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Falling out of favor with providers Capitation in decline


The peak may have passed for capitation.

Capitation arrangements, in which health plans pay physicians a fixed amount per patient, have not disappeared, nor does anyone expect them to. Nevertheless, there has been a marked shift among health plans away from using capitation agreements in compensating health care providers.

Despite capitation receiving high marks as a means of keeping health care costs under control, employers and experts do not see the decline of capitation as a factor in rising health care costs of the past few years. What it will mean for employers in the future, however, remains to be seen.

The move away from capitation agreements primarily stems from health care providers seeking changes in how they are paid, observers note.

Many providers "have found they lost a lot of money with capitation, and they don't want to participate anymore," said Stuart Altman, professor of national health policy at Brandeis University in Waltham, Mass.

For several years, health plans have been lowering the capitation rates they pay providers, experts agree. At first, this just squeezed some money from the providers' pockets; recently, however, levels have gotten so low that some providers have gone bankrupt, critics of the arrangement contend. This has served as a warning to other providers that the system needs to be changed.

"If your capitation levels are set below your costs, you can't stay in business," said Dr. David Friend, managing director at Watson Wyatt Worldwide in Boston. In certain areas, such as the West Coast and the Northeast, capitation rates are generally lower than those in the rest of the country, and this disparity has spurred providers in those areas to confront HMOs over the capitation system.

Because of this growing resistance by providers, some HMOs have decided that the negative response to capitation outweighs its benefits in controlling costs. Some are raising their capitation rates, while others are abandoning the approach altogether.

When capitation first took hold in the early 1990s, providers welcomed it as a way of regaining control of their practices from utilization review and stopping health plans from scrutinizing every treatment decision. Doctors thought that "if they took the middleman out, they could do it better and cheaper," said Gary Hagen, president and chief executive officer of San Francisco-based Western Health Guaranty Fund, a financial guarantee insurer for health care providers.

In addition, health care policy experts touted capitation as the antidote to a fee-for-service model that caused high utilization of services, leading to rising premiums. At the outset, "everyone thought it was going to hold doctors and hospitals accountable for their services," said Don Gasparro, president of Apex Management Group, a consulting firm in Princeton, N.J.

But "the vision has not been realized," said Laurel Pickering, executive director of the New York Business Group on Health.

In particular, capitation has fallen short of its goal because it overestimated the business acumen of doctors, said Jonathan Dopkeen, a consultant with The Segal Co. in Chicago.

Because capitation arrangements pay the providers a fixed, per-patient rate, the burden of health care cost increases falls largely on the providers. This benefited HMOs, which had willingly transferred such risk. But the burden landed on doctors not always equipped to accurately calculate the amount of financial risk they were assuming, experts said, noting that when the HMOs lowered the capitation rates, the risk became even greater.

"They're set up to be doctors and not risk bearers, not insurers," Mr. Dopkeen said.

Compounding this situation is the fact that the many providers lacked the capital to withstand successive bad years, Mr. Hagen said.

Another factor was that HMOs made access to doctors easier by charging low copayments. This increased utilization beyond what doctors had expected, said Michael Lichman, senior vp with Willis North America Inc. in New York.

Perhaps the best illustration of this is the situation in California.

The rates paid to providers in California have dropped continually in recent years, said Steven Thompson, vp for government relations for the California Medical Assn. in Sacramento. Low rates have caused 133 medical groups to declare bankruptcy from 1997 through 1999 and have pushed many others to the brink of insolvency, he said. Health care "is in serious crisis in California," he said.

A study showed that capitation rates in California are 23% below the national average, he said. The state's health care market is dominated by a handful of HMOs that control virtually all the patients, giving them the clout to push down the capitation rates paid to providers, he explained.

Mr. Dopkeen of Segal said that "to some extent, the drive for market share led doctors to accept capitation rates they couldn't live with."

To counter what they see as an uneven bargaining position, the California Medical Assn. is lobbying the state Legislature to pass legislation that would exempt doctor groups from antitrust laws. Similar legislation passed in Texas in 1999, and another comparable measure is pending at the federal level. The California measure would permit doctor groups to band together and bargain as a unit, gaining more leverage to negotiate higher capitation rates (BI, March 13).

