CapitationCapitation. Determination of Premium Rates Benefit Payments –Paid to providers Risk Premiums –Profit earned by payer as a function of accepting.

CapitationCapitation

Determination of Premium Determination of Premium RatesRates


• Benefit Payments–Paid to providers

• Risk Premiums–Profit earned by payer as a function of

accepting financial risk

• Administrative Costs –Claims processing, marketing, insurance

coverage, etc.



• Marketing Expenses– Intangibles (i.e. market power, good

service)

Definition of a Stop LossDefinition of a Stop LossDefinition of a Stop LossDefinition of a Stop Loss

• Specific Stop Loss–Severity of claims

• Aggregate Stop Loss–Frequency of claims

Corridors & Trends To Specific Corridors & Trends To Specific and Aggregate Stop Lossand Aggregate Stop Loss

Corridors & Trends To Specific Corridors & Trends To Specific and Aggregate Stop Lossand Aggregate Stop Loss

• Trends–Measured by Utilization Level &

Charges

–Related to Aggregate Stop Loss

• Corridors–Refers to Costly Claims Requiring LCM

Intervention

–Refers to Specific Stop Loss

Risk RatingRisk RatingRisk RatingRisk Rating

• Process of adjusting healthcare utilization for demographic factors and other factors

Other Factors Affecting Other Factors Affecting Healthcare UtilizationHealthcare Utilization


• Income–Wealthier use more services

• Education–More educated use more services

• Type of Employer–Manufacturing, healthcare, and

unionized workers use more services



• Location–Urban residents use more services

• Benefit Design–Copays & deductibles affect utilization

• Sex–Women use more services

–Men have more catastrophic care



• Age–0-17 yrs. has lowest utilization

–Utilization increases for 18-34 yrs.

–Utilization decreases for 35-44 yrs.

–Utilization rapidly increases for 44+ yrs.

Causes of Financial Risk in Causes of Financial Risk in CapitationCapitation


• Adverse Selection–Occurs when a group’s characteristics

predispose them towards higher than predicted utilization

• Random Nature of Healthcare Demand–Much of utilization results from

random events (i.e. epidemics, accidents, etc.)



• Law of Large Numbers– Increased risk with smaller groups

Effects of CapitationEffects of CapitationEffects of CapitationEffects of Capitation

• Gatekeeper

• Transfer of Risk–Payer to provider

• Utilization Ground Rules

• Specialty Referrals–Reverse Capitation

Effects of CapitationEffects of CapitationEffects of CapitationEffects of Capitation

• Pressure for Fee Reductions– Increased likelihood that specialists

are capitated

– Increased pressures for sub-capitation, carve outs, and disease management

Process of Calculating a Risk Process of Calculating a Risk Contract PMPM Rates Using a Contract PMPM Rates Using a

Capitation ModelCapitation Model


Capitation ModelCapitation Model1Define services included in the

capitation contract

2Risk adjust medical services

3 Identify other variables in PMPM premium rate model




Capitation ModelCapitation Model4Adjust for current demographic

factors for this health plan– Inflation factor

–Premium rate structure & rates at respective levels

–Community rating flexibility




Capitation ModelCapitation Model5Continuous assessment of key

managed care performance indicators–Membership

– Inpatient care

–Ambulatory care

–Financials




Capitation ModelCapitation Model6Adjust for variances in key

indicators–Physician mix

–Level of services

–Level of integration under capitation contract

Average Benefit PaymentsAverage Benefit Payments

Average Benefit PaymentsAverage Benefit PaymentsAverage Benefit PaymentsAverage Benefit Payments

• Total benefit payments usually account for approximately 70-90% of the premium

Average Benefit PaymentsAverage Benefit PaymentsAverage Benefit PaymentsAverage Benefit Payments

• Breakdown for a typical group of insureds during a policy year:–500 of 1,000 = No claims

–375 of 1,000 = Payments of $0-$500

–2 of 1,000 = Payments of >$10,000

–Average cost of providing care per insured = $560 per policy year

Operational ExampleOperational ExampleOperational ExampleOperational Example

• 1,000 insureds at following premiums:–Employee only coverage = $120/month• With 400 lives = $48,000/month

–Employee + 1 or more = $350/month• With 600 lives = $210,000/month

–Total premium per month = $258,000 • $3,096,000 annualized


• Average claims = $560 x 1,000 employees

= $560,00 pre-shock losses

• Two shock losses at $1M & $500K

• Surplus = ($3,096,000 - $560,000 - $1M - $5K)

= $1,036,000

–Covers other operating expenses such as cost of reinsurance, administrative overhead, acquisition costs, etc.


