Making Money from Capitated Plans
Introduction
As a practice management software and service vendor, PCC has helped many offices analyze and negotiate capitated insurance contracts. Although the management of Primary Care practices has changed considerably over the last few years, many offices have felt the considerable stress and strain of capitation.
Even though computer systems like Partner have made it easier to evaluate utilization statistics, too frequently, we notice that our clients enter into insurance contracts - especially capitated contracts - without fully understanding how the plan will affect their practices and their cash flows. This document is designed to shed some light on the subject of capitated contracts and provide a straightforward method for evaluating proposed capitation rates in a Primary Care office.
We will begin with a brief introduction to managed care and capitated insurance companies. We will then demonstrate how to evaluate a capitated offer, including providing a worksheet for you to complete. We then encourage you to examine PCC's other managed care discussions.
Capitated Plans and Sharing Risk
Welcome to the insurance business! Whether you realized it or not, by participating in a capitated plan, you now accept some, if not most, of the risk associated with your patients covered under this plan. The reasoning is simple: you will be paid the same amount of money each month, no matter how often a covered patient visits your practice. In other words, you receive a (small) portion of each patient's monthly premium. In return for the payment, you are not only expected to provide your standard medical care for that patient, but you must also provide guidance and education about the insurance plan, continue to collect the many and confusing outstanding insurance balances, and act as a "gate keeper," deciding when the patient will need a referral to see other medical specialists.
Before you even consider signing that contract, find out how the plan is going to change your practice. Not only will your cash flow be affected, but the manner in which you practice medicine will change too! PCC offers a variety of seminars and documents describing what you might expect and how to change your behavior.
Evaluating Capitation Rates
So, the package arrives in the mail. Twenty pages of legalese with a few numbers tossed in for good measure. Where do you begin? Start with the capitation rates themselves. Here's a sample:
| Age Range | Monthly Capitation |
| Under 1 Year | $18.00 |
| 1-2 Years | $12.00 |
| 3-5 Years | $8.25 |
| 6-12 Years | $4.25 |
| 13-18 Years | $3.17 |
| 19-34 Years | $1.50 |
| 35-50 Years | $1.75 |
| 51-65 Years | $ 2.55 |
| 66-85 Years | $6.80 |
| 85 and Older | $18.21 |
Let's pretend that this contract covers everything, including all procedures (office visits, immunizations, lab visits, etc), and there is no withholding.
Are the rates above reasonable? If you accept them, does your practice stand a chance of even breaking even? To answer these questions, you must complete two tasks: first, an analysis of what it costs for your practice to do business. Second, you need to compare the offered numbers by the insurance to the costs you actually generate in your practice.
Practice Cost Analysis
Unfortunately, many practices attempt to determine proper capitation rates while skipping what is perhaps the most important step: Practice Cost Analysis. It is impossible to determine what your capitation rates (or even your fee-for-service rates) should be without an understanding of what it costs you just to keep your doors open. In theory, the payment side capitation works under the premise that, by spreading the risk of caring for patients across your entire patient population, you will make reimbursement easier and more efficient. In order to make the reimbursment rates accurate, however, and spread the costs among all the clients, one know how much those visits cost.
Begin by taking a close look at your Income and Expense statement provided by your accountant or bookkeeper (if you are unfamiliar with an Income and Expense statement, stop reading now and go learn about it ASAP!).
If your practice is not set up as a corporation, make sure that the doctors' salaries are included in these figures. In the "good old days," many doctors simply kept whatever money was left over as the owners of the business. In a capitated model, however, there is no money "left over" - both by design and in reality! Further, do not forget to adjust the Expense side of your statement appropriately either. Because your capitation rates are for the future, not the past, you need to reflect future expenses as well: expected raises, office and staff expansion needs, computer upgrades (!), etc.
