Getting Paid for What You Do- A Capitation Evolution

Anyone that worked in the industry or had an HMO plan in the 1980s and early ‘90s likely has bad memories of capitated payment plans. These insurance plans, among other things, provided a fixed amount of money for a provider to care for a patient in any contract year.

With the intention to flatten the cost curve of provider costs to insurance companies and thereby hold down insurance premium inflation, it put incentive and opportunity with the provider. Doctors were asked to do cost/benefit analyses when seeing and treating their patients.

  • Was the test or procedure absolutely necessary, or just nice information to have?
  • What might happen if I don’t have the information this test might provide?
  • Do I refer to a specialist or is there a cheaper way?
  • Where does this place me relative to my capitated fee?

There existed an expectation to “ration” care and this put them in a very uncomfortable position. The practice of healthcare was evolving to a business model with many more downside risks to the provider. More employers, trying to hold down costs, were migrating to managed care models and it was necessary, as a provider, to sign on to these networks to remain financially viable.
The for-profit insurers were in control and their first concern was shareholder return. What was missing in these plans was quality of outcomes, efficacy and patient satisfaction.

The ACA (Affordable Care Act) ushered in the concept of the triple aim of:

  • reducing cost,
  • improving quality and
  • increasing patient satisfaction

While this promised to be a game changer, it was not without its problems in the implementation. The Federal government decided to use their primary payment option, Medicare, to move the market in a direction that it hoped would ultimately deliver on these goals.

Medicare Advantage and Risk Adjustments

Medicare Part C, or Advantage plans are supplemental third party capitated plans to traditional Medicare A & B. Providers are given a fixed amount per year to care for members. It is well understood that by 2010 two thirds of Medicare beneficiaries had two or more chronic con ditions and 14% had six or more₁. These patients represent the most expensive patients to treat. Insurers have strong financial incentive to seek out only the healthiest enrollees and exclude the exact ones most in need of the coverage and services (adverse selection). To address this dilemma Risk Adjustment Factors (RAF) were created.

RAFs, at a high level, recognize that patients with multiple chronic conditions need more interventions to maintain their health. The capitation payment is adjusted upward for properly documented patient interactions. Historically, diagnostic codes (ICD-9) were required for reimbursement. RAFs married procedural codes with HCC (hierarchical condition category) codes to help assure that treatments were being properly aligned with the underlying conditions being treated. When these codes are properly documented on an annual basis the capitated reimbursement is adjusted upward, in some cases substantially. This model helps assure a willingness on the part of both the insurers and providers to take on these patients thereby helping to keep them out of the more expensive acute facilities by proactively treating their conditions.

Population Health and Risk Adjustments

As the ACA moves forward, fee for service reimbursements will be replaced by at-risk capitated payment models based upon outcomes. When a larger percent of the insured market is treated by provider organizations that assume risk for managing their attributed populations the plan is to utilize risk adjustment methodologies with these larger populations.₂ Healthcare providers that understand the risk adjustment process and methods and have integrated these into their respective practices will be better suited to successfully transition and thrive.