Marshall University

Marshall Digital Scholar

Management Faculty Research Management, Marketing and MIS

2014

How Effective is Capitation at Reducing Health

Care Costs?
David P. Paul III
Monmouth University

Jennifer Brunoni
Marshall University

Tasha Dolinger
Marshall University, [email protected]

Irina Walker
Marshall University, [email protected]

Danielle Wood
Marshall University, [email protected]

See next page for additional authors

Follow this and additional works at: http://mds.marshall.edu/mgmt_faculty

Part of the Business Commons, and the Health Information Technology Commons

Recommended Citation
Paul III, D., Walker, I., Brunoni, J., Wood, D., Dolinger, T., & Coustasse, A., (2014, November). How effective is capitation at reducing
health care costs. Paper presented at the 41st Annual Meeting of the Northeast Business & Economics Association, West Long Branch,
New Jersey.

This Article is brought to you for free and open access by the Management, Marketing and MIS at Marshall Digital Scholar. It has been accepted for
inclusion in Management Faculty Research by an authorized administrator of Marshall Digital Scholar. For more information, please contact
[email protected].
Authors
David P. Paul III, Jennifer Brunoni, Tasha Dolinger, Irina Walker, Danielle Wood, and Alberto Coustasse

This article is available at Marshall Digital Scholar: http://mds.marshall.edu/mgmt_faculty/123

 HOW EFFECTIVE IS CAPITATION AT REDUCING
HEALTH CARE COSTS?

David P. Paul, III Jennifer Brunoni Tasha Dolinger

Monmouth University Marshall University Marshall University
West Long Branch, NJ 07764 South Charleston, WV 25303 South Charleston, WV 25303
USA USA USA
732-263-5336 304-746-1968 304-746-1968
[email protected] [email protected] [email protected]

Irina Walker Danielle Wood Alberto Coustasse

Marshall University Marshall University Marshall University
South Charleston, WV 25303 South Charleston, WV 25303 South Charleston, WV 25303
USA USA USA
304-746-1968 304-746-1968 304-746-1968
[email protected] [email protected] [email protected]

ABSTRACT income, and geographical location (Boult et al.,

2000). The physician receives a PMPM payment
Due to skyrocketing healthcare costs in the U.S., regardless of how many services are performed for
several strategies, including capitation, have been the patient or how expensive the individual services
utilized to reduce overall cost. Capitation has helped may be (Murphy-Barron, 2002).
to contain costs by placing a limit on the amount of
reimbursement that is offered to the provider for Capitation encourages physicians to reduce excessive
specific types of patients and care. In order for and expensive services, which translates to decreased
physicians to improve their profitability under cost. Because PMPM payments remain constant and
capitation, their practices must become more cost are not directly related to the number and type of
efficient. The purpose of this research was to analyze services provided, capitation may put the PCP at
the effects of capitation on the overall reduction of financial risk (Murphy-Barron, 2002), as the provider
healthcare cost. is responsible patient treatment cost even if the
PMPM payment does not cover the expenditure of
Key Words: Capitation, healthcare cost, fee-for- the services provided. Capitation thus should cause
service, physician reimbursement, effectiveness. the physician to be more financially conscious
(Lerman, 2009).

1 INTRODUCTION The purpose of this literature review was to examine

the effects of capitation in the healthcare system, and
to see whether it has helped to reduce or increase
In an effort to reduce health care costs in the United healthcare costs.
States, a payment system known as capitation has
evolved. In the mid-1980s, in an attempt to get
spending under control, Medicare developed a new 2 RESULTS
form of health care service design known as
Managed Care (MC) (Boult, Kane, and Brown,
2000). Capitation is one type of payment that exists Using 2004-2005 survey data, Landon et al. (2011)
within MC. Under capitation, the physician usually examined the relationship between physicians’
Primary Care Physicians (PCPs) receives a set reimbursement, quality of care and the costs for the
monthly payment for each member called Per patients receiving Medicare coverage. Two thousand
Member Per Month (PMPM) (Lerman, 2009). The two hundred eleven PCPs, working in various
amount of PMPM is derived from multiple factors, settings (e.g., hospitals, small physician groups, and
including the patient’s gender, age, type of residence, private practices) delivered services to more than

