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The Case for Capitation Is Growing Stronger for Health Plans

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By Allen Miller, Cindy Ehnes and Tom Dougherty, FACHE

Necessity really is the mother of invention. During the pandemic, providers quickly scaled alternative care options, including telemedicine and hospital at home. Now, payment structures need to catch up.

The reliance on fee-for-service (FFS) and traditional patient care models during the pandemic hurt both providers and members. Non-COVID-19 patient care plummeted—even for people with chronic conditions and emergencies.

Given the financial hit, providers are much more open to risk-based contracts. At the same time, the health crisis became a needed stimulus of change. Providers learned how fast and effectively they can move to new models if necessary.


Taking the lead

As the health care industry switches from reacting to pandemic problems to designing a new normal, payers now can take the lead in accelerating the shift to value-based care.

It’s in the best interests of health plans and their members to ensure provider networks meet evolving healthcare consumer expectations and needs. Reimbursement needs to adapt and accelerate more efficient care models that give providers resources to develop them, driving better outcomes and controlling costs.

In late 2020, we interviewed payers and providers with successful risk and capitation experience to assess the future of value-based care. They did not see a new president and ongoing pandemic slowing the push at Centers for Medicare & Medicaid Services (CMS) to risk-based contracting to improve care at lower costs. Employers, too, continue their quest to control health benefits expense.

The question, then, is, how will commercial health plans respond?


Four steps to more risk-based payments 

Shifting to more risk-based payments faster could position health plans with stronger provider relationships, happier employers, and member services that provide market differentiation. Drawing from our experts and our deep experience with value-based payments, this four-step 2021 framework can help payers navigate the steps to successfully increasing capitation with providers:

1. Accept the inevitable: New care models are gaining traction.

The experts we interviewed describe the delivery of services through e-visits, mobile care services, hospital at home, remote monitoring, and retail clinics as “unstoppable. The model has met its moment.”

Providers, health plans and policymakers face a difficult challenge in designing optimal payment schedules and regulatory and compliance policies for these new options. In particular, telemedicine’s ability to make care convenient and more accessible may encourage excessive utilization and costs under traditional FFS. Striking the right balance will require providers and payers to collaborate.


2. Pressure is on as COVID-19 financial distress spotlights FFS flaws.

Government is under severe financial strain:

  • Medicare is projected to be insolvent by 2026.
  • Medicaid enrollment is climbing and new inducements will likely accelerate the growth.
  • Revenue has dropped for many states and localities even as the federal government aims to pass a $1.4 trillion COVID-19 relief package.

There is little wonder why there is a growing focus on aligning incentives and driving healthcare value through risk models. With Medicare Direct Contracting, CMS is now offering capitation directly to providers. It’s also rolling out more provider programs with more downside risk accompanied by greater access to medical loss ratio (MLR) savings.

The pandemic has triggered a financial cataclysm for providers as well. According to the American Hospital Association, hospitals alone were projected to lose $320 billion in 2020 revenues and at least $53 billion in 2021 . Some providers, albeit medical groups more so than hospitals and health systems, now view risk-based contracts with steady revenue streams as less risky than volume-based FFS.


3. Payers need to initiate more robust capitation programs.

Health plans have tended to limit the use of global capitation arrangements based on the percentage of the total cost of care, according to data from the Commonwealth Fund.

There are two main reasons for the limited rollout so far. Payers worry that many providers were unwilling or unable to change their mindset, behaviors, and operating models, decrease utilization, and effectively manage networks, analytics, and risk. Simultaneously, some plans didn’t have all the infrastructure capabilities or desire to manage risk transfer. In some cases there are cultural barriers to the level of transparency required to be truly collaborative with providers and align financial incentives.

Bolder action is needed. Our experts agree: Accelerating value-based care means giving more providers resources and support to evolve care delivery, enhance outcomes, and cut costs.


4. Roll out partial cap models.

The leaders we spoke with say an incremental approach that builds off of existing FFS models could be the best path forward for both payers and providers. In the first phase, health plans would pay primary care providers a monthly case management fee to keep patients healthier and reduce waste while continuing traditional FFS reimbursement for care delivered.

With “partial cap” models, most traditional roles persist: Providers handle the care delivery and care management, and health plans pay claims and provide other services, such as utilization management and credentialing. Collaboration increases, however, with payers sharing utilization and quality data with providers so they can work to improve quality, generate efficiencies and decrease the total cost of care.

From COVID-19 to CMS, the trajectory toward capitation is clear. Health plans that pivot to risk by helping providers to build core capabilities for managing risk and enhance services that provide greater member satisfaction and customer loyalty are positioning themselves to succeed with value-based care and value-based payments.


For a deeper dive into the capitation issues and opportunities, please read our white paper Providers Want Capitation but What Are Health Plans Thinking?

Also, please read our February, 11, 2021 Health Payer Specialist article Op-Ed: Payers Should Expand Capitation to Accelerate Value-Based Care Shift (registration required.)

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