The Liberty Bell may be located in Philadelphia, but when it comes to negotiating managed care contracts, there is not much freedom for hospitals and their physicians in the highly competitive Philadelphia marketplace. Take the case of the radiology department at Thomas Jefferson University Hospital (TJUH); this flagship hospital is part of the formidable Jefferson Health System (JHS), a giant linkup of physicians and hospitals that was formalized in 1996. Licensed for close to 900 beds, TJUH is only one of more than a half-dozen hospitals now affiliated under the JHS umbrella. Altogether the JHS has about 2,000 affiliated physicians, making it the largest provider of medical services in the Philadelphia area.

“Any managed health care system coming in can’t ignore us,” says Jay Sial, MBA, chief operating officer of JeffCare, a physician-hospital organization (PHO) subsidiary of JHS that negotiates managed care contracts for the University Hospital among other entities.

But even a health system as strong as JHS is outmuscled by the two big managed care organizations (MCOs) that dominate the Philadelphia marketplace. They are Independence Blue Cross (IBC) and Aetna-US Healthcare. Referring to them as “the two big gorillas,” Sial estimates that together they control 65-70% of the managed care volume in the Philadelphia market. IBC, for instance, has about 2.8 million patients enrolled in the marketplace. Aetna is of a similar stature.

To show how IBC and Aetna are calling the plays, it is helpful to focus on one area of contracting — capitation — as an example. But first a brief history is in order.

Thomas Jefferson University, founded in the 1820s, is a health care-only school. Its close to 2,000 students include about 900 in training at the Jefferson Medical College to become physicians. The rest of the students are in nursing, therapy, and technical assistant programs from which they will graduate into health care also. The school is in the front rank of medical colleges, and every year Thomas Jefferson University Hospital is voted among the top hospitals in America by US News and World Report.

The radiology department at TJUH is equally venerable. In just the last year, its physicians published more than 320 papers or abstracts on imaging. The department had more than 65 outside grants in force last year also, including a dozen from the National Institutes of Health (NIH) or other federal agencies, 11 grants from foundations, and 45 industry-supported clinical trials. Total research funding for the department last year was close to $4 million. One academic star of the department is Mathew Thakur, PhD, a professor of radiology and nuclear medicine who, over the span of a 30-year career, has developed a long list of radiopharmaceuticals that are helping to save patients’ lives. This year, Thakur received the 2000 Georg Charles de Hevesy Nuclear Pioneer Award for his work, the highest award presented by the Society of Nuclear Medicine.

Despite its lofty credentials and accomplishments, the TJUH radiology department is a chip in the stream when it comes to the forces of managed care with which it must deal. Indeed, the whole JeffCare enterprise, which is includes about half of the JHS physicians, breathed a sigh of relief in June when a new 5-year contract was completed with Independence Blue Cross. A 4-year pact with Aetna had been signed late in 1999. The two contracts assured that the university and its allies could compete in the crowded Philadelphia market for the next few years. Perhaps the contracts spoke also to the wisdom that Jefferson had shown in moving aggressively to consolidate hospitals and physicians to keep itself the leading force as a provider of health care in Philadelphia. “This agreement, which is fair to both parties, will substantially help to ensure that JHS can continue to offer high-quality health care to the communities we serve,” said JHS president and chief executive officer Douglas S. Peters when the IBC pact was signed. “Its comprehensive long-term provisions afford a level of stability that will assist us tremendously in planning for the future.”

This accolade was forthcoming, despite an acknowledgement by Jay Sial that many elements of the contract call for reimbursements below the level paid by Medicare.

A Meager meal

One such area where reimbursements are below Medicare levels is in the two segments of capitated imaging that are parts of the much bigger contracts with Aetna and IBC.

David C. Levin, MD, a former fighter pilot and a long-distance runner, is a 1964 graduate of Johns Hopkins Medical School who has been chairman of the Thomas Jefferson University Hospital’s Department of Radiology for more than a decade. Levin, who is also a professor at the Jefferson Medical School, was once more optimistic about capitation as a contracting method for radiologists than he appears to be now.

