Capitation is a method of prospective reimbursement whereby a health plan or independent practice association (IPA) that has accepted risk for medical services pays a provider on a per-member-per-month (PMPM) basis for all members of the plan that are assigned to that provider.

For the health plan or IPA, capitated reimbursement ensures predictability of health care costs, by requiring acceptance of a payment in advance of the need of service(s) in return for providing all required medical services regardless of volume or service intensity. This method defines the actual dollar amount paid to a physician or radiology group regardless of claims volume or expense.

Management and negotiation of a capitation contract require detailed quantitative and financial data, including: eligibility and benefits determination, encounter processing, referral management, claims processing, case management, physician compensation, insurance management functions, outcomes reporting, performance management, and cost accounting. It is important to understand actuarial risk and capitation marketing when considering a capitation contract. Also, capitated payment methodologies may vary to include modified fee-for-service, incentive pay, risk pool redistributions, merit, or a combination of the above.

For the specialty of radiology and imaging services, capitation requires the assumption of risk for an unknown amount of service and the cost thereof. The risk is directly related to the ability to predict utilization and unit cost of imaging services provided to a specific insured population. In capitated environments, radiologists have less control over referrals and will serve many more covered lives; long-term relationships with referring physicians will continue to evaporate; and services will be provided under exclusive, multiyear contracts. In addition to intensified use of technology for image transfer, telecommunications, and sophisticated data processing and tracking systems, imaging departments must continue to provide the greatest amount of appropriate diagnostic information in a timely fashion at the lowest feasible cost and risk to the patient. This article will address several approaches to better contracting for capitated imaging services.


Utilization Management and Access Issues. In a capitated arrangement, performing a clinically unnecessary study costs imaging services providers money, to a point of negative integers in financial assessment. Once a referral is made for imaging services, it is highly unlikely for several reasons that the imaging services provider may decline the service. Therefore, such acceptance could possibly and has likely already led to unnecessary tests being performed.

Examination of historic referral patterns of capitated primary care physicians (PCPs), at risk for whatever claims expense is incurred for referral to radiology services, demonstrates a more conservative approach to the utilization of the same services that would otherwise be referred to imaging services providers absent the capitated risk. Once the claims expense risk is transferred to a specialty risk pool and the PCP is no longer at risk for the referral, a noticeable increase in imaging services is apparent, according to many industry consultants with expertise in capitation.

For this and other reasons, the American College of Radiology (ACR) developed two tools to help radiology facilities practice cost-efficient medicine without sacrificing quality of care: appropriateness criteria and utilization analysis. Appropriateness criteria were established by the ACR Board of Chancellors in 1993 to help imaging facilities determine appropriate imaging studies. These were first published in 1995; a subsequent edition was published in 1996 and annually thereafter. The development of the criteria was based on Agency for Health Care Policy and Research guidelines. A task force chose which clinical conditions and variants were to be studied. The task force then performed a literature search. Members reviewed the literature and reached a conclusion about the appropriateness of the various procedures.

Because capitated contracts require some knowledge of the utilization of services, the ACR formed the utilization analysis committee in 1994. While this established source materials for radiologists to use for benchmarking, it did not really curtail the problem of uncontrolled utilization through referrals made by PCPs that did not take the information provided to heart. Thus, the capitated imaging services would be wise to keep this factor in mind when assessing risk and the potential need for reinsurance coverage. The standard rule of practice dictates that reinsurance coverage is purchased to cover unpredictable and unmanageable costs and to buffer in the event of low enrollment or assignment of capitated plan members.


Valid Data To Make Decisions. Utilization analysis can also be a way to identify and control the risks that imaging services providers have with managed care contracts. It offers the means for measuring a practice’s performance against regional and national databases, and identifies areas of weakness. A practice is then able to take action to improve its quality of care in those areas.

Creating systems to support decision-making requires an understanding of the information needs of the intended users. These needs may be divided into those due to the changes in the managed care market (by health plans, IPAs, physician-hospital organizations, and medical service organizations [MSOs]) and those that are derived from job-specific tasks. The list below details marketplace changes that create new information needs:

  1. Increase in volume of services provided may result in a lowering of profits.
  2. Need to account for actual cost of services (not charges).
  3. Revenue growth limited by capitation due to a fixed reimbursement allowance.
  4. Preventive health measures assume higher priority.
  5. Monitoring of the process of care required.
  6. Communications and data-sharing capability assume greater importance.
  7. Increased capital requirements for new and improved equipment.
  8. Increasing requirements for film copy and image transfer services by contract.

