Has capitation reached its high-water mark?

Low payment rates and a public backlash seem to be slowing its progress. But don’t count on prepaid care to go away anytime soon.

By Ken Terry
Managed Care Editor

When hundreds of San Diego physicians rallied last fall to protest what they viewed as inadequate funding of health care, part of their ire was directed at low capitation payments. "Capitation rates are insufficient to cover the cost of care and are driving physicians out of business," declared the San Diego County Medical Society in a press release.

But family physician James T. Hay, president of the county society, wasn’t one of those protesters. Last July, after a five-year decline in payment rates, he and the five other doctors in his primary care group received a 10 percent raise in capitation payments from their IPA, which supplies 65 percent of the group’s revenues. Capitation now brings the group more revenue, on a per-service basis, than do discounted fee-for-service payments, which are running at about 90 percent of Medicare’s fee schedule. Nevertheless, the group stopped taking new HMO patients last month and is actively seeking more PPO business. Hay cites fears of HMO insolvencies and the doctors’ dislike of their gatekeeper role (see below, Why capitation isn't working for this practice).

Meanwhile, across the country in Buffalo, internist John Notaro praises his capitated arrangement with Independent Health, a local HMO that provides nearly 40 percent of his patients. Including the return of his withhold and a quality bonus from Independent Health, he too figures he’s making more on his capitated practice than on his fee-for-service business. (See the story below on how Notaro is benefiting from capitation.)

But in Richmond, VA, internist John M. Daniel III has watched his capitation rates lose ground to inflation. Cigna is still paying the same amount it did in 1997, he says, and Aetna’s rate is frozen at its 1993 level.

Daniel himself is actually doing a bit better under capitation than under fee-for-service. But he doesn’t think this is true of many of the 70 other doctors in the group practice without walls that he belongs to. That’s because most of his colleagues don’t know how to handle capitation. "They didn’t change their way of practicing and become more efficient," he says.

The very different attitudes toward capitation in San Diego, Buffalo, and Richmond reflect deep divisions among physicians of different backgrounds who face diverse market conditions. What the three doctors share is that they’re all located in areas that have a significant amount of capitation. But in other places, prepaid care seems to be fading or never achieved much of a foothold.

Has capitation reached its high-water mark? If it’s receding, will you eventually be paid wholly on a fee-for-service or salaried basis? If not, will you always be caught between the rock of self-preservation and the hard place of satisfying patient demands? No one has all the answers, but to find out what experts think, read on.

Capitation’s future is still up in the air

Several surveys have shown either an increase in the volume of capitated business or in the number of physicians paid under this system. Medical Economics’ 1999 Continuing Survey, for example, indicated that 44 percent of office-based physicians received capitation payments in 1998, compared with 40 percent in 1996, and that the share of gross income these doctors derived from capitation had jumped from 15 to 20 percent.^*

More recently, a survey by National Health Information, a publisher of capitation-related newsletters, found that 75 percent of responding primary care groups reported they were either seeking more capitation or keeping their current level of risk contracts. Similarly, Evergreen Re, a big reinsurance company, found that 74 percent of physician groups in markets with HMO penetration above 30 percent accepted capitation in 1999, vs 65 percent the year before.

InterStudy, a St. Paul, MN-based research firm that tracks HMOs, reports that from 1998 to 1999, the number of HMO patients in capitated plans jumped from 37.5 million to 43.2 million.

The most revealing figures, which come from the Medical Group Management Association, tell a different story. Between 1998 and 1999, the MGMA reports, the median percentage of practice gross from capitation in multispecialty groups dropped from 16 to 11 percent. Since the number of prepaid groups held steady during that time, this represents a significant decline.

The MGMA’s numbers comport with the view of some observers, who see capitation retreating rapidly as a result of both economic factors and the public backlash against managed care. "I’m seeing capitation go down all around the country," says Greg Korneluk, chairman of the International Council for Quality Care, a Boca Raton, FL, firm that specializes in practice re-engineering. In West Palm Beach, for instance, a primary care group that was 30 percent capitated until a year ago is now only 10 percent prepaid, he says. Four internists who practice together in Brooklyn, NY, he adds, used to have an entirely capitated practice. Now they’re 100 percent fee-for-service, partly because they couldn’t cope with reduced capitation payments.

