Reforming Physician Payments: C A L I FOR N I A H EALTH C ARE Lessons from California F OU NDATION Introduction Capitation in California One point on which many in the current health In California, how is capitation used, and how reform debate agree is that health insurance prevalent is it? Under capitation, a provider group programs must move away from fee-for-service is paid a fixed amount for each enrolled patient payment, which rewards service volume and for a defined bundle of services over a span of Issue Brief intensity, to a system that encourages providers time, regardless of the amount of care that patient to achieve the best health outcomes while using consumes. The prepaid group practice model took resources efficiently. root in California with the Kaiser Permanente medical care program, then spread nationally, Much of California’s population obtains health thanks in part to federal legislation of the 1970s care services from organized physician groups that that fostered the concept. Physician groups in receive comprehensive global payments to provide many parts of the U.S. experienced problems with care for enrolled patients. California’s experience capitation and moved away from it starting in the with capitation — also known as the “delegated late 1990s, but nearly one-third of the residents model” since risk is delegated from health plans to of California — in employer-based health plans provider groups — has several implications for the as well as in Medicare and Medi-Cal (California’s current national health reform debate: Medicaid program) — are covered under capitation ◾◾ For capitation to take hold, formal physician payment arrangements today. groups and business arrangements must be in place. The most common capitation approach entails a health plan paying a physician group a set ◾◾ To prevent undesirable outcomes, such as monthly, per-enrollee fee to deliver all professional physician group insolvency and stinting services, including specialty care and ancillary on needed care, robust regulatory oversight services such as lab and imaging tests. Some is required. capitation arrangements are more global, such as ◾◾ With respect to capitation’s potential to those that encompass hospital care for enrolled improve efficiency and value, California’s patients, and some are narrower, covering only experience is inconclusive. Documenting its primary care physicians’ services or the services of future impact will require more transparent a single specialty, for example. and accountable monitoring than now exists. Physicians in California generally participate This issue brief explores these and related lessons in capitation arrangements in one of two ways. for policymakers seeking to ensure affordability They may be members of formal, multi-specialty and quality as they pursue a reform agenda. group practices in which they share facilities and are salaried, such as the Palo Alto Medical Foundation — a large multi-site clinic which S eptember 2009 also has integrated with several other clinics in northern Under bundled payments, providers are still rewarded California to contract with health plans jointly. Or they with more income if they treat more episodes, but they practice solo or in small, single-specialty groups and join are not rewarded for delivering more services per episode. networks of independent practitioners or independent In contrast, providers under capitation have no incentive practice associations (IPAs) such as Hill Physicians — a to deliver excess services. Rather, their incentive is to northern California network of some 3,000 physicians ensure that enrollees stay healthy, as well as to attract and other providers. Physicians in IPAs may receive more enrollees. either sub-capitation payment — a slice of the larger IPA capitation designated for the particular specialty or The accountable care organization, or ACO, is not yet enrollees — or fee-for-service payment. Often, physicians well defined; however, the concept involves a set of will also be eligible for additional performance incentives providers, including both primary and specialty care (and tied to meeting goals for quality and efficiency. possibly acute and long-term care as well) who share incentives to deliver cost-effective care while achieving In both models, the physician groups negotiate and quality benchmarks. Depending on how ACOs are receive capitated payments from health plans. They are structured — for example, whether they encompass also responsible for financial management and allocation both outpatient and inpatient care, whether payments of revenue among the physician members. are set prospectively for all services, or bonuses are paid for certain outcomes — they may have more or less in What does California’s capitation approach have in common with the delegated model and capitation. common with the federal payment redesign proposals being debated in Congress, and how is it distinctive? The medical home approach calls for each patient to Three concepts found in federal proposals share features have a relationship with a designated provider that will with the delegated model in California: create and preserve a complete record of their individual ◾◾ Payment bundling; health and health care. This model suggests payments be structured to favor primary care and prevention over ◾◾ Accountable care organizations; and complex, interventional care. Proponents of the medical ◾◾ Medical home. home generally assume that payment will continue to be fee-for-service, though capitation can easily be overlaid on Bundling is similar in some respects to capitation, though this delivery structure. capitation is more all-encompassing. Bundled payments lump together fees for providers involved in designated Physician groups that have experience with capitation episodes of care — for instance, combining the surgeon’s may be relatively well-positioned to receive bundled and the hospital’s payments for a hip replacement into payments, to participate in ACOs, or to serve as medical a single fee that the providers share. Like capitation, homes. In an environment where health plans increasingly bundling aims to counter incentives to provide more offer rewards for meeting quality goals and using services, but only within one care episode. In contrast, referral and hospital services efficiently, medical groups’ capitation payments encompass all episodes throughout experience monitoring and managing service use for a an entire enrollment period. designated set of enrollees could be transferable to a range of new payment arrangements. 