Simple Income and Expense Statement | |
 | |
INCOME | |
| |
| Main Office | $1,000,000 |
| Satellite Office | 500,000 |
| Other Revenue | 100,000 |
| |
| Total Revenue | $1,600,000 |
| |
EXPENSES | |
| |
| Wages - Doctors | $750,000 |
| Wages - Nurses | 180,000 |
| Wages - Office Manager | 45,000 |
| Wages - Billing Staff | 90,000 |
| Wages - Receptionists | 90,000 |
| Office Rent | 60,000 |
| Office Supplies | 20,000 |
| Medical Supplies | 20,000 |
| Immunizations | 100,000 |
| Insurance | 40,000 |
| Computer System | 15,000 |
| Office Leases (Furniture, Lab Equip) | 90,000 |
| |
| Total Expenses | $1,500,000 |
| |
NET PROFIT/LOSS |
$100,000 |
Of course, your numbers will likely be very different and not nearly so tidy! They should, however, provide you with the detail necessary to move to the next step.
Comparing Your Numbers
The next step in this analysis is to look at the utilization figures generated by practice. Begin by determining how many patients you see actually see in your practice each year. As a PCC client, your best bet is to use the activity or hmo reports from Partner. Using a computer system should allow you to determine extremely accurate figures.
For the purpose of our analysis, let us say that the practice above sees 30,000 patients visits a year.
Once you determine the total cost to run the practice and an estimate of the number of visits you see in a year, you can quickly determine the average cost to the practice for each patient visit. Simply divide the total cost of running the practice by the number of patient visits:
| Total Cost of Running the Practice | = | $1,500,000 | = | $50 per visit |
| Number of Patient Visits | 30,000 |
Remember: even when you use the computer and have a good accountant, these are moving targets! You want to project your expenses for the next year properly and make an accurate guess as to your patient volume. If you think your volume is going to change or if you are going to have additional expenses, make sure to include those in your estimates.
Once you have determined your cost-per-visit, calculating the appropriate capitation rates is a simple matter. Multiply the cost of the visits by the number of expected visits for the time frame you wish to analyze. The difficult part, of course, is determining how often patients in different age groups visit your practice. PCC clients are fortunate enough to be able to run hmo, which can provide exactly this data.
Here is a sample:
| ----------------------------------------------------- | |||||||
| RATIO of VISITS to MEMBERS for 9/1/98 to 8/31/99 | |||||||
| ----------------------------------------------------- | |||||||
| |||||||
| Provider | O | P | S | F | M | D | TOTAL |
| ----------------------------------------------------- | |||||||
| Under 1 | - | - | 22.67 | 10.50 | 12.73 | 13.56 | 14.56 |
| 1 - 2 Years | - | - | 3.08 | 3.94 | 5.02 | 5.27 | 4.95 |
| 3 - 5 Years | 0.09 | 0.12 | 1.18 | 1.84 | 2.05 | 2.34 | 2.10 |
| 6 - 12 Years | 0.03 | 0.01 | 1.47 | 1.50 | 1.15 | 1.43 | 1.45 |
| 13 - 18 Years | 0.50 | 0.90 | 1.50 | 1.55 | 1.60 | 1.32 | 1.57 |
| 19 - 34 Years | 1.07 | 1.25 | 2.25 | 0.95 | 0.65 | 0.75 | 1.65 |
| 35 - 50 Years | 1.10 | 1.47 | 2.56 | 0.80 | 0.50 | 0.20 | 1.85 |
| 51 - 65 Years | 2.05 | 3.47 | 1.05 | 0.15 | 0.47 | 0.20 | 2.56 |
| 66 - 85 Years | 2.61 | 3.57 | 2.04 | 0.01 | 0.32 | 0.25 | 3.01 |
| 86+ Years | 5.25 | 7.34 | 7.10 | - | - | - | 7.01 |
| ----------------------------------------------------- | |||||||
| TOTAL | 5.07 | ||||||
As you can see in this breakdown, the computer has calculated the average visit rates for a year's time for this practice. (Important Note: when performing capitation analysis, use at least one year of data, when possible. Increasing your sample size allows you to adjust for seasonal changes, etc. Ironically, don't use data that is too old, either - using visit data for when your practice was entirely fee-for-service will mislead you too.)
In the example above, if we wish to determine what the monthly capitation rate should be for 6-12 year olds, we multiply the cost of the visits ($50) by the number of expected visits for the given time frame (1.45/12), like this:
| (Cost Per Visit * Expected Annual Visits For 6-12 Year Olds) | = | ($50 x 1.45) | = | $6.04 per month |
| Months Per Year | 12 |
This calculation should be performed for each age group, as necessary. We have included a handy worksheet for this purpose at the end of this article.
