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Is Capitation Making a Comeback?

In the face of plummeting provider reimbursement due to the COVID-19 pandemic, fixed-fee pay models are getting a closer look. First Report Managed Care consulted an expert panel about capitation’s pros and cons, whether it has staying power, telehealth’s role, and more.

Is the capitated payment model poised to make a comeback? 

A recent analysis revealed grim prospects for physician practices due to the COVID-19 pandemic. Investigators used a microsimulation model to estimate that this year, primary care practices would lose nearly $68,000 per full-time physician. They concluded that “capitation-based payment reforms may be key to ensuring robustness of primary care into the future.” (Basu S, Phillips RS, Phillips R, Peterson L, Landon B. Primary care practice finances in the United States amid the COVID-19 pandemic [Published online ahead of print June 25, 2020]. Health Affairs. doi:  

We asked a panel of experts to weigh in on this potential trend. Does it have merit? What are the pros and cons for payers and providers? Will the federal government promote capitated payment models? How is telehealth factoring in? 

Our panelists include:  

  • Larry Hsu, MD, medical director, Hawaii Medical Service Association, Honolulu, HI
  • David Marcus, director of employee benefits, National Railway Labor Conference, Washington, DC
  • Gary Owens, MD, president of Gary Owens Associates, Ocean View, DE
  • Edmund J Pezalla, MD, founder and CEO, Enlightenment Bioconsult, Hartford, CT
  • Curtis Rooney, founder and president, Glen Echo Strategies, Washington, DC
  • Daniel Sontupe, associate partner and managing director, The Bloc Value Builders, New York, NY
  • F. Randy Vogenberg, PhD, RPh, principal, Institute for Integrated Healthcare, Greenville, SC

The COVID-19 pandemic is giving rise to an increased number of capitated payment arrangements. Do you think this is a temporary trend or an indicator that this type of arrangement will continue long term?  

Dr Owens: The pandemic has created interesting dynamics in health care. Despite high utilization of COVID-19 related services, most of the other service lines have seen decreases. That has especially impacted many of the profitable business lines. Providers and health systems are seeking a more reliable cash flow model such as capitation, which may work well for all involved parties. Such arrangements give payers predictability of medical expense and eliminate some of the fee-for-service (FFS) incentives to do more. It gives the provider network predictable cash flow. 

I think once we cross the bridge, there will be no going back—this is the direction that payment models were heading in anyway.  

Dr Pezalla: I agree. It fixes costs and does not encourage overutilization. Uptake was limited by provider
willingness but now providers are seeing the upside. 

Dr Hsu: The move will not be temporary. The move away from FFS to a more predictable pay model was underway before COVID-19. The pandemic has been the impetus to put capitation on a faster track.

Mr Rooney: Those that are under more pressure find these types of payments reassuring in times of economic stress. It’s a way to build more certainty into your business model. That said, I think it’s too early to tell if this is a solid trend that has staying power.  

Dr Vogenberg: Capitation is a reaction to the financial crisis facing employers as plan sponsors. Health care costs come out of the balance sheet bottom line, so tremendous financial stress is impacting most employer plan sponsors—this on top of the unknown risks associated with the pandemic.

Mr Sontupe: A move to value-based health care is a must for the US health care system. Medicare continues to experiment with it, most notably with the Oncology Care Model, which seems to have staying power. 

During COVID-19, patients are essentially warehousing themselves until they must see a clinician, thereby driving down fees. However, when a COVID-19 vaccine becomes available and people begin to make their way back to the clinicians’ offices, will providers rebel against the per-member-per-month arrangement they have already agreed to? Will they accept patient-reported outcomes and quality measures as part of their compensation?

Mr Marcus: Capitated payment arrangements will still be around post-pandemic, but I do not see them becoming the primary payment model. These arrangements generally require a large number of patients in order to be profitable for providers, and they can disincentivize providers from providing expensive care or services.

Some of you appear to be saying the COVID-19 is the tipping point, while others are unsure. Can you explain your reasoning? 

