Managed Care Contracting -- Specialty Capitation in a Managed Care Environment

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This is the eighth article in the Managed Care Contracting "Signature Series" by Managed Care Resources, Inc. -- articles on topics in managed care written by experts in the field. The authors of this article are  Ira H. Rosenberg and Denise Cameron.

In today's managed healthcare milieu, managed care organizations (MCOs) are looking for physician partners to provide their subscribers an agreed-upon set of medical services for a fixed amount of money per month. The MCOs have accepted a fixed premium for the provision of all medical care, either from the government, other third parties, or commercial companies. Now they need someone to deliver the care. Physicians have an important role to play in managing this risk assumed by the MCO, by providing medical management to members in a cost conscious manner. This sharing of risk is called capitation. Over the past several years this approach to managing the cost of care had been handled by primary care providers, requiring them to act as gatekeepers. However, specialists are now being given the opportunity to also accept capitation. Nevertheless, many specialists still consider a discounted fee for service approach more appealing.

If a specialist is to contract with an MCO, he or she must accept a number of somewhat unpalatable changes in the way the practice will be managed. These include most significantly, reductions in reimbursement levels, access to patients controlled through primary care gatekeepers, and increased administrative requirements necessary to perform effectively in a managed care environment.

Fee-for-service rate schedules as determined by the specialist are virtually non-existent. Today, managed care organizations usually reimburse from a fixed fee schedule, as established by the HMO. These fee schedules vary from plan to plan, and state to state, but are frequently based on the often-criticized Medicare rate schedule.

Patient access to specialists has changed. With an HMO gatekeeper model, a patient can not make an appointment directly with the specialist. The specialty network is usually designed by the managed care organizations (MCOs), and can make referral relationships more difficult to maintain.

Physicians have increased professional risk. The ordering of diagnostic tests and additional referrals "just to be sure", is scrutinized by the MCOs through their referral and utilization management processes. In many ways the physician is held to higher standards in servicing a patient, standards with which many of them do not agree, and are not accustomed to meeting. Additionally, clinical pathways by disease, stipulating what some refer to as "recipes" for services, are now being widely recognized and utilized, requiring the specialist to provide medical service in accordance to the MCO's clinical pathways, and not necessarily to his or her professional judgement alone.

However, despite all these onerous changes, specialists must wake up and smell the coffee. Increased participation in managed care is critical to the success of their practice. Accepting a capitation to guarantee volume and ensure income will be a necessary part of a specialist's business plan in the 2000's.

There are a number of advantages and concerns a specialist should consider when reviewing a capitation opportunity. The following reviews the advantages and disadvantages of capitation agreements.

Advantages to be considered:

• Guaranteed volume. The specialist who is willing to accept the capitation will be the provider with the business. Prepayment establishes a guaranteed number of patients to the practice, which means that the capitated physician gets the business, not the competition.

• Guaranteed income. The physician is guaranteed a check at the same time every month. Though it may not be as much as fee-for-service, it does bring a given cash flow to the physician's books each month, free from the depredations of bad debt, untimely payment, write-offs, referral authorization problems and copayments.

• Technical service income. Most capitation arrangements are for professional services only, and not for any technical service, such as facility fees or tests that may be provided. If your practice performs these additional services, additional compensation can be expected.

• Practice development and expansion. Many specialists have been able to expand their practices, adding physician partners because of payment guarantees.

• Better payor relations. By accepting a capitation with a payor, and sharing risk, long-term partnerships can develop, ensuring a more solid practice.

• Market Share. With guaranteed volume, a physician's market share in the community grows. Remember that capitated patients will have other insured friends.

• Reduced administrative costs. At an average cost of $3.50 for every indemnity claim a physician's billing department processes, the fact that there are no claims to process with capitation saves considerable time and money. Utilization review forms are generally the only forms requested.

Capitation, however, is not a panacea. Issues such as the following must be understood and addressed:

• It is the specialists' fear that when they accept capitation, they are at risk for overutilization by the primary care physician. After all, it doesn't cost the PCP any more to send two or ten referrals to the specialist. The specialist will have to perform time-consuming utilization monitoring and education of the primary care physicians toward more appropriate referral patterns. By working with the primary care physicians to improve communication, successful relationships can be achieved.

