Capitation

1. Capitation

2. 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.

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

4. Definition of a Stop Loss • Specific Stop Loss • Severity of claims • Aggregate Stop Loss • Frequency of claims

5. 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

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

7. 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

8. 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

9. Other Factors Affecting Healthcare Utilization • Age • 0-17 yrs. has lowest utilization • Utilization increases for 18-34 yrs. • Utilization decreases for 35-44 yrs. • Utilization rapidly increases for 44+ yrs.

10. 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.)

11. Causes of Financial Risk in Capitation • Law of Large Numbers • Increased risk with smaller groups

12. Effects of Capitation • Gatekeeper • Transfer of Risk • Payer to provider • Utilization Ground Rules • Specialty Referrals • Reverse Capitation

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

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

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

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

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

18. Average Benefit Payments

19. Average Benefit Payments • Total benefit payments usually account for approximately 70-90% of the premium

20. 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

21. 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

22. 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.

23. 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%

24. 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

25. 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

26. 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

27. 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

28. 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?

29. 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

30. 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?

31. Liability and Compliance Issues

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

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

34. 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