- Email: [email protected]
CAPITATION
MANAGED CARE ISSUES FOR THE GASTROENTEROLOGIST
0889-8553/97 $0.00
+ .20
CAPITATION Theory, Practice, and Evaluating Rates for Gastroenterology Michael L. Weinstein, MD
Managed care growth has affected physicians most dramatically in the way they are paid for the services provided to patients. The phases of managed care penetration into a region are characterized to a great degree by the change in payment methods. Markets see their traditional fee-for-service payment replaced by discounted fee schedules and eventually are dominated by per member fixed dollar prepayments to contracted physicians. In exchange for a guaranteed monthly capitation payment, physicians or physician groups are required to provide all contracted services to the extent needed by any patient of the member population. Capitation payments can take different forms depending on the agreement with the managed care organization (MCO). Most physicians are familiar with MCO direct capitation to individual providers for primary care services. In most plans, other services remain the responsibility of the MCO to be paid on a fee-for-service basis. Alternatively the MCO can arrange a specialty capitation contract for specific services with specialty physician groups. The MCO can effectively offload almost all of its risk, keeping a significant percentage of the premium dollar for the marketing of the plan and coordinating the various capitated contracts. Although the number of at-risk specialty contracts is currently small, they are increasing in frequency and have had significant influence on other health care payment strategies. Capitation can align the
From the Mid-Atlantic Gastroenterology Network; and George Washington University Medical Center, Potomac, Maryland
GASTROENTEROLOGY CLINICS OF NORTH AMERICA VOLUME 26 * NUMBER 4 * DECEMBER 1997
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incentives of patient, provider, carrier, and purchaser to keep covered members as healthy as possible at the least cost possible. The responsibility of cost-effectively managing resource utilization can rest in the hands of the providers. It is the providers who have the scientific training, clinical knowledge, and history of being patient advocates. A multiphysician group may be paid by an MCO on a global or whole-life capitated basis and divide the pool of funds internally on a fee-for-service basis. The fee schedule is typically set using a relative value system. The payments for services are usually adjusted on a monthly basis depending on the total amount of relative value units provided by the entire physician group. Any needed service not provided by a physician within the group must be paid out of the pool to a subcontracted provider. Many physicians misunderstand the theory of capitation and argue that patients will be denied needed services because the incentive once the capitation payment is received is to withhold medical services. In contrast, MCOs have complained that even under discounted fee-forservice arrangements the cost of health care has not decreased. Physicians and specialists in particular may even increase the volume of services to make up for the decrease in their per service reimbursement. In an attempt to control the volume of services, many insurance carriers have used preauthorization or second opinion programs for procedures. Paying for specialty services with monthly per member compensation allows the MCO to offload the risk for changes in the volume and associated cost. Those who believe that capitation is anti-patient are only thinking about the short-term incentives to withhold care. All capitation contracts are renegotiated after 1 or 2 years based on the actual utilization of services by a member population. If the volume of services is smaller than that used to calculate the initial capitation rate, the MCO is justified in asking for a lower capitation rate in the subsequent contract. Capitation arrangements allow physician groups to share the savings that high-quality, cost-effective medical care produces. Groups that can quantify the costs of specific services and manage the utilization of those services through patient intervention and disease management techniques are most likely to be successful in risk contracts.2 Gastroenterologists across the United States are being asked to participate in health plans that put their practices at financial risk for the cost of services needed by their patients. Specialists can participate in capitation payment systems as part of a whole-life capitation contract to a multispecialty health system or as a separate specialty capitation. In either case, the specialist must be committed to providing health care under a system that endeavors to measure quality, manage disease, and provide all appropriate services on a fixed budget. A specialty capitation contract tends to cover a large number of member lives spread out over a region. To satisfy the MCOs needs, this usually requires a network of specialists to ensure reasonable access for all eligible members. If the provider group plans to do nothing but turn the capitation pool into a discounted fee-for-service arrangement, the MCO is successful only in limiting their cost for specialty professional
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services. In addition to regional coverage and controlled costs for professional services, MCOs want the group to control the expenditures for ambulatory facilities, which in gastroenterology can typically approach the same cost as professional reimbursement. The prospective physician group should consist of board-certified specialists prepared to consider alternative payment incentives and ready to institute utilization and quality review. Capitation can affect the delivery of health care services by influencing individual provider decisions, by fostering innovation in disease management, and by encouraging integration of various components of the health delivery system. Physicians vary widely in their use of diagnostic tests, choice of medication, and therapeutic procedures. The variation in practice style does not necessarily mean that one provider is appropriate and the other is inappropriate. Mirvis3 suggests that the differences between providers more likely is due to the uncertainty of outcomes and disagreement about the preferred course of action. On the continuum of resource utilization, there is a range of uncertainty that allows for differences in practice style. Outside this range lies practice patterns more clearly agreed by all as underutilization and overutilization. One of the obvious influences that affects physician decision and resource utilization is financial incentive. Specialty capitation places the responsibility of determining the acceptable range of practice in the hands of the physicians rather than the managed care insurance company. Financial incentives can be aligned to avoid both underutilization and overutilization. Narrowing the range of uncertainty and acceptable practice pattern is better left to basic research in clinical science and outcomes. The magnitude of risk under capitation should not be so great as to influence an individual physician to make clinically imprudent choices for an individual patient. The primary aim of a capitated contract directly involving physicians should be to encourage peers to exchange information about their own patterns of care, to support group learning about clinically prudent options, and to increase the likelihood of cooperation among physicians and between physicians and managers to develop better programs of care. The services covered under capitation contracts should be those about which the risk-bearing entity can make relevant, clinically prudent choices, not those over which the entity has little or no influence. Capitation can encourage better decisions and facilitate the productive redesign of systems for the delivery of care.l NEGOTIATING CAPITATION
As a region matures to a managed care stage at which capitation arrangements are initiated, gastroenterology is not the first foray for an insurance carrier. After primary care capitation, most MCOs concentrate on efforts to reduce their risk in the higher-cost specialties. Capitation contracts for radiology, laboratory services, cardiology, obstetrics and gynecology, and orthopedics already exist in markets considering capi-
