To capitate or nah, that is the question!

One look behind the curtain of organizations like ChenMed, Iora Health, and Oak Street Health and the signs of disruption in the way that healthcare is delivered permeate. To start, they don’t employ billing staff and every patient has a multi-disciplinary care team assigned to them. Appropriateness of care and waste are two concepts that can be cast across healthcare systems that are ripe for disruption. Our steady trend towards healthcare consuming 20% of U.S. GDP creates a necessity to act and the aforementioned organizations serve as testaments to that end. Healthcare Centers of Excellence (CoE) are not quite part of the mainstream lexicon but they are slowly shaping how employers, payers, and healthcare providers think about delivering services to their patients and employees.

Performance-based, prospective-payment reimbursement models (capitation) push healthcare players to take on risk and establish relationship-based approaches to care delivery. When this concept is addressed correctly, quality care at an affordable price becomes a natural by-product. And surprise, behavioral economics suggests that up-front payments with strings attached can have greater impact on behavior (appropriateness of care and waste) than retrospective adjustment of Fee-for-Service (FFS) payments. Incentives, baby!

Relationship-based healthcare puts a patient’s health literacy at the center of the patient experience as much as the clinical outcomes. When patients are engaged not only within the four walls of an organization but more importantly the 95% of time they spend outside of the organization, a rising tide lifts all boats. Multi-discipline teams increase medication adherence, care plan understanding, and the social interactions of patients during their activities of daily living. Further, relationship-based healthcare creates group consensus in the decision-making process for individual care protocols, a.k.a. appropriateness of care. 

HMOs of the 1990s, the Affordable Care Act (ACA) in 2010 to include Accountable Care Organizations (ACOs), and MACRA through the vehicle of Alternate Payment Models (APMs) circa 2015 have all been jockeying towards better care at a lower cost. While the concept of capitation is not new, the data are now at a scale and quality to bear out best practices for delivering capitated models in a durable fashion across many healthcare settings. However, when you drill down a couple of layers into these data lakes, it’s clear that not every healthcare delivery network is created equal. Physician-led APMs tend to provide quality care at a lower cost because of their ability to shop around for the best referrals, cheap diagnostic testing, etc. Hospital-based systems on the other hand tend to reduce their top-line revenues by providing patients options outside of their health system, especially when they are Clinically Integrated Networks (CINs). APMs have a tendency to be zero-sum games for hospital-based providers.

CMS’ program make-up highlights some of these structural challenges; over 70% of ACOs across the country are still operating in up-side risk only payment models and hospital-led ACOs make up the majority of ACOs nationwide. Upside-risk only models take on the benefits of a risk-based contract without the liability of over utilization or under-performance. In essence, not only do the majority of hospital-based systems reduce their top-line revenue by participating in ACOs and APMs, the incentive structures (risk-based models) are not properly aligned to create behavior change. One look at the fact sheet below provides very compelling context:

That being said, primary care is the foundation of a successful ACO. As such, hospital-based systems have been acquiring primary care groups at an unprecedented pace since the passage of the ACA. Given that most estimates peg about 75% of our healthcare spending on chronic conditions, primary care was a logical place to start disrupting care delivery models.

Research from McKinsey suggests there are several variables that interweave to create effective APM organization structures. The following are some of the high-level tenants:

  1. Density and scale
  2. Strategic leverage
  3. Skin in the game
  4. Focus on the forest rather than the trees
  5. Calibration of risks and rewards
  6. The right mix of incentives, motivation, and feasibility
  7. Accounting for consumer behavior

Outpatient healthcare providers are inherently afforded more autonomy and flexibility in creating networks of care extenders that create care plans down to the individual level. That extensibility is what allows community-based physicians to build competencies around the tenants that McKinsey and Co. suggests vs. hospital owned groups. To boot, behavioral economics in the form of prospect theory and loss aversion are subtly working against the adoption of these models within the hospital system space. I would be re-missed without acknowledging the work of some organizations that have made fully-capitated models in hospital-based systems a badge of honor. At the tip of the spear, Kaiser Permanente. There are very prominent institutions right behind Kaiser as well and these crowds are delivering healthcare the right way in one of the most complex systems know to man.

Getting a nudge from some of the larger employers in the United States certainly doesn’t hurt. Both GM and Wal-Mart know a thing or two about cutting out the middlemen that we touched on in our last post. As more large employers are beginning to contract directly with CoEs and push healthcare delivery networks towards full-capitation, CINs are looking towards the Kaiser’s of the world to understand how they’ve been able to effectively deliver fully capitated care. Show me the data!

With data now at a point where Metcalfe’s law can stratify capitation-based best practices across organizations interested in taking on risk, is it any wonder that organizations like United Healthcare now own the actual healthcare providers? If insurance companies core businesses can be completely cut-out of the equation, they have to reinvent where they fit into the supply chain.

Ultimately, critical mass is the key to capitation becoming the disruptor that our healthcare spending needs. By directly contracting with health systems, employer-sponsored health plans can let the gravity of their critical mass (155 million Americans) naturally wring out waste and use multi-disciplinary teams to evaluate the appropriateness of care through the vehicle of capitation.

Published by Miers Q.

This website is a testament to the importance of our healthcare system and the importance our choices have on that system. I have worked in the health information technology software space since hanging up my baseball cleats. Hopefully this information can offer some unique perspective in a notoriously ambiguous industry.

3 thoughts on “To capitate or nah, that is the question!

  1. Your arguments and observations make good sense and should help trigger a nationwide effort to find the most economical ways to deliver health care in this country. Unfortunately good common sense and adult supervision are not always on the same page, if our politics today are any indication. Keep on adding to a very important conversation about the health of healthcare in this country.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

John Kish Classic

In Memory of

%d bloggers like this: