Unmanageable risk?
Health systems make a case against capitation
By Melanie Evan Modern Healthcare, January 3, 2011
Medicare officials, readying for what many consider a promising new way to pay for healthcare,
have heard pleas from hospitals and doctors to include capitation as an option.
That wish, if granted, could help slow the nation's spending on diagnostic tests and medical
devices; clinic and hospital visits; and other healthcare services, advocates of capitation say.
But one California health system's decision to reject capitation underscores the challenges facing
eager providers and policymakers. Scripps Health, based in San Diego, credits the move to end
its capitation contracts as one of the strategies that helped double its cash flow in four years,
according to analysts with the credit-rating agency Moody's Investors Service.
Under capitation, health plans pay providers a lump sum for each enrollee, unlike fee-for-service,
where insurers make a payment for each office visit or procedure, giving providers a strong
incentive to do a high volume of business.
Proponents argue that capitation gives hospitals and doctors leeway to spend money as needed
and motivation to manage care more efficiently. Health policymakers and providers that endorse
various capitation models argue that the financial risk—if treatment costs exceed the lump sum,
hospitals and doctors absorb the loss—may more effectively eliminate wasteful healthcare than a
pay-for-performance bonus.
For and against
Indeed, the Medicare Payment Advisory Commission, in a November letter to the CMS, argued
that payments leaving providers at some financial risk should become the only payment model, or
at least the primary one, for the accountable care organizations to begin under Medicare next
year. The American Medical Association urged the CMS to adopt risk-based payments alongside
a proposed performance bonus in a December letter, as did some other providers, including
Allina Hospitals & Clinics, Minneapolis, and the California Association of Physician Groups.
Scripps Health sharply pulled back from full-risk contracts a dozen years ago, the system's
financial reports show. By January 2003, the California system had exited commercial capitation.
“We began to say, ‘How long do you have to bang your head into the wall before we say this isn't
working?' ” recalls Marc Reynolds, senior vice president of payer relations at Scripps, a fourhospital system that closed its books last September with income of $132.6 million on revenue of
roughly $2 billion.
Health plans did a poor job factoring the cost of care for some of the sickest patients into
capitation plans, a process known as risk adjustment, Reynolds says. That left providers
vulnerable to sharp losses. The system experimented with contracts that excluded transplant
patients and emergency room patients from capitation, but continued to struggle.
For Scripps and others with multiple specialists that attract complex patients, a “lack of risk
adjustment puts them at a disadvantage that you can't overcome through hard work,” Reynolds
says.
Scripps sought to protect against losses from costly exceptions with reinsurance, but Reynolds
says insurance also has a price. “It gets very expensive,” he says. “All you have to do is have a
bad year, so there's really no hiding from these high-cost claims in the long run.”
Meanwhile, health plans offered unrealistic premiums and benefits to members, he adds. And
California's competitive market also held down capitation payments as providers sought to gain
market share. “You're just starting off from a losing proposition,” Reynolds says.
The health system's shift away from capitation toward fee-for-service did not go unnoticed in the
San Diego market, according to a July 2009 report by the Center for Studying Health System
Change, a Washington-based not-for-profit health policy organization, and commissioned by the
California HealthCare Foundation. The report, based on interviews with hospitals, doctors,
employers and insurance insiders, including brokers and consultants, noted a retreat from
capitation could significantly raise costs.
But Scripps is not the only health system wary of capitation.
‘Hold your wallet'
Regarding offers for capitation contracts for Novant Health, a 12-hospital system based in
Winston-Salem, N.C., Bob Seehausen, senior vice president of business development and sales
for Novant, says: “Hold your wallet.”
Seehausen says Novant will accept risk contracts that reward providers for clinical performance
and efficiency. But the health system loses interest in capitation contracts “if it's just a download
of underwriting risk from the insurance companies,” he says, as was the case during prior efforts
at capitation. “It was a very, very blunt instrument.”
Novant sold its HMO nearly a decade ago, in part because the health plan left doctors with
financial risk, which strained relationships with Novant's medical staff, Seehausen says.
But even more recent, more sophisticated efforts to overhaul payments to providers highlight the
challenges with creating incentives for quality and efficiency gains.
Novant physicians were among 10 medical groups in the five-year Medicare demonstration
project considered as one model for upcoming accountable care organizations, though the model
paid bonuses and did not shift risk.
Seehausen says the doctors outperformed a comparison control group, but not enough to qualify
for financial incentives, he says. Novant reached performance targets for 10 heart failure
measures and seven other coronary artery disease measures during year four of the pilot, the
most recent year for which results are available, according to the CMS.
Seehausen says Novant's results underscore the need for well-structured risk adjustment and an
emphasis on clinical goals for emerging payment models, including those that are risk-based.
“This is where you really need to sweat the details,” he says.
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