ACO Organizations and Capitation Lessons Learned

The method of financing Accountable Care Organizations (ACO’s) must be through a form of Capitation in order to adequately pass financial risk from the health plan / consumer to the primary providers of care – hospitals and physicians.

Capitation was used extensively throughout the late 1980’s and 1990’s for physician contracting, but fell into disfavor around year 2000 when (1) health plans abandoned the “gatekeeper” model (they found that 99% of specialty referrals were getting through, and the cost of running a large pre-authorization department exceeded the cost savings of the 1% of patient who were denied referrals), and (2) large national hospital chains refused to accept capitation contracts.

A few capitation plans, or variants thereof, continued to operate after year 2000, but these were generally confined to small sub-specialty networks (dermatology, ophthalmology) and government sponsored plans, and not all providers in these plans were capitated.

• An ACO cannot take capitation (a fixed amount per member per month) reimbursement from a health plan and expect to control utilization by paying fee-for-service to a hospital or physician group. With very limited exceptions for unusual specialties or rural networks, every provider must accept a form of capitation reimbursement.
• Capitation produces big monetary winners and losers; physicians tend to experience loss disproportionately to other providers, such as hospitals.
  • Specialist physicians participating in a capitation payment methodology should expect overall payment for the capitated panels to decrease between 5.0% and 15.0% per unit of work during the first year, depending on the method of capitation used (PCP Full Cap vs. Plan Cap by Specialty, etc….).
• Capitation panels should have at least 30,000 lives in order to minimize the risk of outlier cases exceeding revenue projections causing the ACO to suffer financial loss. Panels with 20,000 members may break even, but it would be more a matter of luck than skill. Panels with 10,000 or fewer members are financial accidents waiting to happen.
• There is no pot of gold at the end of the annual contracting period. When PCPs realize this, they will attempt to increase their reimbursement by taking on larger patient panels, and triaging as much care as possible to specialists. Profit comes from increased patient volume.
• If PCPs are capitated for all professional care (including specialist care), they may want to subcapitate care for your specialty (transfer the risk).
• PCPs are not allies of specialists in a capitated arrangement; these financial relationships in a capitated ACO will be adversarial.
• Accurate data to project capitated costs is generally not available, and if it is, is rarely customized to the physician’s geographic area or exact patient demographic (age, sex, prior illness).
• PCP groups are unlikely to hire their own specialists unless they have a huge capitated panel. Multi-specialty medical groups are very difficult to manage and have a high failure rate.
• Specialists who are geographically dispersed, and have the capacity to take on new patients, will have a contracting advantage over those who do not have a presence in major metropolitan areas where the population resides.
• Medical groups will attempt to push as much capitated work as possible onto mid-level practitioners and employed physicians.

• In a climate of uncertainty, hedge your bets.
  • Serious consideration should be given to adding additional capacity if you believe that ACOs will be a major force in health care delivery.
  • Be aware there will be no additional reimbursement for “new” technology, including testing, that does not materially reduce the direct cost of care (such as a reduction in hospitalizations).
  • Be cautious in implementing any new medical services, tools or tests; they should be financially self-sustaining.
• If there is inadequate / unreliable data to project caseload volume, attempt to subcontact based on a form of “Contact Capitation” such as Episode of Care Capitation.  This will limit the risk of adverse selection.
  • Contact Capitation is a system whereby a certain diagnosis, by a specialist, triggers an “episode of care” for a patient.  Reimbursement will be for a fixed amount over a period of time (generally in one-year increments).
  • Contact Capitation works by setting prices for commonly-seen conditions, discounting them slightly, and packaging them as part of the subcontract arrangement.
  • All other care, including unforeseen care for a “packaged” condition, should be reimbursed at a discounted fee-for-service rate.
  • “Carve out” expensive items over which the physician has little control (pharmaceutical, implants, DME), or for which prices fluctuate frequently and / or significantly, and have these reimbursed separately.
  • “Stop loss” thresholds for unusual cases should be built into the subcapitation contract to protect the Practice.  Generally this is done as a discounted fee for service once a defined threshold is passed.

