Taking the Mystery Out of Capitation

March 5, 2016

When you peel back the mysterious aura that surrounds capitation what you find is a reimbursement mechanism that is basically simple.

All capitation mechanisms stem from one simple mathematical formula. While elaborate capitation systems can be complex, it is possible to work through them if you have an understanding of the basis of capitation. Following is a simple example that demonstrates the formula used to determine the monthly capitation amounts paid to a primary care or specialist physician. In this example we will assume the following:

  • The service to be capitated is an office visit (CPT code 99213)
  • The projected volume of services is 3 office visits per patient per year (12 months)
  • The number of capitated patients and period of time capitated is 1 capitated patient covered for a year (12 months)
  • The target reimbursement for each office visit is $40.

Under these assumptions, the monthly capitation amount that would be paid to the physician for a single capitated patient is $10 per month. It’s easy to intuitively arrive at this amount:

  • I know that this individual patient will have three office visits at an expense of $40 each, for a yearly total of $120.
  • To capitate this patient, I will need to pay the primary care physician $10 per month. At the end of the year, the primary physician will have received $120, fully covering the three office visits at $40 each.

If the primary physician had 1,000 capitated patients, he/she would receive a monthly capitation check of $10,000.

The formula for calculating capitation amounts is:

                        (V / MM) X R    = $ PMPM

Where

V  is the projected volume of services

MM is the number of member months. A member month is one patient captivated for one month. 1,000 patients captivated for a year equals 12,000 months

R is the target reimbursement level for the service

$ PMPM is the monthly capitation amount expressed as $ per member per month.

Plugging the numbers from the example outlined above yields:

                        (3/12) X $40 = $10 per member per month

This formula works for any capitated population from one patient to thousands. There is one important point to keep in mind. V and MM must apply to the same time period.

For example, if you are calculating the capitation for 1,000 patients over a one year period, V is the volume of services provided to the 1,000 patients over the 12 months. If the volume of services covers only a one month period, the number of member months must be from the same one month period.

While the basic formula for calculating capitation amounts is intuitively simple, full blown capitation mechanisms are complex. The primary hidden issue in capitation is estimating the volume of services that will be provided to patients. These utilization projections require either extensive historical data or the expertise of an actuary. Inaccurate utilization or false utilization assumptions may produce grossly erroneous capitation amounts. For example, in the example above, if the patient had 4 office visits instead of 3, the capitation would increase to $13.33.

While it is certainly within the appropriate realm of practice for accountants to calculate capitation amounts, the utilization statistics or assumptions about the volume of services should be provided by a reliable and qualified expert. Even though these data may come from a qualified source, there is still considerable variation in data, making capitation as much an art as a science.

Another simple but important capitation formula is used to determine the utilization of inpatient services. Inpatient utilization is expressed as inpatient days per 1,000 patients.   In regions of the country with extensive managed care experience inpatient utilization is as low as 150 days of hospital services per 1,000 patients. It is easy to calculate inpatient utilization when the number of member months and the number of days of hospitalization are known. For example, assume we have 1,000 patients who have been capitated for one full year, 12 months. This gives us 12,000 member months. Also assume these 1,000 patients had a total of 200 days in the hospital. Under these assumptions, inpatient utilization is 200 days per 1,000 patients. “Days per 1,000” are usually reported in annual terms.

The formula for determining the annualized days per 1,000 is:

                        IP Days ¸(MM ¸ 12,000) = Days/1,000 Patients

Where:

MM is the number of member months

IP Days is the number of hospital inpatient days

Plugging the numbers above into this formula yields:

200 ¸(12,000/12,000) = 200 Days/1,000 Patients

Sophisticated capitation mechanisms go far beyond the type of capitation calculations in the examples above. More elaborate capitation mechanisms commonly include the following additions or variations to basic capitation calculations:

  • Age and sex adjusted primary care capitation – infants, women in child bearing ages, and elderly people are high utilizers of medical services. Therefore, basic capitation calculations vary with the age and sex distribution of the covered population. In fact, primary care capitations that are not age and sex adjusted are probably unfair to primary care physicians.
  • Adjusted capitation levels for different co-payment levels. Basic capitation calculations are adjusted to reflect the mix of $5, $10 or $15.00 co-payment levels.
  • Basic capitation calculations are adjusted to reflect risk pool calculations. If a risk pool has a high likelihood of being paid out, the basic capitation may be adjusted to reflect the likely payout.
  • Stop loss levels and reinsurance also affect basic capitation rates. A low stop loss level will decrease the basic capitation because reinsurance will cover the cost of high utilization or difficult cases.

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