2  |  California HealthCare Foundation What contributed to the expansion of capitation What concerns did the expansion of capitation in California? What has limited its growth? Paying engender among California policymakers and physician groups by capitation originated with Kaiser consumer advocates, and what regulatory remedies Permanente and several other regional group and staff were put in place to address them? Oversight to model health maintenance organizations (HMOs), such assure that providers are delivering appropriate care as Group Health Cooperative of Puget Sound. In the takes different forms, depending on how payments decades after World War II, Kaiser Permanente’s HMO are structured. When health care providers are paid a product gained a significant foothold in most California fixed amount regardless of how much care is delivered, urban areas. an important area for regulatory oversight is ensuring that the amount of care is sufficient. In contrast, when In the 1970s, the federal HMO Act (which Congress let providers are paid on a fee-for-service basis, oversight expire in the mid 1980s) and California’s Knox-Keene is needed to prevent providers from delivering care Act encouraged the proliferation of HMOs and widened that patients don’t need. California addressed concerns their definition to encompass physician participation via about the quality of care provided under capitation by IPAs paid by capitation. Perhaps because Californians establishing both rules and agencies to guard against were already familiar with Kaiser Permanente plans, inadequate levels of care and to ensure appropriate levels the prepaid health plan model flourished once people of risk-sharing between parties. could gain access to private practice physicians in an IPA-HMO plan. The State of California set up multiple levels of appeal. A patient or physician who believes necessary care is Over time, physician groups in California grew large being denied may first appeal to the physician group, through consolidation, and many sought to profit by which conducts an internal review. If the internal review capturing a larger share of health care premium revenues upholds the decision, the patient can then appeal to the from health plans. California law permitted physician health plan. If the decision is upheld there, the patient groups to assume “global risk,” provided they themselves can appeal to the California Independent Medical Review secured what amounted to HMO licenses. In effect, some (IMR) board, a panel made up of independent medical physician groups became health plans within health plans. professionals and managed by a state agency.1 According to one source, approximately 75 percent of appeals to The trend slowed in the mid-1990s, partly as a result the IMR are upheld, which suggests that while physician of competition from newer “open access” health plans groups are largely providing the necessary care, there that touted more freedom of movement for patients at remains a need for regulatory oversight to ensure services a time when the economy was vibrant and health care are not improperly denied.2 cost growth seemed to have abated. Another reason for the slowdown, however, was that a number of physician Another concern is the financial solvency of physician groups collapsed as a result of taking on more risk than groups and their ability to manage risk. Reacting to the they had the capacity to manage. These groups did not dislocations from the physician group failures of the have the capital needed to absorb upswings in health 1990s, the California legislature acted to ensure that any costs, and they also lacked essential tools to monitor organization responsible for paying for patient care is and control consumption of health services in a timely financially able to meet its obligations so that patients manner. do not lose access to care. In 2005, the legislature passed S.B. 260, requiring any risk-bearing organization (RBO) Reforming Physician Payments: Lessons from California  |  3 to collect and report specific organizational and financial Practice consolidation has allowed physicians in California information to the Department of Managed Health Care to invest in information technology at higher rates than (DMHC). If a provider group lacks sufficient resources in other parts of the U.S. For example, according to a to continue accepting risk, the state prohibits the group CHCF study, 37 percent of physicians in California from accepting capitation contracts. report using electronic health records (EHRs), compared to 28 percent nationally. As might be expected, larger Many experts in the California health care community practices of ten or more physicians are more likely to use believe these rules have led to greater stability in EHRs than solo practitioners (13 percent).3 capitation contracts over the past few years. The RBO requirements ensure that physician organizations do not Medical group size, capitation, and adoption of HIT take on more risk than