Of course, discounted fee-for-service payments have steadily decreased, too. But Korneluk notes that when doctors no longer make more from capitation than from fee-for-service, taking on risk doesn’t make sense.

Atlanta-based consultant Gary Matthews states that capitation is fading in his area and across the South. Matthews, of Physicians’ Health Care Advisors, cites the drop-off in capitation in cities like Baton Rouge and Washington, DC. But he admits that in other markets like Miami, Richmond, and Buffalo, capitation is still holding its own.

Phil Beard, a practice management consultant and CEO of Overland Park, KS-based ProStat Resource Group, believes that primary care capitation has leveled off or is declining nationally. While he’s seeing some growth in specialty carveout networks, the only geographical areas where prepaid care is spreading are those where it’s already established, he observes. "In markets where capitation never really grabbed hold, it’s probably not coming in right now. The concept has just fallen into too much disfavor."

Consultant Peter Kongstvedt of Ernst & Young views primary care capitation as fairly stable. But contracts that put primary care physicians at risk for specialty referrals, inpatient care, ancillary services, or drugs are becoming much less common, he says. He attributes that partly to the failures of many practice management companies and IPAs, especially in California. Beard adds that the decline in global and other risk contracts can also be traced to the decreased viability of PHOs and integrated delivery systems that formerly accepted full-risk capitation.

Plans have mixed feelings about prepaid care

Some industry experts maintain that it’s the payers, not the physicians, who are backing away from prepaid care. "I’m sure the plans are pulling back," says Matthews. "The profit’s in being able to manage risk, and so the plans, rather than abdicating risk, are trying to manage it." The reason they didn’t do this years ago is that there was enough of a gap between premiums and capitation payments to allow the plans to turn a nice profit while passing on the risk to providers. When that gap narrowed and HMOs started losing money, the idea of taking risk for care and profiting from direct cost savings became more attractive.

Kongstvedt offers a different explanation: Managed care companies are responding to public opinion, which has turned against capitated HMOs. If not for that, he says, they’d still prefer capitation, because it costs less administratively, and they believe it gives physicians incentives to manage care better.

Beard agrees that the environment has changed. Texas’ lawsuit against Aetna and two other plans over inducements to withhold care,^** he says, signals that consumers regard capitation "as a system that pays doctors not to take care of them. That’s a hard climate in which to push capitation."

Under Aetna’s settlement with Texas, the plan agreed to stop paying incentives to doctors who keep costs within a budget and not to penalize physicians who exceed that budget. Aetna has since applied similar principles to its contracts in Virginia and Georgia, and it’s planning to do the same in the Midwest. It has also stopped capitating doctors in Connecticut. According to Aetna spokeswoman Wendy Morphew, the big insurer is loosening its controls to satisfy physicians, who have criticized Aetna’s strong-arm tactics from coast to coast. "We used to believe our approach was best," she says. "But many physicians didn’t, and we can’t ignore them."

Other plans have decreased their involvement in prepaid care. Last year, Cigna eliminated primary care capitation (but not global risk contracts) in Colorado. And PacifiCare recently increased the portion of risk it assumes in its contracts with capitated practices.

"Capitation has become increasingly problematic for many hospitals and medical groups," said PacifiCare’s VP and corporate medical director, FP Sam Ho. Ho blamed the problems with prepaid care on the escalating costs of care, the poor financial management by some IPAs and medical groups, and plunging premiums during the mid-to-late ’90s that forced health plans to cut their payments to providers.

Market struggles dictate changes in capitation structure

Internist Andrew P. Siskind, medical director and president of the Bristol Park Medical Group, a 100-doctor primary care group in Orange, CA, says his group won’t back away from capitation. "We believe it’s the best way to provide medical care," he says. "It’s the only system where the healthier you keep your patient, the more money you make."

The problem with the system, says Siskind, is that "it’s been underfunded for so long. Unfortunately, that’s going to break up capitation as we know it. There will continue to be managed care and some form of capitation, but there has to be a new business model."

