Fully Capitated Payment Breakeven Rate for a Mid-Size ... · analysis calculates the aggregated capitated rate necessary for the practice to break even compared with FFS, provides

ARTICLEPEDIATRICS Volume 138 , number 2 , August 2016 :e 20154367

Fully Capitated Payment Breakeven Rate for a Mid-Size Pediatric PracticeSteven A. Farmer, MD, PhD, a, b, c, d Joel Shalowitz, MD, MBA, c Meaghan George, MPP, a Frank McStay, MPA, a Kavita Patel, MD, MS, d James Perrin, MD, e Ali Moghtaderi, MBA, PhD, b Mark McClellan, MD, PhDa

abstractBACKGROUND AND OBJECTIVES: Payers are implementing alternative payment models that attempt

to align payment with high-value care. This study calculates the breakeven capitated

payment rate for a midsize pediatric practice and explores how several different staffing

scenarios affect the rate.

METHODS: We supplemented a literature review and data from >200 practices with interviews

of practice administrators, physicians, and payers to construct an income statement for a

hypothetical, independent, midsize pediatric practice in fee-for-service. The practice was

transitioned to full capitation to calculate the breakeven capitated rate, holding all practice

parameters constant. Panel size, overhead, physician salary, and staffing ratios were varied

to assess their impact on the breakeven per-member per-month (PMPM) rate. Finally,

payment rates from an existing health plan were applied to the practice.

RESULTS: The calculated breakeven PMPM was $24.10. When an economic simulation allowed

core practice parameters to vary across a broad range, 80% of practices broke even with

a PMPM of $35.00. The breakeven PMPM increased by 12% ($3.00) when the staffing ratio

increased by 25% and increased by 23% ($5.50) when the staffing ratio increased by 38%.

The practice was viable, even with primary care medical home staffing ratios, when rates

from a real-world payer were applied.

CONCLUSIONS: Practices are more likely to succeed in capitated models if pediatricians

understand how these models alter practice finances. Staffing changes that are common in

patient-centered medical home models increased the breakeven capitated rate. The degree

to which team-based care will increase panel size and offset increased cost is unknown.

aDuke-Margolis Center for Health Policy, Washington, District of Columbia; bGeorge Washington University,

Washington, District of Columbia; cNorthwestern University Feinberg School of Medicine and Kellogg School

of Management, Chicago, Illinois; dThe Brookings Institution, Washington, District of Columbia; and eHarvard

Medical School, Boston, Massachusetts

Dr Farmer, Ms George, Mr McStay, and Dr McClellan conceptualized and designed the study,

performed the literature review and data analysis, and drafted the initial manuscript; Drs

Shalowitz and Perrin critically reviewed the manuscript; Dr Patel conceptualized and designed the

study; Dr Moghtaderi provided data analysis; and all authors approved the fi nal manuscript as

submitted.

DOI: 10.1542/peds.2015-4367

Accepted for publication May 18, 2016

Address correspondence to Steven A. Farmer, MD, PhD, Center for Healthcare Innovation and

Policy Research, George Washington University, 2100 Pennsylvania Ave, Offi ce 316, Washington, DC

20037. E-mail: [email protected]

PEDIATRICS (ISSN Numbers: Print, 0031-4005; Online, 1098-4275).

Copyright © 2016 by the American Academy of PediatricsTo cite: Farmer SA, Shalowitz J, George M, et al. Fully

Capitated Payment Breakeven Rate for a Mid-Size Pediatric

Practice. Pediatrics. 2016;138(2):e20154367

WHAT’S KNOWN ON THIS SUBJECT: Payers are

introducing alternative payment models nationwide

in the hopes of improving quality and reducing

costs. Although previous studies have evaluated

their effects on spending and outcomes, few have

explored how they affect practice fi nances.

