UNDERSTANDING CAPITATION
by: Scott A. Edmonds, O.D., F.A.A.O.
THE EDMONDS GROUP
Philadelphia, PA
The American Health Care System is undergoing rapid change in the
1990's. For Doctors of Optometry, these changes will affect
access to patient populations, the delivery of care itself and
the reimbursement mechanism for services rendered. This article
will examine one of the major features of health care evolution,
that being a capitated reimbursement system.
Reimbursement for health care services has undergone an
evolutionary change that dates back to the turn of the century. (Figure 1) Just like all evolutionary
changes, it is not possible to move backwards to early stages of
development even if those stages seem more desirable when
evaluated retrospectively. The conditions in our society at the
time of any given reimbursement mechanism, can not be duplicated
so as to allow for this type of system to again be popular.
For a large portion of the beginning of the 1900's, health care
services were reimbursed with the first party system. This means
that as health care was delivered, the first party , being the
patient, paid for all health care services with their own
dollars. Health care providers could only charge fees that could
be afforded by individual patients. There is no health care
crisis in this form of reimbursement mechanism. Normal economic
forces and the laws of supply and demand, dictate the health care
market place. As our society moved into the 1900's, health care
improved dramatically. New drugs allowed for effective treatment
of many diseases. Surgical techniques evolved and became more
sophisticated. Hospitals underwent a dramatic change from a place
to seek sanction so that one may die with dignity, to a place
that one may get appropriate treatment, that did, in many cases,
lead to total cure and return to good health. These improvements
in health care, also resulted in a significant increase in the
cost of these services. As these costs moved beyond the reach of
the everyday citizen, health care insurance evolved as a way for
individuals to limit their risk of a catastrophic illness. The
actuary tables that are used to predict the premiums for life
insurance, could be modified and applied to catastrophic health
care issues which resulted in an effective major medical health
insurance product. This marked the initial move into a third
party reimbursement system. Such insured individuals that
suffered a catastrophic health problem could seek care on an as
needed basis and submit the cost of this treatment to a unrelated
third party, their insurance carrier.
At the same time in our country’s evolution, large employers
were seeking new ways to provide employee benefits that could
lower the cost of annual raises yet provide employees with a
value added benefit to their employment. Many large companies
elected to pay the catastrophic health insurance premiums for
their employees in an effort to achieve this goal. As time
passed, it became routine for employers to cover health care
benefits for their employees. The problem of employee benefits is
one that employers face on an annual basis or a contract renewal.
Each year an attempt is made to improve the employee benefit
package and thereby lessen the expense of salary increases.
Employees began to expect more from their health care coverage
than just catastrophic benefits. The logical next step was to
include routine health care services such as physical
examinations, dental care, and eye care as a covered benefit. It
was at this junction, that the current health care crisis of
America began to evolve. With the addition of routine health care
services, the ability of insurers to predict annual premiums
become less and less accurate. The predictions for the rate of
utilization of routine services in the uninsured population was
well below the actual experience of insured people seeking to use
their benefits. Health care providers, in this environment,
became comfortable with ordering extensive diagnostic work-ups
and special tests for patients who had this expanded health care
coverage. Each year the cost of providing these services for
health care insurers rose dramatically. Our whole society from
health care providers, hospitals, vendors, as well as patients
and consumers of health care took full advantage of the third
party system.
Faced with uncontrolled inflation, creative employers as well as
health insurers began to seek a solution to this problem. A study
of the health maintenance organization system which played a
minor role in employee health care benefits dating back to the
1920's, revealed the seeds of a solution to the problem.
Reimbursement for health care delivery based on the number of
members of a given population versus a separate fee for each
individual service rendered would indeed provide an answer to the
problem of annual inflation. In this type of system, the risk of
providing health care is shifted from the insurer or third party
onto the doctor or health care provider which represents the
second party. Pure capitation or other such mechanisms that move
the risk over to the provider or second party are becoming a
common thread in the proposed health care program for the 1990's.
