ARTICLEPEDIATRICS Volume 138 , number 2 , August 2016 :e 20154367
Fully Capitated Payment Breakeven Rate for a Mid-Size Pediatric PracticeSteven A. Farmer, MD, PhD, a, b, c, d Joel Shalowitz, MD, MBA, c Meaghan George, MPP, a Frank McStay, MPA, a Kavita Patel, MD, MS, d James Perrin, MD, e Ali Moghtaderi, MBA, PhD, b Mark McClellan, MD, PhDa
abstractBACKGROUND AND OBJECTIVES: Payers are implementing alternative payment models that attempt
to align payment with high-value care. This study calculates the breakeven capitated
payment rate for a midsize pediatric practice and explores how several different staffing
scenarios affect the rate.
METHODS: We supplemented a literature review and data from >200 practices with interviews
of practice administrators, physicians, and payers to construct an income statement for a
hypothetical, independent, midsize pediatric practice in fee-for-service. The practice was
transitioned to full capitation to calculate the breakeven capitated rate, holding all practice
parameters constant. Panel size, overhead, physician salary, and staffing ratios were varied
to assess their impact on the breakeven per-member per-month (PMPM) rate. Finally,
payment rates from an existing health plan were applied to the practice.
RESULTS: The calculated breakeven PMPM was $24.10. When an economic simulation allowed
core practice parameters to vary across a broad range, 80% of practices broke even with
a PMPM of $35.00. The breakeven PMPM increased by 12% ($3.00) when the staffing ratio
increased by 25% and increased by 23% ($5.50) when the staffing ratio increased by 38%.
The practice was viable, even with primary care medical home staffing ratios, when rates
from a real-world payer were applied.
CONCLUSIONS: Practices are more likely to succeed in capitated models if pediatricians
understand how these models alter practice finances. Staffing changes that are common in
patient-centered medical home models increased the breakeven capitated rate. The degree
to which team-based care will increase panel size and offset increased cost is unknown.
aDuke-Margolis Center for Health Policy, Washington, District of Columbia; bGeorge Washington University,
Washington, District of Columbia; cNorthwestern University Feinberg School of Medicine and Kellogg School
of Management, Chicago, Illinois; dThe Brookings Institution, Washington, District of Columbia; and eHarvard
Medical School, Boston, Massachusetts
Dr Farmer, Ms George, Mr McStay, and Dr McClellan conceptualized and designed the study,
performed the literature review and data analysis, and drafted the initial manuscript; Drs
Shalowitz and Perrin critically reviewed the manuscript; Dr Patel conceptualized and designed the
study; Dr Moghtaderi provided data analysis; and all authors approved the fi nal manuscript as
submitted.
DOI: 10.1542/peds.2015-4367
Accepted for publication May 18, 2016
Address correspondence to Steven A. Farmer, MD, PhD, Center for Healthcare Innovation and
Policy Research, George Washington University, 2100 Pennsylvania Ave, Offi ce 316, Washington, DC
20037. E-mail: [email protected]
PEDIATRICS (ISSN Numbers: Print, 0031-4005; Online, 1098-4275).
Copyright © 2016 by the American Academy of PediatricsTo cite: Farmer SA, Shalowitz J, George M, et al. Fully
Capitated Payment Breakeven Rate for a Mid-Size Pediatric
Practice. Pediatrics. 2016;138(2):e20154367
WHAT’S KNOWN ON THIS SUBJECT: Payers are
introducing alternative payment models nationwide
in the hopes of improving quality and reducing
costs. Although previous studies have evaluated
their effects on spending and outcomes, few have
explored how they affect practice fi nances.
WHAT THIS STUDY ADDS: This study calculates the
breakeven capitated payment rate for a midsize
pediatric practice, provides a tool for practices to
estimate their own breakeven rates, and models the
relationship between attributed patient volume and
payment rates under several practice scenarios.