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tation for gastroenterology services. The cost for gastroenterology services alone is typically less than one half of 1%of the premium dollar. It is usually the combined cost of specialty professional services and the ambulatory facility services that the MCO wishes to control. Situations arise in which either the MCO or the specialty network seeks to enter a capitation arrangement for gastroenterology services. In the former, the MCO notifies providers by a request for proposal. In the latter, a specialty network contacts the MCO via the medical director or director of provider relations and inquires about the MCO’s interest in a specialty carve-out for gastroenterology. No matter who initiates the process, the negotiations lead to a successful outcome only if both parties are willing to reveal all of their information and discuss all details of a contract to the understanding of all involved. Problems in the future are likely if either party is not forthcoming with information. The size of the provider group needed to satisfy a MCO membership is determined by the number of covered lives and the size of the geographic region. Desirable providers are those that have the necessary clinical expertise most easily defined by their board certification status. In addition, providers should have a willingness to maintain a high level of accessibility to patients, to work as team players, and to participate in continuous quality improvement efforts. Before beginning the task of negotiating a capitation contract, it is important to remember that the capitation rate is set before the actual period of service begins and represents a calculated estimate of the amount of money that is required to pay for the specific services described in the contract. The contract creates a degree of risk in that the illness rate of the membership may vary from predictions. In general, specialty capitation contracts spread the risk of the MCO membership among many physicians rather than capitating individual providers for small subgroups of enrolled members. Determining an appropriate capitation rate for a specific membership population cannot safely be done by looking at various benchmark rates. The range of capitation rates reported. in various national or regional articles can vary by more than threefold. Differences in the contract can substantially affect the capitation rate. The population characteristics, the administrative responsibilities, the referral process, and, most importantly, the covered services must be carefully compared. To determine a financially feasible capitation rate that minimizes the risk of uncertainty, it is necessary to have the historical encounter data about the membership’s use of all gastroenterology services. If the MCO is unwilling or unable to produce prior utilization data, any capitation rate agreed on is a guess and a potential financial disaster for the specialty network. If historical data are available, the following analysis (using any electronic spreadsheet) allows one to calculate a capitation rate based on a comparison to a remuneration scale, such as the traditional Medicare fee schedule. An example is shown in Table 1. The first step in creating a calculator for capitation is to list in the first column all of the Common Procedural Terminology (CPT) service codes that are required of participating providers. This list should be identical to an eventual addendum of the completed contract. The list
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Table 1. CAPITATION CALCULATION FOR 60,000 LIVES
CPT
Description
Medicare 1996 Medicare RVUs Allowance Volume
Medicare cost/year
43235 Upper endoscopy,
5.75
$221.09
30
$6633
complex diagnostic 43239 Upper endoscopy for biopsy
6.46
$248.39
180
$44,710
45378 Colonoscopy 45380 Colonoscopy with
8.22 9.20
$316.06 $353.74
100
90
$31,606 $31,837
12.54
$482.16
60
$28,930
99213 Established patient,
0.96
$32.76
350
$1 1,464
low complexity 99214 Established patient, detailed
1.48
$50.50
170
$8,585
99243 Consultations, low
2.54
$86.66
220
519,066
complexity 99244 Consultations, comprehensive
3.57
$121.81
280
$34,106
biopsy
45385 Colonoscopy with polypectomy
Total necessary capitatiordyear Per member per month CPT RVU
= =
5300,000 $30,000 $330,000 $0.46
Total cosVyear Administration
common procedural terminology relative value unit
should include procedure codes as well as evaluation and management codes used for outpatient and inpatient visits. In the second column, the corresponding relative value units assigned by Medicare are placed. The resource-based relative value scale is only one way of assigning a dollar value to each service code. Alternative values might include standard office charges or a discount from standard charges. Each value in the second column should then be multiplied by the current Medicare conversion factor to obtain a dollar value in the third column. The conversion factor and the relative value scale can be updated as needed. The fourth column should contain the number of times the particular service is expected to be performed during the contract year. The best estimate of expected need is the historical utilization from the membership population database maintained by the MCO. In addition to estimating the gastrointestinal illness rate of the defined membership, the historical data also reflect the referral habits of the primary care physicians.The procedure code data are most critical to the capitation calculation because of the assigned higher value units and the associated
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ambulatory facility costs. The MCO may have some difficulty in separating visit code for gastroenterologists from other specialist visits. The product of the dollar value (column 3) and the expected volume (column 4) is listed in the fifth column as the expected annual service cost. The sum of the individual annual service costs is the amount needed to pay a Medicare rate for professional services. To this sum, it is necessary to add the administrative cost of coordinating a capitation contract. The annual capitation rate is calculated by dividing the total annual cost by the number of members covered under the insurance plan. The monthly capitation rate (per member per month) is the determined simply by dividing the annual rate by 12. Adjustments to the capitation rate are needed to cover the administrative costs of coordinating a specialty capitation contract. Administrative costs range from 8% to 12% depending on the size of the contract. If the capitation rate is to include the cost of ambulatory facility fees, the annual cost of these services should be calculated in the same manner as professional services. CAPITATION ANALYSIS SPREADSHEET
In addition to determining a reasonable capitation rate, there are numerous other issues that should be addressed during negotiations. Neglecting to consider one issue can eventually be the difference between acceptable reimbursement for services or the need to terminate the contract because of unacceptable fiscal liability. What services will be covered by the capitation payment? What is the referral authorization process? How often will the provider network be paid? Who will process the claims, and how will encounter data be transmitted to the MCO? What are the terms that deal with cost overages? What are quality assurance reporting requirements? What is the length of the contract, and how can it be terminated? The list of services included in a capitation contract is determined by negotiation with the MCO. In general, providers should accept the risk for all services that they can control. It would not be wise to accept the risk for ambulatory facility fees if the network has not predetermined the cost of using the available sites. Utilization review efforts help control the number of times a facility is used, but the per use costs must be known before accepting the risk. Services that are provided infrequently, such as variceal injection and endoscopic retrograde cholangiopancreatography, should also be considered for contract exclusion or curve-out. Services provided for routine screening may also be excluded because they are subject to extreme utilization variation. Services excluded from the capitation can be covered in the contract by an agreed on discounted fee-for-service schedule. To consider safely an at-risk contract, a sufficiently large membership base is needed to ensure that resource utilization patterns are based on provider practice pattern behavior rather than random chance. In gastroenterology, the necessary membership base is around 10,000 to 20,000 lives. If the membership population is too small, the group should