WHAT THIS STUDY ADDS: This study calculates the

breakeven capitated payment rate for a midsize

pediatric practice, provides a tool for practices to

estimate their own breakeven rates, and models the

relationship between attributed patient volume and

payment rates under several practice scenarios.

by guest on April 3, 2020www.aappublications.org/newsDownloaded from

FARMER et al

Health care spending continues to

grow at an unsustainable rate and

is increasingly unaffordable for

many Americans. 1, 2 The fee-for-

service (FFS) payment method that

dominates health care payments

contributes to inefficiency by

rewarding volume and ignoring

quality. 3 – 7 To address these

deficiencies, public and private

payers are experimenting with

alternative payment models (APMs)

that attempt to align payments with

improved value. More than 21 million

lives are covered through primary

care medical homes (PCMHs), where

FFS payments are increasingly

augmented with partially capitated

per-member per-month (PMPM)

payments. 8 As of 2014, >40% of all

commercial in-network payments are

value based. 9

Pediatricians must understand APMs

and their implications for practice

financials. These payment models

can be confusing, they often lack

transparency, and there is limited

evidence to guide providers in

understanding them. 10 To address

this knowledge gap, we present a

simplified financial model, which

converts a hypothetical, independent,

midsize, general pediatric practice

from FFS to full capitation. The

analysis calculates the aggregated

capitated rate necessary for the

practice to break even compared with

FFS, provides a financial analysis tool

for practices, and investigates the

relationship between the breakeven

capitated rate and variations in

practice parameters including panel

size, overhead, physician salary, and

staffing ratio. Finally, mean payment

rates from a real-world payer are

applied to assess practice viability.

METHODS

Model and Data Sources

This analysis constructs income

statements for a practice with 6

clinicians, including 5 full-time

equivalent (FTE) physicians and

1 FTE advanced practice provider

(APP); FTEs may be allocated

between multiple part-time

providers. The outcome variable

of interest is the breakeven

comprehensive capitated rate

inclusive of shared savings and

quality incentive payments.

The income statement was developed

after interviews with 3 public

and private payers and 2 practice

administrators from midsize

practices. Multiple data sources were

used to establish model assumptions,

including published medical

literature, the Bureau of Labor

Statistics, the Centers for Disease

Control and Prevention, the Medical

Group Management Association,

surveys from the American Academy

of Pediatrics and American Academy

of Family Physicians, and proprietary

data from 200 independent

pediatrics practices across 40

states. As a robustness check, the

final model was reviewed by 2

additional practice administrators,

1 commercial payer, and a pediatric

practice consultant.

For simplicity, the model imposes a

number of constraints. First, it makes

a direct conversion from FFS to full

capitation, inclusive of quality and

cost incentive payments. Second, it

shifts all patients in the practice to

capitated payments simultaneously.

Third, the capitated rate holds the

panel size constant throughout the

year and includes only responsibility

for basic point-of-care testing, such

as rapid strep, hemoglobin, and

urinalysis. Fourth, any revenues

from hospital consultations or

circumcisions are excluded. Finally,

the model simulates a 50/50

payer mix between Medicaid and

commercial payers. 11, 12

Expense and Revenues Under FFS and Capitation

Published panel sizes vary widely,

depending on practice style and the

age distribution of the panel. 13 – 18

The model assumes a panel size

of 1700 and an average of 3.24

visits per patient per year. 15, 19, 20

Table 1 summarizes the core model

assumptions, along with the range for

each variable identified from multiple

sources.

Total expenses are often reported as

60% of actual revenue in pediatrics

and family medicine. 14, 21 –24

To increase transparency and

generalizability, the model separates

staff salary and fringe benefit

expenses from other overhead.

Pediatricians’ salaries vary with

differences in practice ownership,

payer mix, productivity, and

geographic location. 14, 25, 26 The

model uses the Bureau of Labor

Statistics national median salary of

$180 000. 25 Practice administrator

salaries varied for similar reasons,

and the model uses a salary of

$92 000.27, 28 The median salaries

for APPs and registered nurses are

consistently reported at $95 000 and

$65 000, respectively. 29 – 31 Median

salaries for administrative and

clinical support staff vary based on

duties but converge ~$34 000.32 – 35

Fringe costs as a percentage of staff

2

TABLE 1 List of Core Model Assumptions and Practice Parameters

Independent Variable Modeled Range

Physician salary $180 000 $172 000–$254 000

Total expenses (% of revenue)a, % 62 40–70

Overhead (% of revenue), excluding staff expensesb, % 30 24–37

Visits per d 25 14–30

FFS reimbursement $100 $80–$130

Panel size 1700 1000–2500

Staffi ng ratio 3.2 3.0–3.5

Visits per year per patient 3.24 2.32–3.50

a Total expenses are all practice operational costs except for physician salary.b Overhead is total expenses less physician salary and staff expenses.


