Health care organization and incentives under emerging models of elderly health care

Health providers are rapidly establishing integrated delivery systems to prepare for managed care and capitation. However, acute and primary services for the elderly continue to be reimbursed through DRGs or fee-for-service (FFS) payments. Different incentives and care patterns are described for providers caring for elderly populations and younger, capitated groups. Pilot programs to provide Medicare services to the elderly may become models or foundations for a future, capitated health system for the elderly. Existing models of elderly health care that receive capitated payments are described in this article, including Social HMOs, TEFRA HMOs. and PACE programs. The potential significance of these programs for the synchrony of operational incentives, comprehensiveness of health care, volume of institutional services, and primary care orientation is analyzed.     

Risk-based capitation payments for health care: a survey of the literature.

This article provides a synthesis of the literature on risk-based capitation payments for health services and a framework for understanding rate-setting methods. Benefits, timing, integration, and risk are explained as four basic dimensions of risk-based capitation payments that must be understood in setting payment rates. Issues in health care policy are explored, with an emphasis on approaches to setting payment rates. The article is intended for classroom use in courses in health economics, health insurance, health maintenance organizations, or alternative financing and delivery systems.     

Risk adjustment alternatives in paying for behavioral health care under Medicaid

OBJECTIVE: To compare the performance of various risk adjustment models in behavioral health applications such as setting mental health and substance abuse (MH/SA) capitation payments or overall capitation payments for populations including MH/SA users. DATA SOURCES/STUDY DESIGN: The 1991-93 administrative data from the Michigan Medicaid program were used. We compared mean absolute prediction error for several risk adjustment models and simulated the profits and losses that behavioral health care carve outs and integrated health plans would experience under risk adjustment if they enrolled beneficiaries with a history of MH/SA problems. Models included basic demographic adjustment, Adjusted Diagnostic Groups, Hierarchical Condition Categories, and specifications designed for behavioral health. PRINCIPAL FINDINGS: Differences in predictive ability among risk adjustment models were small and generally insignificant. Specifications based on relatively few MH/SA diagnostic categories did as well as or better than models controlling for additional variables such as medical diagnoses at predicting MH/SA expenditures among adults. Simulation analyses revealed that among both adults and minors considerable scope remained for behavioral health care carve outs to make profits or losses after risk adjustment based on differential enrollment of severely ill patients. Similarly, integrated health plans have strong financial incentives to avoid MH/SA users even after adjustment. CONCLUSIONS: Current risk adjustment methodologies do not eliminate the financial incentives for integrated health plans and behavioral health care carve-out plans to avoid high-utilizing patients with psychiatric disorders.     

Capitation payments based on prior hospitalizations

In many countries the concept of capitating health care insurers is receiving increasing attention. In a competitive environment, capitation should induce insurers to concentrate more on cost containment instead of indulging in risk selection. The necessary premium-replacing capitation payments should account for predictable variations in annual per-person health care expenditures as far as these are related to health status. Various studies have shown that crude capitation models based on e.g. age, sex and place of residence, do not reflect expected costs accurately. This implies inefficient pricing possibly leading to risk selection and windfall profits or losses for insurers, thereby undermining the objectives of a capitation system. Using Dutch micro data on some 200,000 individuals, this article simulates various alternative capitation models based on, among others, diagnostic information from previous hospitalizations. Results suggest that the problems of both risk selection and windfall profits/losses may be mitigated substantially by using this type of information together with data on prior costs. These results are not only relevant for situations where competing insurers are capitated, as intended in the Netherlands, but also when providers are capitated, as in the UK, or when HMOs are capitated, as in the US.     

Needs-based primary medical care capitation: Development and evaluation of alternative approaches

Objective. To develop and evaluate alternative methods of adjusting primary medical care capitation payments for variations in relative need for health care among enrolled practice populations. Methods. We developed alternative needs-based capitation formulae and applied them to a sample of capitation-funded primary care practices to assess each formula's performance against a reference standard of capitation payments based on age, sex and self-assessed health status of the enrolled populations. The alternative formulae were based on: (1) age and sex; (2) age, sex and individually-measured socioeconomic characteristics; (3) age, sex and socioeconomic characteristics imputed from census data for enrollees' neighbourhood of residence; (4) age, sex and standardized mortality ratio for enrollees' neighbourhood of residence. Results. Age/sex-adjusted capitation payments for the six practices studied ranged from 10% higher to 18% lower than the reference standard payments. Capitation formulae based on socioeconomic and mortality data did not perform consistently better than the current age/sex-based formula. Conclusions. Primary medical care capitation payments adjusted only for age and sex do not reflect the relative health care needs of enrolled practice populations. Our alternative formulae based on socioeconomic and mortality data also failed to reflect relative needs. Methods that use other approaches to adjusting for differences in relative need among enrolled populations should be investigated. This revised version was published online in July 2006 with corrections to the Cover Date.     

