As your organization continues to exist in the months and years to come, there is one important item which must be addressed - capitation.

 Capitation is:

"A form of payment in which the provider’s compensation is based upon a specific population served. Payment is a fixed price and covers the cost of health care services delivered to the enrolled member. A negotiated rate per member is usually paid monthly to the health care provider."

Capitation puts the provider at risk for the frequency, severity and intensity of health care services being provided. Providers must balance those risks against the potential financial rewards and other benefits to determine when and whether to accept capitation. The type of services which can be capitated are facility charges (inpatient, outpatient, etc.), professional fees (primary, specialty, non-medical), and other medical services (DME, drugs, ambulance services, etc.). Capitation contracts can also cover special carve out services, mental health services, DRG payments, Outpatient services, and also global capitation with include both the physician and facility (hospital).

In moving to capitation, providers become responsible for a group of people rather than a group of service offerings. The broader the services covered under the capitation, the broader the responsibility. While fee-for-service rewards the provider with increased volume, capitation requires hospitals and physicians to serve as the gatekeeper of resources, providing the most appropriate care in the most appropriate setting. Under capitation, the providers’ profitability increases when the covered population increases and the volume of services rendered to the population decreases.

Capitation can provide an opportunity to enhance a community’s health status. Rather than emphasizing treatment of patients’ illnesses it gives incentives to maintain the health of an entire enrolled population. Prevention is key.

In order to become a provider under a capitated managed care health plan, you must look at the health care delivery system from a different viewpoint. Below is the shift which an organization must adapt when looking at moving from fee-for-service to capitation.

 

Fee-for-Service	>	Capitation
World Revolves around Hospital	>	World Revolves around Covered Lives
Care of a Specific Patient	>	Care of a Covered Population
Specialist Driven	>	Primary Care Driven
Solo Practice	>	Network of Providers
Local Service Area	>	Regional Service Area
Volume Driven Revenue	>	Controlled Volume Drives Revenue

Typically, there are two ways your organization can get involved in capitated contracts. The first way is a global reimbursement paid to your organization. In turn, you would pay the hospital and physicians out of the global fee. The organization would keep a portion of the fee for their administrative fee.

Second, the organization contracts with a payor to reimburse the primary care physicians on a capitated basis and all other on a reduced fee-for-service. If the organization does not have an extensive MIS system, most organizations opt for the second choice.

There are advantages and disadvantages associated with capitation. Some are listed below.

Advantages

1. 1. Shifts the providers’ focus to health and prevention
2. 2. Improves cash flow to the provider. The provider receives a monthly payment for the enrolled population whether care is provided or not
3. 3. Reduces accounts receivable and collection problems
4. 4. Allows access to an enrolled population
5. 5. Allows flexibility and creativity in managing utilization
6. 6. Strengthens relationships and creates interdependency among providers
7. 7. Aligns physicians’ and hospitals’ incentives to improve its resource usage and helps each to deliver appropriate care.
8. 8. Shifts emphasis to outpatient and home care

Disadvantages

1. 1. Unknown Risks
2. 2. Requires strong change and utilization controls
3. 3. Philosophical differences
4. 4. Require change
5. 5. May Impact Quality

 

Now that we have an understanding of the background associated with capitation, we will explain how your organization will proceed and evaluate a capitated agreement. Not all health plans require the same services to be provided to patients. One health plan might classify Obstetrics as primary care while another one does not. Knowing that this does occur throughout the industry, we will not examine each variation because the possibilities are almost endless. We will cover the basics.

Lets pick an imaginary amount of covered lives and billed claims. Lets say that your organization has 40,200 covered lives and sent in bills for 194,870 CPT procedure codes. After you multiplied the number of billed CPT codes with each of your corresponding fees, you billed $11,231,132.62. Remember, this is just an example.

The next thing you need to determine is how much money the health plan would have to pay you in a capitation payments to equal $11,231,132.62.

The health plan would have to pay your organization $23.28 per member per month to equal the $11,231,132.62. We arrived at this by dividing the gross revenue by 12 months, and further dividing by 40,200, the amount of covered lives in the example shown.

Example: $11.2 million / 12 months = $ 935,927.72 per month

$ 935,927.72 month / 40,200 covered lives = $ 23.28 PMPM

This example is a simplified version of what your organization would require from a capitation contract, to equal a contract valued at $ 11.2 million. A detailed financial statement from an HMO would typically show that your organization, under a global contract, would receive between $80.00 to $110.00 PMPM. Remember, this PMPM figure is to cover all physicians and hospital charges. Elements which can affect your capitation is the demographics of the population being served, clinical efficiency / proper utilization, stop loss insurance, reputation and the health plan itself.

 

Below are the steps which your organization would take in evaluating a capitated contract.

