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 how 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 ripe for disruption. Our steady trend towards healthcare consuming 20% of the U.S. GDP creates a necessity to act, and the organizations above 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.

Incentives, baby! Performance-based, prospective-payment reimbursement models (capitation) push healthcare players to take risks 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 a greater impact on behavior (appropriateness of care and waste) than retrospective adjustment of Fee-for-Service (FFS) payments.capitation) push healthcare players to take risks 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 significantly impact behavior (appropriateness of care and waste) morethan 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 the time they spend outside the organization, a rising tide lifts all boats. Multi-discipline teams increase medication adherence, care plan understanding, and patients’ social interactions 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 capitation is not new, the data are now at a scale and quality to bear out best practices for delivering capitated models across many healthcare settings. 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 tend to be zero-sum games for hospital-based providers.

CMS’ program makeup highlights some of these structural challenges; over 70% of ACOs across the country still operate in up-side risk-only payment models, and hospital-led ACOs make up most of the ACOs nationwide. Upside-risk-only models take on the benefits of a risk-based contract without the liability of overutilization or under-performance. In essence, most hospital-based systems reduce their top-line revenue by participating in ACOs and APMs, and the incentive structures (risk-based models) are not correctly 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. Most estimates peg about 75% of our healthcare spending on chronic conditions, so 75% of healthcare spending on chronic diseases, primary care was a logical place to start disrupting care delivery models.

Research from McKinsey suggests several variables 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 make care plans down to the individual level. That extensibility allows community-based physicians to build competencies around the tenants McKinsey and Co. suggest 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 behind Kaiser, and these crowds are delivering healthcare the right way in one of the most complex systems known 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 intermediaries from our last post. As more large employers contract directly with CoEs and push healthcare delivery networks towards full capitation, CINs are looking towards the Kaisers of the world to understand how they can 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 eliminated, they must 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.