• 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.

    • Actually capitation, of any sort, is grossly inefficient.

      As I show in my recent paper:

      Cox, T. (2010). Legal and Ethical Implications of Health Care Provider Insurance Risk Assumption. JONA’S Healthcare Law, Ethics, and Regulation, 12(4): 106-116.

      Capitation transfers insurance risk away from larger, more efficient risk managers, to smaller, less efficient risk managers. Their inefficiencies as risk managers lead risk assuming health care providers to lower profitabilities of profitable operations, higher probabilities of excessive losses, decreased benefits for patients, and greater risk of insolvency.

      Capitation advocates simply ignore the reasons insurance works at all, aggregating large numbers of risks to benefit form the Central Limit Theorem.

      • @Thomas Cox – What if one believes (or it is true) that a significant source of waste stems from provider-induced demand? Who should be at risk for such cost? Or do you believe such waste does not exist? (Note, I’m not presupposing it does or its size for the sake of this discussion. But many people believe it is a big problem, which is what capitation is intended to solve.)

    • Austin,

      You’ll have to help me out here. What difference does it make what people believe? It is what “happens” that counts.

      Yes, fee for service does lead to over diagnosis and over treatment. That can be controlled by retrospective review and prosecution for battery and fraud since we can refer to the paper trail justifying the fraudulent billings for evidence.

      Capitation, on the other hand, leads to under-diagnosis and under-treatment and we unfortunately have no way of detecting or prosecuting this because we rely on the very same health care providers who commit battery and fraud to maximize revenues under fee for service systems for documentation that they have failed to diagnose and treat their patients.

      That seems kind of foolish to me.

      Worse still, because providers become inefficient insurers and must protect against high losses – they have to reduce the level of care they provide below the level of care assumed in the risk-ceding insurer’s expected loss costs.

      But don’t take my word – I’m just a mathematician and statistician who spent a decade doing insurance and reinsurance rate making, reserving and expense accounting before I became a registered nurse. I never ask people to “believe” what I say – read the paper and work out the calculations for yourself…



      • @Thomas Cox – As I’ve been posting lately, there is some debate about the existence and extent of provider-induced demand in the system and even what “waste” means. If it does exist, it need not be fraudulent. Is it fraud to prescribe treatment A at a cost of 10x treatment B if you’re job is to do A and the patient came to see you?

        I understand that you wish me to read your paper. You’re under no obligation to respond. I’m not attacking you. I’m just asking a simple question. How does one reduce legitimately provided, even demanded, treatment for a condition that could be addressed for less? If capitation is not the answer and there’s no legal issue, then what?

        Keep in mind that if insurers could already minimize provider induced demand they would be. Do they lack the necessary tools? Or maybe you don’t think (or are assuming) there is no provider induced demand. (I’m asking what you “believe” in the sense of what your assumptions are. They matter. And the research is not conclusive on this issue.)

        Also, would your analysis condemn ACOs? What about bundling? I’m guessing “yes” to the former but “no” to the latter.

    • First, let’s try to avoid mixing metaphors.

      “Waste” and “Fraud” are ambiguous terms.

      We can’t address everything. I addressed fraud because that is something that could actually be evaluated through an evidence based process whereas “waste” is pretty much in the eye of the beholder. You see my mom’s annual mammograms post BC as wasteful. I see them as good preventive care. But I am willing to stipulate that your loved one’s mammograms are wasteful if that will help.

      We should also be careful about using the term “insurer” since there are not a whole lot of pure indemnity insurers out there. But, do insurers have the technological ability to ferret out fraudulent claim submissions? Certainly. Not even remotely a problem technologically. Just define some characteristics for utilization that would expect to be encountered rarely by ethical practitioners and then search through the claims database for outlier providers. Set your outlier criteria wherever you want: P = 0.05; 0.01; 0.005; 0.001. Then do a desk audit on what the computer identifies. Pick off the 20-50 most abusive providers…

      Of course, there is a downside – once they acknowledge such capabilities there would be a whole lot of lawsuits about denied claims and the litigants would want access to the same capabilities. searching insurer’s data for signs of denied and delayed claims.

      So, do I expect insurers to announce such capabilities any time soon? no.

      ACOs and bundling – as I suggest in the paper there are lots of different names for insurance risk transfers. It isn’t the name used – it is the risk transfer that is the problem. So the answer is No and No.

      Your points are good – but more than adequately addressed in the paper.

      To give you a teaser – think about the difference between the “standard deviation” and the “standard error.” Insurers and actuaries love to talk about standard deviations – but it is portfolio size adjusted standard errors that determine the fortunes of risk bearing entities whether the sign on the office door says “Medical Practice,” Insurer, CPCU, NAHU or MD…

      I am certainly not one to discourage productive dialogue – but at the moment you don’t have the advantage of having read the paper so you are likely to make an analytical mistake that could be avoided.

      In insurance – Size matters.

      • @Thomas Cox – Waste in the “flat-of-the-curve” provision sense is the key. I probably shouldn’t have asked about ACOs since they are generally thought of as shared savings only, no downside risk. If the risk is two-sided, as MedPAC has proposed, then maybe your answer would change (?). If not, I don’t understand what you mean by “capitation.”

        I do not have access to the journal in which your paper appears. If you wish to facilitate my reading of it, please send me an electronic copy.