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consider a fee-for-service arrangement until the population has grown to a reasonable size. Another alternative is to consider a risk-band. This involves tracking the used services within the contract on an agreed on fee-for-service basis, such as the Medicare allowance. If the capitation payments fall outside of the risk-band (typically 10% to 20% on either side of the allowance), the MCO makes an additional payment to the providers or receives a refund of the excess capitation payment. The risk of exceeding the risk-band can be the responsibility of the MCO solely or can be shared with the provider network. Stop-loss protection is similar to risk-band protection but applies to an individual patient rather than the population as a whole. In the unlikely event that a single patient requires a volume of services that exceeds an agreed on value, the MCO pays for additional services on a fee-for-service basis. The contract should also specify which party is responsible for services performed by out-of-network providers. This occurs because members become ill when they are out of town or because errors happen in the referral process. The manner in which members may contact capitated specialists significantly affects the utilization rate of services and therefore the capitation pool of funds. The primary care physician usually acts as the gatekeeper in most capitation arrangements. For members to be seen by a participating specialist provider, the primary care physician must complete a referral form, which includes the reason a consultation is requested. Measures that influence the referral rate and member contacts with specialists include shared specialty risk pools and member copayments. Changes from prior measures may affect the utilization rate of services and alter the basis by which the capitation rate was calculated. After a referral is received by a participating provider, a method to verify that a patient is in fact an eligible member must be available. The MCO may already operate an eligibility verification system for other specialists and hospitals, but the responsibility should be addressed in contract negotiations. If a participating provider performs services for a patient whose coverage was terminated, it is unlikely that the MCO will reimburse the specialty network. The physician may be unable to collect for services if the patient is unwilling to pay after the care was rendered. EVALUATING CAPITATION PAYMENTS
In calculating a capitation rate for a given membership, it is important to consider the many factors that can have an effect on the utilization and risk. One must not lose sight of the fact, however, that a capitation rate is an estimate of future resource use. Ongoing collection and analysis of encounter data are necessary to determine whether the assumptions about the illness rate of the membership population were correct. Many experienced physicians in capitation have come to realize that the per-member-per-month payment (PMPM) rate for professional services may not be everything. Opportunities to share in the cost savings achieved in other controlled services may be as or more im-
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portant than the actual professional service capitation PMPM rate. The most important example is the ability for the specialist to share in the hospital risk pool. Capitation rates, in some areas of the country, are so low that they essentially are a break-even reimbursement for the physician. Some capitation rates do not even approximate current Medicare reimbursement. This occurs in very mature markets where large managed care organizations present ”take it or leave it” contracts. It may be more advantageous at times to share, in some way, in the hospital risk pool, instead of wasting hours trying to negotiate the capitation rate upward a penny. Once a capitation contract for specialty services is completed, the real work begins. In contrast to primary care capitation, in which individual providers are capitated for member lives, a specialty network of participating providers needs to manage the pool of funds both to cover the administration expenses and to pay for all of the covered services. Claims for services are generally batched and processed on a monthly basis to correspond with the capitation payment schedule. The dollar flow of a specialty capitation pool is represented in Figure 1. The establishment of a reserve fund to pay for services in the event that the provider network ceases to exist is fiscally responsible and a likely requirement of the MCO. The provider network receives capitation
Total Capitation Pool
Insolvency Fund
i Received Capitation
Administration (10%or less)
Pool Available for Services
LLC Bonus Facility Fees
Fee-for-Service
Negotiated contracts for global payment to ambulatory endoscopy centers
Modified R.V.U professional payment to participating specialists
A pm pntimt see)! bonus
determined by Bonus Pool t Xpts seen and earned based on I. appropriateness
-
2. member satisfaction3. education activity
-
4. office effidency
-
Figure 1. Dollar flow in a specialty capitation pool. RVV
=
relative value unit.
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payment commencing with the initial month of the contract. Because the normal claims submission process creates a 2- to 3-month delay before the first payments are made, the initial month’s capitation can be used to fund a reserve pool. If the contract is terminated in the future, the reserve fund is available to pay those claims that are submitted after the network is no longer receiving capitation from the MCO. In addition to fiduciary responsibility of managing the capitation funds, the specialty network has other administrative obligations. Verification of the credentials of all contracted providers is a National Commission for Quality Assurance requirement for MCOs. The MCO may retain this responsibility or delegate the responsibility for credentialing to the specialty network through the capitation contract. Delegated credentialing responsibility requires the provider group to contact medical schools, training programs, and the National Practitioner Data Bank. Files on every participating provider must be maintained and be available for review by the MCO. The specialty network should consider a preauthorization process for high-cost procedures. This process is especially important if the network has also contracted to take the risk for the cost of the ambulatory endoscopy facility. Gastroenterologists have seen their reimbursement for procedure services decline substantially during the past several years. Working in a fee-for-service environment has given physicians incentive to provide more services, particularly when fears of malpractice suits for failure to diagnose are factored into the treatment decision. To manage utilization successfully, the physicians must agree to follow a standard set of clinical guidelines. The American Society for Gastrointestinal Endoscopy has distributed a set of appropriate indications for procedures. These guidelines are somewhat out of date but are currently under revision and are being updated. A capitation contract does not dismiss providers from having to submit detailed claims for patient encounters. The data collected from providers become the basis by which the capitation pool is divided among participating physicians. In addition, the encounter data are used to assist in quality assurance activities, utilization review, and disease management. Patient addresses from claims are needed to send out satisfaction surveys. Referring physician identifiers are needed to monitor for inappropriate referrals or dumping. The frequency with which specific diagnosis codes are used directs educational activities for primary care physicians and participating gastroenterology providers. The processing of claims for payment and summarizing encounter data cannot be done with a typical physicians’ billing system. The cost of software for adjudicating claims is beyond the means of all but the largest physician networks and with rapid changes in both technology and managed care arrangements is generally a poor investment. Several companies offer services for claims processing on a per claim, a contract percentage, or a lease basis. The network must be sure that the service can provide the necessary reports for utilization review and the encounter data files in a format acceptable to the MCO. Probably the largest challenge for the network is the development of a payment mechanism that aligns the incentives so that providers