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FARMER et al
Health care spending continues to
grow at an unsustainable rate and
is increasingly unaffordable for
many Americans. 1, 2 The fee-for-
service (FFS) payment method that
dominates health care payments
contributes to inefficiency by
rewarding volume and ignoring
quality. 3 – 7 To address these
deficiencies, public and private
payers are experimenting with
alternative payment models (APMs)
that attempt to align payments with
improved value. More than 21 million
lives are covered through primary
care medical homes (PCMHs), where
FFS payments are increasingly
augmented with partially capitated
per-member per-month (PMPM)
payments. 8 As of 2014, >40% of all
commercial in-network payments are
value based. 9
Pediatricians must understand APMs
and their implications for practice
financials. These payment models
can be confusing, they often lack
transparency, and there is limited
evidence to guide providers in
understanding them. 10 To address
this knowledge gap, we present a
simplified financial model, which
converts a hypothetical, independent,
midsize, general pediatric practice
from FFS to full capitation. The
analysis calculates the aggregated
capitated rate necessary for the
practice to break even compared with
FFS, provides a financial analysis tool
for practices, and investigates the
relationship between the breakeven
capitated rate and variations in
practice parameters including panel
size, overhead, physician salary, and
staffing ratio. Finally, mean payment
rates from a real-world payer are
applied to assess practice viability.
METHODS
Model and Data Sources
This analysis constructs income
statements for a practice with 6
clinicians, including 5 full-time
equivalent (FTE) physicians and
1 FTE advanced practice provider
(APP); FTEs may be allocated
between multiple part-time
providers. The outcome variable
of interest is the breakeven
comprehensive capitated rate
inclusive of shared savings and
quality incentive payments.
The income statement was developed
after interviews with 3 public
and private payers and 2 practice
administrators from midsize
practices. Multiple data sources were
used to establish model assumptions,
including published medical
literature, the Bureau of Labor
Statistics, the Centers for Disease
Control and Prevention, the Medical
Group Management Association,
surveys from the American Academy
of Pediatrics and American Academy
of Family Physicians, and proprietary
data from 200 independent
pediatrics practices across 40
states. As a robustness check, the
final model was reviewed by 2
additional practice administrators,
1 commercial payer, and a pediatric
practice consultant.
For simplicity, the model imposes a
number of constraints. First, it makes
a direct conversion from FFS to full
capitation, inclusive of quality and
cost incentive payments. Second, it
shifts all patients in the practice to
capitated payments simultaneously.
Third, the capitated rate holds the
panel size constant throughout the
year and includes only responsibility
for basic point-of-care testing, such
as rapid strep, hemoglobin, and
urinalysis. Fourth, any revenues
from hospital consultations or
circumcisions are excluded. Finally,
the model simulates a 50/50
payer mix between Medicaid and
commercial payers. 11, 12
Expense and Revenues Under FFS and Capitation
Published panel sizes vary widely,
depending on practice style and the
age distribution of the panel. 13 – 18
The model assumes a panel size
of 1700 and an average of 3.24
visits per patient per year. 15, 19, 20
Table 1 summarizes the core model
assumptions, along with the range for
each variable identified from multiple
sources.
Total expenses are often reported as
60% of actual revenue in pediatrics
and family medicine. 14, 21 –24
To increase transparency and
generalizability, the model separates
staff salary and fringe benefit
expenses from other overhead.
Pediatricians’ salaries vary with
differences in practice ownership,
payer mix, productivity, and
geographic location. 14, 25, 26 The
model uses the Bureau of Labor
Statistics national median salary of
$180 000. 25 Practice administrator
salaries varied for similar reasons,
and the model uses a salary of
$92 000.27, 28 The median salaries
for APPs and registered nurses are
consistently reported at $95 000 and
$65 000, respectively. 29 – 31 Median
salaries for administrative and
clinical support staff vary based on
duties but converge ~$34 000.32 – 35
Fringe costs as a percentage of staff
2
TABLE 1 List of Core Model Assumptions and Practice Parameters
Independent Variable Modeled Range
Physician salary $180 000 $172 000–$254 000
Total expenses (% of revenue)a, % 62 40–70
Overhead (% of revenue), excluding staff expensesb, % 30 24–37
Visits per d 25 14–30
FFS reimbursement $100 $80–$130
Panel size 1700 1000–2500
Staffi ng ratio 3.2 3.0–3.5
Visits per year per patient 3.24 2.32–3.50
a Total expenses are all practice operational costs except for physician salary.b Overhead is total expenses less physician salary and staff expenses.
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PEDIATRICS Volume 138 , number 2 , August 2016
salary are 15% for clinicians and the
practice administrator and 30% for
support staff. 14, 36 The model assumes
a support staff to physician ratio of
3.2. 14, 20, 37 Overhead excluding staff
expenses was set at 30% of revenue,
resulting in total overhead of 62% of
revenue.
