"Managed Care Update"

Capitated Contracts Losing Favor Within the Hospital Industry

As more hospitals reject capitated contracts, insurers expect to see further earnings erosion.

IT APPEARS THAT AN INCREASING number of hospitals in mature managed care markets like California and Colorado are rejecting capitated managed care contracts.

If future events verify this trend, the experience of hospitals may demonstrate a way for clinical laboratories to reject capitated arrangements for laboratory testing in favor of other types of agreements.

California is the bellwether state for managed care trends. Hospitals there are already in widespread rebellion against capitated contracts. “We got sold a bill of goods,” said Richard Warren, CEO of El Camino Hospital in Mountain View, California. “I don’t know anybody who’s making money on it.”

They Don’t Make Sense

Columbia/HCA Healthcare Corp. is in the process of renegotiating or exiting capitated contracts covering its California hospitals. Columbia Public Information Officer Jeff Prescott confirmed that the company had changed its policy toward capitated agreements, saying, “in most cases they don’t make sense for us.”

Like clinical laboratories, hospitals find capitated contracts to be unprofitable, difficult to administer, and nearly impossible to acquire the data needed to properly evaluate utilization and risk. “The all-encompassing global contracts have been financial disasters, and so have the hospital-only capitation agreements,” said Larry Foust, attorney with Jenkens & Gilchrist in Houston.

Widespread Resistance

Hospitals, with plenty of economic clout, have more power to reject capitation than clinical laboratories. Also, capitation remains widespread among primary care physicians and some specialist categories. But THE DARK REPORT predicts that the day fast approaches when physicians mount their own widespread resistance to capitated arrangements.

It should also be noted that any growing shift by providers away from capitation will have a financial impact on many HMOs. For example, PacifiCare Health Systems, Inc. is organized almost totally upon capitated, shared-risk arrangements. Moody’s Investor’s Service, recognizing hospitals’ growing rejection of capitation, recently downgraded PacifiCare’s rating for precisely this reason.

Lab executives and pathologists should begin tracking this new trend. It is likely that hospitals will participate in developing another reimbursement mechanism to replace capitation. Their solution may help clinical laboratories improve the risk-reward combination from managed care contracting.

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