BUSINESSCapitation at the crossroads: The trend back to fee for serviceHMOs are de-emphasizing capitation in the face of physician resistance. But even some doctors say that might not be a good idea.By Leigh Page, amednews staff. March 5, 2001.
Managed Care: What's Next?"
With the managed care system drawing complaints from all quarters, doctors, patients, payers and even insurers themselves found themselves looking for alternatives to a concept that hadn't met its promise of improving care while reducing costs. This 2000-02 occasional series highlighted what physicians and others were doing to come up with a way to improve the system -- or replace it with something else. After years of trying to keep physicians under capitation, HMOs are taking the lid off and letting them switch back to fee-for-service reimbursements. Among just the large health plans, Aetna Inc., UnitedHealthcare, Cigna HealthCare, PacifiCare Health Systems and Coventry Health Care, all have acknowledged that they are moving some HMO contracts from fixed per-member, per-month payments under capitation to fee-for-service claims that doctors must submit for each procedure. Physicians are leaving capitation because they lost money on it, disliked its emphasis on cost containment and saw new opportunities in fee-for-service medicine. In addition to the shift in HMO contracts, fee for service is riding a boom in preferred provider organizations. PPO enrollment swelled to 106.8 million in 1999, surpassing that of HMOs for the first time, according to the American Assn. of PPOs. Health plans, for their part, have concluded that doctors' hostility about capitation was bad business. Also, they are facing class action lawsuits that challenge financial incentives including capitation. And in any case, plans say improvements in their utilization data make it easier to manage financial risk themselves without having to hand it over to doctors. The results are showing up in surveys. The Medical Group Management Assn. reports that the proportion of multispecialty practices with capitated contracts fell from 68% in 1996 to 58.3% in 2000. And Dave Gans, MGMA's director of survey operations, said he expected that rate to continue falling to 40% in the next year or two. The swing away from capitation is well on its way in Colorado, which has seen the demise of a half dozen or more groups. These physicians held capitated global risk contracts -- covering physician, hospital and pharmacy services -- and lost millions of dollars on them.
PPO enrollment swelled to 106.8 million in 1999, surpassing that of HMOs for the first time.
"We asked our doctors to act like insurance companies; that didn't work well," said Stanley Borg, DO, vice president of health services at Anthem Blue Cross and Blue Shield in Colorado. As a result, Anthem-Colorado has replaced its global risk contracts with less risky payment pools for hospital and pharmacy charges. Physicians in the pools share savings with Anthem but are not responsible for losses. Anthem is limiting these contracts to four provider groups that can handle the risk. But Thomas M. Jeffers, MD, a family physician at 55-member New West Physicians, a Denver IPA that is still in capitation, thinks doctors' exodus is a big mistake. He also thinks Anthem is too cautious about letting successful groups like New West accept capitation. "Managed care will come back," he insisted. Dr. Jeffers thinks doctors who left capitation eventually will see their payments fall. To return to capitation, they would have to renegotiate contracts and redevelop in-house utilization machinery to manage the risk, he said. But in the short run, he conceded, returning to fee-for-service medicine might make sense. Health plans report that they are using sizable parts of this year's double-digit premium increases to raise both capitation and fee-for-service rates, sometimes for the first time in years.
Primary care physicians need at least 100 to 150 capitated patients to make payment under capitation worthwhile.
It's hard to compare increases in capitation with those in fee for service because the two payment methodologies are like "apples and rocks," said Steve Cigich, a consulting actuary with Milliman and Robertson Inc. in Milwaukee. But he reported that PPOs give primary care physicians 10% to 15% higher fees than HMO fee for service because PPOs cannot guarantee patient volume. Dr. Jeffers is convinced that generous fee-for-service payments ultimately will fail because they cannot control health care expenditures. In 1999, those costs grew at two and a half times the yearly rate of 1993 to 1997, according to Washington, D.C.-based Center for Studying Health System Change. He said capitation forces physicians to figure out how to manage care to keep expenses within their set monthly capitation payment. But under fee for service, they are paid for each service they perform, thus removing the financial incentive to manage the amount of services they order. Employers have grudgingly accepted the switch to higher-cost fee-for-service medicine because they were in a booming economy and wanted to retain employers in a tight job market, Dr. Jeffers said. But if the economy gets worse, he thinks employers will try to get out of PPO contracts and move to some new version of capitated managed care. For example, employers are considering paying employees "defined contributions" for their health care and forcing patients themselves to become prudent buyers. Waving the cap goodbyeIn the meantime, many physicians, hospitals, patients and plans are saying farewell to HMOs and their capitated payments. Primary care physicians with only a few dozen patients under simple professional capitation -- which covers physicians' services only -- are the most obvious group to jump ship. Plans' all-products requirements often forced them into capitation and they were losing money on it. Because the costs of one sick patient can exceed the capitation income from several healthy patients, a primary care physician needs at least 100 to 150 capitated patients to make the payments worthwhile, according to Brent Greenwood, a principal with the actuarial firm of Reden & Anders in Atlanta. Last year, Aetna announced it