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Will this Pandemic Resurrect Capitation?

By Dr. Martin Lustick

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A generation ago, the U.S. completed a failed experiment in capitation. Despite momentary success in the early 90s, providers and patients quickly became frustrated with prior authorization programs that accompanied these arrangements.1By the late 90s, it became clear that providers were not positioned to manage the risk that capitation imposed.  

In California alone, 133 medical groups declared bankruptcy between 1997 and 1999. 2Ever since physicians have been understandably hesitant to reconsider capitation as a fair payment methodology.  Even with the rise of Accountable Care Organizations (ACOs), bundled payments, and other value-based arrangements, providers and payers have focused on modifications to a fee-for-service payment rather than a move to capitation.   

The fallout from the current pandemic will likely be a watershed moment for healthcare in the U.S.  Many are already predicting that the rapid acceleration of telehealth in the context of social distancing will result in a permanent shift toward virtual visits. As we survey clients across the country and across specialties, we are hearing of 50% drops in the volume of services delivered, with procedural specialists even more severely impacted.  Reports of furloughs, layoffs, and closings abound.  Provider organizations are looking for ways to drive efficiencies amid reduced revenue, even as they begin to think about the long-term implications of a shift toward virtual care.

In the aftermath of this economic shock, it’s likely that providers and payers will seek ways to buffer themselves from future financial uncertainty. If hospital systems, private equity investors, and venture capital investors can shield employed and “owned” physician groups through the current crisis, we may see even more movement in that direction.  At the same time, there may be an opportunity to reconsider prepayment models such as capitation. If providers had been getting a monthly payment per patient heading into the pandemic, they would not be experiencing a precipitous drop in revenue from decreased encounters. 

Prepayment programs done well can liberate providers to do what they are doing right now – focus on the most effective and efficient way to deliver services to their patients.  The current situation demands this approach to help manage optimally in the context of an overwhelmed delivery system.  But capitation holds the promise of rewarding providers who pursue efficiency and effectiveness in all that they do for their patients.  It provides them with upfront cashflow to cover their overhead even as it motivates them to drive positive outcomes for their patients with a singular focus on efficiency and effectiveness. 

Many providers and payers are already on the path to increased transparency and the development of robust population health capabilities.  The pandemic has catapulted them into pursuit of operational efficiencies, including virtual care. Together, these factors can position providers for success in capitated arrangements.  In this new, information-rich environment, it would even be possible for providers to replace cumbersome, payer-led utilization programs with population health guided workflows that significantly streamline the healthcare process. 

No one knows exactly what the post-COVID-19 healthcare landscape will look like, whether capitation will see a rebirth, or be left behind.  However, it seems likely that the current surge in telehealth, combined with the dramatic drop in provider revenue will play a major role in shaping that future.  

1https://www.ncbi.nlm.nih.gov/pubmed/15076830

2https://www.businessinsurance.com/article/20000409/story/10003002/falling-out-of-favor-with-providers-capitation-in-decline


Dr. Martin Lustick

Senior Vice President, NextGen® Advisors

Dr. Martin Lustick is a principal and senior vice president with NextGen Healthcare focused on supporting provider organizations in their successful transition from volume to value-based care…

Dr. Martin Lustick is a principal and senior vice president with NextGen Healthcare focused on supporting provider organizations in their successful transition from volume to value-based care.

Dr. Lustick earned a BA in History from Cornell and an MD from Columbia. After completing his pediatric residency at Children’s Hospital National Medical Center in Washington, DC, he was in clinical practice for 17 years with Kaiser Permanente of the Mid-Atlantic States. While there, Dr. Lustick held various management and leadership roles, including chief operating officer for the 800-physician medical group. He oversaw development of their hospitalist program, population health capability, and open access delivery model.

Dr. Lustick then served as chief medical officer for ThompsonHealth—a small health system in Canandaigua, NY—where he provided clinical oversight for hospital, SNF, nursing home, IT, and out-patient physician practices.

In 2005, Dr. Lustick assumed the role of SVP & CMO for Excellus BCBS which covers 1.6 million lives comprised of Medicare, Commercial, and Medicaid. In his 13+ year tenure there he led a variety of strategic initiatives, including a patient-centered medical home program which served as the foundation for the plan’s value-based payment strategy. He also led the implementation of an automated authorization program for care management services, development of a clinical quality improvement strategy, and creation of innovative programs in management of low back pain, screening and prevention, opioid addiction, and chronic disease management.

Dr. Lustick has also been very active in the community, serving on boards and committees confronting issues such as: healthcare capacity planning, Health Information Exchange, mental health, substance use disorders, social determinants of health, and childhood obesity.

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