Capitation Gets Renewed Interest from Providers
 by Charles Crispin, President & CEO, Evergreen Re

Capitation is alive and well and is getting renewed interest from many of our nation’s medical groups and physician organizations. Evergreen Re has clients in 45 states and we have seen new capitation contracting in almost all regions. It is expanding in many geographic areas, particularly in existing Medicare risk markets. We are also seeing new activity in markets where health plans had abandoned Medicare risk contracting but are now considering re-entering.

We believe there are several drivers behind this trend. First, there has been a huge correction in the funding side of health care. With higher premiums for private plans and new federal funding available, there is more revenue in the system so payers are now in a position to offer reasonable cap rates. Payers want to control cost and when implemented correctly, capitation meets that objective better than any other reimbursement scheme. When providers are capitated they are more likely to avoid unnecessary utilization because they have some skin in the game.

A recent report, National Health Information’s 2004 Capitation Survey, shows medical groups accepting risk enjoyed solid rate increases across commercial and Medicaid populations. The survey found that 100% of these capitated respondents reported their contracts are profitable and total capitation revenue for physician groups and IPAs increased for the fourth straight year. The survey also found that while the average number of capitation contracts for physician groups declined slightly, from 5.6 contracts to 4.9 contracts in 2004, the percentage of total revenues represented by capitation increased from 82.5% to 84.6%. (For more information on the survey see National Health Information’s web site, http://www.nhionline.net/products/rates.htm).

Improvements in information management systems are another reason physician organizations are reconsidering capitation contracts. Major technology advances and widespread use of broadband, combined with new disease management programs have created a new set of risk management tools. Because providers’ and payers’ financial incentives are aligned in capitated medical groups, they can become a vehicle for joint initiatives in implementing technology solutions such as E-visits and electronic medical records.

In terms of managing the financial risk of capitation, medical groups and payers should implement sound strategies including reinsurance and management of catastrophic claims. An improper reinsurance decision could have a devastating impact on a capitated provider’s financial solvency. Risk-bearing providers should compare reinsurance medical expenses under various scenarios. By examining their deductibles under a range of expense trends and accounting for variables in the structure of their reinsurance policy, organizations can ensure a higher surplus and a better claims predictability.