Physician's Capitation Trends-Hard times in California warrant caution flags elsewhere
Will changes avert national 'capitation epidemic'?
Rigid capitation formulas combined with enormous for-profit managed care companies are creating one simple result for physician practices in California, according to the state's leading physician advocacy group: bankruptcy.
That's the wicked bottom line for physician groups teetering on the verge of obliteration, says the California Medical Association (CMA), in a white paper that served as the focal point of a health care summit in the state in early September.
At least 34 medical groups or independent practice associations will fail before the end of 1999, CMA officials predict. As many as 90% of California physician organizations are poised for bankruptcy or closure.
This isn't crying wolf, nor is it a "new millennium" or a Y2K catastrophe, the CMA insists, but rather a grim reality based in large part on a report produced by New York City-based accounting firm PriceWaterhouseCoopers. The report, titled "Healthcare: An Industry in ER," was released at a CMA summit on medical group insolvency on Sept. 2. (For the latest developments, see story, p. 174.)
If the prediction comes true, don't expect this phenomenon to spread rapidly across the country. Rather, view it as a wake-up call, suggest practice managers across the nation.
"This isn't a national trend yet, but it is sending a clear message of what could happen in the future in other parts of the country," says Cindy E. Fears, MPH, practice administrator for St. Louis Pediatric Associates. "The situation in California is more extreme than it is in the rest of the country, but the issue of mergers creating large HMOs is making it difficult for physicians to effectively negotiate."
For example, Fears sets a limit of accepting a capitation rate no lower than one that will cover 80% of costs, but the practice has reluctantly accepted rates as low as 64% when the HMO in question holds major market share. Too much of that kind of concession can lead to trouble similar to California's, she notes. Fears is an expert on practice costs and serves as a board member of a major national survey of practice costs released annually by the Medical Group Management Association in Englewood, CO. Low payments are proving to be particularly risky for the pediatric population, Fears points out.
Four factors combine for deadly equation
CMA officials are urging state and federal lawmakers to take legal action to stem this kind of practice erosion. In short, the combination of these factors are killing practices, the physician organization says:
• dangerously low capitation rates driven by market rather than patient factors;
• market domination by the five largest insurers in the state who are big enough to keep competing insurers at bay;
• for-profit insurers who keep the profits and pass off rising costs to physicians;
• lack of data provided to physician groups by insurers to ensure appropriate administrative management;
• incorporation of pharmacy costs in many capitation rates.
By themselves, none of these factors are new nor necessarily devastating, but what is new is the claim that in combination, they are creating such a significant financial blow to physicians, who argue the ultimate impact will be upon patient care. The situation also is significant because California has often set the standards for capitation for the rest of the country.
"There's a world of difference between California and Iowa, but a lot of what we see in California is mirrored in Minneapolis, and could well become a reality in other more urban areas," says Robert Poetting, clinic administrator for Burlington Area Family Practice in West Burlington, IA. While Poetting's region is not experiencing much capitation, it is witnessing some merging of insurers, which is troublesome in terms of healthy competition. But, in more rural areas, he says, "I figure I have at least a two-year head start to prepare."
Payments fall as costs increase
CMA officials point to less luxury of time and a convergence of a number of frightening trends regarding the viability of their practices. Here are three highlights of the difficulties specific to capitation payments, the group says:
• California physician capitation rates have fallen from a high of $45 per month for each HMO member in 1990-1995 to a low of $29 per member per month in 1997-1999, a drop of 35%, according to the PriceWaterhouseCoopers study. This occurred over the same period that the Consumer Price Index reflects a 25.2% increase.
• Physicians receive an average $24.24 per child per month, according to a 1998 CMA survey of the state's pediatricians. But, physician costs for treating this same age group average $47 per child per month, according to a Towers Perrin study in 1998. "This means that California pediatricians lose an average of $270.96 per patient per year," the group says.
• Some California pediatricians report that they receive as little as $10 per child per month. "This amount is not enough to cover even the cost of vaccines all children must, by law, receive," CMA officials say.