is withdrawing from all capitated contracts in Connecticut, partly because many of them were small. Patients' shift to PPOs also has depleted HMO networks. Humana recently announced that it will close its Dallas-Fort Worth HMO on Aug. 1 because it had just 16,000 enrollees, while its local PPO membership had swelled to 100,000. Large groups with a big stake in capitation traditionally have profited under the payment deal, but data from MGMA show that is changing, perhaps because plans are raising their expectations of savings under capitation. In 1999, groups deriving 51% to 100% of their income from capitation reported median revenue of $533,211 per physician, which was lower than the median revenue of $562,673 per physician that was earned by groups that accepted no capitation at all. As usual, groups deriving 11% to 50%of their income from capitation did even worse -- earning $507,043 under the same statistic. AIS Physician Management, a Washington, D.C.-based health care publication, said these data are inconclusive because many of the highly capitated practices were hospital-owned groups, a sector that generally has not been making money. Still, many large IPAs and groups that were heavily invested in capitation have failed in recent years. A particularly bloody battleground is Colorado, where about half a dozen IPAs and groups that accepted global capitation have fallen in the past three years. One of the most prominent examples was Denver-based Paramount IPA, a huge 850-doctor organization that went bust in late 1998 and ended up owing physicians more than $1 million in unpaid claims. Melvyn H. Klein, MD, a Denver internist who was Paramount's president, said the failure was due to a combination of low reimbursements, insufficient investment and poor planning. But regardless of the causes, Colorado doctors have concluded that capitation was "a failed experiment," and they are now "very risk-averse," he said. Many of them won't accept even simple professional capitation any more. California doctors are leaving pharmacy and hospital risk but not professional risk, said Sam Ho, MD, corporate medical director for PacifiCare. He said members under a global risk had fallen from 91% in 1998 to 66% in 2001, but members under professional risk had fallen from 99% to 98% in that time. Ending all capitation would force practices to switch from receiving a predictable prepaid amount each month to submitting bills after the service is given, he said. Indeed, physicians on fee for service complain of slow payments and disputed claims. But in states where capitation started just a few years ago, the exits have almost emptied the field. Mo Mellion, MD, medical director of Blue Cross Blue Shield of Nebraska, said a few large practices in Omaha and Lincoln had signed capitated contracts in the mid-1990s but had lost money on them, and most of these contracts had disappeared. "Physicians were not aware of the infrastructure you needed to really understand your risk," he said. State regulations also have eaten away at capitation. The Harkey Report, a Nashville-based market research firm, blames the dearth of risk-bearing contracts in Colorado on a 1998 law, passed in the middle of Colorado's IPA failures, that forces plans to pay any debts left by failed IPAs. Several other states have similar rules which may be having the same effect, the report said. Staying with capitationAs others exit capitation, a small segment of large physician groups think they have brought management of capitation to a high art and are not about to give it up. In Colorado, New West survived one of the bleakest periods for capitation, when competing Colorado health plans bid down premiums and capitated rates actually fell. But the IPA survived and Dr. Jeffers believes it has become wiser about dealing with capitation. "If it's done in the right way," he said, "managed care is the most cost-efficient, high-quality type of health care, but the incentives have to be designed properly." Meanwhile, doctors who have prospered with capitation tend to be in large groups that resemble insurance companies more than practices. Even before state law required it, New West held reserves and stop-loss insurance to protect itself from losses from capitation. Physician Health Partners, another Colorado physician company that holds capitated contracts for 60,000 to 65,000 lives, employs 65 to 70. They carry out prior authorizations for hospitalization, referrals and surgery; closely monitor outcomes; develop utilization profiles for doctors; and run PHP's disease-management programs. But Jay Want, MD, an internist and PHP's chief medical officer, said all these mechanisms would be useless if the organization's 200 primary care physicians and 700 contracted specialists did not have their hearts in managed care. Dr. Want said he was not bothered that PHP was virtually alone in accepting capitation in Colorado. The lack of competition "creates value for us," he said. ADDITIONAL INFORMATION:Capitation woes -- and the futureWhy physicians lost outWidespread losses prompted many to walk away from capitated contracts, even if it meant losing patients. Rates too low. Physicians accepted poor rates from plans that were keeping premiums low to gain market share.
How they can prosper nowThe shakeout seems to be over, and those who remain capitated have better chances of success. Ride the rate hikes. Reimbursements are increasing, especially for those physicians who can control utilization.
Goodbye, capitationAll parties in the health care equation are leaving capitated payments. Physicians: Burned by low rates and dramatic IPA failures, fewer practices accept capitation; those that still do have fewer capitated contracts. Hospitals are exiting even faster than physicians.
But not everybody is willing to toss aside capitation. Physicians: Those who stay tend to be comfortable with managed care, work in large groups run very much like insurance companies, and can reap financial rewards for lower utilization.
Sources: Medical Group Management Assn.; National Health Information; health plans; consultants Copyright 2001 American Medical Association. All rights reserved.
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