 

Capitation Evaluation Steps

 

When your organization starts to evaluate a capitated contract, you must know how much the managed care organization spends on health care for its members. This "spending" by the managed care company is called "medical loss ratio". So the organization’s first step is:

 

STEP 1

"Identify the most recent medical loss ratio for the managed care company"

Medical loss ratio (MLR) is the amount of money that a health plan pays for medical services to be provided to a covered member. It is shown on all reports as a percentage.

Example:

Health Plan A wants to contract with your organization. The health plan charges an employer group an average of $100.00 per employee each month. What your organization needs to know is how much of the $100 will be spent by the health plan in order to provide medical services for the employee. Does the health plan usually spend 75% or 80% of the premium collected? Your organization can obtain this information from the health plan or from the state insurance department. If, using this example, the health plan spends 80% of its premium on health care services, then your organization would know that you should ask for at least $80.00 PMPM.

Since your organization will be receiving a capitated payment from the health plan, the organization should develop a system for reimbursing its physicians and hospital.

 

STEP 2

"Establish how the organization will pay physicians"

The organization has various options as to how physicians would be reimbursed.

OPTION ONE: For global capitated contracts, pay the physicians on a fee-for-service basis. In order to accomplish this, the organization must have an established fee schedule to reimburse from. The organization has already established a fee schedule, but it is important to remember one item when reimbursing its providers. The organization must stay within a budget because the organization is receiving a capitation check each month for all services. So, if the organization sets a limit for reimbursing its network providers, say no more than $40,000 each month, payments would stop if the organization was accessing more than the $40,000 fund. This is covered in step 4.

OPTION TWO: Subcapitate. Under a very competitive and large covered population base, the organization might want to subcapitate certain types of specialties which make up your network. I thought that it would be an appropriate time to show you what the accepted national norms are for subcapitation of physician specialties. They are listed below.

 

Subcapitation

Commercial Covered Lives

Data - Year 2006-2007 

	Number of lives covered	National Capitation PMPM
OB-GYN	5,000	$2.31
Radiology	5,000	$1.99
Pathology/Laboratory	5,000	$1.431
Anesthesiology	10,000	$2.003
Psychiatry/Mental Health	10,000	$1.866
Dermatology	15,000	$ .277
Emergency Medicine	15,000	$ .363
Allergy/immunology	20,000	$ .288
General Surgery	20,000	$1.601
Ophthalmology	20,000	$ .882
Orthopedics	20,000	$1.443
Otolaryngology	20,000	$ .546
Cardiology	25,000	$ .871
Hematology/Oncology	25,000	$ .418
Gastroenterology	35,000	$ .229
Urology	35,000	$ .553
Endocrinology	45,000	$ .115
Neurology	45,000	$ .337
Nephrology	55,000	$ .451
Pulmonology	55,000	$ .229
Rheumatology	55,000	$ .199
Cardiology (Invasive)	65,000	$ 1.118
Neurosurgery	65,000	$ .447
Plastic Surgery	65,000	$ .342

NOTE: If your organization were to experience a large portion of Medicare covered lives, you could capitate specialties earlier than the chart indicates because utilization statistics throughout the country show that Medicare members’ usage rates are four times greater than commercial rates.

 

Example:

1,000 Commercial lives + 1,000 Medicare lives = 5,000 covered lives (4 to 1 ratio)

 

STEP 3

"Determine what percent the organization needs to carve out for administrative expense. "

 

In our first step of this explanation, the organization received 80% of the health plan’s premium for its capitation check. Now the organization must reduce this capitation amount by a percentage to pay for administrative services. This figure should be reduced another 5%. (The national norm is 10%) The capitated dollars available to the organization network is now $76.00 PMPM.

  

STEP 4

"Calculate what the organization will pay the primary care, specialist, and the hospital."

 

National statistics show that 17% of their monthly capitation check goes to primary care physicians, 33% to specialists, and 50% to the hospital.

 

Example:

Primary Care Physicians $76.00 x 17% = $12.92 PMPM

Specialist $76.00 x 33% = $25.08 PMPM

Hospital $76.00 x 50% = $38.00 PMPM

 

As you can see, deciding on a capitated contract can be complicated to evaluate. The organization should make every effort to seek the highest reimbursement levels relating to PMPM, and make sure that the organization does not assume risk which would be detrimental to your continued success. Generally , you can determine capitated rates by a cost method, demographic method and like a lot of people, guess. Please don't guess. Call the consultant.

What we have attempted to show you is a very basic response to capitation. Again, don't be afraid to call an experienced consultant. They can help you with actuarial data, cost of delivering care, utilization, and revenue distribution. If you are a hospital, if would also be beneficial is you determined the number of covered lives required to maintain your census or occupancy rate.