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Capitated Insurance Contracts: High Risk. Low Returns.

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Some medical providers receive payment for their services via capitated insurance contracts. Capitation is a risk-based payment system. Under a capitated insurance plan, the medical provider (physician, physical therapist, chiropractor, etc.) agrees to accept a predetermined dollar amount each month for each capitated insurance plan enrollee (the “Member”) that is assigned to the provider for medical care. The predetermined dollar amount is termed a “PMPM,” meaning “Per Member, Per Month.” The monthly capitation payment is calculated by multiplying the number of plan Members that are assigned to the medical provider by the PMPM amount. The provider’s monthly capitation check is independent of the Members’ utilization of the providers’ services. The PMPM is the same if every Member utilizes the provider’s services or if no Member utilizes them. Healthy patient populations are generally expected to result in low utilization, with the capitation payment going straight to the medical provider’s bottom line. High utilization is a different story.

The medical provider’s risk with capitated contracts lies in Member utilization of services. Capitation payments are not based on the medical provider’s costs of delivering care. Capitation plans are strikingly different from preferred provider organization (“PPO”) plans. PPO’s reimburse the medical provider on a fee-for-service basis. There is no inherent reimbursement risk. If service is performed, subject to obtaining any necessary authorizations and/or eligibility determinations, the medical provider receives payment. In contrast, per-visit provider reimbursement under the capitated contract is the monthly sum of capitation payments and Member copayments, divided by the number of Member visits in that month. A higher denominator (Member visits) results in lower reimbursement per visit. (Total Capitation Payments + Member Copayments) / (Member Visits).

The risk of capitation can be examined by an analogy using financial investments. Returns are generally lower where the invested principal is safe. Riskier investments offer higher yields. There is a risk-reward trade-off. With riskier investments, there could be a fantastic return, or there could be nothing, including a loss of invested principal. Because of the potential loss of principal, there is a “risk premium.” That is, investors seek higher compensation for the assumption of greater risk. But, is this true of capitated plans? In exchange for the risk assumed, does the capitated plan offer the medical provider the potential for greater reimbursement over “safer” insurance products such as a PPO? The medical provider’s risk is clear. A capitated insurance contract exposes the medical provider to excess costs beyond the capitated reimbursement and Member copayments. The potential for reward is less clear.

Determining whether to accept a capitated insurance contract requires the medical provider to make an informed decision. To determine if the capitated contract adequately compensates the medical provider for the risk assumed, the provider needs to have the information from the insurance carrier, such as historical utilization. Providers should also have a fundamental understanding of what constitutes a fair per-patient encounter reimbursement; the anticipated number of Members that will be assigned to the provider; and the anticipated PMPM and copayment amounts for the Members in the plan.