Overhead costs excluding staff
expenses are calculated as a
percentage of total revenue in
the capitated model. The model
increases nonstaff overhead
costs from 30% to 35% to allow
for additional expenses such as
electronic health record upgrades
and reinsurance. 38 – 40 Fewer
resources may be needed for billing-
related administrative functions in
capitated environments, but staff
must still confirm valid insurance
coverage, and detailed quality
reporting is required. Because
total expenses are calculated as a
percentage of payments collected
(not receivable) in the FFS model,
the total expenses account for a
similar proportion of revenues in
the capitated model (63%).
Vaccines are a large expense for
practices. Given the Centers for
Disease Control and Prevention
vaccine schedule for children 0 to
18 years of age and current vaccine
prices, average vaccination cost is
~$135 per patient per year. 41, 42
Practices typically break even or
gain small profits from vaccinations
billed to commercial payers, whereas
the opposite is true for those billed
to Medicaid. 43 Because the modeled
practice is a 50/50 payer mix,
vaccines are excluded from both the
FFS and capitation models.
Copayments may contribute
meaningfully to practice revenues in
both FFS and capitation. The model
incorporates an average patient
copayment of $8. This amount
is calculated by multiplying the
average commercial copays ($23)
by the proportion of commercial
patients (50%) and the likelihood
that commercial plan requires
copayments (66%). 44 Many
states allow (or will soon allow)
nominal copayments for Medicaid
beneficiaries, but these have been
excluded from the model. 45, 46
In the FFS model, practice revenues
are tied to physician and APP
encounters. Practice revenues
are calculated by multiplying the
average number of visits per day, the
number of providers, the number
of clinical days per year, and the
average payment per encounter. 47
The hypothetical practice assumes
25 patients per day per provider,
220 clinical days annually, and
$100.00 average payment per
visit. 14, 48 –50 APPs may independently
bill at 85% of physician fees,
although APP roles may vary by
practice. 51 The FFS model accounts
for rejected claims, no-shows,
and uncompensated visits by writing
off 10% of expected revenue. The
model includes a 5% practice
margin in both the FFS and capitated
scenarios so that the practice is
able to build and maintain financial
reserves for upgrades or unexpected
expenses.
In the capitated model, practice
revenue is driven by attributed
panel size and the average capitated
payment. Instead of billing payers
for individual patient encounters,
capitated practices receive a risk
adjusted base PMPM payment for
each attributed patient. Particularly
in pediatrics, the capitated rate
should account for the age of covered
patients. 52 The model excludes
vaccination, but if included in
capitated payments, rates must be
substantially higher and must
allow for vaccine price increases,
which occur annually if not more
frequently.
Providers typically receive incentives
for performance relative to quality
and cost benchmarks. Quality and
cost bonuses are paid when practices
reach predetermined performance
thresholds and as a percentage of
spending compared with targets,
respectively. For transparency, our
model converts quality and shared
savings payments into PMPMs.
Incentive payments and copayments
are added to the base PMPM to
calculate total revenue.
In capitation: Net Income = Patient
Co-payments + Capitation Base Rate +
Utilization Incentives + Quality −
Operating Expenses.
Sensitivity Analysis
Practices vary widely in organization
and style. Our model presents an
“average” practice, but several core
assumptions may vary significantly
between practices, including
physician salary, panel size, and
overhead. As a robustness check, an
economic simulation was constructed
where physician salary, panel size,
and overhead less staff expenses
were allowed to vary across the
range of values in Table 1. Each
simulation generated 500 different
practices. The model was iterated 50
times to generate a total of 25 000
practices.
Practice Transformation
Because revenues are not tied to
face-to-face physician or APP
encounters, capitation models allow
providers greater clinical autonomy
than FFS, and all practice staff may
contribute to patient care at the
level to which they are legally
entitled. 13, 37, 53 – 56 We modified the
practice’s staffing ratios to reflect
2 published PCMH transformations
to assess its effect on the PMPM. 37, 54
In 1 example, an additional APP
mental health provider, 2.5 nurses,
1.5 clinical support staff,
0.5 administrative support staff, and
0.5 of a practice administrator were
added. These additions increased
the staffing ratio by 37% (3.2 to 4.4).
In a second example, 2 nurses and
2 clinical support staff were added.
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FARMER et al
These additions increase the staffing
ratio by 25% (3.2 to 4.0).
