Managed Care Contracting -- Primary Care Physician Capitation

This is the seventh article in the Managed Care Contracting "Signature Series" by Managed Care Resources, Inc. -- articles on topics in managed care written by experts in the field. The authors of this article are Ira H. Rosenberg and  Michael Backus.

This article examines the issues surrounding Primary Care Physician (PCP) capitation. It is divided into four sections:


PCP capitation is the amount of money a primary care physician receives every month for members that have selected that physician as their PCP. It can either be paid directly to the physician by an HMO, or to an IPA that has signed a professional services (or "Part-B") capitation agreement. The more sophisticated payors will age/sex adjust the capitation to reflect actuarial experience. Thus, a PCP will receive more for a 25-year-old female than for a 13-year-old male. In addition, payment for Medicare-risk members will be higher than for commercial (non-Medicare-age) members.


As with all capitation, the payor's fundamental motivation for offering the PCP a cap is the desire to "off-load" risk onto another party. In this case, the strategy is to transfer the risk for all of a member's basic care to the PCP, and then offer an incentive for management of the specialty care. The payor correctly assumes that a PCP can better manage utilization than any set of administrative procedures can, and thus looks to shift the responsibility for it.

When contracting for Part-B capitation, payors may have other reasons for offering the PCP capitation. One possibility may be that in a given area there may not be a group with the capability of accepting Part-B capitation. Many large practices, IPAs, and PHOs, seek out Part-B capitation, but few have developed the infrastructure required to actually manage the risk. While a well-run PHO may be closer to both patients and providers, and thus be better at managing care than an HMO, there are scores of inexperienced or ill-equipped IPAs and PHOs that have been financial disasters. In many of these situations, the HMO is left to pay off the outstanding medical claims, meaning it really ended up paying twice. A second possibility may be that an HMO may be seeking to prevent the formation of an IPA, or to avoid dealing with a powerful one. If the HMO is willing to offer contracts directly to PCPs, the PCP has less need to join the IPA to obtain managed care patients. And finally, the HMO typically has more bargaining leverage with an individual physician than with a well-organized IPA or PHO. When dealing with a PCP, HMOs often adopt a take-it-or-leave-it approach to contracting. Many PCPs, more focused on patient care than on negotiations, accept less than optimal terms or reimbursement.

For the PCP, the accepting of a cap is usually driven by several factors. First, may be the reimbursement method selected by the payor. If the PCP wants to see that payor's patients, the only option may be to accept capitation. Second, the PCP may feel that he/she can manage care better than the average physician can. If capitation rates are set based on average costs, and your costs are lower than average, then the potential for bonus exists. A well-managed panel should yield payments higher than simple fee-for-service reimbursement, if it is contracted for on a basis that includes an incentive plan. Finally, accepting capitation may lower administrative costs. With any managed care plan there are pre-certification and other administrative requirements. Capitation eliminates several of the billing and collection costs, including bad debt expenses.

Covered Services

The first question that arises is "What is covered under the cap?" That is, what services provided by the PCP are covered by the capitation rate, and for what services can the PCP receive additional reimbursement? In our experience, coverage has ranged from including everything the PCP does, to only including office visits, and there are valid reasons for both of these positions. The final agreement is usually a compromise. A typical PCP capitation will include office visits, minor in-office procedures, inpatient visits, supplies, and care management. Items such as X-rays, labs, immunizations, and drugs are not included.

There are several reasons for covering virtually everything. From the payor's perspective, the more things that are covered, the lower the costs associated with administering the cap. There are no claims to pay, and only encounter data to be processed and automatically adjudicated. Likewise for the PCP. The more items that are covered, the fewer "low-dollar" claims that need to be submitted and fewer payments that have to be posted. With an average cost of several dollars per claim for a small PCP office, this can represent a real saving. Often, a simple report from the scheduling or billing system can be submitted to meet encounter data requirements, saving time, supplies, and postage. Covering all services also reduces any motivation for self-referral or over-servicing a patient.

At the same time, however, there are good reasons for covering only basic visits. First, there can be discrepancies between the services provided by PCP offices. Some physicians will perform simple procedures such as wart removal and toenail trimming, or offer simple radiology services. In addition, a PCP that operates in an urgi-care setting may provide simple casting and suturing. Clearly it is desirable for the payor to get these services done in the lowest cost setting possible. However, the physician may not want to provide them and incur the accompanying expenses without reimbursement. Much of the encounter data may be incomplete. Second, if there are no payments based on encounter data, PCPs are not highly motivated to submit accurate data on a timely basis. Like most administrative sanctions, contract requirements and threats of penalties have proven generally ineffective at generating compliance.

