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Capitation Revisited

by Scott MacStravic

In yet another example of the “solution” to the “healthcare cost crisis”, Blue Cross/Blue Shield of Massachusetts, the state’s dominant insurer, has proposed a return to the now mainly defunct system of “capitation” payment. They would pay both hospitals and physicians a flat sum per year per patient, adjusting that payment for age and sickness, and including a bonus if providers show improvements in their care. [A. Dembner “New Therapy for Old Woes” Boston Globe Jan 22, 2008]

The intent is that this annual payment would cover all care rendered to the patient, by all physicians and hospitals involved, forcing them to work together to coordinate such care. Such payment is also intended to “empower” providers to deliver the right care, says Andrew Dreyfus, Executive VP for healthcare services. He indicated that it is aimed at achieving a spending level that is affordable, and less than payers are paying in the current system.

One of the impacts BC/BS expects is that care for patients will become more accessible, since it will make financial sense for providers to diagnose and treat patients ASAP, rather than make them wait, during which time their conditions could become worse and more expensive. While providers and patient advocates praise the idea, they are clearly worried about the details. One of the major impacts should be that patients on discharge from hospitals will be given close supervision, rather than left to fend for themselves, for example, in order to avoid relapses.

Such continuous care would surely be better for patients, as well as for the hospitals and physicians who would have to provide added avoidable services with no added payment. Home visits could be arranged for homebound patients, for example, to keep their condition from worsening, or prevent avoidable complications and crises. Chronic conditions in general would be managed, rather than left to worsen on their own.

While the old capitation payment schemes were excoriated for promoting under-treatment of patients and underpayment of providers, as examples of managing costs at the expense of care. But BC/BS insists that safeguards will be put in place to prevent these problems, including oversight of providers’ quality with the threat of cutting them out of the provider network if their performance fails to meet quality standards.

The major concerns among physicians and hospitals are bound to include how capitation payments will be shared among them, one of the “details” that represent where the “devil” may reside. As are most individuals and organizations, providers tend to worry about being held accountable over elements of care over which they exercise little or no control, in reality, or at least as they see it. This includes reasons for the need for services over which patients, themselves, exert the most control, through lifestyle behaviors and compliance with treatment or preventive regimens, as well as services provided by others.

Perhaps the greatest impact of such a payment system would arise if other payers adopted it. But on the other hand, it may be an example, such as the Massachusetts “experiment” with universal health insurance, that would be better limited to this one payer, at least until there is sufficient experience with it to determine what are its positive and negative consequences. Such experience could enable BC/BS of Massachusetts, as well as other payers in that state and elsewhere, to learn from its successes and failures, rather than repeat them.

Clearly any solution to the healthcare cost crisis must include both promotion of and adequate, perhaps competitively better payment for maintaining patients’ health in the first place, keeping the healthy from becoming at risk, the at-risk from contracting acute or chronic disease, in addition to those with chronic disease suffering crises, complications, and worsening thereof. This will mean that payers such as BC/BS of Massachusetts will have to develop or purchase predictive modeling systems that will yield accurate and credible predictions of what patients’ health, need, demand and use of sickness care will be without intervention, as the basis for appropriate risk-based payment, not merely sickness based adjustments.

If payments are structured to be greater than normal only once patients contract chronic diseases for example, it will become in the perverse financial interests of providers to let patients contract them, in order to obtain higher payment for managing them. By contrast, if payment for preventing and managing patients risks of future disease and injury, it will appropriately be in providers’ financial interests to keep such risks from arising in the first place, or from becoming conditions requiring expensive interventions.

This has always been a stumbling block for payers, since paying for the control of risks whose preventable effects are years in the future on average means that the patients concerned may be covered by somebody else by the time they become diseases or injuries. In such cases, it is in the financial interests of the payers to focus only on short-term risks, not on longer-term ones, and certainly not on those where the risks, themselves, are to be prevented through health promotion and risk prevention.

Since only one payer is involved in Massachusetts, this may result in the adoption of a short-term focus, while leaving long-term risks alone, hoping other payers will be responsible by the time such risks turn into sickness care needs. Only where the “fallacy of composition” would mean that if all payers adopted such a policy, all payers would suffer – in other words, in one where all share equally in the eventual damage that preventable and manageable risks can do, will all payers have the financial interest in total health management, rather than dealing only with sickness that already exists. And only significant reduction in the incidence and prevalence of disease and injury in the first place is a true solution to the healthcare crisis likely to be found.


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