Capitation Models for Physicians

Health Plans have developed reimbursement systems to pay primary care and specialist physicians based on methodologies that shift risk to the physician. Referred to as “capitation,” they operate by providing a defined amount of payment on a “per member, per month (PMPM)” basis.

These methodologies have been in use for over 25 years. In the 1990’s they were very commonly used by major health plans. By the year 2000 they were largely abandoned when large hospital systems refused to take them, due to significant monetary losses experienced when projected reimbursements did not meet the reality of disparities in human disease patterns for fixed populations.

Ideally, capitation methodologies should (1) be equitable in terms of provider cost reimbursement, and (2) serve to discourage unnecessary or inappropriate medical treatment.

The preferred method of financing an Accountable Care Organization (“ACO”) is through Capitation, which shifts financial risk from the health plan / consumer to the primary providers of care – hospitals and physicians.

The difficulty in making capitation work lies in accurately forecasting the financial cost of medical care for a given population.

Capitation rates vary significantly by geographic location; one size does not fit all medical risk scenarios. In the Phoenix metropolitan area in the late 1990s, one major health plan divided the region into five separately capitated areas, with per-capita rates varying as much as 20% among them.

The difficulty in accurately projecting medical risk is compounded when the population to be capitated is small (under 30,000 enrolled lives), or is disproportionately represented by a high-risk age category (for example, males over 55 years of age).

High cost pharmaceuticals, implants, DME and similar items where the cost fluctuates frequently and / or use is difficult to project accurately are “carved out” and reimbursed separately. “Stop Loss” thresholds are set to cover patients whose care significantly exceeds the projected averages. Health plans with significant volume and hospitals can purchase stop loss insurance to cover unexpected medical costs (computed on a per-member-per-month basis), but this is generally too expensive for a physician group to purchase.

The most “basic” form of capitation is referred to as “Full Risk Capitation.” This is the most inherently risky form of capitation for specialists. It relies on a very simple methodology that separates patients into two age-defined categories, “Commercial (ages 0 – 64),” and “senior (ages 65+).”

Primary Care is listed in one category, and Specialty Care is broken out by specialist discipline. Below is an extract published by Capitation Rates and Data.

This form of capitation methodology is simple to understand and provides a measurable basis for negotiating contracts based on actual experience. For example, an Allergist who agreed to a rate of $0.38 per member per month (commercial patient population) for a plan with a population of 20,000 covered lives could expect to receive monthly payments of $7,600 ($0.38 x 20,000) to provide the full range of care to covered patients.

At the end of the contract year, the capitated physician can calculate what his reimbursement would have been on a fee-for-service basis, and compare it with his average health plan reimbursement to see if he made or lost money on this contract, and if the latter, how much the rate should be changed to be competitive.

For example, under the full capitation methodology the physician earned $91,200 in a year ($7,600 / month x 12). However, if he had been reimbursed at the prevailing Medicare fee-for-service rate he would have received $100,000 (hypothetical numbers used for example purposes only). This means the capitation contract is paying him at 91.2% of Medicare ($91,200 / $100,000).

In this case, he will have to make a determination as to whether 91.2% of Medicare represents an acceptable reimbursement rate for this plan, or if he needs to renegotiate the commercial rate upward to achieve a more competitive reimbursement. If his objective is to be at 101% or more of Medicare, his new PMPM rate will need to be at least $0.42 PMPM ($100,000 / 20,000 / 12 months = $0.417 rounded to $0.42 PMPM).

A complex (more detailed) model for calculating full capitation is set forth below, as an example of how these methodologies changed over time to more accurately allocate reimbursement to the age categories of the beneficiary population.

Below is an example of a complex capitation methodology for primary care providers.

Age categories continue in 9-year increments through age 70

This type of complex capitation methodology, while more accurate and flexible in terms of allocating reimbursement among age categories, makes it impossible for the physician to make a comparison between competing health plans, and extremely difficult for negotiating rate changes.

Contact Capitation is a means to achieve the goals sought by health plans and distribute risk more equitably to specialists. It allows the specialist to control some of the risk inherent in a capitation contract by paying for the cost of a defined illness, or “episode of care,” as diagnosed by the specialist. There are two main variants of Contact Capitation, called “Traditional,” and “Episode of Care” Capitation, each with its own pros and cons.

In general, Contact Capitation pays specialists based on the number of patients managed, rather than the number of procedures performed.

To set up a Contact Capitation system, the health plan first develops “risk pools” based on the expected use and “blended” cost of specialist services.

Once the risk pools are established, the physician is reimbursed based on the number of (his) patient contacts as a proportion of the total contacts seen by all other physicians in that specialty. The health plan assigns a value to each patient contact.

In the simplest form (“Traditional”) of Contact Capitation, each patient visit is assigned the same value, regardless of the level of complexity of services actually performed. In the “Episode of Care” form, the value of services are weighted using clinical criteria.

Payment models using Traditional Contact Capitation assign each initial patient contact in a defined specialty a value of “1.” At the end of the each month, each physician’s total number of contacts is divided by the total of all initial contacts by all contracted physicians within the specialty to determine each physician’s percentage allocation of the risk pool.

For example, if a physician had 8 new patient contacts in November, and this amounted to 12% of the total of all new contacts that month, the physician would receive 12% of the money available from the risk pool, regardless of the amount or complexity of services delivered.

Each patient is credited to the specialist for a defined period of time following the initial visit (contact), usually 3, 6 or 12 months, depending on the specialty. The physician is compensated for all care delivered during that period at the fixed amount triggered by the initial contact.