In 1996, Levin was lead author of a well-thought-out and tightly written primer on exactly how radiology groups should analyze capitation contracts and compete for them. Joining Levin to write the paper were two of his departmental staffers, George McArdle, BS, an administrator, and Charles D. Lockard, BS, a designer of computer programs. The paper was published by the journal Radiology and was presented prior to publication at the Radiological Society of North America (RSNA) scientific assembly in 1995. [1]

At the time he wrote on capitation, Levin foresaw capitated contracts (in which a radiology group is paid a set fee per member per month for imaging studies no matter the number of such studies performed) as becoming increasingly popular under managed care. The managed care companies would embrace capitation, it was believed, because the risk of not remaining profitable and the responsibility for holding down utilization were transferred from the paying MCO to the radiologists, who accepted capitated payment without knowing precisely up front how much expense they would bear in return for the guaranteed monthly payments.

In the paper, Levin reported that the fees paid under a single capitated contract then in force with his department amounted to slightly more than what they would have received if those procedures had been paid fee-for-service using the Medicare fee schedule. He reported a utilization rate of about 384 imaging studies per thousand members per year for those patients included under the capitated contracts. Levin and his coauthors laid out specific ways for radiologists to evaluate proffered capitated contracts based on data provided by the MCOs or derived from other sources. It was assumed that radiologists would be able to negotiate the capitated contracts in such a way that they would be profitable or the radiologists would be able to turn them down.

Today, roughly 5 years later, the techniques of negotiation that Levin laid out are still valid. But the landscape for employing the techniques has changed drastically. For one thing, capitated contracts never became as popular as many believed they would be. Physicians did not like them because they had to assume the risks of handling patients whose patterns of utilization were not entirely predictable. Patients did not like capitation either. They felt they were rushed through thinned and diminished protocols by doctors being careful to watch their own financial backsides.

“The public voted with their feet,” Sial says. “They moved to non-HMO type plans. The PPOs (physician provider organizations) are growing, and as they grow, capitation is becoming less of an issue.” Sial says he’d like to see capitation ended as a payment method. So would Levin. “I think capitation is going to diminish,” Levin says. “People don’t like it, and doctors don’t like it. Patients want more control over their medical care decisions.”

Despite these assessments, the TJUH radiology department must still contend with capitation. Both the Aetna and IBC contracts with JeffCare and JHS contain pockets of capitated patients that Levin estimates make up about 7% of the total contracts, or roughly 33,000 patient lives. The TJUH radiology unit, which has on staff about 43 radiologists by Levin’s estimate, must serve these capitated patients like all the other patients they see. Levin says the protocols extended to the capitated patients are exactly the same as those the department uses for any other patient.

The capitated segments of the Aetna and IBC contracts, says Levin, pretty much had to be swallowed whole by his department. “I negotiated,” he says. “But really there isn’t a whole lot of negotiation. The big players like this sort of give it to you on a take-it-or-leave-it basis.”

Obviously, the huge contracts, lifeblood to JHS, would not have been allowed to founder because of objections raised by one hospital’s department of radiology. “If my hospital wants to have a contract with Blue Cross, my hospital may put pressure on me,” Levin says. “I’m not totally autonomous; there are a lot of other forces at work here. I might be overruled by the hospital administration even though I don’t like these contracts or because we would like to see other types of products.”

Levin estimates that the payments under the capitated portions of the two big contracts are about 90% of what would be paid by Medicare. Despite careful tracking of utilization, Levin says he is not sure if the contracts are profitable from the radiological perspective. “It’s hard to say,” he admits. Levin says huge contracts like those with IBC and Aetna have become so complicated that “a lot of times people don’t bother to do the calculations.” His department does the calculations as best it can, but with global billing in use, it does not operate in a vacuum either.


It is important to note that the capitated portions of the radiological contracts are for outpatient diagnostic imaging only. No inpatient, emergency department, or interventional imaging is included. When Levin wrote his original paper on capitation, MRI was not included either, but now MRI, at the insistence of the insurance companies, is part of the capitation packages. So is bone density testing. The rates were adjusted upward for both MRI and bone density tests. “Blue Cross arbitrarily decreed that bone density be included,” Levin says. “They adjusted the cap rates upward, but not enough. That’s a source of frustration for me and for other radiologists around the city.”

