Strategic partnership is essential to successful full-risk contract
Act soon if you're in a less mature market
No longer just an anomaly to West Coast hospitals, global capitation is becoming popular even with payers in less mature managed care markets as many carriers seek to make medical expenses a fixed cost in times of declining profit margins. The advice from experts we interviewed: If a payer comes knocking at your door with a request for a proposal for a global capitation contract, consider the maturity level of your managed care market carefully before responding.
It's crucial to start global contracting before an HMO has squeezed out all of the profit in a particular area, consultants interviewed by Managed Care Strategies advise.
"Only in the last 18 months have HMOs been willing to give hospitals the opportunity to manage risk," says James Reynolds, president of Reynolds & Co., a managed health care consulting company in New York City. "I feel that HMOs think they've squeezed a substantial amount of potential cost savings out of the premium rates, and they're much more willing to give that risk and potential reward to providers because they're not sure they can squeeze [out] much more."
However, there are a number of markets where profit potential still exists, and it's providers in these areas who should act soon, says Stephen Goldstone, MHA, senior vice president of First Health Associates Inc. in Colorado Springs, CO. First Health is a health care consulting company with offices in Avon, CT; Ann Arbor, MI; and Houston.
When managed care companies first move into a market, health care utilization generally is high, Goldstone says. But over time, the MCOs help to reduce utilization. That's why the greatest potential for making profits from a reduction in utilization is when managed care is new to your market. "Then you have an opportunity to benefit as a provider by your own good efforts," he says.
Another aspect of global capitation: Providers also assume risk for professional services provided outside their own practices and sometimes out of network, such as hospital care or specialists' care.
The benefits of a global capitation program can be compared with private corporations' profit-sharing plans, in which everyone who contributed to a successful year gets a little piece of the profit as a reward. And just like profit sharing, the provider group, as a whole, must do well before anyone receives a bonus.
Why take the risk?
Some hospital administrators and physicians might be asking themselves why they should be interested in accepting most of the financial risk for patients' health when that should be the health insurance company's job.
The experts' response: Global full-risk contracts place control back in providers' hands. Physicians won't have to answer to managed care organizations for every little detail. Providers under full-risk contracts make all of the decisions about which services to cover and how long certain patients should stay in the hospital after surgery.
Also, hospitals could use their profits from these contracts to fund community health care programs. "That is better for the organization and the community than if an insurance company or some other managed care organization profits and uses those profits in other markets," Goldstone says.
This doesn't mean providers should rush into these contracts, says Lou Pavia, executive vice president of McManis Associates, a subsidiary of MMI Co. in Washington, DC. McManis provides health care consulting for providers, managed care organizations, and other health care companies throughout the country.
"The challenge for providers is: Are they really going to be any better at managing risk than HMOs are?" Pavia says. (See related story on global contracting, p. 39.)
"The key thing is to have mechanisms in place by which you align not only your risks, but the rewards of how individual providers will manage care to maximize savings, maximize clinical outcomes, and share in the savings they produce," Reynolds says.
The head of a California hospital says he is satisfied with a recent global, full-risk contract, although he does not expect the hospital to make a profit on its non-senior business. "We don't see opportunities to make money on the commercial basis, but we're involved because it helps us have an entry to the Medicare-risk population," says Robert Minkin, chief executive officer of Desert Hospital in Palm Springs, CA. Desert Hospital has 388 beds and is part of the Tenet Health Care System of Dallas. In February, Tenet entered into a 50-50 global risk partnership with Empire Physicians Medical Group in Rancho Mirage, CA.
"It was a defensive and offensive move," Minkin says. "We believe capitation is a unifying financial strategy to focus physicians and the hospital on the true clinical needs of the patient."
Empire Physicians Medical Group has been doing limited-risk contracting since December 1992 and full-risk contracting since late 1995, says Joy Diffendal, MBA, executive director of the medical group, which has 140 contracted physicians, of which 80% are capitated. She says the partial-risk contracting, which was done between 1992 and 1995, was profitable.
Empire Physicians has been involved in an evolutionary process since Feb. 1, when it entered into a global risk relationship with the entire market through its partnership with Tenet Health Care System, Diffendal says.
"We have a successful track record that we are building on, and we have a high degree of confidence in our ability to take this to the next step," she adds.
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