A physician's perspective on capitation.

In 1937, the British physician/novelist A. J. Cronin outraged his physician colleagues by describing the abuses and scandals associated with capitated medicine. In his novel, The Citadel, the protagonist (Dr. Manson) accepts a position right out of medical school working for Dr. Page as a primary care physician. Dr. Page's office manager (who also happens to be his wife) explains the system to Dr. Manson: "The Company deducts so much from every man's wages they employ at the mines and the quarries, and pays that out to the listed doctors according to 'ow many of the men signs on with them. All you got to remember is that you're working for Doctor Page. That's the main thing, Doctor. Just remember you're working for Doctor Page and you and poor little me'll get on a treat."[1]

American physicians may find striking similarities when comparing the medical economics of England in the early 20th Century and the medical economics in the United States today:

* Capitation is not just an economic device; it is a method of gaining market share. * Capitated physicians are essentially employed" physicians. * Capitation transfers economic risk that the provider of care can manage only with the assistance of the HMO.

Few argue whether managed care (MC) is here to stay. MC, in one form or another, from modified fee-for-service (FFS) preferred provider organizations (PPOs) to full risk integrated delivery systems (IDSs), has rapidly grown throughout the United States. In 1994, PPOs served 80 million members. In the past decade, health maintenance organizations (HMOs) have grown to cover more than 50 million individuals. During that same time, traditional indenmity plans have lost half their subscribers and now cover fewer than 100 million individuals.[2] For physicians outside of high managed care concentration areas, the transformation is both complex and difficult

This new medicoeconomic environment asks physicians to understand and manage the economic risk for their medical decisions. This is a paradigm shift for most physicians. In FFS medicine, patients or insurance companies pay physicians for each patient encounter. Under capitation, health care payers contract in advance for the provision of services by paying physicians a fixed amount according to the number and type of patients assigned to the particular physician or medical group. This per patient per month" (PMPM) payment mechanism contractually obligates physicians to perform all necessary medical services for this fixed figure. When physicians can provide the agreed-upon services for less than the PMPM payment, the difference is profit. But when the costs of required service exceed the payment, the contracted physician generally has an "out of pocket" loss.

In both fee-for-service and capitated arrangements, the potential exists for economic interests and professional goals to conflict. Some believe the FFS system encourages physicians to increase their income by providing unnecessary services, at the expense of patients' and payers' economic welfare. But others believe the capitated system may encourage physicians to withhold services in order to increase profit margin. In fact, the first lawsuit to allege that a patient's death was a direct result of services withheld to increase the physician's income may be decided in California this summer. A sophisticated clinical and financial management approach to capitation minimizes the above conflicts.

Using Capitation to Gain Market Share

HMOs compete with each other in a given market. The HMO with a lower price (premium) has a significant competitive advantage. Capitation is the way HMOs keep their premium low. With capitation, HMOs can contractually fix the maximum costs of physicians' and other providers' services. From the viewpoint of an HMO, capitation is critical to achieving a competitive market share.

Physicians also compete. As reimbursement rates from Medicare and other insurers have fallen, physicians struggling to preserve their income attach major importance to attracting and retaining large numbers of patients. The greater the number of patients, the greater opportunity the physician will have for positive cash flow and for balancing the statistical probabilities of risk. Physicians willing to sign HMO contracts have access to an important share of the local patient market.

Physicians who find the financial restraints in HMO contracts onerous miss the point. All but the worst HMO contracts potentially have great value if the contract leads to a large enough market share. Physicians who understand the value of attracting HMO contracts that deliver a large market share will have a materially greater chance to succeed in the coming years.

Growing a patient base via HMO contracts can be challenging. New business skills, such as marketing, quality improvement, and customer retention, are quickly becoming as important as the quality of medical services provided. New clinical skills are required to manage the range of care provided by other physicians and health care providers under subcapitation agreements. Health care providers who cannot attract and retain a sufficiently large number of patients cannot expect to compete with medical groups that can. In our experience, a medical group or physician can avoid potential disaster by properly planning for the transition.

Capitated Physicians as

"Employees"

Physicians with HMO contracts cannot simply carry on their business as usual. In the changes engendered by capitation, physicians must realize that many of the protections afforded employed physicians do not apply to them, but that all of the regulations applied to employed physicians do. Capitated physicians must subordinate at least part of their egos to the orders of their corporate payers. When the medical director of the HMO calls a capitated physician about a patient complaint, the best response is, "What can I do to make the patient happy?" The medical director does not want to hear the capitated physician say, "The patient is wrong." Capitated medicine represents a marked departure from physicians' independence in their traditional patient-physician relationship. Physicians were trained to think and act without instruction from a managing authority. Physicians did not feel under any compunction to acquiesce to a patient's improper request. The physician was pretty much free to do what he or she thought best. If a patient was unhappy with a physician's medical care, or if the physician did not feel comfortable treating the particular patient, the physician and patient were free to discontinue the professional relationship.

Capitated physicians cannot do this. Even placing a colleague on call is not always an acceptable alternate to doing one's work as scheduled. Patients choosing a particular physician expect the HMO-affiliated doctor to serve them at their convenience, not the physician's. The employee benefits manager, state regulatory agencies, and the HMO consumer relations department all support this expectation. A single complaint against an HMO physician can trigger a cascade of unpleasant or even disastrous events.

