The other day, I dashed off a quick piece about the capitation contracts some opportunistic payors are floating in front of desperate practices.  Here's the longer missive....

Recently, I've heard from a number of practices who have had an interesting insurance company "offer" dropped in their laps. In CA, for example, it's being called "Primary Care Reimagined." In MI or FL or IN it shares an equally New and Improved name.

In each instance, the promise of a better life awaits. Perhaps it's simply to "safeguard independent primary care practices from the current financial consequences of the COVID-19 pandemic." Perhaps your IPA straight up tells you, "We analyzed your contract and you stand to make an extra $50,000 a year if you sign immediately." Each of the offers also carries the implied threat that it's just a matter of time until you are forced into this New World Order of quality based payments, so you might as well get on board with everyone else.

Read past the few paragraphs of the offer and you will quickly learn that these plans share one other important trait: the return of CAPITATION.

For many practices, it will be their first capitation offer. Others will remember the capitation heyday of the mid-90s and recall those challenges. A few of you still have capitation deals. But the smallest group of all is the few of you who know how to properly assess a capitation contract.

I've said it before and I'll say it many times before I'm through: it's all just a math problem. And if you treat it like a math problem, and leave the emotion out of it, you'll run a better business. Let's do the math!

Some Important Notes Before We Start

• Capitation is not necessarily a bad thing. Most capitated practices are probably grateful for the arrangement during COVID. I've known practices who have done very well under capitation. I don't accept the premise that capitation is always bad.
  
  It's just that the reality of how capitation is administered is often different from the philosophy of what is sold to you.
  
  
• Before you get into it below, let's ask this holistic question: If an insurance company offers you more money, why would you believe them? Especially if there's pressure to sign immediately?
  
  If the insurance companies are truly interested in the viability of primary care practices...they could just start paying you fairly. Maybe increase rates to meet or exceed Medicare? Stop messing around with telemedicine codes? Pay for the 99072/PPE code, pay fully for COVID tests, etc.
  
  Everything the insurance companies do indicates that they don't actually want to pay you more money. Don't be Charlie Brown to Lucy's football.
  
  
• I shared a quick and dirty summary of how to quickly judge if the offer in front of you makes any sense. The bottom line is that most pediatric practices hover around $30/patient/month in total revenue. If the offer in front of you is less than that - and I will all but guarantee it is - we need to figure out what payments will offset that difference.

How Capitation Works

It's not rocket science. The concept is simple. The devil is in the details and execution.

Let's begin with one premise: you presently have a fee-for-service relationship with your insurance companies for the work you do. It may include some bonuses for performance but you are generally paid on a code-by-code basis for your work. You remove a bean from a kid's ear, you get paid for it. You see and manage a kid with strep? You get paid for it. You run through an entire well visit, including shots and screening, you get paid for each of those things. This is the fee-for-service (FFS) model.

It's this model that we're going to compare to a capitation contract. If you work for a year, how much would you be paid under one model vs. the other?

The philosophy of capitation is simple - instead of being paid for each procedure you perform, you are paid a fixed amount (usually monthly) that reflects the average revenue you'd generate on a per-patient basis regardless of how many times you provide service to those patients.

Let's look at a simple example.

It's January and 150 kids visit the practice for a variety of pediatric reasons. Some get shots, some are just rechecks, some require an hour of followup and phone time.

In the FFS model, you'd collect copays for many of those visits and determine whether anyone owes you in advance for the deductible. You'd then bill the insurance and wait 5-30 days for a payment (most of the time). Any remaining balance is either forwarded to the patient, forwarded to the next payor, or written off. There are costs associated with this billing process, as you well know. In this instance, you're looking at about $50,000 in charges that, about 60 days later, turns into $25,000 in payments.

In the capitation model, all of your active patients on that plan are counted up and assigned a monthly amount based on their sexes and ages (younger kids are more expensive) and you get a check for the total. If you see 150 kids in a month, you probably have 800-1000 active patients. Let's say you have 800 and the average per-member-per-month (PMPM) payment is $30. At the end of the month, you receive $24,000.

Easy, right?  

The philosophy sure is. And it highlights some potential benefits - pediatricians are motivated to do the right amount of work. The administrative burden is lower. The practices can focus on the patients. In reality, none of those statements tends to be true, but we'll get to that.

The Problem With Patient Lists

The first challenge to confront when dealing with capitation is the management of your patient lists. It's vital to know, every month, who is assigned to your practice. In the FFS model, someone showing up at your door means you can expect payment. In the capitated model, you may see patients whose monthly payments are assigned elsewhere!

Further, as we know well, the payors themselves aren't very good about knowing who has coverage or not. Here's the baseline question to ask: how do you compare your list of known active patients to their list of active patients?

