Capitated Reimbursement 101

• Are you ready to negotiate capitated risk contracts with health plans?
• Do you need to learn the nuances?

Ready or not, capitation has returned to U.S. healthcare. The last time we saw capitation deals in the market, a few providers made millions in profit while many healthcare providers in private medical practices, IPAs, PHOs and integrated health systems faced bankruptcy because they didn’t know how to analyze, negotiate and manage risk bearing managed care arrangements.

Under capitation, a managed care organization pays you a fixed amount of money for each member enrolled in the health insurance plan each month. You are then responsible for the costs of any of the plan's expenses assigned to the capitation rate inclusions. That can pose tremendous risk if you aren’t 100% clear on what those services are - by CPT code - an the “fully-loaded” activity-based costs to provide them.

You agree to accept a premium payment, and you provide the services when required. Why would any sane medical provider agree to such a thing? In many cases today, you may have no choice but to embrace capitation because many managed care organizations require it. It is a perfect way for them to mitigate and make predictable their risk of claims cost.

An improved cash flow
Although capitation can mean significant changes to your business, they're not all bad. In fact, capitation may prove to be quite beneficial to you if you're a cost-effective provider with an adequate team and information system to manage the risk, and you know your costs of doing business. Why? Because under capitation you benefit financially from your own efficiencies and efforts to reduce resource utilization.

Capitation can improve your cash flow. You get your payments up front at the beginning of the month, and you get them whether or not patients come through your door. Because of that you have no collection costs for this population, either. If anything, they pay a flat fee copayment at the time of service.

Before you dive in, however, make sure you develop a basic understanding of capitation reimbursement agreements. They typically come in three forms.

Three kinds of capitation

Fixed-rate per-member, per-month (PMPM)
Under this agreement, ABC HMO will pay you an amount each month, and you agree to assume the risk of providing whatever care is included in the capitation rate to ABC's members whenever they need it. If ABC's membership increases, your monthly payments will also increase. If the plan's membership decreases, so will your monthly payments. Otherwise, your payments are fixed each month.

Age & gender adjusted capitation
Payment is adjusted each month based on age, gender and possibly other factors. For example, for male members aged 65 — 70, the PMPM payment may be $7; for females aged 65 — 70, $6; for males aged 70 — 85, $21; for females 70 — 85, $10.50, and for both sexes aged 85 and over, $15. (numbers are just for discussion)

Percentage of Premium
Under the third type of capitation agreement, the payer offers your provider network a percentage of the insurance premiums it charges its members and their employers. For example, ABC HMO may offer to pay you 85 percent of the $450 premium it charges each enrollee for membership in its health plan. That means your network receives $360 PMPM under this agreement to divide across the providers who participate in your network.

If the ABC HMO decides to lower its premium charges by 20 percent as a marketing tactic, your payments will also be cut by 20 percent. So if you encounter this type of agreement, be sure to ask the HMO what its marketing plans are and what it expects its rates to be in the year after you sign the agreement. To protect yourself further, negotiate firm percentage-of-premium contracts that are unaffected by the HMO's marketing tactics and cover your reinsurance premiums or transfer reinsurance risk over a certain attachment point or threshhold to the plan.

How much is enough?
Determining whether PMPM payments are adequate is certainly among the most important considerations when weighing capitation agreements.

To calculate whether a PMPM payment will be adequate, answer many crucial questions:

1. How many members were in the health plans last year?
2. What was their utilization history?
3. Can patients go out of network? If yes, who is at risk for the cost of the claim?
4. Does the capitation rate have any contingent or performance-based withholds?
5. What will it cost you to meet that demand of resource utilization?

While there’s no guarantee that historical resource utilization patterns will match those in future years, a careful analysis of historical utilization trends can paint a reliable picture of what you can expect to encounter as the designated service provider for a covered population.

Risk mitigation strategies

Financial risk corridors
Negotiate with the HMO to share financial risk. Under a shared-risk capitation contract, the HMO can reimburse you an agreed-upon percentage of your losses if your expenses exceed your capitation payments. For example, if your annual capitation payments totaled $950,000 for a year and the value of the services you provided to the HMO was $1 million, the shared loss would be $50,000. If the HMO agreed to a 50/50 shared risk, it would have to true up $25,000 for that year in addition to the monthly capitated payments you would receive. You could work around this and insure this loss under an excess loss (reinsurance) policy.

However, under a shared-risk agreement, the HMO might also get to share in your profit. So if the annual capitation payment you received was $950,000, but the value of services you provided to the HMO's members was $850,000, you might have to give half of your $100,000 profit to the HMO for that year if you overlook this tiny detail in the contract terms and conditions.