All capitated providers need to identify patients by insurance plan, determine eligibility status of the patients, track costs and resource usage, and track various types of outcomes. These major categories of information needs/systems include:

Master Patient File (MPF). The MPF allows all provider sites to know when and where patients enter a care delivery system. The MPF assigns medical record numbers and prevents duplicates. This is an essential requirement for tracking costs and outcomes information across multiple sites. This also facilitates tracking and comparison against capitation eligibility rosters and addition and deletion tag reports.

Capitation Eligibility Rosters. The capitation eligibility rosters and addition and deletion tag reports should always contain, at a minimum, information including patient name, age, gender and plan designation, and any co-payment flat fee amounts that must be collected. The contract should stipulate that the provider shall receive the report no less frequently than monthly and that the data should be no older than 30 days from the date of publication; a sample of the report should be annexed as an exhibit to the contract and incorporated by reference. If possible, the reports should be provided as a data dump in a American Standard Code for Information Interchange (ASCII) comma delimited file format to enable programmers to perform the comparisons and integration into the patient master file and other files by electronic means for better efficiency.

Centralized Registration. The efficient use of office space and expensive diagnostic equipment requires the use of registration, scheduling, and appointment systems that are capable of recording and providing usage patterns, provider staffing, and test/procedure dependencies. Systems of this type reduce waste of space and time and facilitate outcomes analyses across the board for capital expense budgeting and profitability analyses in capitated and fee-for-service contracts.

Data Repositories/Data Warehouses. It is necessary to have a system that will allow data to be aggregated and stored in a form usable by decision support systems and statistical analysis programs. Data repositories and data warehouses suit this need well. Data repositories are real-time data stores designed to support patient care activities. A well-designed repository will have patient information, provider data, and cost utilization data in a format that permits cross-referencing and easy retrieval. Data warehouses are historical data stores designed to support aggregate analyses. They are updated on a fixed schedule (daily, weekly, for instance). Warehouses and repositories are recent creations and there are no industry-wide standards for their architecture or functionality. With a data repository, many reports can be created and manipulated using one of the many inexpensive and widely available database management systems instead of purchasing support-hungry proprietary database and custom report generation packages often tied to billing systems.

Cost Accounting/Decision Support. Cost accounting and capitation/risk analysis capabilities are absolutely essential in a capitated environment. Systems of this type should be among the first purchased if capitated contracts are being accepted. Again, many of these tasks can be accomplished with the right database manager. Many practices manage capitated business fairly well using, for instance, Microsoft Access for Windows, and similar programs.

Provider Profiling. Provider profiling is a means of determining how practitioners utilize services and resources. Insurance plans make use of this data in determining which providers will be accepted onto care panels. Individual practitioners should have this capability as a means of protecting themselves from unfair treatment.

For example, an imaging services provider would be well served to profile referring physicians who have a high negative finding rate on all tests ordered, not just expensive procedures. These offenders may do well to participate in a continuing medical education or grand rounds session sponsored and presented by the imaging providers themselves, or in a combined program of the imaging providers and various other academicians in radiology residency programs and fellowships nearby.

These are just some of the myriad of reports and reporting capabilities necessary to negotiate and manage capitated business.


Risk Pool Management and Administration. A pool is any arrangement whereby a health plan creates a fund through credits of a specified per-assigned-member-per-month payment, and it should be based on a traditional capitation model. It may be based on a specific percentage of premiums, but what that number should be varies from actuary to actuary. It is very dependent on age and gender and the covered services performed in exchange for the payment.

The health plan debits from the pool amounts paid for contractually specified covered services. At the end of a specific time, the health plan calculates whether the pool has a deficit or a surplus. Allocation of surplus or deficit is carried out in accordance with the contractually agreed upon formula.

Analysis of the Pool Arrangements. What services does the pool cover? This question has to be answered specifically, through the use of CPT codes, not general categories such as MRI, CT, or plain films. The contract must also specify the time frame in which the services will be provided.

How is the pool administered? Is there one pool for plain films and another one, or many, for special studies? If multiple, are the pools funded correctly, based on historic utilization patterns? What is covered in each pool? What about administrative allowances? What happens in case of a dual diagnosis? What happens when a service falls between two separate pools?

What specific claims are paid? How are the claims paid? When are the claims paid? Is the accounting method to administrate the pool based on a cash or accrual method of accounting?

What specific time period is covered by the pool, is it contractually defined? While the answer may not impact the provider’s risk, it may impact access to surplus funds that will be paid out.


