How Capitation Contracts Can Benefit Provider and Payer Population Health Initiatives

The COVID-19 pandemic exposed the vulnerabilities facing providers under health care’s fee-for-service (FFS) reimbursement model, which is predicated on patient volume. Office closings and emergency public health restrictions in the first half of 2020 triggered a sharp drop in revenue for private practices and hospitals, according to a recently published Health Affairs analysis.

To protect their revenue cycles from future major disruptions caused by natural disasters or public health emergencies, more provider organizations are embracing alternative payment models (APM) built around financial incentives to deliver high-quality care efficiently. Among those APMs is capitation, a reimbursement system in which provider organizations receive a fixed amount of money up-front to cover the predicted cost of all or some of the health care services for a specific patient over a set period. 

Capitation payment models are designed to support the goals of value-based care (VBC), which prioritizes improving individual and population outcomes while reducing health care costs. This makes capitation highly suitable for providers and payers within the context of managing population health.
For providers, capitation ensures a predictable revenue flow and improved administrative efficiency. Yet capitation also introduces risk to provider organizations through increased accountability for outcomes and controlling costs of care. The main benefits of global capitation contracts to payers are cost predictability (because they are paying a fixed amount) and lower administrative costs. 

Aligning Incentives 

Capitation isn’t new; its roots date back to the 1970s when Medicare began experimenting with capitation payments. Today, payers and providers are beginning to meld traditional global capitation contracts with greater coordination between primary and specialty care. 

The goal of these newer capitation models – which might cover primary care, behavioral health, or some types of specialty care – is to more closely align incentives between primary care providers and specialists for both individual patients and entire populations.

For example, patients who are polychronic (with multiple chronic conditions such as diabetes, heart disease, and COPD) would have their health managed under a capitation model by multiple physicians or perhaps a particular specialist who's dealing with the most severe disease. Eventually, the patients begin receiving more specialty care than primary care. 

The challenge with these value-based or fixed-price types of programs is that if specialty care isn’t coordinated (or harmonized) with primary care, providers can easily exceed cost containment or program goals by ordering unnecessary or duplicative services. Further, appropriate care may not be delivered to patients.

“Primary care physicians (PCPs) are less able to manage the health of polychronic members without very strong engagement from specialists,” HealthScape Advisors writes in a report on value transformation in specialty care. “Without strong specialist engagement and coordination, up to 90% of U.S. health care spend attributed to those with chronic and mental health conditions is not being effectively managed.”

HealthScape Advisors notes that payers “continue to struggle with empowering risk-bearing PCPs with the actionable data and information necessary to inform clinical interventions and optimize referral patterns to efficient specialists, particularly when those services are delivered outside of a singular system of care.” This inability to leverage data undermines population health initiatives by limiting visibility into actionable information.

Prioritizing Engagement

Fortunately, we’re starting to see the emergence of a blend of primary care and specialty components within these contracts, particularly with Medicare. The clinically oriented care coordination types of activities these contracts require will impact who participates in a network model and where primary care referrals to various specialists are directed.

The main concern for most patients covered under capitation models is their choice of provider. As providers migrate to more narrow networks and assume the risk for particular populations under a fixed payment model, they have a greater incentive to understand referral patterns and consumption of services and be more judicious about how they deploy resources.

To offset the loss of patient choice, providers and payers must deliver a superior consumer experience to patients/members to retain their business. Consequently, effective patient/member engagement and care coordination are increasingly critical to producing better clinical outcomes and predictable revenue streams. 

Though a major advantage of these global capitation models is the consistency of contracts,  provider organizations contracting across different lines of business – Medicare, Medicaid, commercial, and perhaps some employer-direct components – still face the necessity of managing the nuances of each program.

Preparing for Capitation

An administrative strategy for providers and payers to ensure the success of population health initiatives under a capitation program is to develop a more consistent view of the included services and guidelines. This can reduce the complexity of administering multiple programs across payer contracts. 

To fully support capitation reimbursement models in a population health context, provider and payer organizations must ensure: 

• Primary care and specialty care alignment
• A positive experience for patients/members that includes delivery of appropriate care based on quality measures associated with outcomes
• A digital infrastructure able to support a network of multiple stakeholders that may include hospitals and physician groups, payers, behavioral health providers, social service networks, and community-based organizations (CBOs)

Conclusion

Capitation contracts can benefit providers and payers in implementing effective population health initiatives. However, these payment models require thoughtful planning, careful alignment between PCPs and specialists, a commitment to optimizing the patient/member experience within a narrower network of providers, and a robust and scalable digital infrastructure.