When to share
Shared-risk arrangements often are desirable in the first few years of a contract, as you work your way through a learning curve. Having an excess loss policy in your early years of operating under capitation can provide some comfort. However, once you learn what you're doing under capitation, shared-risk arrangements may become less desirable, because you may not want the HMO to share in the benefits of your efficiency.

Reinsurance and excess loss coverage
Reinsurance policies, which may be available from either the HMO or a commercial insurer, help you handle the expenses of catastrophic cases. Reinsurers will help you pay for these cases, but don't expect to make any money from them. All they do is help you flatten out the financial peaks and valleys of providing care under capitation. And they raise rates if you have a loss experience in a year.

Payer mix
Avoid placing all of your risk in one contract. Maintain a mix of payer sources — some capitated, some non-capitated, including fee for service, bundled case rates, and other payment mechanisms. Non-capitated contracts may help you offset any revenue losses you experience by having to adjust margins in capitated arrangements.

Subcontracted services
In addition to that capitation pitfall, there are others to avoid, and there are areas you should clarify before you sign a capitation contract. For example, find out if the HMO expects you to provide services that you must subcontract to outsourced providers. If that's the expectation, you'll have to contract (and pay for) these services yourself. In some cases, providers discover that it actually pays to subcontract services instead of provide them in-house. For this, it is critical that you know your fully-loaded costs of doing business.

Member eligibility
It's also important for the capitation contract to spell out clearly the criteria to be used in determining when a member should receive services from you. There should be an online means of verifying eligibility without having to spend time on hold, a way to upload the schedule for the day instead of one-patient at a time. Many HMOs can’t give you good information on eligibility, so you may find yourself in a situation where you discover three months after the fact that you treated someone who was no longer enrolled in the HMO, so terms related to promissory estoppel should be articulated in the contract in the event a member shows as eligible when they aren’t.

Adverse selection
When all of the providers in a continuum of care are capitated, game playing can occur. For example, sometimes, providers accuse one another of "dumping" patients to keep from incurring the expense of caring for them. Adverse selection within a provider network is cause for concern.

Repeated services
You could also end up having to provide care for “do overs” when one provider renders substandard care and a remediation is necessary. This can occur in biopsies as well as misdiagnoses and interpretation of imaging. The mitigation may include a requirement of CME, but who pays for the CME remediation?

Utilization appropriateness
Also be sure to investigate the financial incentives the HMO offers to other providers to refer appropriately. Under some capitation plans physicians receive financial incentives to discharge their patients as soon as possible from the hospital. This kind of incentive could increase outpatient and office-based utilization, so it's important to make sure that patients are referred appropriately.

Included services under the capitation
Pay close attention to what is included in the capitation. You'll need to know the exact CPT code of services that members are eligible to receive under your capitation. You'll also need to know how if there are any “carve outs”. This is critical, because it's the basis upon which you will be paid.

Copayment assignment
Determine who is entitled to benefit from the copayments that HMO members may be required to pay. The last thing you want to do is accept financial risk for collections but have to turn the money over to the health plan or suffer a deduction from your monthly check.

Coordination of benefits
You should also be entitled to any money received from coordination of benefits from any third-party payers. In their initial offers to you, many HMOs will claim the money obtained from coordination of benefits, but you should object to that during negotiation. In most cases, COB recovery will only be the copayment amount.

Subrogation proceeds
If your patient is involved in an accident or third-party liability incident, even though you may be eligible to claim under an auto insurance policy that they have or are paid by an attorney from the proceeds of a liability claim, you may owe that money to the HMO since the HMO could assert that you were already paid by the HMO under your capitation.

Clarify payment timing
The timing of your capitation payments — when you'll be paid each month — is another area to clarify. You may think that timely payments won't be a problem, but you could experience a cash-flow crunch if a capitation check floats in the mail for too long. During contract negotiations, it is reasonable to ask that your payments be delivered on the same day each month. Time is money; every day that cash is not in your bank account earning interest for your business erodes any potential profit margin.

Risk withholds
Clarify what "risk withholds," if any, will be made from your monthly payment. Managed care arrangements typically include withholds. Under a risk withhold, you will receive a fixed percentage of the reimbursement due, such as 85 percent of a negotiated rate, with the remaining percentage withheld by the payer. If at the end of the plan's fiscal year pre-established utilization and cost savings goals are satisfied, you are eligible for the payment of all or a pro rata share of the withheld amount. If you don’t hit the mark, the plan keeps your withheld cash. Determine in advance whether you have recourse to those funds if you terminate your contract - otherwise that argument will be a costly arbitration case to settle.

All these points (and others) will be discussed at length in Maria Todd’s Managed Care Master Class workshop to be held in Denver, Colorado on June 8th and 9th, 2015. Class size is limited to only 30 participants and registration deadline is June 5th.

Register online today