The need for an antitrust exemption and the notion that capitation rates are too low are disputed by the California Assn. of Health Plans, the trade group for the state's HMOs. The group asserts that the study cited by the CMA showing below-average capitation rates is flawed and that rates are actually much higher.

Provider groups in California lost money because they took on prescription drug risks, whose costs have skyrocketed, asserted Sally Pinkham, vp of network operations for CIGNA HealthCare of California in Glendale. She acknowledged that capitation rates declined for a period in the 1990s, but said they have increased in recent years. She also noted that low reimbursement rates from the state and federal governments have cut into the providers' revenues.

Colorado providers have also experienced problems with capitation.

In the past two years, the state's two largest independent practice association networks have failed, leaving unpaid doctor bills to be assumed by the health plans. IPAs are provider groups that negotiate on behalf of providers and sign agreements with HMOs and health insurers. The IPAs receive funds from the plans, usually on a capitated basis, and then pay the providers in the group. Both networks failed to take in enough money from health plans to cover rising costs, leading to their demise, explained a spokeswoman for the Colorado Division of Insurance in Denver.

These failures have prompted the Colorado insurance commissioner to establish a task force, scheduled to begin meeting in June, to look at the use of capitation arrangements (see related story).

CIGNA HealthCare of Colorado announced that it will end all capitation agreements with physicians in the state, instead switching to a fee-for-service arrangement.

CIGNA's decision also reflects a larger concern of HMOs. Colorado law, like that of many other states, requires HMOs to assume the unpaid debts when IPAs become insolvent. If capitation agreements are too low and bankrupt the IPAs, the health plans could be looking at double payments -- first paying an IPA under the agreement, and then paying the IPA's unpaid bills if it goes under.

Also of concern to HMOs is a wave of class-action suits targeting the plans' business practices. Many of the suits allege that the HMOs put profits ahead of care, and capitation could be one of the practices targeted in that charge.

As a result, capitation is "becoming not very attractive to (HMOs) as well," said Mark Abernathy, director at Navigant Consulting Inc. in Tampa, Fla.

Opinions vary on whether capitation can be considered a success.

Willis' Mr. Lichman said that, in response to shrinking capitation rates, doctors have been forced to spend less time with each patient. While this helped reduce unnecessary treatment, it also limited the doctor's personal involvement in the patients' lives.

"The unintended consequences of capitation is the way doctors can maximize profits is to not see you or limit the time spent with you," he said. This has hurt patients' perception of the quality of the care, he said.

"Marcus Welby doesn't exist any more," he added. "He can't exist. He wouldn't be able to stay in business."

In addition, doctors have generally not thrived under the system, observers note. Capitation "wasn't the boon a lot of providers thought it was going to be," noted Mr. Abernathy.

On the positive side, more doctors have become aware of how their treatment decisions affect the bottom line, Mr. Gasparro said.

Mr. Lichman said that capitation's attempt to control costs was still better than not trying at all.

Not everyone even agrees that capitation is in decline. Segal's Mr. Dopkeen said that, in areas where the capitation rate is high, such as the Midwest, there isn't the resistance by providers seen in California or the Northeast. And CIGNA's Ms. Pinkham said the HMO has not reduced its number of capitation agreements, except in rural areas.

No clear alternative yet emerged to replace capitation as a payment system. Shaping the alternatives is employers' increasing wish to improve plan quality while keeping costs under control. In addition, employee complaints about managed care in general have forced many employers to take a second look at its practices, Ms. Pickering said.

Employers want an alternative from managed care plans "that still holds (plans) accountable but doesn't have the incentive to skimp on care that some think capitation has done," said Sally Coberly, director of public policy for the Washington Business Group on Health.

Although employers generally leave the payment methods up to the health plans, "it doesn't help the employer to have angry doctors treating their employees," Ms. Pickering said.

But with capitation declining or rates rising, these higher medical costs fall on HMOs more than in the past. And with no place left to turn, the health plans might look to make up the difference by charging higher premiums, Dr. Friend warned.