Physicians who find their relationship with the HMO strained should expect to lose their contracts and the income associated with the contracts. HMOs are quick to cancel contracts with physicians who generate complaints and jeopardize the HMOs' market share. On the other hand, physicians who maintain the best possible relationship with their patients and the contracting HMO will likely see an increase in their patient census. This may sound simple, but it's not easy for some physicians to adjust to their new role.

Capitated physicians are linked to an intricate chain involving the employee/ patient, his or her employer, and the HMO. If the patient is unhappy with the physician's services or the physician's offices, he or she will complain to the employer. The employer will then complain to the HMO. The HMO, fearing the loss of not only a single patient, but potentially an entire group of patients, will do everything it can to pressure physicians into satisfying the patient. While highly professional behavior helps sustain a capitated contract year after year, it does not, by itself, guarantee financial success. Financial success arises from proper management of the financial risk associated with capitation.

Managing Capitation's Financial Risks

The amount of money a capitated contract generates depends on the capitation rate, the illness of assigned patients, the costs of running the office, and the performance incentives offered by the HMO. Nearly all HMOs base their contracts on actuarial analyses for populations in a given geographic area. HMOs will not change by very much the PMPM payment from contract to contract, assuming the same relative degree of risk. But medical groups can greatly increase their revenues by increasing the degree of risk assumed. Medical groups may also decrease their risk by reducing their revenues, increasing the use of subcapitation agreements or purchasing of stop-loss insurance.

For example, a group of primary care physicians could contract for the minimal risk of paying for only their own primary care services. Because the HMO has to pay for all specialists' services, it will limit the amount paid to the primary care group. However, if the primary care group agrees to pay for all specialty services, the HMO would be willing to pay between three and five times the amount paid for primary services alone!

Another option is the assumption of full risk, where a health care provider agrees to pay for all medical services, including hospital care. A full-risk contract may provide $ 1 00 or more PMPM for employed patients and more than $300 PMPM for Medicare beneficiaries. An HMO could pay a health care provider with a full risk contract for 10,000 employees and 5,000 Medicare patients nearly $3 million dollars each month. In light of the potential pitfalls in accepting a full-risk contract, many physicians have formed alliances with hospitals or other groups to mitigate the possible downside risk. Because of cultural differences and, sometimes, divergent goals, these alliances may not achieve the desired results. Only when the objectives and interests of all participants are aligned will the alliance venture have a fighting chance. The aid of an experienced advisor during the organizational stages can pay significant dividends during the later operational stages.

Capitation can generate modest to robust cash flow for the physician. But managing the obligations associated with this cash flow is a responsibility equivalent to handling the health care for a small town. The costs of caring for this large population can easily exceed the group's cash flow.

Wouldn't it be nice if the HMO patients assigned to the capitated group never became ill and never needed physicians or medications? But that's utopian; humans do become ill. However, medical groups can affect the rate at which their patients fall ill.

First, there are preventive programs, such as weight control, smoking cessation, and stress management. These programs may work mostly because they engage patients with the system. Patients who call and seek help early rather than late stand a better chance of avoiding hospitalization.

Second, capitated groups should identify individual patients and groups of patients most at risk for illness. Spending more time delivering care to diabetics, the elderly living alone, and the chronically ill will save far more money that the intensified programs for their care costs.

Third, medical groups must regularly review the quality of their care and their utilization of resources. The capitated group has a financial interest in seeing that each physician is kept Up-to-date on the latest technologies and their proper use. Hardly a month goes by when some standards of care do not change. The medical literature recently has recommended that women obtain mammograms less frequently, endorsed cautious use of MRIs, and expressed doubts as to the value of cholesterol screening in men and women over age 75. Physicians who ignore these developments will order and perform many unnecessary tests at great expense to the capitated group.

It is critical that capitated medical groups control their own medical decisions, via approved practice parameters and valid quality assurance programs. If the HMO is more concerned with patient complaints than with scientifically correct practice patterns, it may force the capitated group to pay for unindicated mammograms, MRIs, and cardiac evaluations merely because the patient makes a request for these services. When the HMO or an employer purchasing HMO benefits dictates what is medically appropriate without regard for the state-of-the-art, the capitated group is facing a potential financial catastrophe. The solution to that circumstance, like other nuances of capitation, requires careful and thoughtful management.

Capitation is potentially very profitable, but it can also be a financial disaster. Few capitated groups are so large as to be invincible against the competitive forces around them. However, even the largest groups face challenges from within their organizations, even if not from without. Although they are too detailed to cover here, we have identified and implemented several effective financial management strategies that should form the foundation of a successful capitated physician's practice. Where effectively managed and controlled, capitation can form the foundation for success in the years to come. No group is so large or so small as to likely survive the next decade without being involved in a capitated contract.

References

[1.] Cronin, A. The Citadel Boston, Mass.: Little Brown & Co., 1937. [2.] "Quality, Change Management, and Managed Care." AGPA Proceedings, 1/1 8-2/l/95.

Jason Green, MD, FACS, is President, Medical Dynamics, a physician-dominated health care consulting firm in Los Angeles, Calif., Rebecca Barnett, MD, is Secretary of the firm.