; Berkeley healthcare policy analyst Peter Boland calls them "interesting hybrids" whose precise dimensions "are not yet clear."
In fact, many groups are scurrying to find the "hybrid" that works for them--tinkering with theright recipe to bake that cake. Tom McAfee, M.D., executive vice president at San Francisco's 1,600-physician multispecialty IPA Brown & Toland, says B&T pays its doctors in a variety of ways.
Physician payment at Brown & Toland, which is capitated by its eight HMOs, depends not only on objective circumstances but also on physicians' preferences. Some specialists are capitated, other specialists are paid fee-for-service, while most but not all primary care physicians are capitated.
"There's no one-size-fits-all answer," even in a tightly knit community like San Francisco, McAfee says. (McAfee does, however, note that in some rural areas such as the Peninsula/Silicon Valley, where there's an undersupply of physician networks due to the breakup or withdrawal of medical groups and IPAs, including B&T, health plans increasingly are contracting with individual doctors on a fee-for-service basis.
But this seems to be an expedient, and few in the state expect this model to become widespread.)
In speaking of this spirit of experimentation and willingness to consider capitation anew, McAfee says, "I talked to (Hill Physicians' Medical Group executive director Steve) McDermott recently, and he said they're now looking at capitation, even though for years he said it doesn't make sense to capitate."
Indeed, McDermott, who leads the state's biggest IPA with 2,500 physicians, has changed his attitude toward capitation. He calls his newest gambit "a modified fee-for-service capitation, sort of a dual form of compensation." Formally, it is known as a population management fee, or PMF. Hill's primary care physicians used to be paid fee-for-service because McDermott says he believed that capitation discouraged doctors from seeing patients.
But the recent increase in capitation rates has inspired him to readjust his thinking. Hill, which like B&T is capitated by its HMOs, for the first time will tie 10% of its primary care doctors' compensation to the number of patients they treat--the capitation part. The more patients doctors handle, through group visits and over the telephone, the more money they'll earn. In the future, the PMF percentage will increase.
Why did McDermott change his mind about capitation? "The environment changed," he says. Where you stand, then, on the matter of capitation in California depends on where you sit. If an IPA or medical group is failing, or has already thrown in the towel, it is possible that its leaders believe capitation is not a workable model. Who could blame them? The alternative is to admit that as managers they blew it; and this conclusion has been reached by many, including McDermott.
On the other hand, those medical groups and IPAs that are making it financially "are not pursuing other (payment) arrangements as long as the capitation rate is adequate," in the words of PacifiCare spokesperson Leslie Ridgeway. If it is adequate, it becomes one of the key ingredients in making that cake as good as it can be.
Steven H. Heimoff is an Oakland, Calif.-based healthcare business writer.