Capitated Rates for a Real-World Payer
For illustrative purposes, we
obtained capitated rates and
program information for Capital
District Physicians Health Plan
(CDPHP), a health plan in upstate
New York that serves nearly a half
million commercial and Medicaid
members. 57 CDPHP provided data
from 2013, including the base
capitated rate, quality incentives,
and shared savings incentives
payments. We applied Medicaid,
commercial, and 50:50 blended
rates to our model with and without
staffing changes, to assess the
financial impact on our hypothetical
practice.
RESULTS
In Fig 1, the left-side income
statement is FFS, and the right side is
capitation. With attributed patients,
staffing, and salaries held constant,
the minimum breakeven aggregated
capitated rate for the hypothetical,
independent, midsize practice was
$24.10. This number may be reached
in several ways. For example, a
base PMPM rate of $20.60 could be
supplemented with $1.50 PMPM
quality incentive and a $2.00 PMPM
cost incentive. Figure 2 illustrates
the relationship between the panel
size and the breakeven aggregated
capitated payment rate. Practices
that receive a PMPM above the
line (in the green) generate higher
revenues than the FFS scenario,
whereas practices that receive a
PMPM below the line (in the red)
generate lower revenues than the
FFS scenario.
Figure 3 illustrates the findings
of the sensitivity analysis for 500
practices. The figure shows the
impact of random combinations of
model inputs across the range of
assumptions drawn from Table 1 on
the breakeven aggregated capitated
rate. In the simulation, 80% of
practices would break even at an
aggregated capitated rate between
$16.12 and $35.00.
With physician and staff salaries
again held constant, Fig 4 illustrates
the relationship between breakeven
aggregated capitated rates and the
2 PCMH staffing transformations
described above. The blue line
represents the breakeven aggregated
4
FIGURE 1Simplifi ed fi nancial model.
FIGURE 2Relationship between PMPM rates, attributed patient population, and profi tability. Breakeven is defi ned as the rate at which the practice is as profi table as it was under FFS. Without staffi ng or other operational changes, the model predicts a $24.10 PMPM; a lower PMPM would result in operational losses, and a higher PMPM would lead to increased revenues.
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PEDIATRICS Volume 138 , number 2 , August 2016
PMPM with no staffing adjustments.
The red line reflects the first staffing
transformation (38% staffing
increase), and the green line reflects
the second practice transformation
(25% staffing increase).
Table 2 presents CDPHP’s mean
capitated rates for both its Medicaid
and commercial populations,
and program details including
performance metrics and covered
services. CDPHP began transitioning
practices to full capitation in 2008 as
part of its Enhanced Primary
Care Initiative (EPCI). 57 Many of
CDPHP’s EPCI participating
practices are also certified PCMHs.
As in our model, vaccines are paid
separately on an FFS basis in the
CDPHP model. Age-, sex-, and risk-
adjusted capitated rates range
from $13 to $65 and depend in
part on whether the patient is in
a commercial or Medicaid plan.
The maximum incentive payment
available is $5.32, but on average,
practices earn 33% ($1.77) of the
potential maximum.
Holding all assumptions constant
in the FFS and capitation financial
statements, the model applies
the mean capitated payments of
$22 (base Medicaid PMPM rate)
and $36 (base commercial PMPM
rate) plus $1.77 PMPM incentive
payments (all patients). Our model
resulted in a 4% and 25% margin
in the Medicaid and commercial
plans, respectively. A practice that
blended 50% Medicaid and 50%
commercial patients resulted in a
base capitation rate of ~$29. After
the $1.77 incentive payment, the
blended practice earned a 17%
margin; this rate was sufficient
to support either of the 2 PCMH
staffing transformations.
DISCUSSION
Given unsustainable growth in
US health spending, public and
commercial payers are transitioning
to APMs that are intended to
better align payment with value.
Although many physicians have
hesitated to participate in APMs,
future participation in new
payment models will probably
be unavoidable. Thirty percent of
Medicare payments are already
tied to APMs. 58 Pediatricians need
to understand the implications
of emerging payment models for
practice organization and finances.
Our model calculates the aggregated
capitated rate where a pediatric
practice would break even relative
to FFS across a range of panel sizes,
describes how that point would
differ between practices, and
illustrates the impact of staffing
changes. Mean payment rates from
a real-world capitated payment
model, CDPHP, are applied as an
illustration.