Credits and debits should be consistent with the type of pool. If the pool is for radiology services, it should not be credited or debited for other diagnostic services from other ancillary providers. If the pool is operated on a cash basis, no debit should be made for an incurred but not reported (IBNR) withhold.

Every debit should have an audit trail. If the pool was debited for a charge, then there should have been a credit to cover it. An accrual basis pool that is debited for an IBNR offset should have an IBNR adjustment reflecting the previous period’s offset and the actual claims paid.

In addition to PMPM allocation by age, gender, and plan reports and drops and adds to the capitation list, recap reports that should be included and annexed to your contract are:

  1. Coordination of benefits and third-party liability recoveries;
  2. IBNR prior year adjustments, if any;
  3. Reinsurance recoveries;
  4. Interest payments on unpaid surpluses or bonuses;
  5. Claims paid reports, including date of service, amount, code submitted, and diagnoses;
  6. Reinsurance premiums paid, if any;
  7. Deductions for service carve-outs to the extent that PMPM payments include credit; and
  8. Reasonable IBNR offset (define reasonable).

It is important to analyze all debit analyses and recaps for any double payments. For example, does a cash basis pool provide for debits for IBNR claims? If so, why?

Also, analyze reports and contractual language and formulas for double dipping. This can occur when the pool provides for debit of administrative fees associated with Coordination of Benefits (COB) or Third-Party Liability (TPL) recoveries when the PMPM credit to the pool included an off- the-top adjustment for the health plan’s administrative services including claims administration.


There should be three distinct accounting periods: interim accounting, year-end accounting, and contract termination accounting. The timing for each should be based on whether accounting is done on a cash or accrual basis. Reconciliation of multiyear IBNR funds is critical and negotiators should spend considerable time stipulating how the plan will calculate the amount of IBNR offset.

“Final contract term accounting” differs from the accounting that occurs at the end of a pool year and takes place when the contract is over. The timing of the final contract term accounting does not change money due the provider, but it does change access to surpluses, so the timing should be spelled out very clearly. It should also address interest payments on the IBNR surplus.

Suggested wording for this particular area of concern is as follows:

“Interim final contract term settlement — 120 days following the close of the contract term, with full and final settlement and IBNR reconciliation no later than X.”

Data, Audit Rights, and Dispute Resolution. Always make the following a contractual requirement:

“Claims Data Dump must be provided monthly and in an ASCII Comma Delimited File Format.”

As mentioned before, contract management of capitated arrangements calls for a detailed listing of the reports, contractually stipulated as to when tendered. Be mindful of these basic rules in contracting:

  1. Obtain examples of all regular reports.
  2. Specify the time period covered by reports — old news is no news!
  3. Specify the number of days following the close of the time period of the report that the report must be tendered.
  4. Specific format of the report.
  5. Annex samples of each report to the contract as exhibits.


Consider adding the following language after your attorney’s review:

“The provider (and his/her designated agents) shall have access to any and all data that is reasonably necessary in order to assess whether the health plan has administered the pool appropriately and performed its administrative functions in accordance with the contract requirements, including any performance standards.”

Who should pay for the audit and under what circumstances must be addressed as well. Consider these options:

“The parties shall share the cost of a mutually selected independent firm to conduct a test of the health plan’s administration on an annual basis on a statistically significant sampling of pool credits and debits.”


“Provider shall pay the cost of the audit unless the audit reveals that a surplus is ten percent (10%) larger than reported by the health plan or a deficit is ten percent (10%) smaller than reported by the health plan.”


“The provider shall bear its own cost of audit unless the audit is conducted as part of a dispute resolution.”

While this article has addressed some of the concerns when entering into capitated contracts with health plans and other payors, it would be wise to seek the counsel of an experienced actuary, health law professional, and reinsurance broker before entering into a contract that could cause financial demise. When seeking the services of a consultant for this task, always check references and outcomes of the arrangements with former clients.

By overcoming the last two hurdles highlighted in this report, readers should gain a new respect for the transfer of capitated risk and hopefully a new comfort level that will lead to the ability to operate a business/practice in a capitated environment, given the right contractual terms and possessing and utilizing the right data. The utilization hurdle may never be solved completely. The only solution may be to continue to try to manage the manageable and reinsure the rest.

“Part II: Analyzing a Capitated Radiology Contract” will be published in the January/February 2000 issue of Decisions in Axis Imaging News.


Maria K. Todd is president and CEO, HealthPro Consulting Consortium Inc, Aurora, Colo, [email protected], and author of several books on MSO development strategies and physician contracts.