PEDIATRICS Volume 138 , number 2 , August 2016

salary are 15% for clinicians and the

practice administrator and 30% for

support staff. 14, 36 The model assumes

a support staff to physician ratio of

3.2. 14, 20, 37 Overhead excluding staff

expenses was set at 30% of revenue,

resulting in total overhead of 62% of

revenue.

Overhead costs excluding staff

expenses are calculated as a

percentage of total revenue in

the capitated model. The model

increases nonstaff overhead

costs from 30% to 35% to allow

for additional expenses such as

electronic health record upgrades

and reinsurance. 38 – 40 Fewer

resources may be needed for billing-

related administrative functions in

capitated environments, but staff

must still confirm valid insurance

coverage, and detailed quality

reporting is required. Because

total expenses are calculated as a

percentage of payments collected

(not receivable) in the FFS model,

the total expenses account for a

similar proportion of revenues in

the capitated model (63%).

Vaccines are a large expense for

practices. Given the Centers for

Disease Control and Prevention

vaccine schedule for children 0 to

18 years of age and current vaccine

prices, average vaccination cost is

~$135 per patient per year. 41, 42

Practices typically break even or

gain small profits from vaccinations

billed to commercial payers, whereas

the opposite is true for those billed

to Medicaid. 43 Because the modeled

practice is a 50/50 payer mix,

vaccines are excluded from both the

FFS and capitation models.

Copayments may contribute

meaningfully to practice revenues in

both FFS and capitation. The model

incorporates an average patient

copayment of $8. This amount

is calculated by multiplying the

average commercial copays ($23)

by the proportion of commercial

patients (50%) and the likelihood

that commercial plan requires

copayments (66%). 44 Many

states allow (or will soon allow)

nominal copayments for Medicaid

beneficiaries, but these have been

excluded from the model. 45, 46

In the FFS model, practice revenues

are tied to physician and APP

encounters. Practice revenues

are calculated by multiplying the

average number of visits per day, the

number of providers, the number

of clinical days per year, and the

average payment per encounter. 47

The hypothetical practice assumes

25 patients per day per provider,

220 clinical days annually, and

$100.00 average payment per

visit. 14, 48 –50 APPs may independently

bill at 85% of physician fees,

although APP roles may vary by

practice. 51 The FFS model accounts

for rejected claims, no-shows,

and uncompensated visits by writing

off 10% of expected revenue. The

model includes a 5% practice

margin in both the FFS and capitated

scenarios so that the practice is

able to build and maintain financial

reserves for upgrades or unexpected

expenses.

In the capitated model, practice

revenue is driven by attributed

panel size and the average capitated

payment. Instead of billing payers

for individual patient encounters,

capitated practices receive a risk

adjusted base PMPM payment for

each attributed patient. Particularly

in pediatrics, the capitated rate

should account for the age of covered

patients. 52 The model excludes

vaccination, but if included in

capitated payments, rates must be

substantially higher and must

allow for vaccine price increases,

which occur annually if not more

frequently.

Providers typically receive incentives

for performance relative to quality

and cost benchmarks. Quality and

cost bonuses are paid when practices

reach predetermined performance

thresholds and as a percentage of

spending compared with targets,

respectively. For transparency, our

model converts quality and shared

savings payments into PMPMs.

Incentive payments and copayments

are added to the base PMPM to

calculate total revenue.

In capitation: Net Income = Patient

Co-payments + Capitation Base Rate +

Utilization Incentives + Quality −

Operating Expenses.

