Are your PPOs merely capitation in disguise?
Are your PPOs merely capitation in disguise?
Discounted fee-for-service cloaks budget limits
Whether youre aware of it or not, most physician groups participating in preferred provider organization (PPO) contracts with insurers are capitated — even though the contracts are presented as discounted fee for service (FFS).
That’s the view of orthopedist Thomas P. Schmalzried, MD, president of California Orthopedic and Sports Medicine Associates in Los Angeles. The difference in how payment works out between a PPO and an HMO really amounts to a mere delay, he argues.
A physician group’s PPO contract in a given year will reflect discounted fees on a per-fee basis, but in actuality, there is a limit on a PPO budget allowed by the insurer for each PPO plan it offers, just as there is for an HMO plan. If that PPO budget limit is exceeded by providers in a given budget year, the budget for the next year is reduced to make up for that loss.
Doctors see the reduction in the form of further discounted fees, and that is exactly what physicians have seen in recent years. The subtle form of capitation is simply retrospective rather than prospective, Schmalzried says. It’s also a big reason for the heavy administrative costs in managed care.
"Those who are paying for health care are no longer in the insurance’ business," he explains. "Insurance implies risk. Today there is no risk because there is a budget for spending. Whether this occurs upfront,’ as with capitation, or retrospectively,’ as in discount [fee-for-service] PPO’s, they are both a manifestation of budgets. This feature is here to stay — regardless of what it is called."
Discounted FFS, with its tight but hidden overall budget target, requires tighter budget controls such as utilization analysis, case management, concurrent review, and claims adjudication, all of which require more staff and technical support.
Those administrative costs consume resources that could be better spent on preventive care or on keeping a lid on patient costs. The better option for everyone, he says, is for physicians to take charge of capitated contracts, assume the risks, and be personally accountable for how resources are used.
What surveys show
Schmalzried’s assertion that discounted FFS contracts are cutting physician revenue each year is supported by two recent surveys conducted by the Englewood, CO-based Medical Group Management Association (MGMA).1 One survey, the MGMA salary review, shows most physician and administrative salaries are not growing, according to Lisa E. Pieper, MBA, MGMA project manager. "They [physicians] are keeping costs down and working hard, yet physician salaries — and [administrators’] — are static. This is the squeeze that our members are in."
According to data in the survey, released in late 1998, group practices’ FFS gross collection percentage, which is the percentage of gross charges collected by group practices, continued its downward movement throughout 1997 to 69.2%, marking the first time it has dipped below the 70% mark. In addition, FFS adjusted collection percentages — the amount of billed charges collected by medical groups — stayed level at 95.5% for multispecialty practices in 1997, continuing an 11-year trend of either flat or slightly declining.
A third key indicator comes from the cost factor, as reflected in MGMA’s 1998 cost survey of 1,334 medical practices. Once costs are factored into the equation, actual revenues declined by 5.5%, according to the survey.
Reference
1. Schmalzried TP, Luck JV. Capitated reimbursement for medical services returns control of the patient to the surgeon. Orthopedics 1998; 21:620-631.
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