Yes, Virginia, capitation is on the wane. But those inclined to celebrate its demise might want to leave the champagne bottle corked for now.
Anecdotal evidence has suggested that capitation is tapering as HMOs bend to consumers clamoring for choice and providers demanding adequate compensation.
Now the Medical Group Management Association of Englewood, Colo., and Stuart, Fla.-based reinsurance brokerage Evergreen Re have quantified a decline.
Evergreen's Managed Care Indicator reported a drop in capitation involvement among physician groups in the study from 74% in 1999 to 57% in 2000.
"Our study shows there's been an absolute decrease in the number of providers involved in capitation," says Evergreen Re President Charles Crispin, which released its fourth annual Managed Care Indicator in May.
But MGMA and Evergreen Re also found the bulk of remaining PMPM arrangements healthy and therefore viable: Half of responding providers not only are still in the ballgame but also are improving their play by dumping poor performers and garnering ratcheted reimbursement from more health plans, Crispin says. "Of those still involved, most have increased their involvement and are negotiating better terms. We think capitation is here to stay."
But not for Bismarck, N.D., family practitioner Jeffrey Orchard, M.D., president of PrimeCare health group. A 175-physician network serving western North Dakota and northern South Dakota, PrimeCare jettisoned its sole capitated contract just as Evergreen Re published its survey.
Although a mere 1% of PrimeCare's annual gross revenues of more than $175 million were funneled through the capitated contract, Orchard says the arrangement, which covered 3,000 state employees, stung providers.
Orchard says PrimeCare's physicians were squeezed by an untenable combination of rising operating costs, work weeks averaging 68 hours, eight years of flat reimbursement and a 25% dip in income over the past 24 months.
"We were trying to provide what our patients needed but were expected to withhold care more and more and more to try to help the bottom line," says Orchard. "It was miserable."
Physicians across the country have felt similarly pinched, says Andrew MacDonald, president of ECG Management Consultants, a healthcare advisory firm based in Seattle and Boston. "It has certainly decreased the quality of life of the average physician."
Bearing risk without any compensating benefit has driven most of ECG's provider clients to drop capitated contracts, says MacDonald. But that doesn't spell death to HMOs. "Managed care is not going away, but the insurance company shedding risk on the provider through capitation is declining. The physicians are just no longer willing to take the risk."
Stephen George, president of Miami-based medical reinsurance firm Provider Risk, says unpredictable risk can be deflected by appropriate stop-loss coverage. The real blame, George says, rests on a "physician leadership vacuum" in an antiquated healthcare delivery system led by an old guard that consumes a "Grand Canyon" of dollars and lets 43 million working Americans go without insurance.
"Like taxes, the funds never seem to be enough. The truth is, there's enough money in our healthcare system to keep people healthy and to let doctors and hospitals make enough money," says George. "The problem is that we are managing a system that hasn't changed much in 30 years, where too many physicians and hospitals want to continue acting like city-states, with the least amount of cooperation and coordination as is required to make a living and keep their business flowing."
Capitation is merely a budget, says George, and healthcare costs must be budgeted lest the floodgate to national health insurance be blown off its hinges.
Government entities already pick up half of the $1.3 trillion spent on healthcare annually, and continued waste foretells more uninsured workers, George says. "Doctors are clinking the champagne glasses, saying, 'We've beaten the evil HMOs.' But the HMOs provide the last stop before employers consider self-funding or getting out of insurance altogether--and companies with less than 50 employees are especially vulnerable.
"Physicians who understand this concept will be more inclined to work at solutions," George says.
Crispin says the downswing in capitation represents "healthy turnover," wherein strong organizations are becoming choosier with their dance cards and thereby sloughing off sagging health plans and inefficient provider groups.
"It's positively Darwinian. If there's a good lesson to be learned, it's that organizations need to operate efficiently and manage their financial operations well. Blame who you want, but everyone needs to control costs, regardless of reimbursement arrangements."
MGMA's David Gans agrees that the fittest are surviving as capitation dips but says factors other than efficiency buoy successful capitation and, therefore, even the tightest of ships can run aground where conditions are unfavorable.
According to MGMA's Cost Survey, provider groups with a high percentage of capitated contracts or none at all have an edge over dabblers. Gans says the pricey infrastructure required to administer such contracts becomes more affordable through economies of scale.
So which provider groups are the most likely to thrive in PMPM arrangements going forward? Expansive, well-managed, multispecialty units located in regions with concentrated population, adequate catastrophic coverage and savvy negotiators, says Gans.
Marvin Kanter, M.D., CEO of Calabasas, Calif.-based Progressive Healthcare Systems, says he has come to terms with capitation in the past 20 years. The payment plan soared from nonexistence in 1979 to comprising 100% of contracts negotiated today on behalf of the management services organization's 80 primary care physicians and 300 specialists.
"We said it would never be more than 5% of our business," Kanter says. "But what was a niche became the mainstream."
During most of the past decade, payments under capitation held steady despite spiraling costs, Kanter says. But premiums and provider reimbursements have edged up slightly since 1999. Through careful negotiating, improved technology and appropriate reinsurance, the MSO remains viable. "These last few years have been very tough, but I think we've weathered the storm and are starting to see some daylight," Kanter says.
Pediatrician Theresa Shouse, M.D., bypassed the storm altogether by just saying no to capitated contracts since forming Pediatric Associates of Plano (Texas) nine years ago.
"Capitation transfers the insurance function to the physician and limits medical care, so I'm totally in disagreement with that method," says Shouse, who has three partners. "In pediatrics, they never allow enough coverage per child per month per age to actually cover the medical care. So either the doctor is short-changed or the child is short-changed. Capitation is not the answer."
So what is? Shouse says financial disincentives designed to curb excess utilization are a better alternative. "I think higher co-pays would give the patients more responsibility about when they seek care."
Michael Tomasko, administrator of PrimeCare, says capitation excises "personal responsibility" from healthcare. "No one expects to go the grocery store and buy whatever they want for $100 per month. When we hit the counter, we all pay according to what we chose. We just refuse to do that in healthcare."
Virginia Mason Medical Center in Seattle, a 420-physician multispecialty integrated system, has cut its percentage of capitated contracts from 30% to 15% this year.
In areas with lower reimbursement rates, such as Seattle, physician groups are becoming more aggressive in shedding reimbursement arrangements that are inadequate to provide quality care and survive economically, says Virginia Mason Chairman and CEO Gary Kaplan, M.D., an internist and MGMA board chairman.
Also giving capitation the boot are HMOs shifting back to fee-for-service in response to a marketplace pushing for choice, Kaplan says.
For providers and health plans still using capitation, the best contracts permit fluctuating rates based on utilization thresholds, rely on sufficient premiums, are designed for long-term viability and recognize providers' and payers' financial needs, Gans says. "That doesn't happen very often."
The road to delivering quality care under capitation must be navigated gingerly by physicians whose training focuses on healing rather than business, says George. "You can be a No. 1, Harvard-trained provider, but if you do the wrong deal and you accept that too-low cap, you can be in big trouble in a year."
