DPC vs Capitation: Parallels to Ponder

Once touted as the antidote for rising healthcare costs and a method of freeing doctors to “focus on the patient” and not the paperwork, the “innovative” capitated health plans of the 1990’s are now virtually nonexistent, with participants quietly shifting back to the Fee-for-Service model that capitation was slotted to replace.

For those that didn’t live through this era a definition is in order:

“…capitation, or the payment by managed care organizations (MCOs) to providers of a fixed annual or monthly lump sum per patient. If a provider organization could deliver health care services to a patient that cost less than the lump sum, it made a profit; otherwise, it lost money. This is provider financial risk at the extreme.” http://blog.academyhealth.org/acosnotcapitation/

Capitation payments are used by managed care organizations to control health care costs. Capitation payments control use of health care resources by putting the physician at financial risk for services provided to patients… Capitation is a fixed amount of money per patient per unit of time paid in advance to the physician for the delivery of health care services. The actual amount of money paid is determined by the ranges of services that are provided, the number of patients involved, and the period of time during which the services are provided. https://www.acponline.org/residents_fellows/career_counseling/understandcapit.htm

And here are a couple commonly accepted explanations of Direct Primary Care (DPC):

“Perhaps the defining characteristic of DPC practices is that they offer patients the full range of comprehensive primary services, including routine care, regular checkups, preventive care, and care coordination in exchange for a flat, recurring retainer fee that is typically billed to patients on a monthly basis.” http://www.aafp.org/dam/AAFP/documents/practice_management/payment/DirectPrimaryCare.pdf

“DPC eliminates undesired fee-for-service (FFS) incentives in primary care. These incentives distort healthcare decision-making by rewarding volume over value. This undermines the trust that supports the patient-provider relationship and rewards expensive and inappropriate testing, referral, and treatment. DPC replaces FFS with a simple flat monthly fee that covers comprehensive primary care services. Fees must be adequate to allow for appropriately sized patient panels to support this level of care so that DPC providers can resist the numerous other financial incentives that distort care decisions and endanger the doctor-patient relationship.” http://www.dpcare.org/#!about1/ccz5

On the surface there doesn’t seem to be a whole lot of difference between DPC and Capitation. The payment methods of the two models are virtually the same: a fixed sum is paid to the provider per unit of time per person to cover potential medical needs.

And philosophically, most of the same arguments now used to tout the advantages of DPC were also used to make the case for capitation plans in the early 1990s.

So why should we have such hope in DPC (and I do) when its financially similar predecessor did not succeed?  What are the fundamental distinctions that need to be considered when comparing these two similar payment models?

First of all, we need to understand some of the factors that may have contributed to the extinction of Capitation; and there were multiple forces working against it not the least of which was the fact that the capitated “fee” was paid by a third-party with its own financial interests at stake.

In the non-ideal world of healthcare, sometimes the “innovative disruption” just means shifting as much risk to someone else as possible while promising simplicity and greater practice autonomy.  Unfortunately for many of my colleagues who jumped at these promises, it was indeed too good to be true.  Here is excerpt from a couple of 2002 articles about “capitation in decline”

“Many providers “have found they lost a lot of money with capitation, and they don’t want to participate anymore,” said Stuart Altman, professor of national health policy at Brandeis University in Waltham, Mass.

For several years, health plans have been lowering the capitation rates they pay providers, experts agree. At first, this just squeezed some money from the providers’ pockets; recently, however, levels have gotten so low that some providers have gone bankrupt, critics of the arrangement contend. This has served as a warning to other providers that the system needs to be changed.” http://www.businessinsurance.com/article/20000409/ISSUE01/10003002/falling-out-of-favor-with-providers-capitation-in-decline

“Among the lessons learned are, on the one hand, that providers can be too small to effectively manage health care financial risk, spreading it over too few patients. On the other hand, they can be too big for insurers to resist their efforts to push the assumption of that risk back on their plates. Both lessons point in the same direction: capitation is too much risk for providers to willingly, viably absorb.” http://blog.academyhealth.org/acosnotcapitation/

If the author above, Austin Frakt, is correct in his last sentence above… and we accept the premise that DPC is essentially the same payment model as Capitation, then will DPC represent too much risk for providers to “willingly, viably absorb”?

Given the unsustainable trajectory of current healthcare spending based on our third-party health network plan model and the premium costs that go with it, I would say that the “risk” of capitation-like arrangements is looking better and better all the time.

Another quarrel I have with Mr. Frakt’s piece (which actually compares ACOs to Capitation) is the notion that physician groups can be “too big for insurers to resist”, implying that it is OK for insurers to dominate price negotiations but NOT OK for physicians to dominate negotiations especially if cost control is the goal… how is that paradigm working out for us???

In the ideal world, the advent of innovative payment models would arise out of the quest to find the “sweet spot”.  That spot would seek to align incentives while balancing risk, maximizing efficiency, increase quality of service & outcomes and control costs.

And I think this is where DPC starts to separate itself from its financially similar family tree.  With capitation, it was all about the managed care company “controlling” costs.  But, of course, it was THEIR costs they were controlling, not the patient’s or the doctor’s costs.  This perversely aligned incentive resulted in taking the cut off the top to ensure profitability before capitated payments were issued, while maintaining a tight grip on care plans and resource utilization which cuts into efficiency and increases administrative costs for the entire plan.

With DPC, it isn’t so much about controlling costs, but more about actually knowing the costs upfront by excluding the third-party; this enables value to be determined because the patient is paying for availability, time, experience and judgment of the doctor when the patient needs them as opposed to premiums and fees that go to finance a cartel.

This is why I say that there are only two real stakeholders in healthcare: The doctor and the patient; there are three if you count the self-funded employer that may help pay a portion of a DPC fee.

So, does DPC have an advantage that Capitation did not have and will it survive?  It has several advantages and I believe strongly that it will survive and thrive.

But the single most important variable between DPC and Capitation, and why I believe DPC has a distinct advantage, is the fact that in the DPC model the recipient of care is also the consumer (buyer) of the care?  Without this vital consumer-driven component, DPC risks becoming the next “Capitation”.

As DPC physicians, whether in large or small practices, we need to be very cautious who we partner with and who we allow to pay us.  We should proceed with extreme caution and know that government payers don’t care about, nor are the influenced by the size of the practice.  This is because with government payers’ prices are not determined by negotiating clout, but by bureaucratic force and politics.  They only care about budgets and ballots.

The magic of DPC is that a DPC physician has dozens or hundreds of “single payers” whom the doctor serves individually; not as a group of lives to manage as in a capitated plan, but rather as individuals.

Yes, DPC is an innovative way for doctors to get paid that does away with the moral hazard and hassles of fee-for-coding.  Yes, it minimizes A/R and simplifies billing.  Yes, it is a lifestyle friendly way to practice medicine.  Yes, it allows doctors to focus on care, rather than codes.  Yes, it allows outcomes to replace outputs.

But the most important factor of all is who pays us.  That’s why it works.

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