Thus, the compromise result mentioned above is logical. Doing immunizations is a good example. Because payors care about HEDIS reporting, paying fee-for-service for immunizations helps insure that PCPs will submit the data on immunizations. In addition, for the PCPs, immunization drug and supply costs can be $30-40 for a visit, clearly an amount worth billing for. With simple imaging, a win/win scenario applies. It is generally cheaper for the payor to reimburse the PCP for an X-ray and pay a small over-read fee, than to send the patient to a hospital's outpatient department or an imaging center. The PCP recovers the variable costs associated with the images and covers some of the overhead from installing the equipment. The patients are happy because they didn't have to go to another place for the films to be taken, and results are available immediately.

Generally, payors will establish one PCP capitation schedule across their network. The more advanced ones may take into account the variety of office capabilities, and have several different schedules. For example, there may be one capitation schedule for offices without radiology, and another, higher schedule for the offices with radiology. Setting those two rates can be as easy as looking at the historical cost for simple radiology and adding that amount to the basic capitation schedule. Then, a periodic examination of encounter data and outside radiology utilization by PCP office can serve to monitor whether or not the strategy is working.

While the list of covered services varies by payor, there is usually an underlying philosophy used to make the decisions. For the PCP, a payor that selects, sticks with, and articulates a philosophy is much easier to work with than one that negotiates each deal separately. Typically, the exceptions to the rationale have valid explanations, usually driven by a mix of cost and patient care issues. A few other items that are typically not covered under PCP capitation along with the rationale behind the decision are listed below:

  • Nursing Home Visits -- It is already uneconomic for a PCP to go to a nursing home for one or two patients. Payment for each visit may lessen the burden, promote continuity of care, and create incentive for a visit. This may prevent a hospital admission, and avoid payment to the nursing home medical director for a monthly visit.
  • Initial Newborn Exam and Daily Hospital Care - Parents often select a different PCP for their newborn, thus the PCP would not receive any compensation for that care.
  • Minor Surgical Trays -- It is less expensive to pay the PCP than a Surgi-center.

When contracting, make sure to examine what is often known as the "default provision". Some contracts will specify that all services provided by the PCP are included in the capitation payment except those shown on an attached list. Other contracts will list the items included in the capitation, and anything not listed is paid for separately. As computer systems and CPT codes change, the difference between these two positions can become significant.

Panel Size

Because a PCP accepting capitation is bearing risk, one of the toughest issues to resolve is how large a patient panel should be to statistically "cover" the risk being assumed. The general rule-of-thumb is that a PCP needs 100 commercial members to adequately spread their risk. IPAs and PHOs generally serve as aggregators of lives, so that a PCP can accumulate 100 lives, even though the patients are from multiple HMOs.

One of the problems in accepting a contract directly from an HMO is that many PCPs simply don't have that many members with an individual HMO. Progressive HMOs have developed means of addressing this issue. Some pay fee-for-service to the PCP until his/her panel size reaches 100 members, and still offer utilization incentives for managing specialty care. Others have developed a form of PCP-stop loss insurance. With these plans, the PCPs submit their encounter data, and if the capitation is less than 70-80% of what the fee-for-service payments would have been, the HMO makes a lump sum payment to the PCPs to bring them up to that level.


PCP capitation is simply another payment mechanism within the managed care environment. As with any financial arrangement, it can work for everyone involved as long as there is a clear understanding of the implications and risks involved on both sides.

For more information on Managed Care Contracting please contact us at (630) 325-6543 or by email at .


I hope that you will join us as we explore all of the elements of managed care contracting in the coming months. In addition, we also offer a "Signature Series" on "Medical Management Under Managed Care". We hope that the two series combined will lessen the mystery of managed care and help level the playing field between providers and payers.

Ira H. Rosenberg

Ira H. Rosenberg

President, Managed Care Resources, Inc.

The Managed Care Resources, Inc. team has over 150 years of combined experience in the development and implementation of managed care services. Please visit our home page to learn more about how we can assist you with your managed care needs. We also invite you to contact us with questions or comments.

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