• Operating costs = 20% of total premiums

customarily = $619,200

• Pre-tax surplus = $1,036,000 - $619,200

= $416,800

= 13.5%

• After tax profit = $416,800 x .61

= $254,248

• Return on total premium = 8%

Are Withholds Ethical or Are Withholds Ethical or Unethical?Unethical?

Are Withholds Ethical or Are Withholds Ethical or Unethical?Unethical?

• Clinical protocols–Can reduce liability exposures

–Must make changes when dictated by indication & necessity

• Professional liability exposures–Claims denials

–Failure to provide coverage

–Abandonment of patient

Requirements for Transition to Requirements for Transition to CapitationCapitation

Requirements for Transition to Requirements for Transition to CapitationCapitation

• Align financial incentives

• Develop primary care driven medical groups

• Establish long-term preferred relationships

• Decentralize medical management

• Develop a continuous improvement process

Calculation of Basic Capitation Calculation of Basic Capitation RateRate


Routine Office Visit: Example #1• Primary care practice receives $45/visit• Average of 3 visits PMPY• 3 visits x $45/visit = $135 PMPY• $135 PMPY/12 months = $11.25 PMPM

(Approximate Cap Rate)

• 2,000 subscribers assigned to the practice • 2,000 ss x $11.25 PMPM = $22,500/month• $22,500/month x 12 months = $270,000 per year



Routine Office Visit: Example #2• Primary care practice receives $45/visit • Members pays $10 copay/visit• Average of 3 visits PMPY• 3 visits x ($45/visit - $10 copay/visit) = $105 PMPY• $105 PMPY/12 months = $8.75 PMPM

(Approximate Cap Rate)• 2,000 subscribers assigned to the practice • 2,000 ss x $8.75 PMPM = $17,500/month



Routine Office Visit: Example #2 (cont.)

• $17,500/month x 12 months = $210,000/ year• Add projected copay of patients– 2,000 ss with 3 visits PMPY = 6,000 visits/year– 6,000 visits x $10 copay/visit = $60,000 copay/yr

• $210,000/yr + $60,000 copay/yr = $270,000/yr

Example #2 has become the prevalent method. Why?

Calculation of WithholdCalculation of WithholdCalculation of WithholdCalculation of Withhold

Using Examples #1 & #2• Withhold policy of managed care company is

20% of total reimbursement• Under Example #1, net reimbursement after

withhold is calculated as follows:

$22,500 x 20% = $4,500/month x 12 months

= $54,000/year

Net reimbursement from MCO = $216,000/yr

Calculation of WithholdCalculation of WithholdCalculation of WithholdCalculation of Withhold

Using Examples #1 & #2 (cont.)

• Under Example #2, net reimbursement after withhold is calculated as follow:

$17,500 x 20% = $3,500/month x 12 months

= $42,000/year

Net reimbursement from MCO = $168,000/yr

• Which practice is better off financially? Why?

Liability and Compliance Liability and Compliance IssuesIssues

Liability Exposure Among Liability Exposure Among MCOsMCOs

Liability Exposure Among Liability Exposure Among MCOsMCOs

• Negligent credentialling &/or provider selection

• Network development

• Vicarious liability

• Utilization review

• Warranties

• Financial incentives

Types of Liability Coverage Types of Liability Coverage Required by MCOsRequired by MCOs


• Medical Professional Liability Coverage–Claims made vs. occurrence from

coverage

–Covers direct patient care



• Directors and Officers Liability Insurance–Decisions and policies– Two types• Managed Care D & O

• Corporate D & O

• Managed Care Professional Liability Coverage–Covers sale of MCO products & services to

third parties

CapitationCapitation. Determination of Premium Rates Benefit Payments –Paid to providers Risk Premiums –Profit earned by payer as a function of accepting.

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