The source of capitation's greatest strengths--and its greatest peril--is the
immutable fact that this type of reimbursement carries with it all the
economics, risks, and rewards of insurance. This simple fact is the axis upon
which the entire restructuring of the health care system will turn as it moves
into the new century: it explains why providers need to consolidate (to pool
risk and reduce financial exposure); integrate (to offer the lowest cost
settings); and industrialize (to reduce costs and improve predictability).
Excerpted from Bleeding Edge: The Business of Health Care in the
New Century by J.D. Kleinke. Copyright 1998, Aspen Publishing Inc., Gaithersburg, MD. Reprinted with
A capitation payment to a group of providers is an insurance premium and it is
meant to cover the entire insured population. A small minority of patients in
the capitated population will require far more care than the fixed payment
amount covers, and providers are obliged to deliver that care without
additional payment. But that care is subsidized by the capitated payments
banked by the providers for all the other patients in the population who
require little or no care. Capitation is the logical endpoint of a system that
will fix its underlying economic problem only when it has shifted all of its
health: insurance risk fully onto providers.
Under capitation, a hospital's and physician's entire income is based on their
success in keeping patients healthy, rather than on maximizing the number of
medical services delivered to those patients. As a consequence, capitation
turns a number of key aspects of health care delivery inside out:
· the least busy physicians and emptiest hospitals are the most profitable
Though capitation was not widely put into practice until the early 1990s, its
clearly superior economics have a snowball effect on any given market, and thus
on the health care system in general. Once introduced into a market, few groups
of physicians or hospitals can compete on something as old-fashioned as price
with those willing to assume all medical/financial risk. Why? Because under
capitation, all the resource consumption patterns (i.e., the 70 to 90 percent
total health care costs that physicians control) change radically. Physicians
under full capitation manage patients better, hospitalize them less often, and
ultimately allocate total medical resources more efficiently. A landmark
New England Journal of Medicine study of capitation in California
found that between 1990 and 1994, the number of MCO enrollees covered under
capitation increased 91 percent. In 1993, near the end of this period, the
authors calculated that the number of inpatient days per 1,000 non-Medicare
enrollees among the capitated groups ranged from 120 to 149 days, versus 232
for all of California and 297 for the total United States.
· excessive or unnecessary interventions cost the physicians and the hospitals
money, not the patient or the payer;
· expensive medical technologies are liabilities to be used judiciously to
minimize costs, not assets to be exploited to maximize fee-for-service
· physicians and hospitals readily provide their own utilization
With total hospitalization days running at half the rate, capitation sets up a
medical cost downdraft that rushes through entire markets. In order to compete
in such markets, all providers are compelled to convert to capitation, often in
one or two insurance purchasing cycles. As a result, more than half of
organized physician networks around the United States now compensate their
physicians through some form of capitation.
And those are the organized networks. As for the entire universe
of physicians, 81 percent expect to accept capitated patients by the year
2000. Those who already do accept them
anticipate that half their practice revenues will be derived from capitation.
The use of capitation removes all the clumsiness, inefficiency, and antagonism
inherent in the three ring circus typical of providers, patients, and
"utilization managers" in traditional managed care settings. Pushing all the
financial risk and associated medical responsibility for an insured population
past the MCOs and squarely onto hospitals and physicians greatly simplifies the
process of "managing care," rendering the phrase a long overdue redundancy.
Most importantly, capitation aligns the incentives of providers with those of
patients. Under capitation, physicians and hospitals
· have a heavily vested interest in maintaining the health, rather than
treating the illnesses, of their capitated patients;
Critics of capitation argue that the system introduces a new economic tension
into the relationship between providers and patients. They claim that
capitation forces physicians and hospitals to choose between their own
financial enrichment and the health of their patients, introducing an
insurmountable conflict of interest into the health care system. Under
capitation, they argue, the foxes are guarding the henhouse.
· are forced to balance profit-seeking behavior and the clinical needs of
· are finally required to act like all other free-market producers of goods,
motivated to focus not only on maximizing revenues, which they have done with
abandon in the past, but also on the cost of goods sold.
This is a knee-jerk reaction, borne of a naiveté jolted from its
ignorance over the reality of fee-for-service medicine. How exactly is
capitation's conflict of interest any different from its inversion? How is the
physician who, under fee-for-service, is paid handsomely for performing a
surgery, not subject to the same conflict of interest when making the
decision to operate or not operate? The reality is there is no difference
whatsoever. It is simply a reworking of an unchanging equation; with the plus
and minus dollar signs on either side reversed, the other variable--namely
utilization--moves in the opposite direction, and total health care costs are
Capitation is scandalous because it is new, and because it questions our faith
in the purity of medical science and the motives of our personal physicians.
Capitation forces people to confront the reality that physicians are
self-interested economic agents, just like the rest of us and that perhaps a
lifetime of our own medical care may have been delivered to us only because we
had the ability to pay and not because of the dedication of "our" physicians
to us personally. But the fears embodied in such criticism--primarily those of
patient underdiagnosis, undertreatment, and neglect--are groundless. The
medical malpractice community has, since the 1950s, provided the nation's
health care consumers with vigilant service in the fight [against what it alone
managed to identify as the teeming and widespread incompetence of physicians.
These lawyers will no doubt prove even more effective in defending patients
against capitated physicians who fail to provide needed care, given the legal
profession's general familiarity with self-serving economic motives.
As the specter of professional liability and, failing that, professional
conscience police against the withholding of needed patient care under
capitation, even better safeguards exist with the long- term financial interest
inherent in the capitation system itself. Herein lies the purest elegance of
capitation as an economic tool. A capitated hospital that prematurely
discharges a patient to improve its own profit on that patient will lose this
profit many times over when the patient returns with complications associated
with the premature discharge. If the patient does not re-admit, then the
discharge, however inconvenient or unpleasant, was obviously not medically
premature. Similarly, capitated physicians who line their pockets by denying
needed treatment to sick people under their capitated care will be
contractually obligated to treat those people when they become very sick. Under
capitation, the foxes may be guarding the henhouse but they are also
responsible for egg production.
The public policy debate notwithstanding, capitation is the system that the
market--no longer tolerant of runaway health costs-- clearly wants. Not only
does this explain why managed care uses capitation aggressively to isolate and
predict its medical costs; it describes the very origins of managed care as an
organization. The original concept of the MCO is based on the principle of
capitation: it theorizes that an organization designed specifically to maintain
people's health will be able to resolve all the medical needs of a population
for a fixed fee per member; it also theorizes that the organizations that do so
effectively will earn a profit for their efforts.
 J. Robinson and L. Casalino, "The Growth
of Medical Groups Paid through Capitation in California," New England
Journal of Medicine, 21 December 1995, 1684.
 H. Brown and R. Shinto, "Making Physicians
Networks Work," Health Care Strategic Management, April 1996, 22.
 Survey conducted by Evergreen Re and
reported in Modern health care, 5 January, 1998, 50.
Survey, Modern health care, 50.
P. Starr, The Social Transformation of American Medicine (New York:
Basic Books/HarperCollins, 1982), 395.
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