July 1995 Bulletin

Tells key to capitating

by Thomas J. Grogan, MD

Thomas J. Grogan, MD, is clinical professor, department of orthopaedic surgery, UCLA, and CEO of California Orthopaedic and Sports Medicine Associates. This article was adapted from the audiotape that accompanies the Academy's book Health Care Reform and Managed Care: A Guidebook for Orthopaedic Surgeons.

The number one key in negotiating a capitated contract is that you must know the demographics of the group that you are capitating.

For instance, we know that the senior populations that we take care of, patients over age 65, consume four to five times more orthopaedic services than the under age 65 groups.

Given a certain number of patients on a yearly basis, we know exactly how much work is going to be required. At present we have our own experience-based data on more than 4 million member-months.

Based on California 1974 Relative Value Scale (RVS) units, I know the average orthopaedic surgeon does about 400 units of work per month or about 5,000 units of work a year. This is based on 1974 RVS units in which a complicated office visit would be one unit; arthroscopy, 8.9 units; and a total hip replacement is counted as 23 units.

We know that a patient under age 65 requires 0.115 units of orthopaedic work per year. That is, given 10,000 patients under age 65, we know it is going to require 1,115 units of orthopaedic work or basically one quarter of an orthopaedic FTE.

I can then charge out on a per member per month basis what we really expect that orthopaedic surgeon to earn for the year, normalized over that population. If we have an under age 65 population and we negotiate a contract at $1.50 per member per month, it is as if we are billing $150 per unit to take care of that patient.

We know that for the population of 10,000 patients over age 65, it takes 6,600 units of orthopaedic work or a little more than what one orthopaedic surgeon can do in a year.

So, when I negotiate these contracts, I know exactly what minimal amount of dollars is needed per member per month.

Another important factor in capitated contracts is to make sure there are stop/loss provisions. If I am the IPA (Independent Practice Association) and have a stop/loss provision, which for the average IPA is between $40,000 to $60,000, and I'm getting paid $1.50 per member per month, what happens if a member has a major trauma? What happens if that member is in the ICU for three months and requires 10 orthopaedic operations?

After the stop/loss is reached, it is not the IPA's responsibility to pay the bills for that patient; the responsibility for payment reverts back to the third-party payer. If the patient passes the stop/loss, my orthopaedic surgeons now bill the third-party payer on a regular fee-for-service basis of $1.60 per unit. Our downside is protected.

I don't like carve-outs of service in contracts. (Carve-outs are adjustments made to capitated reimbursement arrangements to reduce provider risk for services that are not directly controlled or that pose significant financial risk.)

Some orthopaedic surgeons say they don't want to deal with tumor patients or total hip revisions. I suggest that this philosophy is all wrong. You should adjust your contract negotiation on your charge side and take as much risk as you can because that's when you can control the dollars.

I would much rather take risks and take care of all patients, and adopt a good stop/loss provision in my contract with the IPA.

We've gone even further. We have capitated contracts for orthopaedic soft goods, splints, braces, and casting materials. We pay a sum each month to a supplier who provides everything for our groups. The reason that works is because although most contracts say a lot of these durable and soft goods will be supplied, in reality, that usually means weeks of delay for authorizations.

We'd much rather take it in-house and add it to the front-end of the contract. The more cash you receive and manage up front on a monthly basis, the more risk you have to take, and the better job you will do for your population of patients and for orthopaedic surgeons in your group.

The overhead to run an orthopaedic practice is about $60 per unit. If you are billing and collecting $120 a unit, it really means you are collecting and netting about $60 a unit, or multiplied by 400 units of work, about $24,000 a month.

If you negotiate a contract in which your gross is $110 or $100 a unit and your overhead is $60 a unit, you will be netting less.

The bottom line is to make sure you set up the contracts appropriately and manage the contracts effectively.

To order a copy of Health Care Reform and Managed Care: A Guidebook for Orthopaedic Surgeons with audiotape, contact the Academy's customer service department, (800) 626-6726.

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