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Capitation, once the "golden child" of managed care, is starting to take a licking — and many experts wonder if it will keep on ticking as payers’ primary pay vehicle. A recent rise in popularity of fee-for-service payments has slowed capitation’s momentum, but some experts say the softening economy will force employers to become more stingy with health benefits, bringing a resurgence of capitated payments. Meanwhile, studies show that capitation rates are on the rise, making the payment methodology more attractive to many providers.
The revival of fee for service can be traced to a combination of recent events: the concern of HMOs about losing doctors who are fed up with capitation’s restraints; a growing rash of lawsuits claiming that financial incentives resulted in bad care; and the fact that employers have been willing to pay for more expensive benefit packages to keep workers happy.
In past months, for instance, major health plans like Aetna, UnitedHealthcare, Cigna HealthCare, PacifiCare Health Systems, and Coventry Health Care have each announced they are converting some of their previous capitation agreements to fee-for-service (FFS) contracts. Also giving FFS a boost is the boom in popularity being enjoyed by preferred provider organizations (PPO).
Multispecialty practices with capitated contracts dropped from 68% in 1996 to 58% in 2000, reports the Medical Group Management Association (MGMA) in Englewood, CO. Based on this trend, MGMA’s survey guru, Dave Gans, predicts the overall cap rate among multispecialty groups could fall to 40% in the next two years.
Rather than going straight to fee for service, some plans are modifying their cap arrangements. In Colorado, for instance, Anthem Blue Cross and Blue Shield has changed its money-losing capitated global risk contracts by converting to less risky payment pools for hospital and pharmacy charges. Physicians in the pools share savings with Anthem but are not responsible for losses.
Experts also note that California doctors are dropping their pharmacy and hospital risk provisions, but not professional risk. At PacifiCare, for instance, members under global risk contracts dropped from 91% in 1998 to 66% in 2001. Meanwhile, members under professional risk only fell from 99% to 98% during the same time frame.
Because the costs of one sick patient can exceed the capitation income from several healthy patients, a primary care physician needs at least 100 to 150 capitated patients to make the payments worthwhile. This is a major reason larger groups have traditionally done better under capitation. However, this is also changing.
According to MGMA, groups generating from half to all their income from capitation had a median revenue of $533,211 per physician in 1999 — less than the median revenue of $562,673 per physician earned by groups that accepted no capitation at all. Groups earning 11% to 50% of their income from capitation only generated a median of $507,043 per physician.
Flush from double-digit premium rate hikes, many insurers say they plan to raise both their capitation and fee for service rates more than usual this year. Because of the fundamental differences in the two payment systems, however, it is difficult to determine how any increase in reimbursement compares between them.
Because PPOs cannot guarantee patient volume, for example, the fee-for-service fees they have to pay primary care physicians are 10% to 15% higher than what an HMO pays for the same capitated services, estimates the Chicago-based Milliman and Robertson consulting company.
But don’t get your hopes too high. With the economy cooling, many observers predict employers will start to tighten their purse strings by restricting their more generous PPO and fee-for-service arrangements. That argument is backed up by studies from the Washington, DC-based Center for Studying Health System Change showing that fee-for-service-related health costs have grown at two and a half times the average rate in recent years.