• Be proactive; take the initiative to meet with ACO management. Try to “steer the boat” to educate them about your specialty, and to cement your relationship with PCPs and other referring physicians.  Consider these meetings as marketing opportunities.
  • Attempt to be an “exclusive” provider (depending on the size of the panel) for the ACO in return for discounted rates.
  •  Get on the Governing Board if possible.
  • Come to the table with data on cost and utilization; position yourself as the expert on use / cost data in your specialty.
  • Remember, it is easier to jump off the ship once it is underway, than to jump on after it has left the dock.

• Be cautious; examine the full structure of the ACO before joining.
  • Who is in charge?
  • If this ACO contracts with Medicare, be sure it is the major player in your region; under current regulations, you may be restricted from joining more than one ACO unless you join as an “Other Entity,” which restricts your options for receiving shared savings / profit.
  • Are beneficiaries subject to substantial co-payments / deductibles to prevent overutilization?
  • What is your risk?  Are there mechanisms to prevent “leakage (non-ACO patients accidentally getting care through the ACO, leaving the provider to chase reimbursement from the patient)”?
  • Are there reserves for unforeseen specialist costs?  How large are the reserves?
  • Do not let ACOs make up more than 20% of your market share; preferably this number should be 10% or less.

• The theory behind ACOs is that patients will get better care at less cost when physicians and hospitals are not incentivized to over treat.
• Available evidence from 10 + years of capitation experience in the 1990s is that capitation did not control costs, patients did not get statistically significant better care, and the average length of hospital stays was the same under capitation vs. managed fee-for-service care.
  Results from the most recent Medicare experiments with capitation (two-year studies) are mixed.  The initial experiments (2010 – 2013) with “Pioneer ACOs” saw 40% of the original participating hospital systems drop out after failing to reach performance targets.  The most recently completed data, however (as reported by CMS), showed those systems who continued in the Pioneer ACO study did achieve cost savings (primarily through avoidance of hospital re-admissions and emergency department use) while meeting most quality metrics.
  In 2015 HHS set a goal to have 50% of Medicare reimbursement flow through risk-sharing arrangements, such as ACOs, by 2018.
• Primary care physicians enrolled in capitated plans have frequently failed to meet projected goals for controlling caseload growth and reducing utilization of care by patients for the following reasons:
  1. Patients in capitated plans generally do not have high deductibles or co-payments, and therefore no patient disincentives exist to seek unnecessary care.
  2. Physician practice patterns do not change materially with changes in financial reimbursement systems.
  3. Most PCPs have not been actively over treating patients for simple financial gain, so a change in reimbursement systems is not a simple fix to the problem of growing medical costs.
  4. The omission of tort reform on a national level. Physicians continue to practice defensive medicine (an estimated 16% – 25% of total cost) in states where there is little or no protection against spurious litigation.
  5. It is extremely difficult to accurately predict human disease patterns and resulting costs in small panels (under 30,000), as well as to amass large panels of beneficiaries in highly competitive environments.
• Efforts to contain medical costs through capitated ACO plans whose beneficiary members do not have “skin in the game” (through high-deductibles or co-payment requirements), and which operate in a business environment lacking any sort of restraints on spurious litigation (tort reform), are unlikely to be successful.
• Medicare ACOs restrict physicians who bill “primary care” CPTs to membership in only one Medicare ACO.  This restriction applies not only to PCPs, but also to specialists who bill primary care codes, such as E & M codes (99201 – 99215) to Medicare ACO beneficiaries.  Specialists may participate in multiple Medicare ACOs as “Other Entity Providers,” but there is no guarantee they can participate in shared savings or distribution of profits in the same manner as other providers.  Reimbursement for Other Entity providers is at the discretion of the ACO management.

This federal restriction does not apply to non-Medicare ACOs.