Capitation
Determination of Premium
Rates
• Benefit Payments
– Paid to providers
• Risk Premiums
– Profit earned by payer as a function of
accepting financial risk
• Administrative Costs
– Claims processing, marketing, insurance
coverage, etc.
Determination of Premium
Rates
• Marketing Expenses
– Intangibles (i.e. market power, good
service)
Definition of a Stop Loss
• Specific Stop Loss
– Severity of claims
• Aggregate Stop Loss
– Frequency of claims
Corridors & Trends To Specific
and Aggregate Stop Loss
• Trends
– Measured by Utilization Level &
Charges
– Related to Aggregate Stop Loss
• Corridors
– Refers to Costly Claims Requiring LCM
Intervention
– Refers to Specific Stop Loss
Risk Rating
• Process of adjusting healthcare
utilization for demographic factors
and other factors
Other Factors Affecting
Healthcare Utilization
• Income
– Wealthier use more services
• Education
– More educated use more services
• Type of Employer
– Manufacturing, healthcare, and
unionized workers use more services
Other Factors Affecting
Healthcare Utilization
• Location
– Urban residents use more services
• Benefit Design
– Copays & deductibles affect utilization
• Sex
– Women use more services
– Men have more catastrophic care
Other Factors Affecting
Healthcare Utilization
• Age
– 0-17 yrs. has lowest utilization
– Utilization increases for 18-34 yrs.
– Utilization decreases for 35-44 yrs.
– Utilization rapidly increases for 44+
yrs.
Causes of Financial Risk in
Capitation
• Adverse Selection
– Occurs when a group’s characteristics
predispose them towards higher than
predicted utilization
• Random Nature of Healthcare
Demand
– Much of utilization results from
random events (i.e. epidemics,
accidents, etc.)
Causes of Financial Risk in
Capitation
• Law of Large Numbers
– Increased risk with smaller groups
Effects of Capitation
• Gatekeeper
• Transfer of Risk
– Payer to provider
• Utilization Ground Rules
• Specialty Referrals
– Reverse Capitation
Effects of Capitation
• Pressure for Fee Reductions
– Increased likelihood that specialists
are capitated
– Increased pressures for sub-capitation,
carve outs, and disease management
Process of Calculating a Risk
Contract PMPM Rates Using a
Capitation Model
1 Define services included in the
capitation contract
2 Risk adjust medical services
3 Identify other variables in PMPM
premium rate model
Process of Calculating a Risk
Contract PMPM Rates Using a
Capitation Model
4 Adjust for current demographic
factors for this health plan
– Inflation factor
– Premium rate structure & rates at
respective levels
– Community rating flexibility
Process of Calculating a Risk
Contract PMPM Rates Using a
Capitation Model
5 Continuous assessment of key
managed care performance
indicators
– Membership
– Inpatient care
– Ambulatory care
– Financials
Process of Calculating a Risk
Contract PMPM Rates Using a
Capitation Model
6 Adjust for variances in key
indicators
– Physician mix
– Level of services
– Level of integration under capitation
contract
Average Benefit Payments
Average Benefit Payments
• Total benefit payments usually
account for approximately 70-90% of
the premium
Average Benefit Payments
• Breakdown for a typical group of
insureds during a policy year:
– 500 of 1,000 = No claims
– 375 of 1,000 = Payments of $0-$500
– 2 of 1,000 = Payments of >$10,000
– Average cost of providing care per
insured = $560 per policy year
Operational Example
• 1,000 insureds at following
premiums:
– Employee only coverage = $120/month
• With 400 lives = $48,000/month
– Employee + 1 or more = $350/month
• With 600 lives = $210,000/month
– Total premium per month = $258,000
• $3,096,000 annualized
Operational Example
• Average claims = $560 x 1,000 employees
= $560,00 pre-shock losses
• Two shock losses at $1M & $500K
• Surplus = ($3,096,000 - $560,000 - $1M - $5K)
= $1,036,000
– Covers other operating expenses such as
cost of reinsurance, administrative
overhead, acquisition costs, etc.
Operational Example
• Operating costs = 20% of total premiums
customarily
= $619,200
• Pre-tax surplus = $1,036,000 - $619,200
= $416,800
= 13.5%
• After tax profit = $416,800 x .61
= $254,248
• Return on total premium = 8%
Are Withholds Ethical or
Unethical?
• Clinical protocols
– Can reduce liability exposures
– Must make changes when dictated by
indication & necessity
• Professional liability exposures
– Claims denials
– Failure to provide coverage
– Abandonment of patient
Requirements for Transition to
Capitation
• Align financial incentives
• Develop primary care driven medical
groups
• Establish long-term preferred
relationships
• Decentralize medical management
• Develop a continuous improvement
process
Calculation of Basic Capitation
Rate
Routine Office Visit: Example #1
•
•
•
•
Primary care practice receives $45/visit
Average of 3 visits PMPY
3 visits x $45/visit = $135 PMPY
$135 PMPY/12 months = $11.25 PMPM
(Approximate Cap Rate)
• 2,000 subscribers assigned to the practice
• 2,000 ss x $11.25 PMPM = $22,500/month
• $22,500/month x 12 months = $270,000 per year
Calculation of Basic Capitation
Rate
Routine Office Visit: Example #2
•
•
•
•
•
Primary care practice receives $45/visit
Members pays $10 copay/visit
Average of 3 visits PMPY
3 visits x ($45/visit - $10 copay/visit) = $105 PMPY
$105 PMPY/12 months = $8.75 PMPM
(Approximate Cap Rate)
• 2,000 subscribers assigned to the practice
• 2,000 ss x $8.75 PMPM = $17,500/month
Calculation of Basic Capitation
Rate
Routine Office Visit: Example #2 (cont.)
• $17,500/month x 12 months = $210,000/ year
• Add projected copay of patients
– 2,000 ss with 3 visits PMPY = 6,000 visits/year
– 6,000 visits x $10 copay/visit = $60,000 copay/yr
• $210,000/yr + $60,000 copay/yr = $270,000/yr
Example #2 has become the prevalent method.
Why?
Calculation of Withhold
Using Examples #1 & #2
• Withhold policy of managed care company is
20% of total reimbursement
• Under Example #1, net reimbursement after
withhold is calculated as follows:
$22,500 x 20% = $4,500/month x 12 months
= $54,000/year
Net reimbursement from MCO = $216,000/yr
Calculation of Withhold
Using Examples #1 & #2 (cont.)
• Under Example #2, net reimbursement after
withhold is calculated as follow:
$17,500 x 20% = $3,500/month x 12 months
= $42,000/year
Net reimbursement from MCO = $168,000/yr
• Which practice is better off financially? Why?
Liability and Compliance
Issues
Liability Exposure Among
MCOs
• Negligent credentialling &/or
provider selection
• Network development
• Vicarious liability
• Utilization review
• Warranties
• Financial incentives
Types of Liability Coverage
Required by MCOs
• Medical Professional Liability
Coverage
– Claims made vs. occurrence from
coverage
– Covers direct patient care
Types of Liability Coverage
Required by MCOs
• Directors and Officers Liability
Insurance
– Decisions and policies
– Two types
• Managed Care D & O
• Corporate D & O
• Managed Care Professional Liability
Coverage
– Covers sale of MCO products & services to
third parties