Data Mine: Avoid the 'dead zone' of global payment

There are few truly new ideas or concepts. Whether we quote the Bible’s “Nothing new under the sun”1 or Yogi Berra’s “It’s déjà vu all over again,” it is important to remember lessons of the past.

Take, for example, aspects of the Patient Protection and Affordable Care Act of 2010 (ACA) that describe how financial incentives can change healthcare delivery and outline how physicians and hospitals can create accountable care organizations (ACOs).

The ACA outlines a shared savings program in which the Centers for Medicare & Medicaid Services (CMS) splits savings with ACOs that meet specified quality goals. At the same time, some commercial insurers have initiated global payment contracts that cover entire populations on a per-beneficiary, per-month (PMPM) payment, with bonuses for quality and patient satisfaction scores. Sound familiar?

Capitation revisited

While some group practice leaders believed that capitation died at the end of the 20th century, it is alive and well in the form of global payment. As a result, it is important to understand the financial implications of capitation when considering ACO pathways.

A first step is to examine the performance of medical groups in the late 1990s. MGMA’s Cost Survey: 1997 Report Based on 1996 Data provides historical information detailing what happens to medical groups in a health system dominated by capitation.

In the report, 68.3% of multispecialty groups reported capitation revenue compared to 31% of cardiology groups and 39% of orthopedic surgery groups.

The chart and graph below illustrate the financial performance of physician-owned multispecialty groups with no capitation and at increased levels of capitation. The best financial performance occurred in practices with no capitation or with a lot of capitation, while groups with small levels of capitation experienced low revenue, high cost and minimal profit — a dead zone.





Oceanographers describe areas of the oceans with low oxygen as dead zones since aquatic life in these areas struggle to survive. In 1996, medical groups with low levels of capitation were in a similar situation. Activities that would maximize fee-for-service income cut into the profit from capitation contracts, while the reverse occurred when groups attempted to manage utilization. Additionally, they had to manage different information systems — one to collect from fee-for-service patients and another to measure utilization and resource use by patients insured through capitation contracts.

The chart summarizes the financial performance. Medical groups with no capitation reported the highest level of total physician compensation and benefits (the “true” bottom line for physician-owned medical groups since virtually all excess revenue over expenses is income to doctors and shareholders). Practices that traced more than 51% of their revenue to capitation were not far behind, but groups with 11% to 50% capitation had the worst performance. Expenses were about the same for groups with no capitation, but they had the lowest revenue, which can be attributed to the fact that providers behaved as if groups were fully capitated although the majority of revenue came from fee-for-service contracts.

Is this a lesson for medical groups considering global payment contracts? In the words of Edmund Burke, a British statesman and philosopher, “Those who don’t know history are destined to repeat it.”

Substantial changes will occur when medical groups are paid on a per-member basis. The best course of action may be to avoid these types of contracts or completely embrace the new payment system. Judging from history, anything in between those two courses of action could place you in a dead zone.

Note:

1. Ecclesiastes 1:9, “What has been will be again; what has been done will be done again; there is nothing new under the sun.”