Repeatedly - and I mean, nearly every time - my work with clients turns up patient list differences of 10-20%. You'll have a list of 1000 kids - 200 of yours are missing from theirs and 100 of theirs are missing from yours! Remember, you're going to need to pay someone to compare those lists each month. You then need to fix those lists - spending time on phone fixing each and every name.  Is that really less onerous than billing FFS? I'm not so sure.  

Once you have confirmed your mutual lists are close enough that you can move on, you then have to confront their payment grid. In the good ol' days, the capitation rates were pretty simple. There might have been 3 or 4 breakdowns across an entire payor (kids 0-1, kids 1-3, kids 3-12, kids 12-18). Now, not only will there be a different PMPM rate for each year of age but it will be split by sex as well (there's 36 breakdowns right there). To make matters much worse, you might have a dozen or two dozen or three dozen variations based on the group within the payor plan! Here's an example:

Can you squint enough to see this breakdown?  Imagine having over 200 insurance groups for just one payor, like BCBS or UHC?  Do you see how every one of these variables easily contributes to a potential leak of your revenue? A few missing kids, an adjustment to the grid you're not aware of, a few dollars off in one of the boxes. Month after month, and your revenue gets whittled by a couple percentage points.

The Math Gets A Little More Challenging

There are a few more things we have to add to the equation.

First, there are copays. Most of those visits get a small patient payment. Naturally, the more complicated the copay scheme is, the harder it is to estimate the impact. Your best plan is to look at historical volume for the patients you expect to be capitated and adjust accordingly. If your PM system can calculate the volume of copays collected from a group of patients, you can often quickly estimate how much your revenue will still remain FFS from this source.  A quick and dirty way to estimate your copay impact is look at the percentage of revenue that copays represent presently - if it's 10% of your revenue now, you can take 10% off of your expected capitation payments.

Note - copays are much more often associated with sick visits. Keep in mind that sick visit volume will be a challenge to estimate for the foreseeable future.

Second, there are carveouts. Carveouts are those procedures or even visits that are not capitated. For example, it often makes sense for both parties to "carve out" vaccines from the capitation equation. Your entire well visit may be capitated, but you will continue to get paid FFS for your vaccines.

It's tempting to focus heavily on those things that cost your practice money when it comes to carveouts. Vaccines, screening tools that require licensing or utilization fees, etc. My suggestion: don't think about that at all. It's still just a math problem. Would you rather get paid $50 per month per patient and have no carveouts or $20 per month and have your vaccines carved out? Unless your vaccines represent 60% of your revenue, you go with the $50 deal every time!

Third, your new capitation program might also feature of a layer of P4P or other quality incentives. You need to pore over the details of your new performance requirements and keep two important things in mind: how will you perform under these measurements and how will you *prove* you will perform under these measurements?

As an EHR vendor, I can tell you that many practices never even think about their new data sharing requirements until it's too late. Here's a nice new contract (capitated or otherwise), the performance measures look pretty easy, and, oh, your EHR has to now give us total access to your database at all times. Or you have to submit data to us using a proprietary format. And you have to start next week. I assure you, we EHR vendors have enough integration worked queued up to last us the rest of our lives already. The time to learn that your new friend wants unfettered access to _all_ of your patient data (not just their insured) and requires an expensive integration is BEFORE you sign that agreement.

Benefits of Capitation

With all of the above caveats, there are still some real benefits to a well run capitated plan. Presuming you are working with a partner who is both fair and administratively strong:

• Your administrative costs, especially billing, should be reduced.
• You can focus entirely on the care your patients need and less on what the payor might be paying for at this moment and what HIPAA/CPT-challenged method they want you to use to bill for it.
• Your seasonal ups-and-downs will be mitigated and your cash flow much more predictable.
• Pandemic-related cash flow challenges are minimized or eliminated.
• Aligning with partners who are mutually interested in the global health of your patients should pay clinical dividends for everyone.

I certainly welcome more perspectives on the benefits of capitation (such as they are).

Wrap Up

On paper, capitation can make great sense for a well run practice partnered with a fair insurance contract. The real-life administration of this arrangement is often a different story, however. If you're staring at a capitation contract, here's a quick list of questions to get answered before you get that pen ready:

• - How do you reconcile active patient lists each month?
  • Can we do an initial patient list comparison?
  • What will the monthly matching process look like?
• How do we address problems with the list?
  • How will we clean up the initial comparison?
  • How do we add all the patients we've seen over the last 12m who don't list us PCP?
  • If we see a patient who doesn't list us as PCP, do we refuse them care?
• Can we review a detailed list of every "carved out" CPT code and what we are paid for each?
• How are services like telemedicine / portal access / phone calls covered?
• Can we review a a detailed description of the performance-based payment rules?
  • Can we get the specifications for each quality measurement?
  • What data will we be required to submit and how? What obligations will we have to share our data?

I hope this helps someone out there!  Comments encouraged.