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Capitation

Capitated payment systems are, as the name implies, based on a payment per person, rather than a payment per service provided. There are several different types of capitation, ranging from relatively modest per member per month (pmpm) case management payments to primary care physicians involved in patient centered medical homes, to pmpm payments covering all professional services, to pmpm payments covering the total risk for all services: professional, facility, pharmaceutical, clinical laboratory, durable medical equipments, etc. And there are innumerable variations on these basic capitation types, depending on the particular services the parties decide to "carve out" and handle on either a fee-for-service basis or by delegation to a separate benefit management company. 

Physicians are, once again, receiving invitations from commercial payers to enter into capitated arrangements. Governmental payers and federal policymakers are also reconsidering the possibilities of capitation as a means of controlling the growth of health care costs. 

Chapter four: Capitation

Although many capitated arrangements of the 1990s proved unpopular with much of the public, and sometimes disastrous for physicians, some believe that this time will be different. Capitation supporters argue that today’s sophisticated information technology systems, data capture and performance measurement capabilities, and more accurate risk adjustment mechanisms will facilitate the development of capitation arrangements that will slow health care cost growth without alienating patients and employers. 

There is no dispute over the fact that capitated payment models raise numerous issues. Physicians must carefully analyze these issues if they are to determine accurately the likely financial impact of the capitated contracts offered to them. Physicians must also be committed to developing business and practice operations acumen that is more sophisticated than that required under a purely fee-for-service regime. Because capitation requires the assumption of risk, physicians will need to:
  • implement accrual accounting and a process for tracking incurred-but-not-reported (IBNR) liabilities that must be paid for from capitation revenue
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  • ensure the actuarial soundness of the per member per month payment based on the precise scope of services to be covered by that payment
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  • track detailed patient demographic and health status information, and ensure that the actuarial projection is appropriately risk adjusted based on this information
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  • ensure that they receive accurate and timely capitation payments, including complete patient enrollment data and a detailed explanation of any capitation deductions
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  • fairly limit their risk, by obtaining appropriate stop-loss insurance and carve-outs
Because you will likely be assuming full risk for your services, and possibly the services of others, you must fully understand any applicable risk adjustment methodology. And, particularly if you are new to capitation, it would be prudent to retain the services of an actuary to help you figure out how to make a capitated contract work for you.

Several other issues will be important to consider if you are invited to participate in a capitated arrangement. The timing of capitation payments is one such issue. If, for example, an individual enrolls in a health plan and only later is assigned to you, you need to know if capitation payments will be retroactive to the enrollee’s effective enrollment date or if payments only commence from the time of assignment.

You will also need to understand the extent to which capitation payments will cover time periods subsequent to enrollee termination or disenrollment. If the capitation payment period ceases immediately upon termination or disenrollment, but you remain on the hook for providing services after that event, you may end up being obligated to treat the patient for free until the post-termination/disenrollment continuity of care period ends.

Also think about what role, if any, fee-for-service reimbursement will play. Some services you may be obligated to provide may be "carved out" from the capitated arrangement. Carved-out services are usually paid on a fee-for-service basis, and should be specifically identified by CPT®, HCPCS, ASA, and ICD-9-CM codes, and by any applicable modifiers. You will also likely need a fee schedule to cover services paid by stop-loss insurance, and simply as a benchmark against which to measure the value of the capitation contract.

Capitation success is not just a physician responsibility. To avoid the problems of the past, health insurers must treat physicians as equal partners. They must freely share accurate and timely patient enrollment and utilization information with physicians, so that physicians can perform the types of pre-contract and ongoing analyses essential to succeeding under capitation.

Engaging in capitation arrangements can be challenging. However, some physician practices have been successfully participating in capitated contracts for many years. Under the right conditions, physicians can make capitation work.

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