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financial incentives

How Does Your Doctor Get Paid? The controversy over capitation by Mark Hagland

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Hagland is an independent journalist and public speaker in health care based in Chicago. He has been covering the health care industry as a writer, editor, researcher and speaker for over a decade.
There are many ways of paying physicians, hospitals and other health care providers. The traditional way, used both by private health insurers and by government (Medicare and Medicaid programs) is called 'fee-for-service.' Under fee-for-service (FFS) reimbursement, the payer of the health care service pays, within reason (and certain guidelines, under Medicare and Medicaid) whatever the physician, hospital or other health care provider charges, without prearrangement of fees, once the provider of care submits an insurance claim. Fee-for-service payment is also the basis of early forms of managed care payment, in what is called 'discounted fee-for-service' managed care. This simply means that providers agree to provide health services at prearranged discounts of their regular fee-for-service fees (the usual arrangement for PPOs (preferred provider organizations), which are essentially lists of available providers in a network).

Capitation was meant to be a step up in terms of creating better incentives for efficiency, cost control, and preventive care in health care. Under capitation, a doctor, medical group, hospital or integrated health system receives a certain flat fee every month for taking care of an individual enrolled in a managed health care plan, regardless of the cost of that individual's care (usually with a few exceptions built into the contract for unusual types of care). Given that the majority of individuals enrolled in a health plan will never use health care services within any given month, capitation arrangements should naturally 'balance out' the 'high utilizers' of health care in health plans with those enrolled members who use little or no health care every month. What's more, because the physician, hospital or health system is responsible for the enrolled member's health regardless of cost, in theory, capitation motivates the health care provider to provide health screenings (mammograms, pap smears, PSA tests), immunizations, prenatal care, and other preventive care to enrolled members, and to focus on keeping the member healthy through good primary care (and less reliance on costly medical specialists).

There are essentially two kinds of capitation, with many variations. The first is called 'global capitation,' in which whole networks of hospitals and physicians band together to receive single fixed monthly payments for enrolled health plan members; under global capitation, the providers sign a single contract with a health plan to cover the care of groups of members, and then must determine a method of dividing up the capitated check among themselves. Capitation that is not global is simply capitated payment contracted to a specific provider group: a physician group, or a hospital, individually.

So, where does the controversy come in? There are two areas of debate in the health care system regarding capitation. First, physicians and other providers say that capitation has inserted economic considerations into their provision of care. They say they are sometimes aware that they can save money by withholding care or providing less expensive care (for example, substituting a generic drug for a name-brand pharmaceutical), and this creates an inherent conflict of interest.

Second, physicians and other providers say that, with the low capitated payment rates they've been receiving in competitive managed care markets like Northern and Southern California, Portland, Oregon, and other markets, those low payments aren't providing enough money to really fund the kinds of preventive care services that capitation should theoretically encourage. Capitated payment has become a major issue in the federal government's Medicare managed care program as well, which has been plagued with departures by health plans and providers who feel that payment rates are simply too low at this time to make participation successful.

Additional controversy has been generated by the fact that many health plans offer physicians bonuses for efficiency--either for following 'utilization management' guidelines (which try to keep the use of health care services within certain parameters on the part of patients and doctors), or through some other mechanism. Some physicians complain that such bonusing programs add additional potential for ethical conflict of interest, since they usually reward physicians who make conservative decisions on what care they give to patients. It's difficult to generalize about these arrangements, however, as every managed care contract is different, and the types of financial incentives involved, whether for efficiency, or for perceived quality, vary so widely across the board.

Of course, it must be pointed out that there always have been economic considerations in giving care, and that fee-for-service health insurance coverage has long been criticized for encouraging excessive and unnecessary care (i.e., a physician will order a whole battery of extra tests, knowing they are unnecessary or of marginal value, because the doctor will be paid extra for doing those tests for the patient). But in some markets, there is a danger that, improperly handled and managed, capitation could create some disincentives to care, rather than encouraging the most efficient care possible.

Meanwhile, capitation is stalling out as a payment method in many markets, as physicians and hospitals find that they very often lose money on capitated contracts, and go back to discounted fee-for-service payment whenever possible, instead. Most experts believe that, in contrast to predictions made several years ago, capitation will remain a major method of managed care payment only for organized physician groups in the most 'advanced' managed care markets on the West Coast and in certain pockets of the U.S., while hospital capitation will continue to wither through most of the country.

What are the implications of all this for physicians and patients? For physicians, the patient visit has become more complicated, as all the different health plans he/she contracts with have different rules about what drugs the doctor can prescribe, what authorizations are needed to refer the patient to a specialist, and so on. For the patient, the most immediate impact of all the payment changes to physicians is that the vast majority of physicians, in order to try to maintain their income levels, are seeing more patients these days, and crowding them into tighter and tighter timeframes, meaning that the patient visit has become shorter and shorter. The average patient visit is now about 10 minutes long, which means that it's important, if you're the patient, to know what you want, what you want to say, and to get what you need out of the physician in the short time you have with him/her. Being prepared by doing consumer health research on the Web before or after the patient visit is becoming increasingly common, as is reliance on allied health professionals like nurse practitioners and physician assistants, for care support. Being an educated, discerning and assertive consumer is becoming more and more important in interactions with time-pressured (and sometimes financially pressured) physicians.

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