First Important Note: Don't forget that most capitated plans are weeks or months behind when updating their enrollment lists, especially for newborns. Presume that some number of patients for whom you should be paid will not be counted properly. While the actual rate at which this paperwork problem persists - from .1% to 10% - varies from locale to locale and insurance company to insurance company, it is something to consider. A crucial part of success with a capitated plan is to ensure that you are paid for all patients who list you as their primary provider, even those you have not seen.
Second Important Note: Make sure to use at least two digits of significance (i.e., numbers to the right of the decimal point) when performing these calculations and never round against yourself. A few simple exercises will show you that being off by even the smallest fractions - 1/10 of a visit or $.25 - can cost you thousands of dollars.
In many instances these exercises will quickly show you that the rates offered by an insurance company will not cover your costs, and your negotiations can end there. For some practices, though, the calculations may need to continue, so we'll examine the additional factors in this equation.
Additional Factors
Gender
In many areas, capitation rates may also be broken down by the gender of the patient to reflect the different gender usage patterns (such as OB/GYN coverage, etc.). If so, simply perform the same calculations as above, but determine what the average visit rate is per age group, per gender. While this constitutes additional work on your part, significant differences in your visit rates or potential capitation rates need to be confirmed.
Copays
As you know, part of the fun of working with capitated plans is figuring out how much money each patient should pay you at the Time of Service. In Primary Care practices, collecting copays is critical because copays represent a significantly larger portion of a standard visit's charges than in other specialities.
In theory, copays represent small barriers to health care access for the patients. By charging patients $5 or $10 for each visit, insurance companies figure, patients will be more likely to visit you only when they need to. Of course, the insurance companies also figure that this additional $5 or $10 should be counted against the total money you should expect to receive for your services.
Calculating the expected capitation rate for different copay rates is not very difficult, fortunately. Because we already know the expected cost-per-visit, we simply have to subtract the expected copay from the cost-per-visit before we calculate the monthly rate. Please note: unless your office collects every single penny from your patients, you may wish to adjust the expected copay based on your collection rates. For example, if you normally collect about 95% of your personal balances, you may wish to lower the expected copay rate by 5%. While the insurance companies will not take responsibility for patient balances, do not forget that capitation is a completely different payment model from fee-for-service billing; if you do not build some understanding of what your collection rate is into your projections, you could have trouble.
For example, let's say the company above is a $10 copay plan and you collect 95% of the money owed to you. For the 51-65 age group, our calculation would be as follows:
| ((Cost Per Visit - (Collection Rate * Copay))* Expected Visits Per Year) | = |
| Months Per Year |
| (($50 - (95% * $10)) * 2.56) | = | $8.64 per month |
| 12 |
Important: Do not forget to determine what the visit rates are for each insurance company, broken down by copay! Data from PCC's Partner programs will quickly show that patients on lower copay plans utilize your services more often, so don't lump them in with everyone.
Carveouts
Many capitated plans offer "carve outs," or procedures that are covered on a fee-for-service basis in addition to the monthly capitation rate. For example, in many Pediatric offices, capitated plans will pay "extra" for immunizations - some will cover the cost of the entire shot, some will cover just a portion. How should you factor in such carve outs? There are two ways to do it, but unfortunately, the two methods differ in both accuracy and philosophy.
The Simple Carveout Method
The simpler method presumes that there is an equal distribution of carved-out procedures among your patients. For example, you might receive additional reimbursement for weekend or after-hours appointments. In this instance, simply calculate the total expected amount of carve-out payments and distribute those payments equally among all visits by subtracting an equal amount from each expected visit, just like a copay. To calculate this figure, use your computer system to add up all the expected carved out procedures and divide it by the number of expected visits. Don't forget: it is not as if the insurance companies do a better job paying you for carveouts than they do with regular fee-for-service charges. You certainly need to factor in a collection rate with these figures, and your collection rate for insurance charges may be different from your personal collection rate.