Early results from adoption of bundled payment for diabetes care in the Netherlands show improvement in care coordination

In 2010 a bundled payment system for diabetes care, chronic obstructive pulmonary disease care, and vascular risk management was introduced in the Netherlands. Health insurers now pay a single fee to a contracting entity, the care group, to cover all of the primary care needed by patients with these chronic conditions. The initial evaluation of the program indicated that it improved the organization and coordination of care and led to better collaboration among health care providers and better adherence to care protocols. Negative consequences included dominance of the care group by general practitioners, large price variations among care groups that were only partially explained by differences in the amount of care provided, and an administrative burden caused by outdated information and communication technology systems. It is too early to draw conclusions about the effects of the new payment system on the quality or the overall costs of care. However, the introduction of bundled payments might turn out to be a useful step in the direction of risk-adjusted integrated capitation payments for multidisciplinary provider groups offering primary and specialty care to a defined group of patients.     

Risk-adjusted capitation payments: developing a diagnostic cost groups classification for the Dutch situation

In many countries market-oriented health care reforms are high on the political agenda. A common element of these reforms is that the consumers may choose among competing health insurers or health plans, which are largely financed through premium-replacing capitation payments. Since 1993, Dutch sickness funds receive risk-adjusted capitation payments based on demographic factors. It has been shown that the predictive accuracy of a demographic capitation model improves when it is extended with diagnostic information from prior hospitalizations, in the form of Diagnostic Costs Groups (DCGs). In this study a DCG classification is developed using Dutch cost data of sickness fund members of all ages. The study also dealt with the question of how to handle high discretion diagnoses. For the Dutch situation high discretion diagnoses may be defined as those diagnoses for which day case treatment is a possible alternative for a hospital admission. Grouping persons with a hospital admission for high discretion diagnoses together with people without an admission resulted in a slight reduction of the predictive accuracy of the DCG model. Adequate risk-adjustment is critical to the success of market-oriented health care reforms. The use of diagnostic information from prior hospitalizations seems a promising option for improving the capitation formula.     

Risk adjustment for high utilizers of public mental health care

BACKGROUND: Publicly funded mental health systems are increasingly implementing managed care systems, such as capitation, to control costs. Capitated contracts may increase the risk for disenrollment or adverse outcomes among high cost clients with severe mental illness. Risk-adjusted payments to providers are likely to reduce providers' incentives to avoid or under-treat these people. However, most research has focused on Medicare and private populations, and risk adjustment for individuals who are publicly funded and severely mentally ill has received far less attention. AIMS OF THE STUDY: Risk adjustment models for this population can be used to improve contracting for mental health care. Our objective is to develop risk adjustment models for individuals with severe mental illness and assess their performance in predicting future costs. We apply the risk adjustment model to predict costs for the first year of a pilot capitation program for the severely mentally ill that was not risk adjusted. We assess whether risk adjustment could have reduced disenrollment from this program. METHODS: This analysis uses longitudinal administrative data from the County of Los Angeles Department of Mental Health for the fiscal years 1991 to 1994. The sample consists of 1956 clients who have high costs and are severely mentally ill. We estimate several modified two part models of 1993 cost that use 1992 client-based variables such as demographics, living conditions, diagnoses and mental health costs (for 1992 and 1991) to explain the variation in mental health and substance abuse costs. RESULTS: We find that the model that incorporates demographic characteristics, diagnostic information and cost data from two previous years explains about 16 percent of the in-sample variation and 10 percent of the out-of-sample variation in costs. A model that excludes prior cost covariates explains only 5 percent of the variation in costs. Despite the relatively low predictive power, we find some evidence that the disenrollment from the pilot capitation initiative input have been reduced if risk adjustment had been used to set capitation rates. DISCUSSION: The evidence suggests that even though risk adjustment techniques have room to improve, they are still likely to be useful for reducing risk selection in capitation programs. Blended payment schemes that combine risk adjustment with risk corridors or partial fee-for-service payments should be explored. IMPLICATIONS FOR HEALTH CARE PROVISION, USE, AND POLICY: Our results suggest that risk adjustment methods, as developed to data, do not have the requisite predictive power to be used as the sole approach to adjusting capitation rates. Risk adjustment is informative and useful; however, payments to providers should not be fully capitated, and may need to involve some degree of risk sharing between providers and public mental health agencies. A blended contract design may further reduce incentives for risk selection by incorporating a partly risk-adjusted capitation payment, without relying completely on the accuracy of risk adjustment models. IMPLICATIONS FOR FURTHER RESEARCH: Risk adjustment models estimated using data sets containing better predictors of rehospitalization and more precise clinical information are likely to have higher predictive power. Further research should also focus on the effect of combination contract designs.     

