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Can the Massachusetts Blues revive capitation? New twist includes quality bonus

The new contract is designed for large physician groups and hospitals. If doctors leave fee for service, experts say, other insurers might look closer at this model.

By Emily Berry, amednews staff. Feb. 11, 2008.

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At one time in the 1990s, capitation seemed inevitable -- and then in many parts of the country it disappeared almost as quickly as it arrived.

But at least one plan wants to bring capitation -- paying a flat fee per member instead of reimbursement based on services -- back to the mainstream.

Capitation is BlueCross BlueShield of Massachusetts' "new" big idea in contracting, though the plan isn't hyping the term explicitly with physicians. Instead, the Massachusetts Blues calls it the "Alternative Quality Contract." It is an improved form of capitation, the company said. Along with per-member, per-month reimbursements, physicians could receive up to a 10% bonus based on success in 70 quality measures.

"Previous capitation deals were designed to have insurance companies push risk off onto providers. That's not what we're trying to do here," said Robert Mandel, MD, vice president of health care services for the Massachusetts Blues plan.

Rather than target small groups with capitation contracts, the Blues said its model targets large groups and hospitals that it believes already have the size, market power and experience to negotiate payments up and down the health care system, analyze costs and risks, and evaluate and measure their own quality.

Quality incentives are what make this plan different from past capitation systems, said Paul Ginsburg, PhD, president of the Center for Studying Health System Change, a Washington-based research organization. "The previous generation of capitation had things like HEDIS reporting, all designed to make sure the quality wasn't too low -- you could be penalized, but there were no rewards for better quality," he said. "This is a change, offering substantial reward for quality."

Experts say the reintroduction of capitation from such a large health plan could trigger renewed interest from other insurers that would like to shift financial risk to doctors as a way for plans to put a lid on rising medical costs. But first the Blues has to convince skeptical doctors, hospitals and members in the state that returning to a capitated HMO system from one based on fee for service is desirable.

If the company fails to sell its design, Dr. Ginsburg said, "it would just become evidence of how hard it is to change your system."

Capitation was a managed care buzzword of the 1990s. The idea was that by paying doctors a flat fee, they would be more careful about managing their patients' health expenses and would offer more preventive services to ensure cost savings. Instead, many physicians found having to manage costs inside and outside the practice to be cumbersome, especially as they determined the fees they were paid were too low, even without a catastrophic case that could blow a hole in their budgets, experts say. The use of capitation also began to wane as patients left HMOs in favor of less-restrictive PPOs.

According to figures from the Center for Studying Health System Change's Community Tracking Survey, the percentage of doctors accepting any capitated payments dropped from 54.2% in 1996-97 to 44.7% in 2004-05. Most doctors accepting capitation did so for less than a quarter of their patients. Experts say most practices that still welcome capitation are confined to a few areas of the country, such as the West Coast and upper Midwest.

The capitation model works best with a health system that includes a range of care settings, both inpatient and outpatient, and with groups of physicians that are large enough to manage the risk that comes with per-member payment, Dr. Ginsburg said. Those conditions make a re-emergence of capitation a bit more feasible in Boston, he added.

The Massachusetts Blues is the largest insurer in the state, with 3 million members, and its market is dominated by relatively few hospitals -- 15 health systems make up 85% of the plan's HMO payments, Blues spokesman Chris Murphy said.

Massachusetts Medical Society President B. Dale Magee, MD, an ob-gyn from Shrewsbury, said the Blues' proposed contracts could cause conflicts within the care system as one part becomes responsible for paying everyone else. For example, physicians might worry hospitals would use payments for their projects, and skimp on paying affiliated physicians under the contract.

"A lot of that depends on how open the books are and how good the relationships are between doctors and the system," Dr. Magee said. "There would have to be open books, showing where the money is spent and where the money is coming from."

Capitation contracts have been replaced by fee-for-service arrangements for a lot of reasons, but basically because they are difficult to manage.

"Assuming the principal responsibility for managing risk requires physicians obtain the economic and actuarial skills to successfully manage a capitation model," said Joseph M. Heyman, MD, chair-elect of the AMA Board of Trustees and an ob-gyn from West Newbury, Mass.

"The AMA strongly encourages physicians to exercise extreme caution prior to entering into a capitation agreement and ensure that the quality of patient care is not threatened by inadequate capitation rates. It is important that physicians avoid undue economic pressure that can lead to a culture of denial."

The required breadth of services under the capitated contract makes participation an awkward fit for even a large hospital like Beth Israel Deaconess Medical Center in Boston, president and CEO Paul Levy said.

"We don't feel we can be held responsible for the cost of nonaffiliated organizations," he said. "We're not quite ready to sign on."

Partners HealthCare network president Thomas H. Lee, MD, said his hospital system wants to keep talking to the Blues, but isn't interested in signing up unless the Blues makes some changes to the contract structure to make sure the pitfalls that originally doomed capitation don't come up again.

"I don't think any of us want to go through that cycle again," he said. "There's a lot of heartache, a lot of evening meetings."

Participation in the Massachusetts Blues' capitated contract is optional, and the contract payments would be based on what Blue Cross calculates it is already paying for all of the included services on a per-patient basis. Then each year, for the first five years, the per-patient reimbursement would automatically increase for inflation, around 4%, Dr. Mandel said.

Murphy said the Blues plan is in "active negotiations" with a couple of large physician groups, who in turn would contract with hospitals and others to round out the required spectrum of care.

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