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choose to provide services in a cost-efficient manner. Controlling the utilization of procedure services affects the capitation pool to the greatest degree. The proportion of the pool used to pay for procedure services can range from 60% to 80% if the costs of facility services are considered. The goal of the network should be to avoid underutilization and overutilization of procedure services. The interests of the MCO, the specialty network, and, most importantly, the patient are not furthered by either of these approaches. The maintenance of a pathology log assists the network in its goal of providing cost-effective care to the covered membership. Tissue results from prior procedures are useful in determining the interval for follow-up of several gastrointestinal conditions, including colonic neoplasia and esophageal Barrett’s dysplasia. The log not only enables the network to avoid unnecessary surveillance procedures, but also identifies those members who should be contacted for preventive health care measures. Providing intervention to patients at high risk can significantly decrease future utilization and cost. Physician-to-physician communication is vital to enforcing the clinical guidelines. Each provider must understand that the guidelines are not meant to withhold care but promote quality through elimination of variation. There are cases that for specific reasons the guidelines do not allow an easy determination to be made as to the appropriateness of performing a procedure. In these cases, physicians must carefully document the extenuating circumstances which determined that the care should vary from the guidelines. Being able to justify that all procedures performed for a membership population were clinically appropriate is critical in future negotiations with the MCO. The establishment of a large utilization review and quality assessment committee is helpful in attaining the goals of the specialty network. Provider participation in these functions should be encouraged. The clinical guidelines used by the network should carry the stamp of approval from a diverse segment of the participating provider group. Committee members also then have a sense of responsibility in ensuring the success of the capitation contract having invested their time and effort into the process. The payment system for a capitation pool should attempt to reward participating providers who exemplify the goals of the specialty network. The largest portion of the capitation pool should pay for services based on the some measurement of work performed. One method, also known as a contact payment, is to allot a payment to a provider for each referral made to his or her office, which covers all necessary services for a given period of time. Another option is to use relative value units for each type of service. The relative value units assigned by Medicare serve as a starting point but tend to be overly complex and tilted toward rewarding physicians who perform more procedures. One way to simplify the payments to providers is to lump multiple codes into an individual class for payment at a single fee. The lumping of all visit codes into a single payment category eliminates arguments that might occur between providers concerning the appropriate level of coding based on the complexity of visits. Just as the law of averages
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tends to equalize the illness rates among members of large populations, the number of difficult cases and easy cases evens out between providers. The coding for endoscopic procedures can be simplified in a similar manner. A portion of the capitation pool should be reserved for a bonus system. Obtaining a full bonus payment should be realistically attainable and dependent on factors within each provider's control. Factors including procedure utilization rates, educational activities, and patient survey results can be used in bonus determination. Bonus penalties should befall only providers who are significant outliers. A bonus of 10% to 20% is usually enough to seem worthwhile to most physicians. Patient satisfaction surveys if not a requirement of the capitation contract are useful in any case to demonstrate to the MCO that care is accessible and courteous. The results from surveys can also be used as part of the capitation pool distribution formula as mentioned previously. Although a single bad review from a patient should not affect reimbursement, the information is still of use to the practice in efforts to improve patient care. The MCO is interested in questions about satisfaction with office location, appointment availability, and the physician. TROUBLESHOOTING
Several signs may indicate that the capitation contract or specialty network is experiencing trouble. Some delay and confusion in claims filing is expected with the institution of a new contract. If there are a large number of physician offices involved in the contract, the specialty network can expect ongoing problems in coordinating the referral, preauthorization, and claims submission process. As office personnel change, the requirements of the capitation contract may not be relayed to new staff. The network's processing staff should look for unusual claims volume and missing preauthorizations as a sign to recontact identified offices. Higher-than-expected claims volume may indicate that the assumptions used in calculating the capitation rate were incorrect. An altemative explanation is that the MCO has incorrectly identified the total eligible population or that the population composition has changed. A high volume of claims from a specific primary care physician or group compared to the average may indicate inappropriate referrals or dumping. A year or more may be needed before an analysis of claims shows a trend that points to a problem. Capitation contracts in place for long periods of time have shown that consultations and procedures per 1000 patients in a fixed HMO population fall dramatically after a few years. This is simple to understand since most chronic gastrointestinal disorders, such as inflammatory bowel disease, chronic hepatitis, etc., will be cared for appropriately by the specialists in the system. Patients become stabilized and well, and can be referred back to their primary care physicians. A capitation arrangement may not meet expectations for several reasons. Both parties in a capitation contract want the arrangement to
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be successful in the long-term. The physician group should maintain open lines of communication with the MCO and carefully track the utilization of all services and the cost of administering the contract. The effort to begin a capitation process is substantial for both sides. Neither necessarily wants to scrap the arrangement without trying to negotiate a change in the capitation rate that allows both to succeed. SUMMARY
Capitation risk contracting has the potential to combine insurance functions with medical care functions. Success depends on a careful consideration of the capitation rate and a thorough understanding of all capitation contract issues. Proper incentives to physicians in a specialty network stimulate a major reengineering effort to squeeze the inefficiency out of the system. Within the network, true peer review can effectively diminish variability in medical care. Such variability leads to increased cost without benefit to health status. The superior medical management of a capitated specialty network can create added value by coordinating more cost-effective and appropriate evaluation and therapy. References 1. Berwick DM: Quality of health care: Part 5. Payment by capitation and the quality of care. N Engl J Med 335:1227-1231, 1996 2. Krohn R W Making risk contracting work in specialty networks. MGM JournalJanuary/ February:13-19, 1997 3. Mirvis D M Managed care, managing uncertainty. Arch Intern Med 157385-388, 1997 Address reprint requests to: Michael L. Weinstein, MD Mid-Atlantic Gastroenterology Network PO Box 60316 Potomac, MD 20854-0316