For the practice above, with 30,000 patient visits, Partner users might find something like this by using the new Insurance Reimbursment Module ira2:
| INSURANCE
COMPANY REIMBURSEMENT REPORT: Summary Report | ||
| ||
| From: 01/01/99 To: 09/20/99 | Generated On: 9/20/99 | |
| ||
| Procedure Group | # Chgs | Tot Charged |
| -------------------------------- | ------- | ------------ |
| Hospital | 500 | $xxxxxx.00 |
| Immunizations | 1000 | $xxxxxx.00 |
| Labs | 1200 | $xxxxxx.00 |
| -------------------------------- | ------- | ------------ |
| GRAND TOTAL | 26690 | $xxxxxx.00 |
Let's say that the insurance company reimburses $25 for each Hospital visit, $10 for each Immunization, and $6.25 for each Lab procedure. Using the counts above, this calculates to an additional $30,000 of expected carve-out payments over the course of a year, or an average of $1 per visit (note that what you would have charged on a fee-for-service basis is not important here). By subtracting this additional dollar, we come up with a new result for those 51-65 year olds:
| ((Cost Per Visit - (Collection Rate * Copay) - (Collection Rate * Expected Carveout/Visit)) * Expected Visits Per Year) | = |
| Months Per Year |
| (($50 -(95% * $10) -(90% * $1)) * 2.56) | = | $8.45 per month |
| 12 |
Don't forget to perform these breakdowns on a copay-by-copay basis, as Partner users will discover that different copay levels utilize your services differently. Low copay plans ($0-$15) will visit your practice more often.
Please note that while this method is not completely accurate (as you will see below), it is accurate enough to give you a rough estimate of expected reimbursement.
The complex carveout method differs in one important philosophy: it assumes that the distribution of carveouts does not happen equally among the different age/gender categories. For example, only children typically receive immunizations or women have OB/Gyn Lab results. As a result, the goal is to analyze usage by age and gender category and determine what the expected carveout is for each of them. With your Partner system, it is easy to determine the expected visits and expected carveout procedures for a given age/gender category. Once you have determined the new, by-age/gender group expected carveout, you simply calculate the capitation rate as above.
Please remember that you may find yourself "making" money on one age/gender group and not another. This is not abnormal nor even inappropriate. As we'll discuss below, you must examine the entire plan to determine its value to you.
Extra Work
Last, but not least, do not forget to factor in a "difficulty" rating for working with a capitated plan. As any of you who have worked with capitated plans know, the amount of work required to collect your money often increases, meaning that your cost of doing business for that plan is actually greater. As anyone who has ever gone line-by-line through a member list knows, capitated plans include all kinds of neat "benefits" you may not have considered.
Once you have completed the calculations above (using the handy worksheet!), we have to step back and examine the entire plan and its reimbursment scheme. Why? Neither looking at the capitation rates by themselves, examining just one age group, or comparing the carveouts to your fee-for-service charges will not tell the entire story. Some companies may reimburse you very well on a carveout basis, while others may simply have higher capitation rates. Some companies may have slightly lower capitation rates for newborns and higher rates for teenagers.
To determine whether or not the insurance company is being fair, you have to plug their numbers into your model, working backwards.
In other words, for each age group, you must calculate your total number of expected visits and multiply by your calculated capitation rates. Add these dollar figures together to learn what your total capitation payments should be. Do the same thing a second time, but substitute your rates for their proposed rates. Compare the results!
Below, please find a worksheet for your use!
| Capitation Worksheet |
| Date:_______________________________ |
| Insurance Company:_____________________________________ Copay:____________ |
| Calculate your
Cost-per-Visit | |
| Total Annual Cost of Running the Practice | (A) |
| Annual Number of Patient Visits | (B) |
| Annual Carveout Reimbursment | (C) |
| Average Cost Per Patient Visit (A/B) | (D) |
| Average Carveout Per Visit (C/D) | (E) |
| Compare
Proposed Reimbursement Rates | ||||||
| Cost-Per- Visit (D) |
Expected Copay (F) |
Expected Carveout (G) |
Visits Per Year (H) |
Proposed Capitation | Proper Capitation (D-F-G)*H/12 | |
| Under 1 (SAMPLE) |
$50 | $9.50 | $9 | 14.56 | $26.50 | $38.22 |
