In a field littered with analogies, health care in the mid-nineties is best characterized as an enterprise caught in the violent cross winds of a tropical storm known as managed care. Like a series of hurricanes, managed care has reshaped the landscape of health care delivery in drastic and unpredictable ways. While the forces of managed care have increasingly altered more health care markets, others are only beginning to feel the winds of change. As managed care overtakes fee-for-service (FFS) medicine, profound alterations in health delivery are occurring which affect every aspect of American health care.

Particularly noteworthy is the use of capitation as a primary method of reimbursement. The ramifications of capitated health care are broad and warrant exploration from several vantage points. One basic concern in capitated health plans and managed care is the effect of new payment incentives on physician evaluation for purposes of credentialing. This Article focuses on managed care credentialing—the process of appointing, reappointing, and delineating clinical privileges—from a legal perspective. While the Article centers on the link between capitation and credentialing, it has broader applicability in that the same physician evaluation mechanisms in capitated settings are found in discounted FFS arrangements as well. The piece provides a brief overview of capitation and credentialing, and a discussion of trends that have altered hospital medical staff credentialing processes.

The health care market, the organizations that deliver health care, and health care payment mechanisms have all changed significantly in recent years and continue to change. In contrast, the so-called antikickback provision of the fraud and abuse statute remains much as it was in 1977, when it was amended into its current general form. By prohibiting financial incentives to induce referrals, the antikickback law counters abuses to the Medicare and Medicaid programs that are likely to proliferate in a cost-based, fee-forservice (FFS) health care market. In a FFS system, financial incentives stimulate increased use of services and often result in overutilization. The antikickback section has significantly less relevance to a capitated health care system in which the payment system itself inhibits overutilization and other costly practices. However, the antikickback section is broad and the regulatory safe harbors promulgated under it are narrow. As a result, practices such as capitation, which encourage cost-effective care and the formation of organizations to provide care on a capitated basis, are poorly insulated from the strictures of the statute.

A patient of mine, Mrs. Lopez, suffered a lower back injury while lifting heavy equipment. She sustained the injury while working in the housekeeping department at a local college. I telephoned her supervisor and asked him about Mrs. Lopez’s injury. He assured me that he had forwarded an accident report to the benefits department. He said he was unaware of any employer policies or training programs governing heavy lifting. The college did not have an employee health service, but instead relied on a local law firm to handle the administration of its workers’ compensation. When I informed the supervisor that I thought Mrs. Lopez might be able to return to a restricted duty job soon, he said that he did not want Mrs. Lopez to return until “she was 100%.” I told him that this employee would benefit medically from returning to a restricted duty job as soon as it was reasonable rather than waiting until she could perform heavy lifting again. However, the supervisor replied “Don't you worry about returning her to work so soon. Workers’ compensation will pay for it.”

When a provider accepts capitation from a health plan for a pool of patients, it assumes risk from the plan. The risk is that the cost of furnishing health care needed by the patients may exceed the funds paid to the provider by the health plan. There are several levels of risk. The first level is capitation arrangements for services rendered by the provider. The next level is capitation arrangements where the provider assumes risk not only for its own services, but also the services of other providers. As the number of services of other providers for which risk is assumed increases, the risk-taking provider comes closer and closer to assuming risk for the entire benefits package. At some point, it makes sense for the risk-taking provider to become a licensed health plan. As providers become more capable in managing large amounts of risk, they become more interested in organizing health plans.

In the American health care system, payers are rapidly moving toward the use of capitation as the preferred method for paying for health care services for sponsored patients. n capitation, the payer pays a provider organization a set rate per patient to care for a group of patients. The provider organization assumes the risk of the actual costs of caring for these covered lives. The theory of capitation is that providers, by assuming risk, will have incentives to contain their costs.

The provider entity that provides the care can take many corporate forms. A capitated provider can be a small group of physicians with admitting privileges at a single hospital or a complex integrated delivery network comprised of hospitals, physicians, and other health care professionals and institutions with integrated case management and data systems. Currently such integrated delivery networks assume a variety of organizational forms, ranging from traditional staff model health maintenance organizations (HMOs) in which physicians are employees of the health plan to physician hospital organizations (PHOs) in which physicians and hospitals join together for purposes of contracting with payers. Hospitals and physicians belonging to their medical staffs are motivated to form integrated delivery networks or other consolidated business organizations in order to contract with payers that seek providers willing to accept financial risk for the care of sponsored patients. Providers join such arrangements out of fear of losing patients if they do not.

Health care is being capitated throughout the United States, and much of the spread of capitation is attributable to the efforts of insurers to contain costs. The present lack of comprehensive studies evaluating the impact of capitation on overall health care quality leaves vast room for speculation.

Capitation does, however, carry a very fundamental certainty with broad implications. Whether the arrangement calls for a fixed sum for treating a particular ailment, a set fee for meeting all of an individual patient’s health care needs, or a standard charge for supplying all the medication for a specific condition, capitation sets limits. Because the health care costs for any given patient or condition are in reality zero-sum rather than fixed, capitation is about pooling patients and rationing. It involves denying services to some patients despite a general contractual commitment to coverage, presumably so that more patients can be covered or receive better care. The implications of capitation are even more significant when set fully in the context of the overall health care reform now underway. Simultaneously and comprehensively, health care is being managed, made for-profit, and consolidated.

The emerging king of the new health care order is capitation. “Whoever controls the capitated revenue stream will be poised to dominate the emerging health care delivery system— and to reap an enormous windfall that could total hundreds of billions of dollars.” Accordingly, we are witnessing a tremendous struggle over the locus of capitation. Once firmly ensconced in the insurance and HMO industry, capitation is now spreading to organizations controlled by doctors and hospitals.

In a world littered with countless acronyms and organizational types—HMO, IDS, MCO, EPO, PHO, IPA, PSN, OWA—we are most reluctant to introduce yet another. But we must. None of the existing terms describes an important aspect common to all of them that is the subject of this article—providers bearing financial risk for medical expenses. We call these Risk-Bearing Provider Groups (RBPGs). The most prominent example of an RBPG is a physician-hospital organization (PHO), which consists of at least one hospital and one physician practice group that accepts partial or full capitation for at least some of its patients. Accepting capitation risk is not essential to being a PHO, but is a common characteristic. PHOs seek to maintain the financial center of gravity in a provider organization as insurers and employers increasingly come to dominate health care delivery. PHOs can do this by contracting directly with employers on a fully or partially capitated basis, thereby by-passing insurance companies. They can also subcontract with insurance companies or HMOs—so-called “downstream” capitation. Accepting treatment obligations under financial risk helps providers maintain their professional and institutional autonomy and offers the prospect of capturing some of the financial rewards created by the market restructuring that is presently sweeping the country.