This is the 5th in a series of posts on evaluating financial risk in managed care agreements. Don’t bother looking for the 4th – DRG payments and case rates – I skipped ahead to number 5.
In this post, we look at capitation or “per-member-per-month”` payment methods.
As with the other payment methods we discussed, capitation incorporates business risk. The provider or practitioner is taking a risk that his / her / its average cost per month for providing all the services its patients need will be less than the monthly payment. The capitated provider is assuming risk for the cost of the health services needed for its patient population AND the frequency of services needed by its patient population. If you accept capitated payments without knowing your actual costs, without a sufficient patient base on which to average those costs (called “spreading risk”) and without sufficient protections against a greater than expected number of expensive patients, losses can mount quickly.
Back in the early 1990s when many payors were using this method, many of the providers with whom they contracted did not have information systems in place to make independent and informed decisions about what their average costs were and how much variation they could expect from one month to the next. As a result, some providers discovered that the effective payment rate for their services, when they divided the total capitation by the total services provided, resulted in payments of between 20% and 30% of charges.
Another result from this era
was that providers signed these contracts relying on payor data and inevitably,
there were claims that the data was inaccurate, misunderstood, falsified,
etc. Providers must be able to generate
and have confidence in their own data. They
must be able to monitor their costs and services weekly.
The first issue when considering a capitated arrangement is; what patients are included in the provider’s capitation?
• Are you familiar with this patient population?
• Do you know what illnesses this population is prone to having and can you predict how frequently they occur?
• Are you in a position to
influence the health of the patients for whom you are capitated? If for example, the provider is a hospital,
it may be paid capitation for patients whose primary care physicians refer
primarily to that hospital. Does the
hospital have sufficient systems in place to influence the overall health of
this population and need for its services?
As I’ve said in each of these financial risk posts, the rule of thumb for evaluating a payment method is: the scope of the risk you accept should match the scope of your control over costs. And where control is concerned, data is critical.
Scope of Capitated Services.
• What services are you expected to provide in exchange for the capitation?
• Are you familiar and comfortable with the scope of services for which you will be paid capitation?
• Are there any tests, drugs, devices or other services that should be excluded from the capitation payment and paid separately because they are unpredictable of so costly that they throw off the average?
If a provider is paid capitation for services other than
those services it can provide directly, such as a primary care physician whose
capitation includes the services of an unaffiliated hospital, the provider may
be assuming insurance risk. Some states
will require an insurance license for a provider to accept insurance risk.
The challenge with capitation is whether you accurately calculate the average resources needed to treat an average patient per month.
• Do you know what it costs to perform each of the services for which you are paid capitation?
• Can you determine on average, how many of each procedure you do per patient per month – for each procedure you perform?
• Do you know the average cost for your practice to treat each of the common or chronic illnesses in your patient population?
• Can you divide this cost over a predictable treatment period to arrive at a predictable cost per month?
• How much variance do you experience from this average?
• If you are a practitioner, can you limit the diagnoses for which you will accept capitation to those that you can predict with confidence?
• For those patients for whom you are considering accepting capitation, do you know what causes the cost to treat a particular patient to vary from the norm?
• Are the principal causes of the variance within your
Changes to the Capitation
• Can you renegotiate the rate if you find your average costs or frequency of procedures changing by some substantial amount?
• Can you renegotiate the rate if accepted treatments change?
• What about if the payment per service under the capitated payment yields less than a certain percentage of charges?
• What leverage do you have to either increase the capitation to include the variance or incorporate an additional payment for outlier cases?
• Do you understand how the payor determines which procedures or symptoms entitle you to a risk-adjustment?
• If the payor looks for certain treatments or clinical criteria for risk adjusting, do you have the ability to run parallel searches to make sure all patients are appropriately risk adjusted?
• Do you have appeal rights if you disagree with a payor’s determination?
• Is the payor’s manner of classifying patients consistent with industry standards so that the information you will gather to prove entitlement to the risk adjustment will be the same as for other payors’ risk adjustments?
• Does any risk adjustment to the capitation payment cover
the additional costs for patients with this diagnosis?
Limiting the Risk
• Can you purchase stop loss insurance from a commercial insurer?
• If the payor offers stop loss insurance, can you get competitive quotes to ensure the rates are reasonable?
• Can you get additional payment for any patient who exceeds the average by a certain amount?
• Can you get additional payments if the average cost for all patients or all patients with a certain diagnosis exceed the average by a certain amount?
Quality of Care
• Can you quickly determine whether services are being provided beyond the predicted level and who is ordering them and why?
• Do you have method for ensuring that your organization is performing all medically necessary services for the capitated patients?
• How frequently to you measure and review reports on adequacy of care?
• Do you have a method for ensuring that the quality of the services to capitated patients is consistent with services to other patients and meets community standards for patient care?
• Are your quality reviews consistent with any information gathering and reporting that you are required to do for the payor?
• What is the payor’s remedy if they determine you are not meeting quality goals?
These are just a few of the questions I ask when reviewing a per diem arrangement and are intended as a primer. It cannot cover all issues arising in a contract negotiation over payment. We will discuss DRGs and inpatient per procedure payment in our 4th post. At the rate I’m going with these, you can expect this some time in 2010.
As with all columns, your thoughts and contributions are welcome.