To study this phenomenon more carefully, a detailed look at
capitation delivery systems with a special emphasis on eye care
is appropriate. The definition of capitation in it's purest form
is a payment for each member of a given population based on the
average expected health care utilization of all members of the
population. Similar to life insurance, the premiums paid by each
member of the population must provide the annual budget for all
health care delivered. Services must be rendered with this budget
in mind. In order for these programs to be successful, it is
important that the number of covered lives be very large. The
larger the number, the more predictable this process becomes with
a subsequent decrease in the overall risk. For most capitated eye
care programs, a number of 10,000 covered lives has been the
suggested break point. Below this there is sizable risk for
catastrophic events and above this enough premium dollars are
collected to balance this risk.
In order to be effective, the population service area must be
well defined so that all members of the population have
reasonable access to care. Developing such an eye care delivery
system models includes: developing broad based networks of
providers with an emphasis on primary care while centralizing
inpatient care facilities, tertiary providers, and high tech
diagnostic and treatment facilities.
When studying a population for capitation considerations, there
are many risk factors of the population which will dictate
utilization. Most common upon these factors is age. A population
that is weighted with excess numbers of seniors (above age 65)
will be expected to utilize more health care services than a
population weighted to employed people often known as
"commercial" populations with most members between the
ages of 21 and 65. Other risk factors include: race, sex, type of
employment, and geographical location.
Providers who deliver health care in a system of capitated
reimbursement learn new philosophies of care that are quite
different from the philosophies that would naturally involve in a
fee for service system. When contrasting these systems, it is
enlightening as well as disturbing to see just where the
financial incentives lie in the traditional fee for service
system. With a capitation system, health care provider has a
financial incentive to keep all members of the population
healthy. Emphasis quickly shifts to preventative care as well as
health maintenance to lower the risk of catastrophic yet
preventative health care problems. When evaluating treatment
options, the philosophy is again quite different. There is a
shift away from high tech and high risk procedures that yield
only academic or conceptual success with little chance of
functional improvement. An example of this would be a cataract
extraction with intra-ocular lens implantation on a densely
amblyopic eye.
The calculations for capitation eye care systems are actually
quite straightforward. It is however in the accuracy of the
actuary tables as well as a proper assessment of the population
that makes the assessment difficult. It is also difficult to
judge the success of a capitated program over a short period of
time. It is only retrospectively over a minimum of one year that
the success or failure of the program could be properly analyzed.
Eye care is one particular area of health care that is indeed
cyclic as well as seasonal in its utilization analysis.
(1) Total Encounters/Member/Year X
(2) Eye Encounter Rate/Member/Year X%
(3) Encounter Factor (1)x(2)
Eye Care Splits: Payment Rates: Cost Factor:
Routine X% Y XY
P.O.C. X% Y XY
A.M.C. X% Y XY
Surgical X% Y XY
(4)TOTAL COST FACTOR: SUM=Z
Total Cost Factor (4)
X (3) Encounter Factor (3)x(4)
(5) Clinical Factor (5)
(6)Administrative Factor X%
(7)Total Bid Member/Year (5)x(6)
Total Bid Member/Month (7)/12
In evaluating capitated programs, it must be carefully considered
the scope of the services in question. There are five basic
programs for eye care services although some programs may
represent a mixture or be more difficult to define. The programs
are as follows:
A. Eyeglass only
B. Eyeglass and eye exam
C. Eyeglass, eye exam, and primary eye care
D. Full service optometry/ophthalmology
E. Full service optometry/ophthalmology and eyeglasses
Evaluating each of these systems several factors
must be kept in mind. For an eyeglass only program, capitation
can be quite dangerous. Utilization is difficult to predict in
these programs but is generally quite high. Additionally the
acquisition cost of materials becomes critical as well as the
patient's options for frames and lens upgrades.