Sensitivity Analysis

Practices vary widely in organization

and style. Our model presents an

“average” practice, but several core

assumptions may vary significantly

between practices, including

physician salary, panel size, and

overhead. As a robustness check, an

economic simulation was constructed

where physician salary, panel size,

and overhead less staff expenses

were allowed to vary across the

range of values in Table 1. Each

simulation generated 500 different

practices. The model was iterated 50

times to generate a total of 25 000

practices.

Practice Transformation

Because revenues are not tied to

face-to-face physician or APP

encounters, capitation models allow

providers greater clinical autonomy

than FFS, and all practice staff may

contribute to patient care at the

level to which they are legally

entitled. 13, 37, 53 – 56 We modified the

practice’s staffing ratios to reflect

2 published PCMH transformations

to assess its effect on the PMPM. 37, 54

In 1 example, an additional APP

mental health provider, 2.5 nurses,

1.5 clinical support staff,

0.5 administrative support staff, and

0.5 of a practice administrator were

added. These additions increased

the staffing ratio by 37% (3.2 to 4.4).

In a second example, 2 nurses and

2 clinical support staff were added.

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FARMER et al

These additions increase the staffing

ratio by 25% (3.2 to 4.0).

Capitated Rates for a Real-World Payer

For illustrative purposes, we

obtained capitated rates and

program information for Capital

District Physicians Health Plan

(CDPHP), a health plan in upstate

New York that serves nearly a half

million commercial and Medicaid

members. 57 CDPHP provided data

from 2013, including the base

capitated rate, quality incentives,

and shared savings incentives

payments. We applied Medicaid,

commercial, and 50:50 blended

rates to our model with and without

staffing changes, to assess the

financial impact on our hypothetical

practice.

RESULTS

In Fig 1, the left-side income

statement is FFS, and the right side is

capitation. With attributed patients,

staffing, and salaries held constant,

the minimum breakeven aggregated

capitated rate for the hypothetical,

independent, midsize practice was

$24.10. This number may be reached

in several ways. For example, a

base PMPM rate of $20.60 could be

supplemented with $1.50 PMPM

quality incentive and a $2.00 PMPM

cost incentive. Figure 2 illustrates

the relationship between the panel

size and the breakeven aggregated

capitated payment rate. Practices

that receive a PMPM above the

line (in the green) generate higher

revenues than the FFS scenario,

whereas practices that receive a

PMPM below the line (in the red)

generate lower revenues than the

FFS scenario.

Figure 3 illustrates the findings

of the sensitivity analysis for 500

practices. The figure shows the

impact of random combinations of

model inputs across the range of

assumptions drawn from Table 1 on

the breakeven aggregated capitated

rate. In the simulation, 80% of

practices would break even at an

aggregated capitated rate between

$16.12 and $35.00.

With physician and staff salaries

again held constant, Fig 4 illustrates

the relationship between breakeven

aggregated capitated rates and the

2 PCMH staffing transformations

described above. The blue line

represents the breakeven aggregated

4

FIGURE 1Simplifi ed fi nancial model.

FIGURE 2Relationship between PMPM rates, attributed patient population, and profi tability. Breakeven is defi ned as the rate at which the practice is as profi table as it was under FFS. Without staffi ng or other operational changes, the model predicts a $24.10 PMPM; a lower PMPM would result in operational losses, and a higher PMPM would lead to increased revenues.



PMPM with no staffing adjustments.

The red line reflects the first staffing

transformation (38% staffing

increase), and the green line reflects

the second practice transformation

(25% staffing increase).

Table 2 presents CDPHP’s mean

capitated rates for both its Medicaid

and commercial populations,

and program details including

performance metrics and covered

services. CDPHP began transitioning

practices to full capitation in 2008 as

part of its Enhanced Primary

Care Initiative (EPCI). 57 Many of

CDPHP’s EPCI participating

practices are also certified PCMHs.

As in our model, vaccines are paid

separately on an FFS basis in the

CDPHP model. Age-, sex-, and risk-

adjusted capitated rates range

from $13 to $65 and depend in

part on whether the patient is in

a commercial or Medicaid plan.