1
250,000 Medicare beneficiaries. The study found Average spending increase was smaller for
that, in this capitated environment, healthcare participants in the intervention group, $15.5 (1.9%)
providers charged 3.9% less than physicians with less per quarter. Savings resulted largely from lower
fixed salaries. The owners of practices with great expenditures for procedures, testing, and imaging;
amounts of capitated profits exhibited doctor and from a decreasing in spending for enrollees with
expenses only half as large relative to salaried staff the highest expected spending (Song et al., 2011).
(6.9%). These authors concluded that healthcare
providers who were reimbursed via capitation were Ettner et al. (2006) surveyed and reviewed medical
more cost efficient and had less intense utilization of records of 6,194 diabetic patients, examining
services compared to physicians providing care correlations between provider reimbursement
through FFS. incentives and care process. Researchers reported that
83% of patients were predicted to get a proteinuria
Reschovsky, Hadley, and Landon (2006) examined assessment under direct salary, 68% with FFS model,
how payment type, different management tools, and and 66% under capitation.
compensation methods shape health care providers’
perceptions of whether specific financial incentives The Lewin Group (2009) reviewed 24 studies
lean toward increasing or decreasing services to commissioned by the state and federal governments,
patients. Physicians associated with capitated researchers, and private foundations. These studies
contracts were over 9% less likely to state incentives reported that Medicaid Managed Care Model
to increase services to patients and more than 4% (MMCM) yields from 1%-20% cost savings. In
stated that financial incentives resulted in reduced Ohio’s Premier Care program, inpatient costs
services to patients compared with physicians with no decreased 27% under capitated MMCM, from $76
capitation. However, nearly 70% of healthcare PMPM to $55 PMPM (Lewin, 2009). Researchers
providers did not believe that incentives affected reported that the PMPM cost of drugs for Ohio
services to patients. patients in MC setting was 10% to 15% less than in
the FFS setting. Ohio’s capitated programs created
An evaluation of capitation and enhanced FFS $72.4 million in savings (The Lewin Group, 2009).
models initiated in Ontario in 2001-2003 found that
patients in capitated practices had lower morbidity Another case study compared capitation and FFS
and comorbidity indices, less after-hours care and reimbursement methods. Grieve et al. (2008)
more visits to emergency departments. Overall, conducted a study which evaluated Quality-Adjusted
providers in the capitated group enrolled fewer new Life Years (QALYs). One group received a mental
patients than did physicians in the FFS group (37.0 v. health reimbursement through Direct Capitation
52.0 per provider). Patients had fewer office visits to (DC). The second group used capitated services
physicians working under capitated payment offered through an experienced Managed Behavioral
compared to physicians performing under FFS Health Organization (MBHO). Both of these
(Glazier et al., 2009). capitation groups were compared to a strictly FFS
group. The average cost per case was evaluated pre-
The Lewin Group calculated the savings with capitation, and two 9 month post-capitation periods.
adoption of capitation contracting with Medicaid The MBHO group had the lowest average cost per
Managed Care Organizations (MCOs), noting that case after the second nine month period at $3,359.
savings through capitation ranged from 2%-19%. This was compared to $4,000 for the FFS group and
After the first year adopting capitation, researchers $7,094 for the DC group.
estimated 4.1% savings for West Virginia.
Additionally, it was estimated $83 billion cumulative Fang and Rizzo (2008) used the Community
national savings would be achieved if capitiation Tracking Study physician survey data from 2000-
were instituted nationally across the first 10 years 2001 and 2004-2005. The data from survey questions
(Lewin Group, 2006). regarding financial incentives related to both
Capitated MC (CMC) and Non-Capitated MC
In 2009, Blue Cross Blue Shield of Massachusetts (NCMC). In 2000–2001, physicians who accepted
implemented the Alternative Quality Contract (AQC) managed care insurance had about 53% of their
based on global payment and pay for performance. patient care practice revenue come from managed
Researchers analyzed 2006-2009 claims for 380,142 care. Among physicians whose financial incentives
enrollees who received care from physicians in the did not favor reducing services, the average managed
AQC system and for 1,351,446 enrollees who care involvement was lower — 45%. So in 2000–
received care from providers not in the system. 2001, greater managed care involvement was

2
associated with greater financial incentives to reduce
services. The Lewin Group calculated potential savings for
ACAP and MHPA if capitation contracting were
A study using a Capitated Matrix System (CMS) for accepted with Medicaid MCO. If implemented, the
purchasing implants for Total Knee Arthroplasty capitation could yield 2%-19% savings. Further
(TKA) and total hip arthroplasty (THA) was investigation found that the studies done by Lewin
conducted by Fankhauser and Fowler (2009). The were based on data from Milliman, USA (Barclay,
Capitation Matrix (CM) developed and categorized 2002). The data came from programs that were in an
the various orthopedic implants into four different HMO model that were converted to a Fee-For-
levels of technological characteristics and cost (the Service Equivalent (FFSE). The FFSEs were
more technologically advanced the implant, the estimates of state expenditures if the current HMO
higher the charge by the vendor). The CMS prices models were replaced with a traditional FFS model.
were based on the previous year’s average prices for
each category minus 15%. The authors of the study Ettner et al. (2006) used surveys and medical record
evaluated the cost of implants with this CM over one review to determine the association between provider
year. The year’s cost analysis was then compared to reimbursement incentives and care process for
the prior year when no CMS was in place. Prior to diabetic patients. The authors reported that, under
the CMS, the average cost of a prosthetic implant capitation incentives, there existed a smaller chance
was $4700 for the TKA and $5800 for the THA. of the physician ordering a proteinuria assessment.
After the CM, the target average prices were $3600
per TKA and $4800 per THA (Taylor et al. 2009). Taylor et al. (2009) used a capitated matrix system to
After comparison, the resulting cost savings in the evaluate the purchase of implants for TKA and THA.
CMS was 26.1% for both THA and TKA implants. An overall savings for the entire study period was
calculated as 26.1%. The study strongly supported
3 DISCUSSION the hypothesis that a capitated model decreases the
overall cost of health care.
Grieve et al. (2008) evaluated the cost of care for
Medicaid patients with severe mental illness. The end 4 CONCLUSION
result found that a capitation model with a for- profit
element was more cost-effective than the FFS model Capitation appears to encourage a decrease in the
or the not-for-profit capitation group. utilization of physicians’ services in some areas of
healthcare in the short run. The use of capitation in
Glazier et al. (2009) reported that capitation models the healthcare environment as a means to lower
were most cost-effective in groups where patients overall costs has revealed some mixed results in the
have less complex [costly] diagnoses. The study studies examined. Capitation does encourage
showed that the capitation practices reported fewer physicians to be more financially responsible in the
sick patients, and more patients enrolled in the selection of services provided to the patients as well
practices compared to the enhanced FFS models. as the supplies used in surgical procedures.

