Key Considerations for Providers Thinking of Capitation Payments

November 12, 2020 - More providers are thinking of switching to capitation payments in light of the COVID-19 pandemic. However, the decision should not be taken lightly; provider organizations need to consider the major risks and challenges of the lump sum payments, industry experts are saying.

A recent Health Affairs blog post authored by Brigham and Women’s Hospital’s Vishal S. Arora, MD, and Sachin H. Jain, MD, MBA, FACP, president and CEO of SCAN Group and Health Plan, highlight five challenges that healthcare organizations must consider if they want to adopt capitation payments successfully.

First, organizations must consider the impact industry consolidation will have on capitation payment rates, explained the authors who are also affiliated with Harvard Medical School and Stanford University School of Medicine, respectively.

“Consolidation changes the calculus of global capitation. If independent physician groups had control over global capitation payments, there is a clear financial incentive for clinicians to scrutinize hospitalizations and emergency department visits and provide greater service levels to patients,” they write.

This may especially be a challenge for consolidated health systems that include hospitals and employed physician groups. These organizations will have to assess resource allocation to cover the fixed and variable costs of inpatient care while also funding alternative care sites.

“Striking this balance with a fixed budget is not obvious, and health care executives may need to divest from more expensive hospital-based labor and capital over the long run,” Arora and Jain explain.

Second, organizations will need to address specialist compensation under capitation payments.

Organizations in alternative payment models strive to put the primary care provider at the center of a patient’s care team and capitation payments certainly encourage organizations to do that. However, specialists still need to be accountable for total costs of care under the alternative payment model.

To do that, Arora and Jain suggest that organizations provide capitation payments to specialists based on the percentage of health plan premiums. They also advise provider groups to use global budget payments to implement fee-for-service incentives for primary care engagement among specialists.

Third, leaders of health systems will need to address provider networks to successfully execute a capitation strategy.

Capitation has been implemented in the past, particularly under the HMO movement of the 1990s. However, the narrow networks created to successfully implement the alternative payment model faced significant backlash from patients and providers who did not like the limited choices.

Backlash could still occur, Arora and Jain warn, so organizations will need to show patients the value and coordination benefits of establishing narrow networks of high-quality, cost-efficient providers.

Fourth, health systems will need to understand how to manage financial risk under capitation payments.

Complications, chronic conditions, and other avoidable issues jeopardize the success of capitation payments. But providers can mitigate the impact of these issues by engaging stop-loss insurance and carving out payments for high-cost items, like specialty drugs and devices, Arora and Jain advise.

Finally, healthcare organizations should consider the entire portfolio of payer contracts before jumping into capitation payments with one payer.

In a fragmented system, organizations will benefit from multi-payer contracts that all contain capitation payments, Arora and Jain conclude. This would also provide a more predictable payment system for providers and reduce the administrative burden of negotiating separate payer contracts.

It is very likely that capitation will see a revival after the COVID-19 pandemic. Even though providers received – and may receive more – financial aid from the government to get them through the pandemic, evidence shows that providers in contracts with capitated payments deliver higher quality care and support long-term financial viability.

But whether the alternative payment model thrives when it couldn’t two decades ago may hinge on providers overcoming the top challenges of capitation.