Global Capitation: The Three Less-Obvious Vulnerabilities for Health Systems Considering Global Payments

I receive a fair number of emails and Linkedin messages from healthcare executives who are interested in global risk contracts and are looking for a some advice from the provider side. Here’s what I usually tell them: Global risk can be a very good thing for both patient care and for margins– but it’s a wildly complicated business and not without its perils for participating health providers.

Most executives understand the financial ramifications of taking responsibility for all their patient’s medical expenses.  That part is intuitive.  But, I usually tell folks that they also need to keep their eye on three less obvious vulnerabilities. I call them:

  1. The Levers Issue
  2. The Critical Mass issue
  3. Foot in Two Canoes Issue: Cap/FFS Unpredictability

I’ll talk about each of these.

First, by way of setting the stage, let me be sure to define global risk:  global capitation (as opposed to intermediate forms of risk-sharing such as pay-for-performance and bundled payments) is when provider groups take financial responsibility for ~all the healthcare services that an enrolled patient uses. Insurance companies give provider groups a monthly “bucket” of money from which all healthcare services, (even those delivered at outside organizations) must be paid.   These payments include internal costs, but can also include the charges for medications, hospitals, ambulances, skilled nursing facilities, cancer care, etc. delivered outside the organization… There may be contractual limits to the charges each patient can rack up and reinsurance limits, but these are often high.

The provider group has the opportunity to make a margin by eliminating waste and by being careful in deciding what and where care is delivered.   Providers can also be creative with wellness and chronic disease programs that avoid expensive downstream care which is really the goal of this financial model.   (I have a primer on accountable care here).

There are three less-obvious vulnerabilities for provider groups to be aware of:

1. The not-enough-levers issue

Many provider executives think that taking global risk somehow frees you from the insurance company – and to a degree that’s true.  The real problem is that global cap contracts only give a few of the levers health system executives need to fully control healthcare costs, while at the same time making them fully responsible for those costs.

4755061259_1211648d4f_zI’ve often said that health costs are driven by three variables: the volume of service; the location of service and the rate paid. If you’re going to be totally on the hook for the cost of a patient’t care, you’d like to be able to control each of these things.

In global capitation, health providers have the ability to control the volume of care, and by extension the appropriateness of care.

But they have a limited ability to determine where care is delivered. They manage the referral but usually a patient’s choice of provider is determined by the insurance network and will include nonaffiliated/ expensive “magnet” health providers unless the insurance company has a narrow or ultra-narrow network.  The risk-bearing group can’t draw a fence and determine the network- that’s the insurance company’s lever to pull.   Similarly, risk-bearing groups are generally on the hook for the rates negotiated by the insurance company with the outside provider groups.   Rate is another insurance company lever.

Being in the cockpit, able to use one of three available levers to fly the plane can be scary.  You need to have a lot of confidence in your insurance partner.  From the risk-bearing provider’s perspective, you need to know what happens when the insurance company and the fancy hospital down the street negotiate a significant rate increase.  It may easily hit your books, hard.

2. The Critical Mass issue

The secong issue is one of scale.  Global risk is an extremely expensive business, requiring great backend IT, analytics, decision support, case management, clinical pharmacy etc. as well as robust provisions for palliative care, behavioral health and the like.  A lot of these services require a high initial investment, but can then be scaled pretty successfully.  A robust population health infrastructure will save millions in downstream utilization, but organizations need to make the initial investment.

You have to not only justify the initiation fee— but also be confident that you will grow lives and ideally continue to amortize the investment over a larger and larger population of covered lives.  This is one reason why risk-bearing is driving consolidation in the US market.

3. A Foot in Two Canoes:  Cap/FFS Variability and Unpredictability is a Real Problem

Most capitated healthcare systems take some proportion of fee-for-service volume, which many systems look at as marginal incremental revenue.  It’s necessary, but FFS often doesn’t cover the cost of providing the costly population health and case management infrastructure that patients receive in a risk-bearing system.

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At the same time, most health systems have a hard time/ a principled aversion to discriminating fee-for-service patients from the capitated patients – and thus extend the full suite of population health services to all of their patients, taking a loss on the fee-for-service patients who often cost more than they bring in when costly population health overhead expenses are allocated on a per-patient basis.  This represents a de-facto subsidy to the insurance companies, since with FFS patients, it’s the insurance companies that hold the risk but benefit from the disciplined case management that the provider group is providing (at a loss).

If risk-bearing health systems had their way, most would likely prefer to take risk contracts, and then spread their population health costs equitably.  But, unfortunately, the market determines what patients are buying.

I think it’s a question of time before the US system migrates toward some version of greater risk bearing.  But the migration seems to be happening in fits and spurts and with significant amounts of variability- the trend seems undeniable, but is jagged.

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From the health system’s perspective, it’s very hard to make long-term investments in population health infrastructure with wild swings in the FFS/capitated revenue ratios. And, the markets seem very unpredictable as high-deductible plans and self-insured employer models begin to alter the landscape.

An example from one market: This is a graph from the Massachusetts Attorney General looking at healthcare cost trends in the Commonwealth.  The growth of both self-insured plans and PPO (read FFS) plans seems like a thing.   Every market nationally is likely seeing a different pattern of growth.

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Incidentally, the AG’s report makes a great point about what these market dynamics may mean for risk-bearing systems:

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The uncertainty is real.  There is pressure from regulators to drive toward risk, perhaps by migrating PPO programs toward alternative payment models, which have traditionally been HMO plans.

The takeaway, I think, is provider executives need to have a pretty good handle on 1) the high level trends as they pertain to the growth of risk vs. FFS products in local markets and 2) an understanding of the degree of volatility of FFS versus cap growth. It’s very hard to make intelligent decisions with regard to long-term investments in population health when the revenue base to support those investments varies significantly from year-to-year.

Photos: Jamin Gray and DieselDemon on Flikr, cc license