Physician's Capitation Trends
Physicians more discerning in capitation contracting
Other trends also bode well for 2001
Capitation never offers guarantees, but several key indicators portend good possibilities in 2001 for risk-based contracting on the physician side of the health care equation.
That’s the consensus of several recent analysts, reports, and trend forecasters who focus on capitation and the interplay between public- and private-sector health care activities.
Overall, the biggest gain for physicians may well be their increased sophistication in dealing with capitation. "Providers are being more discerning in accepting capitation deals," says Charles Crispin, vice president principal of Evergreen Re, a Stuart, FL-based reinsurance company, in a recent report on the state of capitation nationally.1
This seasoned discernment means physician groups are being more selective about which contracts to accept and about how the specific terms of each contract should be laid out.
"Provider systems are constantly trying new arrangements and new health plan partnerships," Crispin says. "They exit arrangements when the results are not satisfying, but still enter into new contracts."
Sometimes contracts work well, sometimes they don’t, and some work better than others — which is why there are no clear statistics about whether capitation on the rise or on the decline.
Note these positive factors
Because there are so many activities in adding and dropping capitation contracts, Crispin and his team believe the system is beginning to work in favor of savvy physician groups. These additional trends working together suggest a favorable year in 2001, experts report:
• Government pay hikes in 2001.
The Health Care Financing Administration (HCFA) recently announced a 4.5% overall payment increase for Medicare payments (See details from the Nov. 1, 2000, Federal Register notice.) This often leads to increases in per member per month private-sector payments because they usually are driven by Medicare’s resource-based relative value scale (RBRVS).
• Increased capitation competency.
Clarification and enrichment of core competencies relevant to capitation and managed care in general are surfacing both in medical training settings and in practices themselves, according to Gordon T. Moore, MD, a physician at Harvard Pilgrim Health Care in Boston, and his colleagues Michael J. Yedidia, PhD, and Colleen C. Gillespie, PhD, both professors of health and public service at New York University in New York City.
• Hard times at HMOs.
HMOs are facing intense competition and low popularity. (See reports on dropping enrollments, Physician’s Managed Care Report, June 2000.) At the same time, their costs are increasing, but it’s not a popular time to be passing all of those costs on to their customers, according to officials at the Segal Co., a New York City-based benefits management company.
• Tight labor market.
Employers are looking at higher insurance costs — particularly in the area of drugs. But, a tight labor market can demand high-quality and affordable health insurance. This creates the incentives for companies to self-insure, says Crispin. Together, these factors bode well for physicians interested in taking advantage of many recent state legislative efforts to ease their ability to engage in direct contracting and compete head-on directly with insurers.
After surveying 169 physician groups and IPAs and 116 hospital officials, Crispin and team noted several contradictory findings. "In some ways, respondents to the survey reported increases in their use of capitation," the report states. "For example, when compared to the previous year, more of the respondents in this year’s survey said that they were involved in capitation contracts." Many respondents said they intend to sign new capitation contracts in the year 2001.
"But responses to other questions pointed in a different direction," Crispin explains in the company’s Third Annual Evergreen Re Managed Care Indicator. "For example, providers estimated that capitation revenue would decline as a percentage of total revenues in the next two to five years. So which is it? Are providers heading for the exits when it comes to capitation, or are they plunging in more than ever? Some cynics say that capitation is dead, just not buried yet. Do we agree?"
Perhaps the truth includes some of both, notes the report. "Provider systems are adding new contracts in which they accept some portion of risk and, at the same time, exiting from some of their capitation arrangements. From Evergreen Re’s national perspective on the health care industry, capitation is far from dead. In fact, we think this is an opportune time for capitation contracts if providers have the right tools, data, and know-how to choose good contracts and manage them effectively."
Rising costs caught up to insurers
The bad news is that costs are going up in lots of areas: "Plan sponsors should expect double-digit increases in the cost of their medical and prescription drug programs in 2001," according to the Segal Health Plan Cost Trend Survey, released in mid-November.
"Prescription drug benefits, which continue to be the highest component of plan sponsors’ health care costs, are expected to increase at an annual rate of 20% in 2001. Segal, a New York City-based benefits management company, surveyed 45 major health plans.
The dilemmas of the HMO industry can work in favor of the physician community, Crispin suggests. "Provider organizations need to be alert to the new opportunities to share risk in contracts to serve commercial groups, as well," he says. "For example, as insurance premiums increase, it is only natural that employers will consider the option of self-funding their health benefits, and some would like to explore closer ties with provider systems within a self-funded arrangement."
A fix or an exit?
Overall, physician groups are using more finesse to determine how to make capitation work for them. "When provider groups realize that they are in an unfavorable arrangement, they should determine if the problem can be fixed or exit the contract," Crispin says. "By adding some contracts and terminating others, providers are seeking to establish relationships for payment and patients that are more stable and more predictable."
In Evergreen Re’s survey, success and failure crop up all over the place. "It will come as no surprise to readers to hear that some provider organizations have accepted bad contracts in the past, and that some will do so again in the future," he says. "Provider organizations have feared losing access to patients if they don’t accept what HMOs offer. Having lived with hose contracts, providers are now going through a period of re-evaluation. In some cases they are leaving those contracts."
In the process of evaluation, providers should be looking not just at the terms of the contract but at their own operations. Maybe the providers lost money on certain contracts because they were operating inefficiently. "In the end, HMOs want to deal with efficient delivery systems whether they are under capitation or fee-for-service arrangements," he says.
Reference
1. Evergreen Re Co. Third Annual Evergreen Re Managed Care Indicator. Stuart, FL, 2001.
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