Capitation tossed as HMO market dries up

A Cincinnati group's shift from full capitation to full fee for service is an example of changes in some regions from managed care to PPOs.

By Mike Norbut — Posted Feb. 23, 2004

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Because it started as a staff-model HMO 30 years ago, Cincinnati-based Group Health Associates wasn't ready to pull up its capitation roots with the first market tremor.

That tremor, however, became a full-fledged quake over the last few years as employers started looking for ways to avoid dramatic premium increases and consumers started looking for more choice, despite the added cost. PPOs were growing, and the HMO market was simply drying up.

Over the course of two years, Group Health, which found comfort and success in managing risk, went from a fully capitated practice to one that accepted only fee-for-service contracts.

"We found if we stuck with capitation, we would be all dressed up with nowhere to go," said Patrick Tellez, MD, CEO of Group Health Associates. "We would have had the best buggy whip in the world."

The experience of Group Health, which has more than 100 physicians in most specialties, is a fairly extreme example of the evolution -- or de-evolution, in the mind of some physicians -- of health insurance across the country. Few practices have gone from one end of the spectrum to the other in such a short time, but many have opened up more to PPO patients simply out of necessity.

The PPO plan has gained market share at the expense of HMOs over the past decade. The American Assn. of PPOs reported more than 112 million people are enrolled in PPOs around the country as of Feb. 2002, and that number is expected to increase when new figures are released this year. The association also points to Mercer's National Survey of Employer-sponsored Health Plans, which reported that 49% of all people with insurance were enrolled in a PPO, compared with 31% in an HMO and 14% in a point-of-service plan.

But in other markets, capitation is still alive and well. In its 2000 cost survey based on 1999 data, the Medical Group Management Assn. reported about 39% of more than 1,000 responding groups reported having capitated contracts, while the mean net capitation revenue per full-time physician was about $87,400. In MGMA's 2003 cost survey based on 2002 data, just more than 25% of 1,150 groups reported having capitated contracts, but mean net capitation revenue per full-time physician was about $130,000.

If a market has a low managed care penetration and there is an abundant source of primary care physicians, you're more likely to find capitated contracts, said William J. Spratt Jr., a health care attorney and partner with Kirkpatrick & Lockhart LLP in Miami. As a market matures, however, the potential for cost savings and profit distribution among physicians declines, "and there probably will be fewer and fewer physicians willing to accept capitation rates," he said.

Market response

Though Group Health wanted to maintain its single capitation contract with Anthem, the market dictated other action, Dr. Tellez said.

The first signs came a few years ago, after Group Health and Anthem partnered to form Paragon Health System, a medical management company designed to manage the system's capitated lives. As HMO enrollment started to decline, the parties realized the work for Paragon was waning, so they ended the venture last year.

"The reason [capitation is declining] is not because capitation doesn't work," said Paul Beckman, vice president for southern Ohio at Anthem Blue Cross and Blue Shield. "The customers we have are moving to PPOs. Capitation doesn't work in a system that isn't closed."

The shift from capitation to fee-for-service has had repercussions for Group Health, including changes to its cash flow and its pay structure for doctors. While a simple salary structure used to work under a capitated system, physicians now are paid based on production, Dr. Tellez said. But patients have better access to doctors, and the group has improved its offering of preventive services, he said.

Revenues also have taken a hit under the new paradigm, mostly because costs for some patient groups are different under the new system than under capitation and patients are more discretionary in their spending, Dr. Tellez said.

Capitation evolution?

Group Health now has many different fee-for-service contracts with several different insurers. Its contract with Anthem still includes elements of capitation: The group is paid on a fee-for-service basis, but if it stays within a certain target cost range, it can receive a bonus.

Experts point to bonus structures and pay-for-performance models as examples of how capitation will continue to play a role in health care financing. Even as they recognize that capitation is on the decline, some say it will evolve and avoid extinction.

"Imagine a system of capitation that can eventually reward physicians for better medical practice," said Sheldon S. Zinberg, MD, chair of CareMore Medical Group, a large group with a wrap-around IPA based in Downey, Calif., near Los Angeles. "Imagine a capitation system based on an acuity index."

In California, which is still a stronghold for capitation, physician groups and health plans are ironing out bonus structures based both on quality and cost. Physicians who can manage care effectively for chronically ill patients stand to earn more under new concepts.

Dr. Zinberg conceded that if consumers in CareMore's region started choosing PPOs over HMOs, the group might have to bow to market pressures and switch to fee-for-service contracts as well, but "our intent is to make our system better than theirs."

Cost, of course, will play a major role in deciding what remains on the health care landscape. If premiums rise and employers look for ways to cut costs, capitation might get another chance, experts said.

But just in case, it would be smart to be ready to change, Dr. Tellez said.

"The absolute cost is not the biggest driver; it's the value," he said. "Medical groups with substantial HMO risk should be thinking about what they would do if the market changes. It would be smart to have a Plan B."

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