Many Hospitals Are Demanding Shared Risk, but Some Providers Prefer Capitation
For many years in California and a handful of other areas, fixed-payment, or capitated, contracts between managed care plans and their hospital and physician providers was the dominant business model. Capitation was credited with holding down premium costs for employers during managed care’s salad days in the late 1980s and most of the 1990s.
Today is a new day, however: health premiums and medical costs are on the rise. Some reasons for that include an aging population, increased use of services, and new, expensive technologies and pharmaceuticals.
Large medical groups and hospitals are calling for health plans to absorb a greater share of the cost increases. And some,most notably Orange-based St. Joseph Health System, Sutter Health in Northern California, Baylor Hospital in Texas and Partners HealthCare in Boston,are walking away from contracts that they feel do not meet their needs.
In view of that, some managed-care companies are renegotiating and restructuring their hospital contracts to take on more cost overruns.
“We did do (capitated) contracts, but it’s really shifted,” said Edward Tanida, general manager of Aetna U.S. Healthcare’s Orange County and Inland Empire region. Statewide, Tanida estimated, Aetna’s hospital contract mix has gone from 60% capitation in 1999 to around 20% today. Aetna has around 110,000 OC HMO enrollees.
Tanida said the change came about because of recognition by Aetna and hospitals that medical care has become more costly in recent years and that the HMO wants to do what’s right by its providers.
“Hospitals realized that their costs have gone up and they can’t make it on capitation,” said Tanida, a former Aetna contracting official. He believes that fixed-payment arrangements will be more common on the independent practitioner association/doctor side of the business and shared risk become more of the norm on the hospital side.
“You don’t find a lot of capitated hospital arrangements outside of California,” said Tanida, a transplant from the eastern United States.
As for why the movement started, Tanida linked it to a combination of the cap on Medicare reimbursements written into the Balanced Budget Act of 1997 and higher occupancy rates than four or five years ago. He also said mandated benefits and other costs, including seismic retrofitting of older California hospitals, are influences in the change.
Tanida also addressed what businesses that buy healthcare benefits should expect because of contracting changes. “Ultimately, they’ll be shifting more costs to their employees.”
He said strategies for that include picking prescription drug plans that have employees pay more if they want a drug that isn’t on the HMO’s “formulary” list, for example.
Meanwhile, PacifiCare Health Systems Inc., the Santa Ana-based managed care giant, looks like it will stay the course with capitation as well as jump into the shared-risk market. Approximately 35% of PacifiCare’s California membership is now covered under full-risk arrangements, according to President and Chief Executive Howard Phanstiel.
Analysts have linked some of PacifiCare’s recent past financial problems to a dramatic changeover in California from fixed-fee contracts with doctors and hospitals to pacts that have the health plan shoulder cost increases.
Brad Bowlus, president and chief executive of PacifiCare’s Health Plans division, noted that the company’s California risk-based contracting changeover should slow this year because most of its providers still on capitated contracts prefer them.
“(This) should help us to stabilize our medical care ratios and allow us more time to build the infrastructure for a larger risk-based business in future years,” Bowlus said.
Phanstiel, in an earlier interview, acknowledged that capitation isn’t for every hospital or doctors’ group. He said it didn’t work for medical groups and hospitals that lacked the proper infrastructure and capability to manage risk.
“On the other hand, particularly with the right price point, capitation can work very well,” Phanstiel said. He added that PacifiCare has some preliminary studies that suggest that medical outcomes may be better under a capitated system.
Separately, Phanstiel told stock analysts in a conference call regarding PacifiCare’s fourth-quarter earnings that it expects its commercial HMO premiums this year to go up 10% to 25%, with an average of 13%.
Blue Shield of California, with more than 132,000 Orange County members, said it’s been dealing in a shared-risk mode for a while.
“Blue Shield felt that it was in our interest to only capitate physicians and pay hospitals on a fee-for-service basis,” said Tony Lipp, the carrier’s district manager of provider relations.
Additionally, Lipp said, Blue Shield has created a shared-risk fund for hospital services that rewards doctors if they are able to work within their capitated rates. If they cannot, providers must pay Blue Shield back.
Blue Shield is among one of five “partner health plans” that emerged as part of St. Joseph’s new HMO network. The others are Aetna, Blue Cross of California, Cigna HealthCare of California and Health Net.
HMOs have “always stepped back and re-evaluated whether to capitate or pay fee-for-service” rates, according to Todd Nelson, a consultant with William M. Mercer’s Orange office. Shifting toward discounted fee-for-service (traditional) ways of paying hospitals and doctors’ groups, rather than hard capitation, will put California on the same or similar ground as other states, he said.
Nelson pointed out, however, that full-risk capitation was what enabled California HMOs to provide their plans at a lower cost to their employer-customers.
Some plans do not want to address capitation or shared-risk issues for the record, including Blue Cross, a unit of WellPoint Health Networks Inc. with more than 200,000 OC members. A company spokeswoman said such matters are proprietary. n