The funding and purchasing of health care—a book with seven seals

After examining the ongoing debate on health care in Germany, the functional and institutional features of the German system are characterized. Regarding external funding of the German health care system, one of the favored alternatives in the current debate is the possibility of introducing per capita payments. After a short introduction to the capitation option, I show that there are other options, such as a mixed system of capitation and contributions based on income. External funding describes the form of revenue generation. On the other side, internal funding is the method of how different health care services are purchased or reimbursed. This becomes a rather hot topic in light of new trends for integrated and networked care to patients and different types of budgeting. Another dominating question in the German health care system is the liberalization of the contractual law, with its “joint and uniform” regulations that have to be loosened for competition gains. Having discussed the consequences of diagnosis-related groups (DRGs) in Germany, I conclude with a note on the political rationale and its players.     

Making capitated Medicare work for women: policy and research challenges.

Growth in capitated Medicare has special ramifications for older women who comprise the majority of Medicare beneficiaries. Older women are more likely than men to have chronic conditions that lead to illness and disability, and they often have fewer financial and social resources to cope with these problems. Gender differences in health status have a number of important implications for the financing and delivery of care for older women under both traditional fee-for-service Medicare and capitation. The utilization of effective preventive interventions, new therapeutic interventions for the management of common chronic disorders, and more cost-effective models of chronic disease management could potentially extend the active life expectancy of older women. However, there are financial and delivery system barriers to achieving these objectives. Traditional FFS Medicare has gaps in coverage of care for chronic illness and disability that disproportionately impact women. Managed care potentially offers flexibility to allocate resources creatively, to develop new models of care, and offer enhanced benefits with lower out-of-pocket costs. However, challenges to realizing this potential under Medicare managed care with unique implications for older women include: possible gender bias in capitation payments, risk selection, inadequacy of risk adjustment models, benefit and market instability, and disenrollment patterns.     

Diagnostic risk adjustment for Medicaid: the disability payment system

This article describes a system of diagnostic categories that Medicaid programs can use for adjusting capitation payments to health plans that enroll people with disability. Medicaid claims from Colorado, Michigan, Missouri, New York, and Ohio are analyzed to demonstrate that the greater predictability of costs among people with disabilities makes risk adjustment more feasible than for a general population and more critical to creating health systems for people with disability. The application of our diagnostic categories to State claims data is described, including estimated effects on subsequent-year costs of various diagnoses. The challenges of implementing adjustment by diagnosis are explored.     

Risk adjustment of capitation payments to behavioral health care carve-outs: How well do existing methodologies account for psychiatric disability?

This study used 1994–1995 administrative data from a large public employer to examine the viability of commercial risk adjustment systems for setting capitation payments to competing behavioral health care “carve-outs”. The ability of Hierarchical Condition Categories and Adjusted Diagnostic Groups to predict psychiatric expenditures was improved by controlling separately for psychiatric disability. However, even the best models underpredicted expenditures of patients with psychiatric disability by 15%. Relative to full capitation, “mixed” payment systems and soft capitation reduce the ability of carve-outs to earn disproportionate profits by enrolling healthy patients and avoiding sick ones, yet also diminish incentives for cost containment. This revised version was published online in July 2006 with corrections to the Cover Date.     

Risk sharing between competing health plans and sponsors

In many countries, competing health plans receive capitation payments from a sponsor, whether government or a private employer. All capitation payment methods are far from perfect and have raised concerns about risk selection. Paying health plans partly on the basis of capitation and partly on the basis of actual costs ("risk sharing") reduces plans' incentives for selection but sacrifices some incentives for efficiency. This paper summarizes our empirical research on Dutch health plans with respect to various forms of risk sharing. All sponsors can improve their payment systems by either implementing or changing their form of risk sharing.     

Understanding capitation and at-risk contracting

New payment methods are driving the formation of integrated systems, but how do these payment plans really work? HSL researched capitation and other forms of at-risk contracting with primary care practices, specialty groups, and hospitals in both second and third generation managed care. Our story clarifies the complexities underlying capitation so leaders can identify the implications for their systems.     

Beyond capitation: how new payment experiments seek to find the 'sweet spot' in amount of risk providers and payers bear

A key issue in the decades-long struggle over US health care spending is how to distribute liability for expenses across all market participants, from insurers to providers. The rise and abandonment in the 1990s of capitation payments-lump-sum, per person payments to health care providers to provide all care for a specified individual or group-offers a stark example of how difficult it is for providers to assume meaningful financial responsibility for patient care. This article chronicles the expansion and decline of the capitation model in the 1990s. We offer lessons learned and assess the extent to which these lessons have been applied in the development of contemporary forms of provider cost sharing, particularly accountable care organizations, which in effect constitute a search for the "sweet spot," or appropriate place on a spectrum, between providers and payers with respect to the degree of risk they absorb.     

