Academic health systems management: The rationale behind capitated contracts

Objective To determine why hospitals enter into "capitated" contracts, whic h often generate accounting losses. The authors' hypothesis is that hospita ls coordinate contracts to keep beds full and that in principal, capitated contracts reflect sound capacity management. Summary Background Data In high-overhead industries, different consumers pa y different prices for similar services (e.g., full-fare vs. advanced-purch ase plane tickets, full tuition vs. financial aid). Some consumers gain acc ess by paying less than total cost. Hospitals, like other high-overhead bus iness enterprises, must optimize the use of their capacity, amortizing over head over as many patients as possible. This necessity for enhanced through put forces hospitals and health systems to discount empty beds, sometimes t o the point where they incur accounting losses serving some payers. Methods The authors analyzed the cost accounting system at their university teaching hospital to compare hospital and intensive care unit (ICU) length s of stay (LOS), variable direct costs (VDC), overhead of capitated patient s. and reimbursement versus other payers for all hospital discharges (n = 2 9,036) in fiscal year 1998. The data were analyzed by diagnosis-related gro ups (DRGs), length of stay (LOS), insurance carrier, proximity to hospital, and discharge disposition. Patients were then distinguished across payor c ategories based on their resource utilization, proximity to the hospital, D RG, LOS, and discharge status. Results The mean cost for capitated patients was $4,887, less than half of the mean cost of $10,394 for the entire hospitalized population. The mean c apitated reimbursement was $928/day, exceeding the mean daily VDC of $616 b ut not the total cost of $1,445/day. Moreover, the mean total cost per pati ent day of treating a capitated patient was $400 less than the mean total c ost per day for noncapitated patients. The hospital's capitated health main tenance organization (HMO) patients made up 16.0% of the total admissions b ut only 9.4% of the total patient days. Both the mean LOS of 3.4 days and t he mean ICU LOS of 0.3 days were significantly different from the overall v alues of 5.8 days and 1 day, respectively, for the noncapitated population. For patients classified with a DRG with complication who traveled from mor e than 60 miles away, the mean LOS was 10.7 days and the mean total cost wa s $21,658. This is in contrast to ail patients who traveled greater than 60 miles, who had an LOS of 7.2 days and a mean total cost of $12,569. Conclusion The capitated payor directed the bulk of its subscribers to one hospital (other payers transferred their sicker patients). This was reflect ed in the capitated group's lower costs and LOS. This stable stream of rela tively low-acuity patients enhanced capacity utilization. For capitated pat ients, the hospital still benefits by recovering the incremental cost (VDC) of treating these patients, and only a portion of the assigned overhead. T hus, in the short run, capitated patients provide a positive economic benef it Other payers' higher-acuity patients arrive more randomly, place greater strains on capacity, and generate higher overhead costs. This results in d ifferential reimbursement to cover this incremental overhead. Having a port folio of contracts allows the hospital to optimize capacity both in terms o f patient flows and acuity, One risk of operating near capacity is that cap itated patients could displace other higher-paying patients.