Daughter of Capitation

We need to invent a new reimbursement system, aimed at chronic care, that rewards efficiencies and outcomes and encourages coordination.

By Ian Morrison

If you listen to the experts, you’ll hear that chronic conditions account for the vast majority of health care costs and that the number of people with chronic conditions and the attendant cost of treating them is going to explode as baby boomers age. So what’s our plan? It’s consumer-directed health care and catastrophic coverage, all delivered through discounted fee-for-service reimbursement systems paid to siloed, disconnected providers frantically trying to optimize their incomes while the patients wander back and forth in search of continuity of care. That should all work really well, eh?

Consumer responsibility for payment hurts the poor and the chronically ill the most, causing huge non-compliance problems with the resultant impact on health status. People forgo the Lipitor and end up with heart disease. Catastrophic coverage is a green light for providing the nearly dead with excessive acute care, but it is not particularly helpful for chronically ill patients who have to spend through the deductible corridors and doughnut holes to get to the promised land of acute care catastrophic coverage. And Medicare, bless its heart, is emulating the private sector PPO market (with a little faith-based and for-profit disease state management thrown in) rather than re-energizing the capitated Medicare HMO market. This is all goofy.

I was a fan of Medicare HMOs in the late 1980s and early 1990s because I observed the transformative effects of capitation on the organized medical groups of California. The best of those doctor groups, especially the pioneers who took full capitation risk, looked at the capitated seniors as whole patients, examined all the medications their elderly patients were taking, even fixed their patients’ loose carpets so wobbly seniors wouldn’t go boom-fall-down and end up needing hip replacement. Why did the doctors care? Because they were at financial risk for the acute care consequences of bad chronic care management.

Capitation failed because it was under-funded in the mid- to late 1990s as Medicare HMO penetration grew and these groups started to attract more, and much sicker, patients–and as reimbursement failed to keep pace with the rising cost of technology. Journalists demonized capitation as bribing doctors to under-treat patients. Medical groups exhausted the strategy of reducing hospital bed days per thousand members as PPOs with preadmission certification quickly emulated the hospital utilization profile of the medical groups. And to be fair, a lot of capitated medical groups abused the system or were incapable of managing the risk. But the real reason capitation stalled and failed was that there were not enough willing and able medical groups that were sophisticated enough to transform care delivery, reduce hospital use and manage within a capitated budget. Nevertheless, as an incentive, capitation caused delivery system transformation, experimentation and organizational innovation. In contrast, fee for service is a reward for doing more regardless of the outcome, and is a particularly toxic incentive for the management of chronic care patients. We can do better.

I don’t predict a return to capitation, but I do believe we need to design Daughter of Capitation, a reimbursement system aimed at paying providers to maximize the efficiency and effectiveness of care for the chronically ill population. It should be designed and promulgated by CMS (the artist formerly known as HCFA), and should be copied by the private sector as the way that chronic care is reimbursed. It should encourage providers to coordinate their care all the way from primary prevention to hospice. It should be evidence- and outcome-based. It should allow innovators to experiment and design new delivery systems that improve performance, and the innovators should enjoy the surplus or profit of their innovation—provided it is based on true innovation, not because they are cream-skimming healthy patients. It should all be enabled by 21st-century IT and bioscience, and it should reward constructive redesign of the entire health care delivery system. Not much to ask.

Early signs of this can be seen in the pay-for-performance experiments around the country. Large medical groups and integrated delivery systems from HealthCare Partners in Los Angeles to Kaiser to Sentara Health Systems are structuring themselves to be willing receptors of such payment mechanisms. Let’s get a new set of incentives out there so that these folk and other innovators can come up with a 21st-century health care delivery system for the effective management of chronic care. Before it’s too late.

Ian Morrison is an author, consultant and futurist based in Menlo Park, California.