0889-8553/97 $0.00
+ .20
CAPITATION Theory, Practice, and Evaluating Rates for Gastroenterology Michael L. Weinstein, MD
Managed care growth has affected physicians most dramatically in the way they are paid for the services provided to patients. The phases of managed care penetration into a region are characterized to a great degree by the change in payment methods. Markets see their traditional fee-for-service payment replaced by discounted fee schedules and eventually are dominated by per member fixed dollar prepayments to contracted physicians. In exchange for a guaranteed monthly capitation payment, physicians or physician groups are required to provide all contracted services to the extent needed by any patient of the member population. Capitation payments can take different forms depending on the agreement with the managed care organization (MCO). Most physicians are familiar with MCO direct capitation to individual providers for primary care services. In most plans, other services remain the responsibility of the MCO to be paid on a fee-for-service basis. Alternatively the MCO can arrange a specialty capitation contract for specific services with specialty physician groups. The MCO can effectively offload almost all of its risk, keeping a significant percentage of the premium dollar for the marketing of the plan and coordinating the various capitated contracts. Although the number of at-risk specialty contracts is currently small, they are increasing in frequency and have had significant influence on other health care payment strategies. Capitation can align the
From the Mid-Atlantic Gastroenterology Network; and George Washington University Medical Center, Potomac, Maryland
GASTROENTEROLOGY CLINICS OF NORTH AMERICA VOLUME 26 * NUMBER 4 * DECEMBER 1997
773
774
WEINSTEIN
incentives of patient, provider, carrier, and purchaser to keep covered members as healthy as possible at the least cost possible. The responsibility of cost-effectively managing resource utilization can rest in the hands of the providers. It is the providers who have the scientific training, clinical knowledge, and history of being patient advocates. A multiphysician group may be paid by an MCO on a global or whole-life capitated basis and divide the pool of funds internally on a fee-for-service basis. The fee schedule is typically set using a relative value system. The payments for services are usually adjusted on a monthly basis depending on the total amount of relative value units provided by the entire physician group. Any needed service not provided by a physician within the group must be paid out of the pool to a subcontracted provider. Many physicians misunderstand the theory of capitation and argue that patients will be denied needed services because the incentive once the capitation payment is received is to withhold medical services. In contrast, MCOs have complained that even under discounted fee-forservice arrangements the cost of health care has not decreased. Physicians and specialists in particular may even increase the volume of services to make up for the decrease in their per service reimbursement. In an attempt to control the volume of services, many insurance carriers have used preauthorization or second opinion programs for procedures. Paying for specialty services with monthly per member compensation allows the MCO to offload the risk for changes in the volume and associated cost. Those who believe that capitation is anti-patient are only thinking about the short-term incentives to withhold care. All capitation contracts are renegotiated after 1 or 2 years based on the actual utilization of services by a member population. If the volume of services is smaller than that used to calculate the initial capitation rate, the MCO is justified in asking for a lower capitation rate in the subsequent contract. Capitation arrangements allow physician groups to share the savings that high-quality, cost-effective medical care produces. Groups that can quantify the costs of specific services and manage the utilization of those services through patient intervention and disease management techniques are most likely to be successful in risk contracts.2 Gastroenterologists across the United States are being asked to participate in health plans that put their practices at financial risk for the cost of services needed by their patients. Specialists can participate in capitation payment systems as part of a whole-life capitation contract to a multispecialty health system or as a separate specialty capitation. In either case, the specialist must be committed to providing health care under a system that endeavors to measure quality, manage disease, and provide all appropriate services on a fixed budget. A specialty capitation contract tends to cover a large number of member lives spread out over a region. To satisfy the MCOs needs, this usually requires a network of specialists to ensure reasonable access for all eligible members. If the provider group plans to do nothing but turn the capitation pool into a discounted fee-for-service arrangement, the MCO is successful only in limiting their cost for specialty professional
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services. In addition to regional coverage and controlled costs for professional services, MCOs want the group to control the expenditures for ambulatory facilities, which in gastroenterology can typically approach the same cost as professional reimbursement. The prospective physician group should consist of board-certified specialists prepared to consider alternative payment incentives and ready to institute utilization and quality review. Capitation can affect the delivery of health care services by influencing individual provider decisions, by fostering innovation in disease management, and by encouraging integration of various components of the health delivery system. Physicians vary widely in their use of diagnostic tests, choice of medication, and therapeutic procedures. The variation in practice style does not necessarily mean that one provider is appropriate and the other is inappropriate. Mirvis3 suggests that the differences between providers more likely is due to the uncertainty of outcomes and disagreement about the preferred course of action. On the continuum of resource utilization, there is a range of uncertainty that allows for differences in practice style. Outside this range lies practice patterns more clearly agreed by all as underutilization and overutilization. One of the obvious influences that affects physician decision and resource utilization is financial incentive. Specialty capitation places the responsibility of determining the acceptable range of practice in the hands of the physicians rather than the managed care insurance company. Financial incentives can be aligned to avoid both underutilization and overutilization. Narrowing the range of uncertainty and acceptable practice pattern is better left to basic research in clinical science and outcomes. The magnitude of risk under capitation should not be so great as to influence an individual physician to make clinically imprudent choices for an individual patient. The primary aim of a capitated contract directly involving physicians should be to encourage peers to exchange information about their own patterns of care, to support group learning about clinically prudent options, and to increase the likelihood of cooperation among physicians and between physicians and managers to develop better programs of care. The services covered under capitation contracts should be those about which the risk-bearing entity can make relevant, clinically prudent choices, not those over which the entity has little or no influence. Capitation can encourage better decisions and facilitate the productive redesign of systems for the delivery of care.l NEGOTIATING CAPITATION
As a region matures to a managed care stage at which capitation arrangements are initiated, gastroenterology is not the first foray for an insurance carrier. After primary care capitation, most MCOs concentrate on efforts to reduce their risk in the higher-cost specialties. Capitation contracts for radiology, laboratory services, cardiology, obstetrics and gynecology, and orthopedics already exist in markets considering capi-