In this system, there is a significant risk of adverse selection, as the reimbursement pools are built on assumptions of what an “average” patient will receive for treatment. In the real world, if the risk pool is small, there may not be enough “average” visits to compensate for high acuity visits, and it is rare that all physicians would be referred the same ratio of average to high acuity visits.

In addition, traditional Contact Capitation is very complex to administer, both from the standpoint of the health plan and the physician. The health plan must have a sophisticated data collection system to accurately pay claims based on the predetermined point value of each encounter.

The physician must accurately track first encounters, separate out continuing payments, and retroactively compare these to a monetary standard, such as percentage of the Medicare reimbursement rate. This takes considerable time and effort, and the results can only be accurately measured several months after the close of the reimbursement year. This is generally too late to use to renegotiate a new payment rate or methodology for the following year, and so rate changes tend to lag at least one year in implementation.

This form of Contact Capitation is very similar to the Traditional method, with the exception the value assigned to the initial contact (“encounter value”) is assigned by the health plan, weighted in a more clinically sophisticated manner, and takes into account such criteria as the patient’s age, sex, and principal diagnosis assigned by the specialist.

The payment still covers a defined time period for which an average patient in the weighted category will receive treatment.

In an Episode of Care system, problems relating to adverse selection are minimized, but issues dealing with administrative complexity remain for both the health plan and the physician.

The following is a simplified example that illustrates how Episode of Care capitation reimbursement would work for General Surgery (data from Capitation Rates and Data, Atlanta, Georgia).

Commercial Pool = 20,000 enrollees at $1.40 PMPM = $28,000/month
Payment per Encounter Value = $600

In this example, only $19,800 of the $28,000 in the risk pool was distributed. The remainder will be rolled to subsequent months to compensate for any shortfalls not covered by withholds taken from the primary care risk pool. If there was a shortfall instead of a surplus, the shortfall would be carried forward into future months and (hopefully) reimbursed at the end of the contract year.

The payments to the physicians are intended to cover the full episode of care for his patients who received initial services in this month, regardless of how long the course of treatment lasts.

The Medicare Access and CHIP Reauthorization Act (commonly referred to as the “Doc Fix” legislation) passed in April 2015 set as a goal the establishment of “Care Episodes” and “Patient Condition Groups” to account for 50% of all Medicare expenditures (Part A – hospitals and Part B – physicians) starting in 2023.

It is important that a physician be able to model the average cost of care for the most commonly encountered diagnosis for his specialty before entering into a capitated payment methodology.

Most physician specialties see 80% of their revenue come from 6 – 12 diagnosis, and generally these can be financially modeled for use in a Contact Capitation payment system. For those that cannot be fully modeled, “outlier” categories should be established which pay at a “discounted fee for service” rate. These outlier payments are generally paid from risk pool withholds.

As in any business transaction, the “devil is in the details,” and there are a host of issues to consider when evaluating a contract where the payment methodology is based upon some form of capitation.

1. The purpose of capitation reimbursement is to stabilize medical costs for the health plan, and reduce the overall cost of medical care by eliminating incentives to over treat patients.
2. Medicare sponsored health plans expect to see an overall reduction in total expenses ranging from 2% to 5% of the prior year’s cost. For this reason, capitation rates build in the desired discount.
3. Capitated plans promise to split any financial savings with providers. Any year-end excess in a risk pool is first split (generally 50%) with the sponsoring organization, and only after that is paid, with the providers, which may include hospitals as well as physicians.
4. Profit from a capitated payment methodology can be most reliably generated through increased patient volume from referring physicians within the capitated network.
5. The use of risk pools means that physicians participating in a capitated payment plan will be at risk for the cost and amount of care given by others, factors they can not control.
6. Capitation reimbursement generally has “withholds” taken from it, usually in the amount of 10%, which are held until the contract year ends. They are used to cover any unexpected expenses.

The following is a generic list of questions to ask to determine the amount of risk to the provider when evaluating a payment arrangement based on capitation:

1. Is this a “Traditional” or “Contact Capitation” arrangement?
2. What is the per-member-per-month rate (or episode of care rate if applicable)? How was it calculated? What percentage of the current Medicare fee schedule does it equate to? Was it based on prior capitation payment rates? Over what time frame were these calculated, and do these apply to the same enrollee population covered by this contract? What is the timing on the payment of the capitation?
3. Are there any carve-outs, and if so, how and at what rate are they reimbursed?
4. Is there a provision for stop-loss insurance? If so, is it paid on individual claims or in the aggregate? At what level does it attach? Who pays for this? Is there a provision for stop loss insurance, and if so, does the payment come out of the specialist risk pool?
5. How are the risk pools set up? Are they funded as a defined per-member-per-month rate specific to my specialty, or are they set up as a “percentage of premium” arrangement whereby all physician services will be reimbursed out of the same pool?
6. Is the risk pool responsible for cost overruns from hospital, pharmaceutical, primary care physician or other risk-sharing arrangements set up by the health plan?
7. How is the payment for patients who disenroll in the middle of an episode of care calculated?
8. How are disputed claims resolved? What is the time period for filing a disputed claim? What is the time period for resolution?
9. What is the time lag between the time this contract starts and the first capitation check is received? How long will be the delay between the end of each capitation month and the issuance of checks?
10. How large is the pool of beneficiaries?
11. How large is the panel of providers in my specialty?