Indeed, the Medicare Payment Advisory Commission, in a November letter to the CMS, argued that payments leaving providers at some financial risk should become the only payment model, or at least the primary one, for the accountable care organizations to begin under Medicare next year. The American Medical Association urged the CMS to adopt risk-based payments alongside a proposed performance bonus in a December letter, as did some other providers, including Allina Hospitals & Clinics, Minneapolis, and the California Association of Physician Groups.
Scripps Health sharply pulled back from full-risk contracts a dozen years ago, the system's financial reports show. By January 2003, the California system had exited commercial capitation. “We began to say, ‘How long do you have to bang your head into the wall before we say this isn't working?' ” recalls Marc Reynolds, senior vice president of payer relations at Scripps, a four-hospital system that closed its books last September with income of $132.6 million on revenue of roughly $2 billion.
Health plans did a poor job factoring the cost of care for some of the sickest patients into capitation plans, a process known as risk adjustment, Reynolds says. That left providers vulnerable to sharp losses. The system experimented with contracts that excluded transplant patients and emergency room patients from capitation, but continued to struggle.
For Scripps and others with multiple specialists that attract complex patients, a “lack of risk adjustment puts them at a disadvantage that you can't overcome through hard work,” Reynolds says.
Scripps sought to protect against losses from costly exceptions with reinsurance, but Reynolds says insurance also has a price. “It gets very expensive,” he says. “All you have to do is have a bad year, so there's really no hiding from these high-cost claims in the long run.”
Meanwhile, health plans offered unrealistic premiums and benefits to members, he adds. And California's competitive market also held down capitation payments as providers sought to gain market share. “You're just starting off from a losing proposition,” Reynolds says.
The health system's shift away from capitation toward fee-for-service did not go unnoticed in the San Diego market, according to a July 2009 report by the Center for Studying Health System Change, a Washington-based not-for-profit health policy organization, and commissioned by the California HealthCare Foundation. The report, based on interviews with hospitals, doctors, employers and insurance insiders, including brokers and consultants, noted a retreat from capitation could significantly raise costs.
But Scripps is not the only health system wary of capitation.