Landon et al. (2011) found physicians spent 3.9%

less in a capitated system in comparison to physicians 5 REFERENCES
on a set salary, although the consideration of
physician bias could not be excluded from the study.
Barclay, T.S. 2002. Wisconsin HMO’s success in
Reschovsky et al. (2006) used a survey to evaluate Medicaid and badger care: Government cost savings
physicians’ perceptions of the influence of capitation and better health care quality. Milliman. Retrieved 5
on decisions to decrease services to patients. The July 2013 from http://www.communityplans.net/
study reported that 69.4% of healthcare providers did LinkClick.aspx?fileticket=p9T4QlPFrgg%3D&tabid
not believe that incentives affect services to patients. =208&mid=686&forcedownload=true.

A physician survey conducted by Fang and Rizzo Boult, C., Kane, R., Brown, R. 2000. Managed care
(2008) showed that the first year under capitation of chronically ill older people: The US experience.
increased physician incentives to reduce cost. The BMJ (Clinical Research Education), 321 (7267),
second year showed relatively little difference 1011-1014.
between the two groups.

3
Ettner, S.L., Thompson, T.J., Stevens, M.R., 2013 from http://www.oecdbookshop.org/oecd/
Mangione, C.M., Kim, C., Neil Steers, W., Goewey, display.asp?lang=EN&sf1=identifiers&st1=5lmqcr2k
J., Brown, A.F., Chung, R.S., Narayan, K.M., TRIAD 4rwd
Study Group. 2006. Are physician reimbursement
strategies associated with processes of care and Reschovsky, J.D., Hadley, J., Landon, B.E. 2006.
patient satisfaction for patients with diabetes in Effects of compensation methods and physician
managed care? Health Services Research, 41 (4), group structure on physicians' perceived incentives to
1221-1241. alter services to patients. Health Services Research,
41 (4P1), 1200-1220.
Fang, H., Rizzo, J. 2008. The changing effect of
managed care on physician financial incentives. Song, Z., Safran, D., Landon, B., He, Y., Ellis, R.,
American Journal of Managed Care, 14 (10), 653- Mechanic, R., Day, M.P., Chernew, M. 2011. Health
661. care spending and quality in year 1 of the alternative
quality contract. The New England Journal of
Glazier, R., Klein-Geltink, J., Kopp, A., Sibley, L.M. Medicine, 365 (10), 909-918.
2009. Capitation and enhanced fee-for-service
models for primary care reform: A population-based Taylor, B., Fankhauser, R.A., Fowler, T. (2009).
evaluation. Canadian Medical Association Journal, Financial impact of a capitation matrix system on
180 (11), E72-E81. total knee and total hip arthroplasty. The Journal of
Arthroplasty, 24 (5), 783-78.
Grieve, R., Sekhon, J.S., Hu, T.W., Bloom, J.R.
2008. Evaluating health care programs by combining
cost with quality of life measures: a case study
comparing capitation and fee for service. Health
Services Research, 43 (4), 1204-1222.

Landon, B.E., Reschovsky, J.D., O'Malley, A., Pham,

H.H., Hadley, J. 2011. The relationship between
physician compensation strategies and the intensity
of care delivered to Medicare beneficiaries. Health
Services Research, 46 (61), 1863-1882.

Lerman, J. 2009. Medical practice strategies: systems

based practice - business laws ethics. Retrieved 19
Jun 2013 from http://www.medicalpracticecme.com/
Class 1/Articles for class 1/article_6.htm

The Lewin Group2006. Medicaid capitation

expansion’s potential cost savings. Medicaid Health
Plans of America. Retrieved 4 July 2013 from
http://www.mhpa.org/upload/lewin%20cost%20savin
gs%20capitation.pdf

The Lewin Group 2009. Medicaid managed care cost

savings – A synthesis of 24 studies. Medicaid Health
Plans of America. Retrieved 4 July 2013 from
http://www.lewin.com/publications/publication/395/

Murphy-Barron, C. 2002. Provider reimbursement.

Academy of Managed Care Pharmacy. Retrieved 1
July 2013 from http://amcp.org/WorkArea/
DownloadAsset.aspx?id=12029

Organization for Economic Cooperation and

Development [OECD]. A disease based comparison
of health systems. Paris: OECD. Retrieved 5 July