Capitated Payment Programs: Accounting for Healthcare Contracts at Risk
Considerations for healthcare provider CFOs and controllers prior to fiscal year close.
For service providers collecting payments from commercial or government payors, the next generation of healthcare reimbursement models are underway. These models intend to drive down costs, focus on outcomes, and shift risk to the provider—delivering a holistic approach to patient care rather than a reactionary treatment to a symptom. A commonly known challenge among healthcare industry experts is that as reimbursement/payment models evolve, providers will run into new accounting issues to address. In 2020, COVID-19 concerns led to a temporary shutdown of many provider locations, and shutdowns may have created an unforeseen liability for those providers under a capitation agreement.
Capitated reimbursement models: at-a-glance recommendations for healthcare providers
In the healthcare system, capitated reimbursement models are gaining popularity—to drive efficiency at the provider level and ensure patients receive adequate care. When providers fall below contractual thresholds, payors are entitled to a recovery of some of the fees paid under the capitated contract arrangement.
To understand exposure, providers need to:
Track current service level performance
Maintain an updated schedule of minimum service levels and track performance toward achievement of those minimums. Measurement should follow the specifics in the contract.
Assess exposure early
Determine areas in which the provider falls below thresholds for service or quality outlined in the payor contract. Assess the financial exposure at the contract level and begin to accrue a liability as soon as the shortfall becomes probable and estimable; not waiting until the contract period is closed and audited.
Renegotiate with payors, where possible
In the current economic climate, there may be opportunities to negotiate with payors to reduce the payment or stretch out the payment to ease the cash flow burden. Providers that self-report shortfalls early are in the best position to negotiate a tailored repayment solution that better accommodates current pandemic-driven business challenges.
Capitated reimbursement models are becoming increasingly popular with payors. Under a capitated contract arrangement, the healthcare provider is paid a set dollar amount per month as established in the payor contract, also referred to as Per Member Per Month rate (“PMPM”), to provide care to patients regardless of the actual number of monthly treatments or patient encounters. The agreement dictates the provider will receive a flat, monthly payment in advance to stand-ready to provide a defined set of services to the member pool each month. For example, a primary care physician contract would typically include: preventive, diagnostic, and treatment services; injections, immunizations, and medications administered in the office; outpatient laboratory tests performed in the office or at a designated laboratory; and in-office health education or counseling services.
In these unusual times, providers may have opportunities to negotiate with payors to reduce or defer the payment to ease the cash flow burden.
The model intends to drive efficiency at the provider level by minimizing unnecessary treatments because the more treatments a patient pool requires each month, the less margin the provider makes on that pool. To ensure patients do not receive suboptimal care (due to under-utilization or poor-quality health care services), certain commercial and government payors establish minimum thresholds of resource utilization, quality metrics, and patient outcomes in provider practices. When providers fall below contractual thresholds of quality or care, payors are entitled to a recovery of some of the fees paid under the capitated contract arrangement.
Due to closures related to COVID-19, many providers operating under capitated payment contracts may now face an unforeseen situation: resource utilization falling below minimum threshold and failing to meet contractual obligations. Providers in this situation can take steps to understand, assess, and proactively manage associated financial exposure.
Gain visibility into the exposure
Provider groups often operate under a variety of reimbursement models, and traditional internal reporting does not always capture important metrics like capitated contract thresholds—particularly when achievement of such thresholds was historically considered a “given”. To understand exposure with capitated contracts, organizations should maintain an updated schedule of minimum service levels by contract and track performance toward achievement of those minimums. Measurement should follow the specifics in the contract, including both measurement periods and specific thresholds for defined services. Most claims management systems have sufficient reporting at the claim level to report on detailed activity and provider groups should make the review and analysis of such reports against minimum service levels a recurring reporting activity. Capitated payments and utilization thresholds may require refinement by contract year as they evolve. In such cases, organizations should have a control in place to ensure that the measurements in place align with the current contract provisions.
Assess the implications at timely checkpoints
Traditionally, capitated contracts are audited at the end of each contract year and providers that fall below thresholds for service or quality may have financial impacts or obligations because of the shortfall that is outlined in the payor contract. Providers should assess any financial exposure at the contract level on a regular basis. If the shortfall reveals a potential financial liability, organizations should begin to accrue the liability as soon as the shortfall becomes probable and estimable—not waiting until the contract period is closed and audited. For example, if “average monthly visits across a contract year” is a threshold metric, and a provider group was shut down for a quarter of the year due to the COVID-19 pandemic, the probability of meeting that minimum threshold in the contract year may be very low. In this case, it may be appropriate for the provider group to forecast expected annual volume, accounting for the pandemic-driven shortfall already experienced, and begin accruing a liability for any financial impacts long before the end of the contract year. Timely recognition accounts for the shortfall according to generally accepted accounting principles (GAAP); more importantly, it provides visibility into the impending cash flow impact of the shortfall when the liability becomes payable.
Be proactive: seek opportunities to negotiate payments
Financial adjustments associated with service level shortfalls are typically collected all at once, but in these unusual times, providers may have opportunities to negotiate with payors to reduce or defer the payment to ease the cash flow burden. Providers who proactively self-report shortfalls are in the best position to negotiate. Providers in this situation should strongly consider approaching the payor with a report showing the anticipated shortfall and proposing a solution to remedy the shortfall with terms that might be more advantageous to the provider than those outlined in the capitation contract. These solutions could include stretching out payments over a set period, reducing future PMPM payments or something else that still makes the payor whole, but on favorable terms to the provider. As an example, one provider proactively approached a payor to self-report an anticipated shortfall and asked for a deferred repayment schedule. The payor granted the request by agreeing to reduce the monthly capitated payment for a six-month period to recover what would have otherwise been an upfront payment, providing valuable cash flow to the provider in a period when cash was tight.
Prior to COVID-19, many performance minimums in capitated contracts were considered perfunctory—set in place to ensure a minimum level of utilization and quality, but providers rarely missed minimums to a point of triggering any material financial impact. As a result, tracking performance and measuring any related shortfalls has typically only been an annual exercise. With the lower volumes experienced by many provider groups in the spring and summer of 2020, the likelihood of dropping below minimum thresholds is far from remote, and this reality could have meaningful financial implications for the organization. Groups can minimize significant financial disruption by remaining knowledgeable about capitated contract details and establishing strong processes to assess performance, calculate financial impacts, and plan accordingly.