Capitation 101 - it's baack!

Could be. The news that Blue Cross of Massachusetts wants to try a capitation scheme seems to be getting attention in various quarters, so I decided that I should discuss the pros and cons of this quaint reimbursement scheme.

Many of you may have heard of capitation, which pretty much died out around 2000, having been the “hot” item of the 1990s. I used to do day long seminars that dealt heavily with the ins and outs of capitation and managing the system – I’d be very happy to come speak with any group who would like an update.

Anyway, it works like this: you are assigned a panel of patients who you are responsible for providing certain services if they need it. You are then paid a fixed fee for each patient (“member” in insurance/HMO parlance) each month. With that check, you are to provide the needed services for any patient/member in that group (panel) who needs services from you. Now, many to most patients will never see you, some will see you a lot, and one group will see you an average number of times.

Let’s look at an example: An internist has a panel of 1,000 patients, for which he is paid $20 per member per month, or $20,000 per month total. Back in its day, physicians used to complain that “I lose money being paid $20 to see a patient”. That is not the way to look at capitation – you are paid to see a group of patients, regardless of whether or not you provide a service for them. Of the 1,000 patients, only a small group will see you in a month. So, you divide your total payment by the number of visits from the panel members in the month, and you then get to what you were really paid for each visit. Note – there are some more sophisticated (yet simple to execute) analyses for a better grasp of your profit and loss here, such as using RVUs, but this analysis works as a first pass.

What capitation does is to move some of the risk of the medical spending (called the “medical loss ratio” in insurance parlance) from the insurance company to the practice. In the 1990s, a number of large medical groups got into serious trouble, and there were some large bankruptcies, as they took on risk for more than just the services that they were providing themselves. You’re not an insurance company, insurance companies have enough trouble managing their own business, so don’t take on the risk that you are not equipped to handle.

So: if you are approached about a capitation plan, the contract has to be reviewed carefully, and a financial pro forma has to be built and run. It shouldn’t be a hugely expensive proposition, but necessary. On the other side, you need to monitor the contract and have a good grasp of your costs.