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.