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tation for gastroenterology services. The cost for gastroenterology services alone is typically less than one half of 1%of the premium dollar. It is usually the combined cost of specialty professional services and the ambulatory facility services that the MCO wishes to control. Situations arise in which either the MCO or the specialty network seeks to enter a capitation arrangement for gastroenterology services. In the former, the MCO notifies providers by a request for proposal. In the latter, a specialty network contacts the MCO via the medical director or director of provider relations and inquires about the MCO’s interest in a specialty carve-out for gastroenterology. No matter who initiates the process, the negotiations lead to a successful outcome only if both parties are willing to reveal all of their information and discuss all details of a contract to the understanding of all involved. Problems in the future are likely if either party is not forthcoming with information. The size of the provider group needed to satisfy a MCO membership is determined by the number of covered lives and the size of the geographic region. Desirable providers are those that have the necessary clinical expertise most easily defined by their board certification status. In addition, providers should have a willingness to maintain a high level of accessibility to patients, to work as team players, and to participate in continuous quality improvement efforts. Before beginning the task of negotiating a capitation contract, it is important to remember that the capitation rate is set before the actual period of service begins and represents a calculated estimate of the amount of money that is required to pay for the specific services described in the contract. The contract creates a degree of risk in that the illness rate of the membership may vary from predictions. In general, specialty capitation contracts spread the risk of the MCO membership among many physicians rather than capitating individual providers for small subgroups of enrolled members. Determining an appropriate capitation rate for a specific membership population cannot safely be done by looking at various benchmark rates. The range of capitation rates reported. in various national or regional articles can vary by more than threefold. Differences in the contract can substantially affect the capitation rate. The population characteristics, the administrative responsibilities, the referral process, and, most importantly, the covered services must be carefully compared. To determine a financially feasible capitation rate that minimizes the risk of uncertainty, it is necessary to have the historical encounter data about the membership’s use of all gastroenterology services. If the MCO is unwilling or unable to produce prior utilization data, any capitation rate agreed on is a guess and a potential financial disaster for the specialty network. If historical data are available, the following analysis (using any electronic spreadsheet) allows one to calculate a capitation rate based on a comparison to a remuneration scale, such as the traditional Medicare fee schedule. An example is shown in Table 1. The first step in creating a calculator for capitation is to list in the first column all of the Common Procedural Terminology (CPT) service codes that are required of participating providers. This list should be identical to an eventual addendum of the completed contract. The list
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Table 1. CAPITATION CALCULATION FOR 60,000 LIVES
CPT
Description
Medicare 1996 Medicare RVUs Allowance Volume
Medicare cost/year
43235 Upper endoscopy,
5.75
$221.09
30
$6633
complex diagnostic 43239 Upper endoscopy for biopsy
6.46
$248.39
180
$44,710
45378 Colonoscopy 45380 Colonoscopy with
8.22 9.20
$316.06 $353.74
100
90
$31,606 $31,837
12.54
$482.16
60
$28,930
99213 Established patient,
0.96
$32.76
350
$1 1,464
low complexity 99214 Established patient, detailed
1.48
$50.50
170
$8,585
99243 Consultations, low
2.54
$86.66
220
519,066
complexity 99244 Consultations, comprehensive
3.57
$121.81
280
$34,106
biopsy
45385 Colonoscopy with polypectomy
Total necessary capitatiordyear Per member per month CPT RVU
= =
5300,000 $30,000 $330,000 $0.46
Total cosVyear Administration
common procedural terminology relative value unit
should include procedure codes as well as evaluation and management codes used for outpatient and inpatient visits. In the second column, the corresponding relative value units assigned by Medicare are placed. The resource-based relative value scale is only one way of assigning a dollar value to each service code. Alternative values might include standard office charges or a discount from standard charges. Each value in the second column should then be multiplied by the current Medicare conversion factor to obtain a dollar value in the third column. The conversion factor and the relative value scale can be updated as needed. The fourth column should contain the number of times the particular service is expected to be performed during the contract year. The best estimate of expected need is the historical utilization from the membership population database maintained by the MCO. In addition to estimating the gastrointestinal illness rate of the defined membership, the historical data also reflect the referral habits of the primary care physicians.The procedure code data are most critical to the capitation calculation because of the assigned higher value units and the associated
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ambulatory facility costs. The MCO may have some difficulty in separating visit code for gastroenterologists from other specialist visits. The product of the dollar value (column 3) and the expected volume (column 4) is listed in the fifth column as the expected annual service cost. The sum of the individual annual service costs is the amount needed to pay a Medicare rate for professional services. To this sum, it is necessary to add the administrative cost of coordinating a capitation contract. The annual capitation rate is calculated by dividing the total annual cost by the number of members covered under the insurance plan. The monthly capitation rate (per member per month) is the determined simply by dividing the annual rate by 12. Adjustments to the capitation rate are needed to cover the administrative costs of coordinating a specialty capitation contract. Administrative costs range from 8% to 12% depending on the size of the contract. If the capitation rate is to include the cost of ambulatory facility fees, the annual cost of these services should be calculated in the same manner as professional services. CAPITATION ANALYSIS SPREADSHEET
In addition to determining a reasonable capitation rate, there are numerous other issues that should be addressed during negotiations. Neglecting to consider one issue can eventually be the difference between acceptable reimbursement for services or the need to terminate the contract because of unacceptable fiscal liability. What services will be covered by the capitation payment? What is the referral authorization process? How often will the provider network be paid? Who will process the claims, and how will encounter data be transmitted to the MCO? What are the terms that deal with cost overages? What are quality assurance reporting requirements? What is the length of the contract, and how can it be terminated? The list of services included in a capitation contract is determined by negotiation with the MCO. In general, providers should accept the risk for all services that they can control. It would not be wise to accept the risk for ambulatory facility fees if the network has not predetermined the cost of using the available sites. Utilization review efforts help control the number of times a facility is used, but the per use costs must be known before accepting the risk. Services that are provided infrequently, such as variceal injection and endoscopic retrograde cholangiopancreatography, should also be considered for contract exclusion or curve-out. Services provided for routine screening may also be excluded because they are subject to extreme utilization variation. Services excluded from the capitation can be covered in the contract by an agreed on discounted fee-for-service schedule. To consider safely an at-risk contract, a sufficiently large membership base is needed to ensure that resource utilization patterns are based on provider practice pattern behavior rather than random chance. In gastroenterology, the necessary membership base is around 10,000 to 20,000 lives. If the membership population is too small, the group should