The eyeglass and eye exam programs also known as traditional
vision care programs, are the most common programs available
today. Unfortunately, due to the relative ease of administrating
these programs the market is very competitive. The buyer of these
types of plans do not seem to note a significant difference in
the quality of one network versus another and the decision is
often made on price alone. This trend has driven the
reimbursement for participation in these programs below the level
that most independent practitioners can survive. A new variation
on this traditional plan is a program that includes primary care
or optometric therapeutic services, with these programs, medical
eye care has not actually been carved from the master contract
and the reimbursement for optometric treatment for primary eye
disease, is actually a duplication of coverage. The patient can
choose between receiving these services from their optometrist
and being reimbursed under the vision program or by seeing an
ophthalmologist and being reimbursed under the major medical
portion of their coverage. With this duplication of coverage,
these programs are not particularly cost effective and represent
more of an evolutionary step towards a full eye care carve out
plan.
The comprehensive eye care program that integrates optometry and
ophthalmology services is often known as a "carve out". (Figure 2) This terminology stems from the
fact that all eye care services are actually removed or carved
out from the master contract and administrated by an eye care
delivery system. These programs traditionally do not cover any
type of hardware benefit for eyeglasses or contact lenses but
include a routine eye examination. This progressive form of eye
care delivery, is growing in popularity in the 1990's. In order
to be successful however it does require an integrated
optometry/ophthalmology delivery system that is often organized
on a regional basis. These Regional Eye Care Delivery Systems or
REDS are currently forming in many parts of the country. Both
Optometrists and Ophthalmologists have launched independent
efforts to organize provider panels. These un-integrated programs
have battled over fee-for-service contracts and have lowered the
final reimbursement to unrealistic levels in many parts of the
country. Recently, there has been an effort to join these
regional efforts into Integrated Networks and work together on a
capitated or accountable carve out basis. There is also a
national effort in attempting to coordinate these delivery
systems to bid on multi-state or national contracts. The
structure of these programs links the Integrated Optometry
Ophthalmology Network to a national Management Company or Medical
Service Organization (MSO) through a contractual relationship.
This two tiered eye care delivery system (Figure
3) creates a very efficient program with the Doctors
supervising the quality and accountability and the MSO focusing
on sales and data management. Since medical surgical eye care is
a primary feature in these programs, quality of care again
becomes an issue. Competition for these programs is based more on
the integrity of the network than on price.
The last and final type of eye care delivery system is
comprehensive to include all optometry and ophthalmology services
as well as the hardware of eyeglasses and contact lenses.
Although these programs are still in development due to the
difficulty of administration, it is indeed where the REDS concept
is heading. The risk in these models, is that all eye services
provided by both optometry and ophthalmology as well as the
related supplies are included in the package. Although this
program may be desirable for buyers, the ophthalmic community may
need more time to evaluate the service only capitation systems
before moving to this type of progressive model.
In conclusion, there are many factors that affect the success or
failure of a capitated program. The following represent a few
tips in organizing eye care delivery systems to gear up for this
new market.
1. Capitated delivery systems depend heavily on aggressive
primary care.
The more expanded the scope of the optometric practitioner, the
more efficient the delivery system can become and therefore the
more successful.
2. It is absolutely necessary to develop an integrated delivery
system including both optometry and ophthalmology. Attempts by
optometry to develop optometry driven programs with limited
ophthalmology involvement as well attempts by ophthalmology to
develop ophthalmology led programs with minimal optometric
involvement are doomed for failure. The ability to contract
facility piece of total eye care is also important.
3. For providers who organize these types of delivery systems, is
necessary to have an experienced management team involved in
developing the program. This can be done by hiring appropriate
management staff or by working with a consulting group but the
role of these professionals can not be understated.
4. Integrated delivery systems must have an aggressive sales
force. With the traditional mind set of the industry considering
ophthalmology services as part of medical care and optometry
services as a vision eye glass plan must be countered with a well
trained sales force.
5. With the merging of many insurance companies, hospitals, and
managed care organizations, it is important to have multi-state
coverage to do large contracting. As large contracts are the key
to capitated programs, delivery systems must consider the
multi-state aspect.
6. These delivery systems, to be successful must have grassroots
involvement by the providers in each region. This means
optometrists and ophthalmologists must take an active role in
organizing and working with the delivery systems rather than
focusing on their individual practices. This is indeed a shift in
the paradigm for most eye doctors but one that is critical
towards success in the evolving eye care market.