The maximum incentive payment

available is $5.32, but on average,

practices earn 33% ($1.77) of the

potential maximum.

Holding all assumptions constant

in the FFS and capitation financial

statements, the model applies

the mean capitated payments of

$22 (base Medicaid PMPM rate)

and $36 (base commercial PMPM

rate) plus $1.77 PMPM incentive

payments (all patients). Our model

resulted in a 4% and 25% margin

in the Medicaid and commercial

plans, respectively. A practice that

blended 50% Medicaid and 50%

commercial patients resulted in a

base capitation rate of ~$29. After

the $1.77 incentive payment, the

blended practice earned a 17%

margin; this rate was sufficient

to support either of the 2 PCMH

staffing transformations.

DISCUSSION

Given unsustainable growth in

US health spending, public and

commercial payers are transitioning

to APMs that are intended to

better align payment with value.

Although many physicians have

hesitated to participate in APMs,

future participation in new

payment models will probably

be unavoidable. Thirty percent of

Medicare payments are already

tied to APMs. 58 Pediatricians need

to understand the implications

of emerging payment models for

practice organization and finances.

Our model calculates the aggregated

capitated rate where a pediatric

practice would break even relative

to FFS across a range of panel sizes,

describes how that point would

differ between practices, and

illustrates the impact of staffing

changes. Mean payment rates from

a real-world capitated payment

model, CDPHP, are applied as an

illustration.

To our knowledge, no study has

examined the practice financials

5

FIGURE 3Sensitivity analysis of breakeven aggregated capitation rates with varied practice assumptions. An economic simulation allowed model assumptions to vary across the range of values shown in Table 1. These values were drawn from multiple sources.

FIGURE 4Relationship between the breakeven aggregated capitated rate, panel size, and PCMH staffi ng variations. As staffi ng ratios change, the breakeven PMPM rate will also vary. This fi gure shows the impact of 2 staffi ng changes on the breakeven PMPM. The fi rst (red) adds an APP mental health provider, 2.5 nurses, 1.5 clinical support staff, .5 administrative support staff, and .5 of a practice administrator were added. The second (green) adds 2 nurses and 2 clinical support staff. To the extent that staffi ng changes increase effi ciency, the cost of additional staff may be offset by increased panel size.


FARMER et al

of a transition from FFS to

capitation in pediatrics. Kuo et al 59

recently estimated primary care

expenditures by Medicaid patients

at $19 PMPM, 25% below our

breakeven capitated rate. However,

most commercial plans reimburse

at higher rates than Medicaid plans,

and our breakeven rate reflects

the average of all patients in the

practice. 60

Practice style and organization

vary in important ways. The

sensitivity analysis presented

in Fig 3 demonstrates a wide

variation in breakeven rates

based on these differences. The

income statement shown in Fig

1 may be adapted to calculate

the breakeven capitated rate for

specific practice circumstances.

Even so, most practices will

need technical assistance from

payers to identify the number of

attributed patients (panel size),

assess performance on utilization

and quality metrics, and project

revenues. 61 Capitation model

designs also differ, as do eligibility

and participation requirements;

practices should pay careful

attention to program terms

when assessing the financial

impact of participation. If

vaccinations are included in

the capitated payments, a new

calculation is needed.

PCMH models are often paid through

capitation at rates intended to

support a team-based care approach

that may lower costs and improve

outcomes. 8, 62, 63 In these models,

physicians may elect to spend

more time with the most complex

patients while delegating simple

visits to a broader team. For

example, in the case of a pediatric

patient with asthma, simple but

important tasks such as teaching

nebulizer technique and reviewing

asthma action plans may be

performed by nurses or medical

assistants. 64, 65 Some clinicians

may work with patients by phone,

e-mail, Web chat, or even video call,

potentially improving efficiency,

access, and patient satisfaction. 49, 66

However, not all PCMH models

perform better than traditional

primary care models. Studies

of the effects of APMs and APM-

supported delivery reforms on

health care expenditures and

patient outcomes find mixed

effects. 67 – 73

PCMH practices often change

staffing ratios to optimize the care

team and extend services. The

optimal staffing mix should be

driven by practice and community

needs. 13, 74 – 76 Many of these staffing

changes will increase the breakeven

capitated rate. Our findings are

consistent with a recent review that

found that PCMH staffing changes

increase the breakeven capitated

rate by ~$5.00 PMPM.54 Our first

staffing model resulted

in an increase of $5.50 (23%), and

our second staffing model resulted

in an increase of $3.00 (12%).

