What you need to understand about global capitation
Accepting risk for all patient care may seem like a good idea, but don't underestimate the pitfalls
From the April 1998 ACP Observer, copyright © 1998 by the American College of Physicians.
Global capitation may offer considerable independence from the oversight of health plans, but physician organizations must assess market conditions and their own capabilities before accepting all risk for patient care.
Capitation has created both problems and opportunities for physicians. In accepting capitation for their professional services, for example, physicians face increased requirements for data and uncertain reimbursement, but they often find that they are able to regain clinical control of their practice and capture revenues previously retained by health plans.
Global- or full-risk capitation offers even greater opportunities—physicians can earn significantly more income—and greater risks. Under global- or full-risk contracting, provider organizations receive per-member per-month payments for all patient care, not just the physician's professional services. Physicians are financially responsible for managing all aspects of patient care; they will profit if care costs less than the capitated payment and lose money if the reverse is true.
Most large physician organizations have at one time or another considered global capitation, yet relatively few have actually signed a global capitation contract. Before accepting a global-risk contract, physicians must make sure that both external conditions are right and that the capabilities of the provider organization can support such an arrangement.
Legal and market conditions
External factors such as local laws, health care premiums, and the attitudes of health plans and hospitals can greatly affect the decision to accept global capitation. Physicians should consider the following factors:
- State laws must allow providers to accept full risk. Many states regulate the degree to which a provider can be at risk and require providers to obtain an HMO license in order to accept full-risk capitation. Because HMO licensure requirements are frequently onerous, providers in these states have often elected not to assume global capitation. In these cases, providers can develop payment arrangements with managed care payers that are similar to the payment characteristics of global capitation.
- Health care premiums need to be at relatively high levels to justify the investment and effort required to take full risk. In many markets, competitive HMOs have driven premiums down to the point where there simply isn't much money to be made from efficiently managing care. In these markets, providers may be financially better off under fee-for-service reimbursement.
- Health plans must be willing to capitate providers for full risk. The battle for risk hinges on market power. Where health plans are powerful, they are frequently unwilling to capitate providers; where providers are powerful, they are often unwilling to sign contracts unless they are capitated.
- Most successful full-risk contracts are in markets where hospitals compete aggressively for business. Competition between hospitals drives down prices, allowing greater profitability for whomever is paying for health care services. Hospitals that dominate their markets, on the other hand, often refuse to discount their prices or they require a share of any profits to be returned to them. In these markets, physician organizations may be better off accepting capitation for professional services only and leaving risk for pricey hospital services with the health plan. Alternatively, physician organizations can negotiate an incentive that rewards or penalizes them based on hospital utilization instead of hospital charges.
Physician skills
Physician organizations must also be able to manage the risk inherent with global capitation. These factors include the following:
- An organization contemplating full-risk capitation should have experience with lower levels of risk. This experience should consist of several years of accepting capitated payments for professional services and shared risk for hospital services. Experience managing these lower levels of risk will prove vital to managing not only full risk for patient care but also the organization's finances and operations.
- Utilization data for all at-risk services should be accessible. Data obtained through previous experience will assist in negotiating premium rates and subcontractor payments. These data will also help evaluate new health plans, determine how funds are distributed and evaluate how well new risk is managed.
- An established and successful provider network is essential. Global risk should be considered only if the providers involved have a history of working together successfully under lower levels of risk. Accepting global capitation will intensify any problems the network may already be experiencing. For example, if a particular subgroup of providers has a negative attitude about managed care, this attitude will only worsen when greater degrees of risk are involved.
- Claims processing must be set up to produce data. Claims processing is one of the most crucial and misunderstood functions for risk-bearing organizations. Provider organizations that accept capitated payments for services they do not provide internally—hospitalization, for example—will receive claims for those services from outside institutions. They have two choices: pay the claims themselves, or get help from a payer or health plan.
Physicians do not necessarily have to process their own claims, and health plans do not generally pay providers who assume this function anything extra. Nonetheless, many providers pay their own claims for two reasons.
First, doing so gives the providers immediate access to utilization and expense data. If a health plan processes your claims, you may not see those data for several months, depending on that payer's capabilities. In addition, many providers feel that quality control improves when they process their own claims. Many providers believe that payers are less careful and therefore more errors result in adjudicating claims when the provider's money is at stake.
Having a health plan pay your claims can save a lot of money, but it is a complex process. One provider group that was spending $1 million a year processing its own claims decided to have a payer take over, but the transition required careful negotiation of what data would be forwarded to the physicians. The provider group also felt it was necessary to create a separate data analysis department to produce utilization reports and to audit claims data for accuracy.
- To be successful, highly capitated organizations need to manage care. Prospective medical management includes preauthorization for nonemergency specialty referrals, procedures and hospital admissions. Concurrent medical management means actively guiding patient care during an episode of treatment, such as a hospital stay. Retrospective medical management is the analysis of past utilization to determine patterns of care and potential opportunities to improve care.
Many groups have found that once physicians have some experience working in managed care, they become more efficient with their referrals. After working in a managed care environment for a few years, then, most referral or admissions requests are approved. As a result prospective utilization review is no longer cost-effective.
While very few groups have entirely abandoned prospective management, those with experience in managed care tend to focus more on concurrent and retrospective reviews. This includes developing protocols for delivering care more efficiently and ensuring that patients are treated in the most appropriate venue (for example, at a subacute facility instead of a hospital). Experience in developing and implementing these programs is crucial for success under global capitation.
- An effective risk-sharing and reimbursement mechanism can help manage providers. Many provider management issues, including alignment of incentives, risk management and appropriate compensation, can be addressed by carefully allocating the flow of funds. Allocating capitated funds is a complex and often controversial process that frequently results in animosity among physicians; these difficulties can be aggravated when the stakes are increased by accepting global risk.
Physician groups use combinations of payment methods (such as fee-for-service, subcapitation and risk-sharing) for each type of service for which they accept risk. One health system spent more than six months planning how to distribute capitated funds, so be prepared to devote significant effort to ironing out these arrangements.
It should be evident from this list of requirements that global capitation requires a fortuitous combination of environmental factors and management skills that few physician organizations have been able to muster. The medical groups, independent practice associations and physician-driven health systems that have successfully developed these functions have not all been as financially successful as they have hoped, but most would agree that they have regained control of their financial destinies.
Kevin M. Kennedy is senior manager at ECG Management Consultants Inc. in Seattle.
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