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consider a fee-for-service arrangement until the population has grown to a reasonable size. Another alternative is to consider a risk-band. This involves tracking the used services within the contract on an agreed on fee-for-service basis, such as the Medicare allowance. If the capitation payments fall outside of the risk-band (typically 10% to 20% on either side of the allowance), the MCO makes an additional payment to the providers or receives a refund of the excess capitation payment. The risk of exceeding the risk-band can be the responsibility of the MCO solely or can be shared with the provider network. Stop-loss protection is similar to risk-band protection but applies to an individual patient rather than the population as a whole. In the unlikely event that a single patient requires a volume of services that exceeds an agreed on value, the MCO pays for additional services on a fee-for-service basis. The contract should also specify which party is responsible for services performed by out-of-network providers. This occurs because members become ill when they are out of town or because errors happen in the referral process. The manner in which members may contact capitated specialists significantly affects the utilization rate of services and therefore the capitation pool of funds. The primary care physician usually acts as the gatekeeper in most capitation arrangements. For members to be seen by a participating specialist provider, the primary care physician must complete a referral form, which includes the reason a consultation is requested. Measures that influence the referral rate and member contacts with specialists include shared specialty risk pools and member copayments. Changes from prior measures may affect the utilization rate of services and alter the basis by which the capitation rate was calculated. After a referral is received by a participating provider, a method to verify that a patient is in fact an eligible member must be available. The MCO may already operate an eligibility verification system for other specialists and hospitals, but the responsibility should be addressed in contract negotiations. If a participating provider performs services for a patient whose coverage was terminated, it is unlikely that the MCO will reimburse the specialty network. The physician may be unable to collect for services if the patient is unwilling to pay after the care was rendered. EVALUATING CAPITATION PAYMENTS
In calculating a capitation rate for a given membership, it is important to consider the many factors that can have an effect on the utilization and risk. One must not lose sight of the fact, however, that a capitation rate is an estimate of future resource use. Ongoing collection and analysis of encounter data are necessary to determine whether the assumptions about the illness rate of the membership population were correct. Many experienced physicians in capitation have come to realize that the per-member-per-month payment (PMPM) rate for professional services may not be everything. Opportunities to share in the cost savings achieved in other controlled services may be as or more im-
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portant than the actual professional service capitation PMPM rate. The most important example is the ability for the specialist to share in the hospital risk pool. Capitation rates, in some areas of the country, are so low that they essentially are a break-even reimbursement for the physician. Some capitation rates do not even approximate current Medicare reimbursement. This occurs in very mature markets where large managed care organizations present ”take it or leave it” contracts. It may be more advantageous at times to share, in some way, in the hospital risk pool, instead of wasting hours trying to negotiate the capitation rate upward a penny. Once a capitation contract for specialty services is completed, the real work begins. In contrast to primary care capitation, in which individual providers are capitated for member lives, a specialty network of participating providers needs to manage the pool of funds both to cover the administration expenses and to pay for all of the covered services. Claims for services are generally batched and processed on a monthly basis to correspond with the capitation payment schedule. The dollar flow of a specialty capitation pool is represented in Figure 1. The establishment of a reserve fund to pay for services in the event that the provider network ceases to exist is fiscally responsible and a likely requirement of the MCO. The provider network receives capitation
Total Capitation Pool
Insolvency Fund
i Received Capitation
Administration (10%or less)
Pool Available for Services
LLC Bonus Facility Fees
Fee-for-Service
Negotiated contracts for global payment to ambulatory endoscopy centers
Modified R.V.U professional payment to participating specialists
A pm pntimt see)! bonus
determined by Bonus Pool t Xpts seen and earned based on I. appropriateness
-
2. member satisfaction3. education activity
-
4. office effidency
-
Figure 1. Dollar flow in a specialty capitation pool. RVV
=
relative value unit.
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payment commencing with the initial month of the contract. Because the normal claims submission process creates a 2- to 3-month delay before the first payments are made, the initial month’s capitation can be used to fund a reserve pool. If the contract is terminated in the future, the reserve fund is available to pay those claims that are submitted after the network is no longer receiving capitation from the MCO. In addition to fiduciary responsibility of managing the capitation funds, the specialty network has other administrative obligations. Verification of the credentials of all contracted providers is a National Commission for Quality Assurance requirement for MCOs. The MCO may retain this responsibility or delegate the responsibility for credentialing to the specialty network through the capitation contract. Delegated credentialing responsibility requires the provider group to contact medical schools, training programs, and the National Practitioner Data Bank. Files on every participating provider must be maintained and be available for review by the MCO. The specialty network should consider a preauthorization process for high-cost procedures. This process is especially important if the network has also contracted to take the risk for the cost of the ambulatory endoscopy facility. Gastroenterologists have seen their reimbursement for procedure services decline substantially during the past several years. Working in a fee-for-service environment has given physicians incentive to provide more services, particularly when fears of malpractice suits for failure to diagnose are factored into the treatment decision. To manage utilization successfully, the physicians must agree to follow a standard set of clinical guidelines. The American Society for Gastrointestinal Endoscopy has distributed a set of appropriate indications for procedures. These guidelines are somewhat out of date but are currently under revision and are being updated. A capitation contract does not dismiss providers from having to submit detailed claims for patient encounters. The data collected from providers become the basis by which the capitation pool is divided among participating physicians. In addition, the encounter data are used to assist in quality assurance activities, utilization review, and disease management. Patient addresses from claims are needed to send out satisfaction surveys. Referring physician identifiers are needed to monitor for inappropriate referrals or dumping. The frequency with which specific diagnosis codes are used directs educational activities for primary care physicians and participating gastroenterology providers. The processing of claims for payment and summarizing encounter data cannot be done with a typical physicians’ billing system. The cost of software for adjudicating claims is beyond the means of all but the largest physician networks and with rapid changes in both technology and managed care arrangements is generally a poor investment. Several companies offer services for claims processing on a per claim, a contract percentage, or a lease basis. The network must be sure that the service can provide the necessary reports for utilization review and the encounter data files in a format acceptable to the MCO. Probably the largest challenge for the network is the development of a payment mechanism that aligns the incentives so that providers