Dr Owens: FFS will still be the predominant model in the near term and likely even for the next few years. COVID-19 is driving changes to payment models, but this will not necessarily make FFS obsolete. There will always be situations where FFS is difficult to change—especially for those systems that remain profitable.

Dr Pezalla: COVID-19 will accelerate the trend to value-based payments because the pandemic has made us question what we pay for and why. We are seeing hospitals lose money while caring for lots of patients and realizing that we overpay for elective/semi-elective surgery and underpay for ICU/medical care. This leads to underinvestment in public health and care for patients with infectious diseases and other medical problems.

Mr Rooney: One way to look at value-based payment is as a riff on capitated payments. Value-based payments are here to stay because they are locked into statute. However, the definition of value-based payments will change over time as more information becomes available and the political process determines how to divide the pie in the future.

Dr Hsu: The pandemic is not necessarily the tipping point, but it is a reminder that different payment models are needed because FFS is not sustainable. 

Dr Vogenberg: Whether or not the pandemic is a tipping point remains to be seen. Implementation of change remains a barrier. Keep in mind that there are many stakeholders who are financially integrated to one another in some way.  Disrupting those relationships and redeploying capital spent on health care in different flows will require time and grit by the purchasers of care.

Mr Marcus: FFS models can be integrated with value-based care incentive programs, so I do not see capitated payments arrangements as necessary for value-based care. For capitated payment arrangements to be profitable for providers, incentive programs are important. But value-based payments can exist outside of capitated arrangements.

Mr Sontupe: The challenge is to not rush into change that will have a negative effect. FFS and value-based payment as a shared payment model could be the most effective way to implement change. I think the more important question is how we make these models fair and competitive. Fear of a failing practice may push physicians to accept too much risk in order to guarantee a steady payment. Too much risk will undoubtedly result in worse care for patients.

So, you think it’s possible that clinicians and patients can come out on the short end if they are not careful. What about payers?  

Mr Sontupe: Plans are thriving. UnitedHealth Group’s earnings for the first half of 2020 were up $1.5 billion compared to last year, according to reports. Yet health plans continue to push for higher deductibles and copays. Now they are seeking to convince clinicians to take the risk that was theirs to begin with. I think the risk-reward will almost never be in the physician’s favor.

Value-based payment models are, in general, uniformly embraced by Democrats and Republicans in Washington.  What role will the federal government play in this trend? 

Dr Pezalla: Medicare will lead the way. Commercial payers are more likely to adopt models of care—especially complex ones—if there is a Medicare precedent because providers will become familiar with it and because they will define concepts and terms.

Dr Hsu: If CMS [Centers for Medicare & Medicaid Services] implements value-based payment models more expeditiously, commercial health plans will be quicker to consider and implement them.

Mr Rooney: There is a political consensus on value-based payment models. It allows both sides of the aisle to talk about payment in the way they see it, as either market-based or regulated capitation. 

Dr Owens: Medicare will continue to evolve into value-based payment models, as they have done with oncology. However, the process will be slow as Congress deals with competing priorities: including the overall public health crisis, the economy, schools, etc. It has taken a very long time for the oncology model to evolve to its current state and even now many practices are not in two-sided risk models.  

Mr Marcus: I agree that there are higher priorities that distract from any real focus on this issue. Not much will be accomplished during a presidential election year, and I think Washington will still be focused on the pandemic in 2021. 

Dr Vogenberg: The dysfunction of Washington does not help anyone at this point. That serves to illustrate the importance of commercial markets and their ability to make change happen.

Mr Sontupe: Government and government actuaries are fundamentally important. We have to be sure that these payment models provide the revenue that physicians need, as well as the care that patients deserve. We cannot look only at costs. The models need to be outcomes-based, with patients and physicians rewarded for working together to create better results. 

We have touched briefly on the advantages capitated plans present for providers and payers. Do you have anything to add? 

Dr Owens: It is all about predictability of payment for the payers and shifting some risk. For providers it is about predictability of revenue. 

Dr Pezalla: For payers, the advantages are fixed costs, reduced need for utilization management, and improved quality metrics. For providers, set levels of revenue allows for them to make decisions regarding staffing, physical plant, etc.