they can handle, and that a group tend to be linked. Only relatively large medical groups always has enough cash available to pay physicians for are well-positioned to accept capitation payments. The patient care. financial stability that sometimes accompanies size has helped some large medical groups to be early HIT Looking beyond provider solvency, California has sought adopters. Yet not all large medical groups in California to ensure that health plans offer good access to services. rely primarily on capitated payments, nor are they all on The Department of Managed Health Care imposes the vanguard of HIT adoption. regulatory requirements on HMOs regarding provider accessibility and the adequacy of provider networks. With respect to cost, service use, and quality, what do California HMOs are subject to specific physician- we know about the impact of capitation in California? enrollee ratios and distance standards for the location of Why don’t we know more? A California HealthCare providers, and must receive prior regulatory approval of Foundation-funded analysis shows that hospital use near provider networks. the end of life is lower among HMO enrollees than patients covered by plans that pay providers under fee-for- Has capitation influenced health care practice in service.4 With the exception of that focused analysis, California (e.g. use of e-mail, electronic records, etc.)? however, data on cost, use and quality of care in capitated A number of market forces have caused physicians in physician groups are limited, making it difficult to California to consolidate their operations to a greater compare the results under capitation with other payment degree than elsewhere in the nation. Consolidation arrangements. promotes economies of scale that support investments in health information technology (HIT) as well as the Historically, health plans and employers did not demand application of evidence-based medicine standards. The detailed information from physician groups. Knowing physician group establishes practice guidelines, helps that a defined package of services would be delivered for physicians install and run HIT systems, and purchases a preset price was sufficient. Moreover, cost trends for medical technology and other needed capital equipment capitated groups were favorable and quality concerns were that can be used by physicians throughout the entire not evident. The groups themselves had little incentive organization. These aids are difficult for small group to be transparent; doing so both added administrative or solo providers to acquire independently, yet such expense and gave customers a window into the groups’ advanced tools are needed for controlling health care costs proprietary financial data. while improving quality. 4  |  California HealthCare Foundation Physician groups hesitate to divulge underlying Authors utilization and cost patterns, in part because sharing Eric Hammelman, Narda Ipakchi, Jennifer Snow, and such information might help health plans negotiate Bob Atlas of Avalere Health, LLC. lower capitation rates. However, health plans and employer groups continue to look for ways to examine About the F o u n d at i o n the information on processes and outcomes, in an effort The California HealthCare Foundation is an independent to better understand the full return on their health care philanthropy committed to improving the way health care investment. is delivered and financed in California. By promoting innovations in care and broader access to information, our Greater transparency with respect to utilization would goal is to ensure that all Californians can get the care they allow physician groups to assuage concerns about care need, when they need it, at a price they can afford. For more levels and quality. The uncertain influence of market information, visit www.chcf.org. power among payers, health plans, and providers in determining the outcome of financial negotiations makes Endnotes the impact of cost transparency less clear. 1.California Department of Insurance. Consumers: IMR Program. Los Angeles, CA: July 2002 (revised), Implications for Federal Policy www.insurance.ca.gov/0100-consumers/0020-health- In designing payment reforms, what lessons does related/0020-imr/#whatisimr. California’s experience with capitation and delegation of risk have to offer federal policymakers? California’s 2.California Department of Managed Health Care, 2007 broad-based use of capitation demonstrates that this Independent Medical Review Results by Health Plan, hmohelp.ca.gov/library/reports/complaint/2007.pdf. form of payment could be employed on a large scale. The delegated model embodies the incentives that 3.California HealthCare Foundation. “Health Information policymakers are seeking as they strive to promote Technology: California Leads the Nation But Still Has Far affordability and quality of care. To Go.” January 17, 2008, www.chcf.org/press/view.cfm? itemID=133554. However, successful use of capitation hinges on certain 4.Baker, Laurence. Same Disease, Different Care: How Patient conditions. The lessons from California suggest the Health Coverage Drives Treatment Patterns in California. need for formal organizational arrangements among California HealthCare Foundation. Oakland, CA: April participating physicians with rewards for providing 2008, www.chcf.org/topics/view.cfm?itemid=133616. appropriate care and possible penalties for failing to reach quality standards, plus regulations and external oversight to protect physician solvency and ensure proper patient care. Greater transparency about performance under capitation would also help payers and the public have more confidence in the relative value being delivered by delegated physician groups. Reforming Physician Payments: Lessons from California  |  5