As part of a large integrated delivery system, Bristol Park has set up its own version of this new model. The group and its affiliated hospitals–which contract together through a foundation–didn’t renew contracts with 12 of the 17 HMOs they dealt with and negotiated radically different agreements with the others. While the health system didn’t get a major increase in rates from the remaining plans, it persuaded them all to take back a significant share of risk and to sign a uniform contract.

"Now we’ll have just one contract type with the five payers," notes Siskind. "We’ve gotten rid of all pharmacy risk, including injectables and immunizations. And we’ve gone to a shared risk pool on outside provider costs and hospitalization." The result, he hopes, will be markedly higher reimbursement for the group, because it will no longer be solely at risk for costs it can’t control.

Siskind isn’t worried about eliminating contracts that brought in 25 percent of the group’s revenues, because all those contracts were unprofitable. The 2 to 3 percent increases the plans offered the group, he says, were inadequate to cover the increased cost of care. And they were far less than the 10 to 15 percent hikes that the insurers pried out of local employers.

"Babes in the woods" play at capitation

In contrast with Bristol Park’s physicians, who are trained from residency to be efficient, Siskind views the East Coast doctors he’s met as "babes in the woods when it comes to capitation." Inpatient costs, in particular, are still bloated in the eastern half of the country, he believes. If physicians knew how to control them, large groups could do quite well with global capitation, he says. But groups don’t have a clue about how to handle capitation risk.

The situation he describes matches the experience of Richmond internist John Daniel. His 70-doctor group without walls is still taking only primary care capitation, which the plans pay directly to individual doctors. One reason the group hasn’t pursued more risk is that it has a fairly primitive information system. Only within the past year has the organization even gained the capability to track its capitation payments against fee-for-service equivalents to measure how it’s doing on each of its prepaid contracts.

Some of the group’s doctors have made counterproductive changes in the capitated portion of their practices, says Daniel. For instance, many are unaware that plans will pay them fees for services not covered in their capitation contracts. So if mole removal isn’t a service covered under the cap, they’ll refer patients to dermatologists instead of removing the moles themselves, as they would for fee-for-service patients.

Daniel himself has learned how to cope with capitation, he says. If the prepaid portion of his business increased, "I wouldn’t be glad, but I’d tolerate it. I don’t think I’m losing anything by it, but it’s not the way I learned to practice medicine. All of us learned to work on a piecework basis. I don’t think it’s superior–it’s a habit. It’s just what people are used to. You feel you’re getting a little bit more when you work more."

Will physicians ever embrace capitation wholeheartedly outside of areas like Orange County, CA, where it has become the norm? Consultant Phil Beard thinks not. "We had the best chance for physicians to accept capitation over the past five to eight years, when there was this flurry of activity and every physician had heard about it and thought it was coming." Now that prepaid care has stalled, he says, fee-for-service doctors have less reason to try it.

Capitation failed to dominate health care because "doctors never went along with the concept that they had to change how they practice medicine and manage costs," says Beard. "They never set up an infrastructure in their practice or did anything different under capitation. It was expensive to do, and it went against their basic theory of ‘I treat all patients the same.’ The bottom line is that you can’t treat capitated patients the same as fee-for-service patients. You really have to look at them differently."

^*See "Capitation on the rise," Dec. 6, 1999.

^**See "What the Texas-Aetna agreement really means," Sept. 4, 2000.

A Medical Economics Web Exclusive

Why capitation isn’t working for this practice

Family physician James Hay of San Diego is seeing more HMO patients than ever before, and he’s making more on them than he is on his fee-for-service patients. Yet he and his five colleagues in the North Coast Family Medical Group recently decided not to accept any more HMO patients and to build their PPO business instead.

The biggest factor in their decision is their fear of what’s in store for HMOs, which have been plagued by the failures of practice management companies and provider groups in southern California. "PacifiCare is in trouble, and that’s a big chunk of our business," explains Hay. "If we allow that plan to continue to grow, and all of a sudden PacifiCare goes away, we’ll be harmed worse than if we just take a little bit less in capitation payments right now.