Under capitation, practices may

increase revenue by increasing

panel size, increasing quality

incentives, or increasing utilization

incentives. There is therefore a

dynamic relationship between

staffing choices, practice efficiency,

and the breakeven capitation rate.

The mix of providers and services

that optimizes efficiency and

performance remains

undefined. 77

This study has several limitations.

We modeled a midsize,

independent, general pediatric

practice, but many other practice

configurations are possible.

Practices differ in the number

and type of providers, support

staff ratios, overhead costs, and

panel sizes. The model does not

account for varying ratios of new

to established patient visits or

the time and payment differences

between well and sick visits.

We based our practice on average

data drawn from >200 pediatric

practices distributed across a

broad geographic area, the medical

literature, and published surveys.

Although our model illustrates

important considerations in

transitioning to capitation, our

sensitivity analysis demonstrates

wide variation in the breakeven

capitation rate when assumptions

are varied. Individual practices

should use the income statement

as a guide to calculate the

breakeven capitated rate for their

specific circumstances. Lastly,

the assumption that all patients

simultaneously transition from

FFS to capitation is not typical,

and most practices will participate

in several payment models

simultaneously.

6

TABLE 2 CDPHP Enhanced Primary Care Capitated Payment Rates for Pediatric Patients

CDPHP Medicaid CDPHP Commercial

Mean base capitated rate, mo $22.00a $36.00a

Range base capitated rate, mo $14.00–$37.00a $21.00–$66.00a

Covered EPCI services Standard services: telehealth, 1-on-1 or group education classes,

emergency offi ce visits or off-hours basic visit, preventive

counseling, brief behavioral or mental health assessment and

medical management

Eligible cost/quality incentive

PMPM

$5.32b $5.32b

Example quality measures HEDIS measures: immunizations, asthma medication ratio,

antidepressant medication management, disease screenings, lead

testing, antibiotic use in children, member experience (CAHPS)

CAHPS, Consumer Assessment of Healthcare Providers and System; HEDIS, Healthcare Effectiveness Data and Information

Set.a Not risk or age adjusted, pediatric PMPM.b Most practices receive 33% of eligible performance incentive payments.



CONCLUSIONS

Practices are more likely to succeed

financially in APMs, such as

capitation, if they understand how

these models alter practice finances

and how to calculate the breakeven

rate and if they take advantage of

the added flexibility to improve

efficiency and value. Additional

work should focus on analyzing

practices in blended payment

models and the relationship

between differing staffing ratios,

patient panel size, and patient

outcomes.

ACKNOWLEDGMENTS

The authors thank CDPHP’s

Bruce Nash, Eileen Wood, and Ali

Skinner for providing us with data,

model support, and invaluable

editorial comments. We also thank

Cheryl Arnold, Theresa Cleveland,

Sunnah Kim, and Chip Hart for

their helpful comments on this

manuscript.

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7

ABBREVIATIONS

APM: alternative payment model

APP: advanced practice provider

CDPHP: Capital District

Physicians Health Plan

EPCI: Enhanced Primary Care

Initiative

FFS: fee-for-service

FTE: full-time equivalent

PCMH: primary care medical

home

PMPM: per-member per-month

FINANCIAL DISCLOSURE: The authors have indicated they have no fi nancial relationships relevant to this article to disclose.

FUNDING: Supported by the Merkin Family Foundation.

POTENTIAL CONFLICT OF INTEREST: The authors have indicated they have no potential confl icts of interest to disclose.


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Fully Capitated Payment Breakeven Rate for a Mid-Size ... · analysis calculates the aggregated capitated rate necessary for the practice to break even compared with FFS, provides