CapitationCapitation

Determination of Premium Rates Benefit Payments –Paid to providers Risk Premiums –Profit earned by payer as a function of accepting financial risk Administrative Costs –Claims processing, marketing, insurance coverage, etc.

Determination of Premium Rates Marketing Expenses –Intangibles (i.e. market power, good service)

Definition of a Stop Loss Specific Stop Loss –Severity of claims Aggregate Stop Loss –Frequency of claims

Corridors & Trends To Specific and Aggregate Stop Loss Trends –Measured by Utilization Level & Charges –Related to Aggregate Stop Loss Corridors –Refers to Costly Claims Requiring LCM Intervention –Refers to Specific Stop Loss

Risk Rating Process of adjusting healthcare utilization for demographic factors and other factors

Other Factors Affecting Healthcare Utilization Income –Wealthier use more services Education –More educated use more services Type of Employer –Manufacturing, healthcare, and unionized workers use more services

Other Factors Affecting Healthcare Utilization Location –Urban residents use more services Benefit Design –Copays & deductibles affect utilization Sex –Women use more services –Men have more catastrophic care

Other Factors Affecting Healthcare Utilization Age –0-17 yrs. has lowest utilization –Utilization increases for yrs. –Utilization decreases for yrs. –Utilization rapidly increases for 44+ yrs.

Causes of Financial Risk in Capitation Adverse Selection –Occurs when a group’s characteristics predispose them towards higher than predicted utilization Random Nature of Healthcare Demand –Much of utilization results from random events (i.e. epidemics, accidents, etc.)

Causes of Financial Risk in Capitation Law of Large Numbers –Increased risk with smaller groups

Effects of Capitation Gatekeeper Transfer of Risk –Payer to provider Utilization Ground Rules Specialty Referrals –Reverse Capitation

Effects of Capitation Pressure for Fee Reductions –Increased likelihood that specialists are capitated –Increased pressures for sub-capitation, carve outs, and disease management

Process of Calculating a Risk Contract PMPM Rates Using a Capitation Model 1Define services included in the capitation contract 2Risk adjust medical services 3Identify other variables in PMPM premium rate model

Process of Calculating a Risk Contract PMPM Rates Using a Capitation Model 4Adjust for current demographic factors for this health plan –Inflation factor –Premium rate structure & rates at respective levels –Community rating flexibility

Process of Calculating a Risk Contract PMPM Rates Using a Capitation Model 5Continuous assessment of key managed care performance indicators –Membership –Inpatient care –Ambulatory care –Financials

Process of Calculating a Risk Contract PMPM Rates Using a Capitation Model 6Adjust for variances in key indicators –Physician mix –Level of services –Level of integration under capitation contract

Average Benefit Payments

Total benefit payments usually account for approximately 70-90% of the premium

Average Benefit Payments Breakdown for a typical group of insureds during a policy year: –500 of 1,000 = No claims –375 of 1,000 = Payments of $0-$500 –2 of 1,000 = Payments of >$10,000 –Average cost of providing care per insured = $560 per policy year

Operational Example 1,000 insureds at following premiums: –Employee only coverage = $120/month With 400 lives = $48,000/month –Employee + 1 or more = $350/month With 600 lives = $210,000/month –Total premium per month = $258,000 $3,096,000 annualized

Operational Example Average claims = $560 x 1,000 employees = $560,00 pre-shock losses Two shock losses at $1M & $500K Surplus = ($3,096,000 - $560,000 - $1M - $5K) = $1,036,000 –Covers other operating expenses such as cost of reinsurance, administrative overhead, acquisition costs, etc.

Operational Example Operating costs = 20% of total premiums customarily = $619,200 Pre-tax surplus = $1,036,000 - $619,200 = $416,800 = 13.5% After tax profit = $416,800 x.61 = $254,248 Return on total premium = 8%

Are Withholds Ethical or Unethical? Clinical protocols –Can reduce liability exposures –Must make changes when dictated by indication & necessity Professional liability exposures –Claims denials –Failure to provide coverage –Abandonment of patient

Requirements for Transition to Capitation Align financial incentives Develop primary care driven medical groups Establish long-term preferred relationships Decentralize medical management Develop a continuous improvement process

Calculation of Basic Capitation Rate Routine Office Visit: Example #1 Primary care practice receives $45/visit Average of 3 visits PMPY 3 visits x $45/visit = $135 PMPY $135 PMPY/12 months = $11.25 PMPM (Approximate Cap Rate) 2,000 subscribers assigned to the practice 2,000 ss x $11.25 PMPM = $22,500/month $22,500/month x 12 months = $270,000 per year

Calculation of Basic Capitation Rate Routine Office Visit: Example #2 Primary care practice receives $45/visit Members pays $10 copay/visit Average of 3 visits PMPY 3 visits x ($45/visit - $10 copay/visit) = $105 PMPY $105 PMPY/12 months = $8.75 PMPM (Approximate Cap Rate) 2,000 subscribers assigned to the practice 2,000 ss x $8.75 PMPM = $17,500/month

Calculation of Basic Capitation Rate Routine Office Visit: Example #2 (cont.) $17,500/month x 12 months = $210,000/ year Add projected copay of patients –2,000 ss with 3 visits PMPY = 6,000 visits/year –6,000 visits x $10 copay/visit = $60,000 copay/yr $210,000/yr + $60,000 copay/yr = $270,000/yr Example #2 has become the prevalent method. Why?

Calculation of Withhold Using Examples #1 & #2 Withhold policy of managed care company is 20% of total reimbursement Under Example #1, net reimbursement after withhold is calculated as follows: $22,500 x 20% = $4,500/month x 12 months = $54,000/year Net reimbursement from MCO = $216,000/yr

Calculation of Withhold Using Examples #1 & #2 (cont.) Under Example #2, net reimbursement after withhold is calculated as follow: $17,500 x 20% = $3,500/month x 12 months = $42,000/year Net reimbursement from MCO = $168,000/yr Which practice is better off financially? Why?

Liability and Compliance Issues

Liability Exposure Among MCOs Negligent credentialling &/or provider selection Network development Vicarious liability Utilization review Warranties Financial incentives

Types of Liability Coverage Required by MCOs Medical Professional Liability Coverage –Claims made vs. occurrence from coverage –Covers direct patient care

Types of Liability Coverage Required by MCOs Directors and Officers Liability Insurance –Decisions and policies –Two types Managed Care D & O Corporate D & O Managed Care Professional Liability Coverage –Covers sale of MCO products & services to third parties