Victor Sarro, who holds an MPS, a master’s of professional studies in health, is radiology administrator for TJUH. While Sarro describes his role in negotiating the capitated contracts as “peripheral” and less central than Levin’s, Sarro is involved in much of the utilization tracking that takes place in the department to see how the contracts are performing. He can tell you, for instance, that last year the department did 33,000 mammograms altogether. Only a small percentage were capitated. But it is one indication of a busy department. When it comes to mammograms, Levin is irritated that mammographies are included under capitation at all. He believes capitating them creates a disincentive to perform them. “Screening mammographies shouldn’t be capitated,” he says.

When he wrote his 1996 paper, Levin wrote of the need for radiologists to analyze fee splits with hospitals when global billing lumps together the technical and the professional segments of one imaging procedure. For TJUH, Levin says that the fee split for the capitated contracts is now about 69% to the hospital and 31% to the doctors, except for MRI, when the split becomes 80-20.

One area that has changed since Levin wrote his paper is radiological utilization. Utilization has gone up. When Levin wrote the paper, he reported a utilization rate of about 384 imaging studies per 1,000 enrollees per year. That figure has now climbed to about 520 for the capitated portions, he says. There are several reasons for this rise in utilization perhaps, but Levin sums them up by saying: “PCPs (primary care physicians) are being more and more limited in the time they can spend with patients. The quick road to diagnosis is to send them for an imaging study, and we’ll make the diagnosis for them, or rule something out.”

Sarro puts a slightly different spin on the utilization increase. For one thing, more PCPs have been recruited as TJUH radiology users since 1996, he says. But he adds: “When people see a physician, they expect that something’s going to be done. The PCP and the specialists are more pressured, so it’s very natural to order a radiology test to satisfy that patient expectation.”

One impact of the utilization increase is that TJUH is no longer in a position to market itself to PCPs for certain modalities, including MRI. When Levin wrote his paper, he stressed how important it would be to market radiological services in order to capitalize with greater patient numbers on a well-negotiated capitation contract. Since under the capitation arrangement each PCP can designate a single radiology provider only, the thought was it would be important to market to PCPs. That marketing is no longer part of the equation for the capitated segments of TJUH’s contracts with the managed care giants in Philadelphia.

“We’re not having to market ourselves to PCPs,” Levin says. The reasons for this appear to be twofold: The contracts are not so profitable as to warrant the marketing effort to expand the patient base covered by capitation. Even if the contracts paid better, TJUH is booked up in many modalities.

“We’re pretty much booked up,” Levin says. “We could do more in radiography, ultrasound, and nuclear medicine.”

Sarro says MRI is the most booked up of the modalities. “MRI demand has been increasing,” he says. “I’d like to be able to say ‘C’mon down,’ but for MRI we’re probably 4 to 5 days out, nuclear is a day or two, and it’s 2 or 3 days out on CT.”

While Aetna and IBC do have advisory groups that meet several times per year and field physician suggestions or complaints, Levin is skeptical about how much these meetings accomplish. “We can plead the case, but they’re not very likely to listen to us,” he says.

Both Levin and Sial are of a mind that TJUH is not scanning the horizon for more capitated contracts from any of its managed care payors. “We don’t want any more capitated contracts,” says Levin. Sial adds, “We’re not set up as an institution to do this capitation very well. We take capitation reluctantly.”

Capitation contracts are being displaced steadily by discounted fee-for-service contracts, which Levin estimates amount to approximately 25-30% of hospital receipts. Previously, because the contracts of Aetna and IBC are so big and represent significant revenue to JeffCare and JHS, capitated contracts were accepted because the big MCOs demanded that they be accepted. “However, just recently a large radiology group within the JHS dropped its Blue Cross capitated plan because the fees were too low,” Levin says, “and we might have to think about doing the same thing. Regardless, I think a lot of us would like to be in other markets where managed care may not have the power it does here.”

Sarro seconds that thought. “Philadelphia is a difficult market for any facility,” he says. “The institutions have to manage their capitated contracts very closely.” That was the reality Levin was trying to get radiological groups everywhere to accept when he wrote his paper on capitation 5 years ago. And that consequence of managed care holds true — even if capitation has not proved to be as widespread a contracting method as most in the medical community once feared it would be.

George Wiley is a contributing writer for Decisions in Axis Imaging News


  1. Levin D, McArdle G, Lockard C. Capitated contracting in radiology: negotiating techniques, financial calculations, and utilization management. Radiology. 1996; 198:651-656.