There is no question that California's intensive HMO markets have affected standards elsewhere. In many cases, California's standards form the basis for benchmarks in many other markets. There is no better example of that than the highly touted "hospital days" measure. With the advent of tighter capitation models, the length of stay in hospitals has declined significantly — more so in more capitated, highly competitive areas.
Beyond capitation itself, there are other high-pressure market dynamics in the state, the CMA says. They point to these three in particular:
• Excessive HMO administrative costs and profits. The largest for-profit health plan dedicates nearly 25% of the premium dollar to profit and overhead, while the largest not-for-profit insurer dedicates 5% to profit and overhead. These compare with the 15.2% average for all HMOs in the state.
• Large employer purchasing pools. Several major employer insurance pools, like Pacific Business Group on Health, are making clear inroads toward keeping already low health insurance premiums from increasing. For example, recent California premium rates are 40% less than northeastern states with similar costs of living. California health plans receive an average of $135.19 per enrolled member, while in northeastern states, HMOs receive $174.86 per member per month. California premiums average $120 per month compared to a national average of $127 per month. That equates to $83 million less per month, almost $1 billion less per year in the health care system in a state with the highest cost of living in the nation.
• Little indication of passing on recent premium increases to patient care. Business reports show that HMOs are doing well financially. For example, second quarter profit earnings were up 19% for WellPoint (BlueCross), 41% for PacifiCare, and 12% for Aetna over the same time period last year. While premiums fell from 19% in 1989 to 5.6% in 1994, they are inching back up since 1997. "But not enough of this increase is being dedicated to patient care," the CMA says.
Instead, profits are created by shifting costs to physicians, CMA officials argue. "These front-line providers must try to deliver more care to more people while receiving very low capitation rates."
What needs to change? California physicians are making four recommendations:
1. Establish patient-driven capitation rates rather than market-driven rates. Medical groups are plunging into insolvency because they are providing medical care but not meeting costs, the group says. They attribute this to the fact that capitation rates currently are determined more by what the market will bear than what the patient needs clinically. Rates should be actuarially based, which is actually required by law in the state but apparently not enforced. Congress is looking to mandate this by requiring some level of clinically adjusted cap rates, but it is uncertain when this will materialize. (For details, see Physician's Managed Care Report, July 1999, pp. 104-105, and April 1999, pp. 55-56.)
2. Prohibit folding pharmacy in with capitation payments. The popularity of a pharmacy benefit with managed care needs to be handled in some other way besides merely leaving it to physicians to incorporate the costs into existing reimbursements. (See related stories in PMCR, October 1999, pp. 151-153, and July 1999, pp. 103-105.) With the second year of double-digit inflation for pharmacy, costs are exceeding payments for drugs, the group says. And, in some contracts, physicians have to pay the difference if they exceed the pharmacy payment levels for patients.
3. Ease administrative burdens and provide better data support. Physicians feel that in many cases, HMOs require more reporting but fail to provide the data physicians need to make sound reports and decisions. Practices need basic insurance data in a timely fashion, including financial and utilization information on risk pools, regular reports for coordination of benefits receivables, third-party recovery receivables, pharmacy rebates, retroactive additions and deletions in enrollment, and changes in benefits. Some independent practice associations now estimate that they need at least 40% of the physician portion of the capitation payment to cover administrative costs.
4. Empower physicians to have some leverage with large HMO corporations. In California, insurers have become so large that they overpower physicians and patients, the group argues. The five largest health plans control nearly 90% of the market. That leaves little competition for ensuring patient interests, physicians argue.
Congress clearly is listening and focusing on major managed care reform. Yet despite legal interventions, practice managers recommend keeping in mind that capitation is complex and that focusing on costs is critical. Also, stay on top of changes that can occur in contracts, suggests Fears.
For example, one major change looming in her region is a requirement not only for individual physicians to be credentialed, but for an entire practice to be credentialed as well. That's another administrative complexity that affects which physicians can serve on which contracts.
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