Mr Rooney: Payers often get both a greater diversity in their offerings and the improved ability to calculate risk. Providers trade higher reimbursement for greater certainty. 

Dr Hsu: Payers have a predictable cost of care. Providers can predict their cash flow, know their potential risk and benefits and learn to manage costs.

It sounds like a win-win, provided that it is designed and executed fairly. 

Mr Marcus: The purpose behind capitation is to develop a system that promotes incentives for improved health care while becoming more efficient with better cost controls. If it works, the model is great for all involved. However, there are risks and not all capitation models achieve the desired results.

Dr Vogenberg: For third-party payers, it’s a different value proposition from just claims processing services. For purchasers of care, it represents a vendor supply chain disruption more representative of overall control vs silo savings.

What are the cons for these stakeholders?   

Dr Owens: The biggest downside for the providers is having to adjust their business models to a fixed payment arrangement and not necessarily driving more utilization of services. The biggest negative for payers could be that some services remain low-demand or never return to pre-COVID-19 levels. Thus, they risk overpayment.

Dr Pezalla: By offering capitation, payers are limiting networks and locking members into specific providers. This may create some problems with dissatisfied members. Additionally, if providers find that they accepted too small a payment they may withdraw at the end of the contract, depleting the pool of available providers in the network.

Mr Rooney: The downside for providers is the loss of greater potential income. For payers, in the employer context, the negative is that employees often view these plans as more affordable but without the preferred flexibility of networks and services available. 

Mr Sontupe: The provider cannot easily stratify a patient base. Too many patients do not take responsibility for their own health care. How can a physician take risk knowing that patients may be nonadherent? Taking risk for things one cannot control for the simple guarantee of a steady income can be a big mistake, because that income will eventually dry up.

Mr Marcus: I agree. The success of this model is dependent on whether the consumer is willing to embrace this solution. Without this, the model is doomed. The question is whether or not the design is such that it motivates patients to utilize properly. Additionally, depending on geographic location, capitation may not be financially feasible.

Dr Vogenberg: Unreliable data is a potential downside. If availability of meaningful data is not addressed, then forms of prepaid care are doomed to fail. The data needs to be actionable, the plan needs to use it for continuous quality improvement, and all parties must actively
discuss it. Most of this was poorly executed pre-COVID.   

Dr Hsu: Reliable data is a big issue. History tells us that under capitated arrangement, if providers do not have data or directional support, they are not able to manage the cost of care and end up losing financially. 

Does the increasing trend and comfort with telehealth bode favorably for capitated arrangements? 

Dr Owens: Telehealth fits well in a prospective payment model. It is less costly to provide than on-site services and can be useful for many non-urgent care needs. If the system is capitated and can use telehealth for appropriate low acuity or routine follow-ups, that can result in efficiencies for the system and the ability to redirect human and facility resources to other areas.

Dr Pezalla: Providers have invested in telehealth and are receiving larger payments than in the past. They are becoming more comfortable with the process and outcomes. They are also realizing its efficiency and will consider capitated arrangements because they can reduce in-office expenses by relying on telehealth.

Mr Rooney: There has been a lot of experimentation around telemedicine payments—including capitation—on specific services for more than 30 years. What is different now is that the practice is widespread. It will take time for the payment system to catch up now that the genie is out of the bottle.

Dr Hsu: Under capitated arrangements, there will be incentive for providers to use even more telehealth because it is less costly.

Mr Sontupe: Telemedicine could possibly help with outcomes-based agreements, especially if the physician can use it for outreach. It provides an opportunity to make house calls to check in on patients, giving them a push to stay adherent. It is a low-cost way to stay engaged with a patient and more importantly, keep the patient engaged in their care.

Mr Marcus: The industry is certainly moving in this direction but we still need to prove the efficacy of this type of delivery model compared to the traditional in-person visit. 

Dr Vogenberg: Telehealth aids efficient patient management but that doesn’t change the downside of prepaid health arrangements. Capitation can be easily suited for primary care but falls apart in secondary or tertiary care needs for patients. The years of dysfunction in the care delivery and supply chain will take time to disrupt.

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