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October 01, 2014 01:00 AM

Reform Update: Capitated payments more acceptable to providers, survey finds

Melanie Evans
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    A survey of 39 health plans released this week adds to mounting evidence that hospitals and medical groups are getting comfortable with incentive-based payment structures that reward quality and lower costs. This new snapshot includes surprising evidence that a significant percentage are willing to expose themselves to financial losses under a new generation of capitation models, which went out of vogue 20 years ago.

    The survey by Catalyst for Payment Reform, an employer-funded health policy group, found that 15% of what the participating health insurers spend on medical bills is paid under capitation. Experts cautioned the figure may be somewhat skewed because the health plans that responded to the survey included a lopsided number of insurers with capitation contracts, but that would not entirely account for the significant percentage.

    The survey reflects payments for 101 million people—about two-thirds of the nation's privately insured. The rapid adoption of more robust risk-based payment models could foster more rapid changes to how patients receive medical care.

    Use of incentives got a boost from the Patient Protection and Affordable Care Act, but not all incentives are equal. Some impose modest financial risk, as is the case with the healthcare law's Medicare penalties for 30-day readmissions and potential bonuses and losses under Medicare accountable care contracts.

    Not all providers are equipped to handle the risk that goes with capitation, said Dr. Robert Berenson, a senior fellow with the Urban Institute. Nonetheless, it's likely a more effective way to change providers' behavior than more limited incentives that allow hospitals and doctors to keep some savings from cost-control efforts or impose modest penalties for low performance on quality measures.

    Capitation is jargon for a simple concept: a lump sum paid to cover all of a patient's medical expenses. Providers profit when that sum is more than the expense and eat the loss if it isn't. As incentives go, capitation carries significant risk but also the potential for bigger reward and greater flexibility for providers to pay for whatever care they consider most effective.

    Until recently, capitation had become a dirty word to many outside of California, Oregon and perhaps Minnesota. The model shared the fate of managed care, which rapidly gained market share two decades ago and almost as quickly lost favor with doctors.

    Medical groups suffered major losses under capitation as fast-growing medical expenses exceeded the lump sum payments. Doctors consolidated and used new leverage to reject capitation or demand higher rates. Slightly more than 15% of physician office visits for Medicaid and privately insured patients were paid under capitation in 1996, one federal analysis found. Nine years later, the figure stood at 7%.

    Experts now report mixed anecdotal evidence on the resurgence of capitation. They generally corroborate Catalyst for Payment Reform's conclusion that incentives for quality improvement and cost control are growing, but they point out that the growth is uneven. Credit-rating agencies say capitation remains a small share of health systems' revenue.

    “There's a great interest in changing payment models,” said Elizabeth Sweeney, a senior director in healthcare with Standard & Poor's, but adoption is still nascent in many markets. “In the hospital side, there is great appetite for increasing risk, but the kinds of risk hospitals are taking is fairly limited.”

    Capitation among hospitals remained a small fraction of total revenue last year—1.3% for the median hospital—among hospitals with credit ratings from Moody's Investors Service. “It's a small amount and slow-growing,” said Moody's Lisa Goldstein, an associate managing director and analyst for the rating agency. The median hospital saw another 2.4% from risk-based contracts. The recent entry into contracts with incentive risks is “very measured” compared with the unprepared rush during the 1990s, she said.

    But Moody's analysts do expect risk-based incentives and capitation to grow, she said, which is why the rating agency last year began to include reporting by payment model in the financial indicators its analysts track.

    Blue Shield of California has seen enrollment drop in its managed-care plans during the last five years but expects to rapidly boost enrollment through new managed-care plans that use accountable care to create additional performance incentives, said Juan Davila, executive vice president of healthcare quality and affordability for the insurer.

    Historically, Blue Shield of California paid doctors under capitation with its managed-care plan. In recent years, those plans lost market share as premiums increased, in part because large medical groups used their leverage to raise the capitated payments. The new plans continue to pay doctors under capitation, but total spending must also stay within an annual budget. Doctors, hospitals and Blue Shield split profits when spending stays below the budget and share losses when the budget is exceeded.

    Blue Shield so far has 20 such contracts and expects to have 45 to 50 by 2018, which should account for half its enrollment, Davila said.

    Pioneer woes

    Fitch Ratings this week said the Medicare Innovation Center's Pioneer accountable care effort likely cannot survive without changes. The program has suffered a string of departures that has reduced the number of participants to 19 from 32. “Revitalizing Medicare's Pioneer accountable care organization models will likely require the Center for Medicare and Medicaid Services (CMS) to adjust its payment methodology, improve patient attribution and accelerate benchmarking reporting,” the ratings agency said in a comment. James LeBuhn, a Fitch senior director, said the benefits to Pioneer ACOs so far have been organizational, but not financial. “The experience has been valuable,” he said.

    Ahead of reform, affordability gap widened

    In the years before the Affordable Care Act, the gap between the poorest and wealthiest families' ability to pay for a trip to the doctor widened, research by the St. Louis Federal Reserve Bank shows. The analysis, posted on the bank's blog, analyzed annual Centers for Disease Control and Prevention survey data between 1995 and 2012. Researchers looked across income levels and compared the percentage of people who answered yes to the following: “Was there a time in the past 12 months when you needed to see a doctor but could not because of cost?” Among the poorest 20% of households, one-third answered yes in 2012 compared with 23% in 1995. For those in the top 20% (as well as the second-wealthiest 20%), researchers saw “a slightly upward, but insignificant, trend” in affirmative replies.

    Follow Melanie Evans on Twitter: @MHmevans

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