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choose to provide services in a cost-efficient manner. Controlling the utilization of procedure services affects the capitation pool to the greatest degree. The proportion of the pool used to pay for procedure services can range from 60% to 80% if the costs of facility services are considered. The goal of the network should be to avoid underutilization and overutilization of procedure services. The interests of the MCO, the specialty network, and, most importantly, the patient are not furthered by either of these approaches. The maintenance of a pathology log assists the network in its goal of providing cost-effective care to the covered membership. Tissue results from prior procedures are useful in determining the interval for follow-up of several gastrointestinal conditions, including colonic neoplasia and esophageal Barrett’s dysplasia. The log not only enables the network to avoid unnecessary surveillance procedures, but also identifies those members who should be contacted for preventive health care measures. Providing intervention to patients at high risk can significantly decrease future utilization and cost. Physician-to-physician communication is vital to enforcing the clinical guidelines. Each provider must understand that the guidelines are not meant to withhold care but promote quality through elimination of variation. There are cases that for specific reasons the guidelines do not allow an easy determination to be made as to the appropriateness of performing a procedure. In these cases, physicians must carefully document the extenuating circumstances which determined that the care should vary from the guidelines. Being able to justify that all procedures performed for a membership population were clinically appropriate is critical in future negotiations with the MCO. The establishment of a large utilization review and quality assessment committee is helpful in attaining the goals of the specialty network. Provider participation in these functions should be encouraged. The clinical guidelines used by the network should carry the stamp of approval from a diverse segment of the participating provider group. Committee members also then have a sense of responsibility in ensuring the success of the capitation contract having invested their time and effort into the process. The payment system for a capitation pool should attempt to reward participating providers who exemplify the goals of the specialty network. The largest portion of the capitation pool should pay for services based on the some measurement of work performed. One method, also known as a contact payment, is to allot a payment to a provider for each referral made to his or her office, which covers all necessary services for a given period of time. Another option is to use relative value units for each type of service. The relative value units assigned by Medicare serve as a starting point but tend to be overly complex and tilted toward rewarding physicians who perform more procedures. One way to simplify the payments to providers is to lump multiple codes into an individual class for payment at a single fee. The lumping of all visit codes into a single payment category eliminates arguments that might occur between providers concerning the appropriate level of coding based on the complexity of visits. Just as the law of averages
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tends to equalize the illness rates among members of large populations, the number of difficult cases and easy cases evens out between providers. The coding for endoscopic procedures can be simplified in a similar manner. A portion of the capitation pool should be reserved for a bonus system. Obtaining a full bonus payment should be realistically attainable and dependent on factors within each provider's control. Factors including procedure utilization rates, educational activities, and patient survey results can be used in bonus determination. Bonus penalties should befall only providers who are significant outliers. A bonus of 10% to 20% is usually enough to seem worthwhile to most physicians. Patient satisfaction surveys if not a requirement of the capitation contract are useful in any case to demonstrate to the MCO that care is accessible and courteous. The results from surveys can also be used as part of the capitation pool distribution formula as mentioned previously. Although a single bad review from a patient should not affect reimbursement, the information is still of use to the practice in efforts to improve patient care. The MCO is interested in questions about satisfaction with office location, appointment availability, and the physician. TROUBLESHOOTING
Several signs may indicate that the capitation contract or specialty network is experiencing trouble. Some delay and confusion in claims filing is expected with the institution of a new contract. If there are a large number of physician offices involved in the contract, the specialty network can expect ongoing problems in coordinating the referral, preauthorization, and claims submission process. As office personnel change, the requirements of the capitation contract may not be relayed to new staff. The network's processing staff should look for unusual claims volume and missing preauthorizations as a sign to recontact identified offices. Higher-than-expected claims volume may indicate that the assumptions used in calculating the capitation rate were incorrect. An altemative explanation is that the MCO has incorrectly identified the total eligible population or that the population composition has changed. A high volume of claims from a specific primary care physician or group compared to the average may indicate inappropriate referrals or dumping. A year or more may be needed before an analysis of claims shows a trend that points to a problem. Capitation contracts in place for long periods of time have shown that consultations and procedures per 1000 patients in a fixed HMO population fall dramatically after a few years. This is simple to understand since most chronic gastrointestinal disorders, such as inflammatory bowel disease, chronic hepatitis, etc., will be cared for appropriately by the specialists in the system. Patients become stabilized and well, and can be referred back to their primary care physicians. A capitation arrangement may not meet expectations for several reasons. Both parties in a capitation contract want the arrangement to
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be successful in the long-term. The physician group should maintain open lines of communication with the MCO and carefully track the utilization of all services and the cost of administering the contract. The effort to begin a capitation process is substantial for both sides. Neither necessarily wants to scrap the arrangement without trying to negotiate a change in the capitation rate that allows both to succeed. SUMMARY
Capitation risk contracting has the potential to combine insurance functions with medical care functions. Success depends on a careful consideration of the capitation rate and a thorough understanding of all capitation contract issues. Proper incentives to physicians in a specialty network stimulate a major reengineering effort to squeeze the inefficiency out of the system. Within the network, true peer review can effectively diminish variability in medical care. Such variability leads to increased cost without benefit to health status. The superior medical management of a capitated specialty network can create added value by coordinating more cost-effective and appropriate evaluation and therapy. References 1. Berwick DM: Quality of health care: Part 5. Payment by capitation and the quality of care. N Engl J Med 335:1227-1231, 1996 2. Krohn R W Making risk contracting work in specialty networks. MGM JournalJanuary/ February:13-19, 1997 3. Mirvis D M Managed care, managing uncertainty. Arch Intern Med 157385-388, 1997 Address reprint requests to: Michael L. Weinstein, MD Mid-Atlantic Gastroenterology Network PO Box 60316 Potomac, MD 20854-0316