Medical group bankruptcies: an emerging problem

This article explores the reasons why medical group practices and independent practice associations are filing for bankruptcy with increasing frequency. The problem stems from capitation payments by managed care organizations that are not sufficient to cover the costs of providing necessary care. The result is the dislocation of patients who have to find a new provider and providers who have to find a new practice setting. This article suggests that if the managed care industry could adopt clinical risk adjustment as a mainstay of physician compensation, medical groups and IPAs would have a far better chance of managing patient risk more successfully under capitation.     

Many large medical groups will need to acquire new skills and tools to be ready for payment reform

Federal and state policy makers are now experimenting with programs that hold health systems accountable for delivering care under predetermined budgets to help control health care spending. To assess how well prepared medical groups are to participate in these arrangements, we surveyed twenty-one large, multispecialty groups. We evaluated their participation in risk contracts such as capitation and the degree of operational support associated with these arrangements. On average, about 25?percent of the surveyed groups' patient care revenue stemmed from global capitation contracts and 9?percent from partial capitation or shared risk contracts. Groups with a larger share of revenue from risk contracts were more likely than others to have salaried physicians, advanced data management capabilities, preferred relationships with efficient specialists, and formal programs to coordinate care for high-risk patients. Our findings suggest that medical groups that lack risk contracting experience may need to develop new competencies and infrastructure to successfully navigate federal payment reform programs, including information systems that track performance and support clinicians in delivering good care; physician-level reward systems that are aligned with organizational goals; sound physician leadership; and an organizational commitment to supporting performance improvement. The difficulty of implementing these changes in complex health care organizations should not be underestimated.     

Dialogue. Prescription for problems? Capitating mental health drugs--the great debate

With the issue of physician capitation far from being resolved, mental health drug capitation is understandably up for debate. Those who deem it essential point to the rising cost of mental health drugs and urge management techniques which they believe can hold the delicate balance between a plan's budgetary limitations and a patient's appropriate care. They suggest that with an objectively calculated capitation rate, based not on expenditure alone, but on a defined population and their care needs, providers will not have to choose between profitability and optimal care. But others, responding to increasing quality concerns under capitation, worry that the increasing use of formularies will preclude patients and their providers from ready access to newer, more effective medications. With advocates still striving for nationwide parity for mental health benefits, capitating medications is not likely to assuage their concerns. Driving the debate is the fact that new technology drugs are expensive and most health plans are unable to anticipate the funding of breakthrough pharmaceuticals. With the advent of marketing to consumers directly through television and print media, plans and providers are increasingly pressured to provide these medications. The recent clamor for Viagra is an excellent example of how quickly the word can spread. New mental health medications may be even more expensive and offer patients and their families greater effectiveness with far fewer side effects. Plans, providers, and patients are caught in the middle, each holding their distinct view of the problems and solutions. This issue's dialogue brings our readers a discussion of capitation of pharmaceuticals as a primary answer to the sharp rise in mental health drugs. Three points of view lay out the viability and cautions of developing formularies and systems that could keep costs under control while still providing patient access. Without question, the debate will continue as legislative and consumer pressure continues to focus on managed care's techniques for cost savings and patient management. More sophisticated systems, designed for increasingly integrated and complex treatment plans, are certain to be required in the future. However, decisions about how to develop practice guidelines and integrate formularies with expensive new pharmaceutical technology, must begin to take shape now.     

Physician Remuneration Methods for Family Physicians in Canada: Expected Outcomes and Lessons Learned

Canada is a leader in experimenting with alternative, non fee for service provider remuneration methods; all jurisdictions have implemented salaries and payment models that blend fee for service with salary or capitation components. A series of qualitative interviews were held with 27 stakeholders in the Canadian health care system to assess the reasons and expectations behind the implementation of these payment methods for family physicians, as well as the extent to which objectives have been achieved. Results indicate that the main reasons are a need to recruit and retain primary care physicians to rural and remote regions of the country, and the desire to increase collaboration, care continuity, prevention and health promotion. The general perception is that positive results have been observed, but problems are not alleviated. Blended payments have had some positive effects on preventive care delivery, collaboration, and care continuity. Salaries have provided a stable, predictable, and high source of income for physicians, thereby improving recruitment and retention. The implementation of salaries, however, led to concerns with declining physician productivity, and has brought to light a need for improved measurement and monitoring systems.