• A specialist must clearly understand the full costs of his or her operation in order to monitor the capitation rate accepted. He or she must first determine what ultimate discount from fees is acceptable. A specialist can monitor the success of the cap rate by comparing the claims produced but not sent for collection, to the capitation check each month. Of course utilization will vary month to month, so it is important to compare the capitation payment to fee-for-service utilization over longer periods, such as quarterly, semi-annually, and annually. An investment in a system that can perform this function and provide tracking requirements for each MCO will be essential.

• Initially the provision of quality medical services under a capitation may seem excessively costly; and unfortunately there may appear to be incentive to cut costs by reducing services. Don't take this approach-it will invariably be most costly in the long run. Specialists may need to gain greater understanding of critical pathways in order to assume effective and efficient protocols for provision of care.

In competitive managed care arenas, the choice of accepting a capitation is not as difficult as obtaining the opportunity. Today, with so many full risk capitation contracts being accepted by PHO's and IPA's, a specialist may need to be more creative in accessing the market: A specialist could accept a cap directly with a payor, or through an IPA or PHO, (referred to as a horizontal cap). He or she might also accept a capitation directly from an independent medical group, (sub cap), or from a physician management group.

Specialists in many markets share these arrangements with their competitors in order to obtain large volume opportunities. Volume direction, whereby utilization is tracked by an agreed fee-for-service measurement, and the monthly capitation checks divided according to the FFS utilization, is an example of a common methodology. However, this model has been known to create incentives for overutilization. amore successful mechanism has been to review the procedures performed at the end of each month, weight the procedures in the same manner as RBRVS, for example, and divide the income. Typically, the IPA, PHO, or medical group assumes the responsibility for the implementation of this shared process.

Consider a staff model HMO's approach to managed specialty care: Here is a group practice, usually multispecialty, where the physicians are employees of the HMO. A staff model is considered the dinosaur of the models today, but a review of some of their methods can be a guide to establishing a capitation. The HMO may not always have the patient volume in certain geographic areas necessary to support the employment of all types of full time specialists, so they look to prepay the part-time services they cannot support full time.

There are a series of steps to take in creating a viable capitation rate. First, the specialist's costs are reviewed for a particular population, based upon the previous years' fee-for-service experience. Secondly, the cost of employment of a physician providing that service for the same population (a competitive salary package, including the cost of benefits and malpractice insurance) is determined. Thirdly, the fee-for- service revenue for that population and that year is compared to the cost of employment of a physician to perform the same services, and the cost of supplies and overhead. This comparison will determine the level of revenue needed by the specialist to perform the service and enjoy a reasonable profit. The profit is the negotiable area. Fourthly, the annual cost plus profit is divided by the population size, and then divided by 12 to determine the monthly capitation rate. Finally, the specialist should do reasonable due diligence, and compare his or her results with a number of national capitation surveys, to substantiate the cap rate determined.

A specialist must decide what level of discount represented by the capitation is ultimately acceptable. Like all other health care costs, capitation rates are market driven. Discounts represented by capitation range nationally from 50% to 75% of charges. One HMO in Chicago found its benchmark accepted by aggressive, market conscious physician groups to represent about 45-55% of charges, or 80-90% of Medicare reimbursement.

The best choice for a specialty practice today would be to achieve a balance of all payment mechanisms. The advantages of accepting a capitation arrangement as part of the physician's strategy will outweigh the risks. Capitation arrangements combined with utilization management, and favorable relationships with the primary care physicians (following the managed care lead of the strongest referring physicians), are key elements to a specialist's business plan today.

This article was written by Denise Cameron. As a Vice President of Managed Care Resources, Denise, with 15 years of managed care experience and seven years of clinical experience, offers a unique and personalized approach to managed care. Her primary focus has been in the area of developing relationships between providers and payors to assure long term mutually beneficial relations.

For more information on Managed Care Contracting please contact us at (708) 482-0123 or by email at info@mcres.com .

I hope that you will join us as we explore all of the elements of managed care contracting in the coming months. In addition, we also offer a "Signature Series" on "Medical Management Under Managed Care". We hope that the two series combined will lessen the mystery of managed care and help level the playing field between providers and payers.

Ira H. Rosenberg

President, Managed Care Resources, Inc.

The Managed Care Resources, Inc. team has over 150 years of combined experience in the development and implementation of managed care services. Please visit our home page to learn more about how we can assist you with your managed care needs. We also invite you to contact us with questions or comments.

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