Another Kind of Cost Shifting: The Partial Capitation Model

A well designed study can find real evidence of cost shifting. I participated in such a study and with co-authors Steve Pizer, Robert Schmitz, and Soeren Mattke wrote up the findings in a paper titled “Voluntary Partial Capitation: The Community Nursing Organization Medicare Demonstration” (PDF, Health Care Financing Review, 2005).

The Community Nursing Organization (CNO) demonstration was conducted from 1994 through 2001 to test an innovative approach to care management via the provision of community nursing and ambulatory care services for Medicare beneficiaries.The hypothesis was that provision of such community-based services would promote the timely and appropriate use of health services and to reduce the use of costly acute care services.

Organizations participating in the CNO demo were paid a fixed per-member-per-month rate (a.k.a. a capitated rate) for covered services. But the participating organizations–the CNOs–were only at risk under capitation for a subset of Medicare benefits, an arrangement called partial capitation or carve-out. The financial incentive in such an arrangement would be to minimize utilization covered under the capitated payment but not necessarily to minimize utilization of services not covered because traditional Medicare, not the CNO, would be at risk.

Our quantitative evaluation of the CNO demonstration focused principally on the implications of the CNO treatment model for cost to the Medicare Program. Specifically, our analyses compared the costs to Medicare of services utilized by those treated under the CNO model (CNO treatment group) to those generated by a randomized control group and a population reference group (the latter consisting of beneficiaries with no known contact with a CNO). Our main finding was that Medicare spending was higher for members of the CNO treatment group as compared with both the control group and to the population reference group.

Our  conclusion that the CNO model under partial capitation led to increased Medicare costs is based on very robust findings that were consistent across several analytic approaches. The cost differences between treatment and control or reference groups persisted after the application of increasingly complex risk-adjustment methods. Moreover, the differences increased over time and were robust to changes in the way CNO participation was defined. Lastly, we found no statistically significant evidence of increase in physical or social functioning of the treatment group, as compared with the control group. CNOs cost more without providing any health benefits along dimensions measured.

Regardless of whether they affected provider decisions, the financial incentives built into the design of the CNO demonstration are the same as would accompany any partially capitated Medicare demonstration or initiative. Shifting of costs to the subset of benefits not covered under capitation benefits the organization receiving payment and increases costs to the Medicare Program. Unfortunately, the primary financial tool available to Medicare, the capitated payment rate, is ill-suited to address this problem. Decreasing capitated payment in order to recover some of the cost only increases the cost-shifting incentive. If Medicare continues toward increased privatization of risk it would be advantageous, in terms of financial incentives, to require private organizations to provide all (or as many as feasible) Medicare benefits rather than to divide benefits among different entities. Only when all benefits (or, at least, all those that could be substituted for one another) are bundled together can the capitated payment induce cost containment without cost shifting.

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