"The other thing is that none of us is happy being a gatekeeper. We actually hate the idea, and wish that whole system would go away. Even though the per-patient revenue is greater, the per-patient work flow is also greater, because there’s more paperwork, more phone involvement, and more staff time necessary to take care of an HMO patient."

The hassle factor aside, Hay and his partners dislike being the intermediaries between the plans and their patients. "I don’t think any of us has had difficulty making the correct ethical decisions. It’s just the bind we’re placed in when we’re confronted by patients who want things they may or may not need. We’re the barrier between them and the service they want. We’re very comfortable discussing what services they think they need; but when it comes down to being the ones who choose or don’t choose to fill out the authorization request, we’re pretty uncomfortable with that."

Two-thirds of North Coast’s revenue comes in the form of capitation payments from an IPA that takes full risk from HMOs, contracts with physicians, and manages their utilization of services. This delegation of health-plan functions to IPAs hasn’t worked well, says Hay. He explains that that’s because, until this year, capitation payments in California had declined for a decade. Most risk-taking groups and IPAs barely have sufficient funds to stay in business and pay their doctors a living wage. So they haven’t been able to buy the advanced information systems needed to do the kind of medical management that would both improve care and enable the groups to stay within their budgets.

Hay fears that the situation will deteriorate further. "When the levels of payment get low enough and many groups are going bankrupt, doctors will have to decide whether to restrict services or go out of business. That’s not defensible. If I don’t have enough money to provide the care, and I have to choose between my business staying open and providing what some people want, that’s a choice I don’t know how to make."

A Medical Economics Web Exclusive

Capitation can be successful if it’s done right

Internist John Notaro of Buffalo, is excited about his group’s "virtual lipid clinic." In this homegrown program, the 100-doctor Buffalo Medical Group identifies HMO patients at high risk for cardiovascular disease and tries to make sure they receive cholesterol-lowering treatments. Such a program would be unthinkable, says Notaro, if the group’s revenues came mainly from fee-for-service insurance. But under capitation, he says, it’s feasible and sensible to shift resources to the patients who need them most.

One local HMO, Independent Health, supplies most of Notaro’s prepaid business, which accounts for 40 percent of his volume. While it pays his group only $8 to $9 per member per month in primary care capitation, Notaro and the 30 other primary care doctors in the group got their 15 percent withhold back this year. The return of that withhold, for which all of the primaries shared risk, was contingent on them staying within their budgets for pharmacy, labs, ER use, and specialty referrals. In addition, Notaro received a care-management bonus for good patient satisfaction and access. Overall, he finds that he makes more from capitation than from fee-for-service.

Capitation has also aided Notaro’s efforts to re-engineer his office processes. For instance, as a result of going to open-access scheduling, where patients can get appointments on the same day they call, he has been able to increase his panel size by 30 percent. He couldn’t have done it, he says, without doing more nonvisit care. That wouldn’t have been reimbursed under fee-for-service, but capitation rewards doctors for keeping patients healthy. Instead of churning patients, as some fee-for-service doctors do, he tries to do as much as he can in each visit, reducing the need for follow-ups.

Equally important, Notaro feels he can do more for prepaid chronic-disease patients and others who need extra care. Nurses in the virtual lipid clinic, for example, call up high-risk patients, telling them how to control their cholesterol and asking them to come in only if necessary.

"The program doesn’t depend on one-to-one office visits," Notaro points out. "In the old fee-for-service system, there’s no way to pay for that. Because in that system, the only thing that gets reimbursed is the office visit, even if that isn’t the optimal mode of interaction. We get suboptimal results with chronic-disease patients in systems that depend on one-to-one visits. But outside of capitation, you couldn’t pay for something like our virtual lipid clinic."

In the population health approach, Notaro sees a counterbalance to the natural tendency of doctors to undertreat capitated patients. He cites the prescribing of lipid-lowering statin drugs, which he studied by pulling charts at random. "We have to build systems so that high-risk people get the medication, and not the low-risk people, for whom the risk of the drug outweighs the benefit. That’s also a poor use of resources. We want to build systems, even in capitation, that guarantee quality by targeting high-risk patients. With those kinds of guarantees, capitation can be successful."