To our knowledge, no study has
examined the practice financials
5
FIGURE 3Sensitivity analysis of breakeven aggregated capitation rates with varied practice assumptions. An economic simulation allowed model assumptions to vary across the range of values shown in Table 1. These values were drawn from multiple sources.
FIGURE 4Relationship between the breakeven aggregated capitated rate, panel size, and PCMH staffi ng variations. As staffi ng ratios change, the breakeven PMPM rate will also vary. This fi gure shows the impact of 2 staffi ng changes on the breakeven PMPM. The fi rst (red) adds an APP mental health provider, 2.5 nurses, 1.5 clinical support staff, .5 administrative support staff, and .5 of a practice administrator were added. The second (green) adds 2 nurses and 2 clinical support staff. To the extent that staffi ng changes increase effi ciency, the cost of additional staff may be offset by increased panel size.
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FARMER et al
of a transition from FFS to
capitation in pediatrics. Kuo et al 59
recently estimated primary care
expenditures by Medicaid patients
at $19 PMPM, 25% below our
breakeven capitated rate. However,
most commercial plans reimburse
at higher rates than Medicaid plans,
and our breakeven rate reflects
the average of all patients in the
practice. 60
Practice style and organization
vary in important ways. The
sensitivity analysis presented
in Fig 3 demonstrates a wide
variation in breakeven rates
based on these differences. The
income statement shown in Fig
1 may be adapted to calculate
the breakeven capitated rate for
specific practice circumstances.
Even so, most practices will
need technical assistance from
payers to identify the number of
attributed patients (panel size),
assess performance on utilization
and quality metrics, and project
revenues. 61 Capitation model
designs also differ, as do eligibility
and participation requirements;
practices should pay careful
attention to program terms
when assessing the financial
impact of participation. If
vaccinations are included in
the capitated payments, a new
calculation is needed.
PCMH models are often paid through
capitation at rates intended to
support a team-based care approach
that may lower costs and improve
outcomes. 8, 62, 63 In these models,
physicians may elect to spend
more time with the most complex
patients while delegating simple
visits to a broader team. For
example, in the case of a pediatric
patient with asthma, simple but
important tasks such as teaching
nebulizer technique and reviewing
asthma action plans may be
performed by nurses or medical
assistants. 64, 65 Some clinicians
may work with patients by phone,
e-mail, Web chat, or even video call,
potentially improving efficiency,
access, and patient satisfaction. 49, 66
However, not all PCMH models
perform better than traditional
primary care models. Studies
of the effects of APMs and APM-
supported delivery reforms on
health care expenditures and
patient outcomes find mixed
effects. 67 – 73
PCMH practices often change
staffing ratios to optimize the care
team and extend services. The
optimal staffing mix should be
driven by practice and community
needs. 13, 74 – 76 Many of these staffing
changes will increase the breakeven
capitated rate. Our findings are
consistent with a recent review that
found that PCMH staffing changes
increase the breakeven capitated
rate by ~$5.00 PMPM.54 Our first
staffing model resulted
in an increase of $5.50 (23%), and
our second staffing model resulted
in an increase of $3.00 (12%).
Under capitation, practices may
increase revenue by increasing
panel size, increasing quality
incentives, or increasing utilization
incentives. There is therefore a
dynamic relationship between
staffing choices, practice efficiency,
and the breakeven capitation rate.
The mix of providers and services
that optimizes efficiency and
performance remains
undefined. 77
This study has several limitations.
We modeled a midsize,
independent, general pediatric
practice, but many other practice
configurations are possible.
Practices differ in the number
and type of providers, support
staff ratios, overhead costs, and
panel sizes. The model does not
account for varying ratios of new
to established patient visits or
the time and payment differences
between well and sick visits.
We based our practice on average
data drawn from >200 pediatric
practices distributed across a
broad geographic area, the medical
literature, and published surveys.
Although our model illustrates
important considerations in
transitioning to capitation, our
sensitivity analysis demonstrates
wide variation in the breakeven
capitation rate when assumptions
are varied. Individual practices
should use the income statement
as a guide to calculate the
breakeven capitated rate for their
specific circumstances. Lastly,
the assumption that all patients
simultaneously transition from
FFS to capitation is not typical,
and most practices will participate
in several payment models
simultaneously.
6
TABLE 2 CDPHP Enhanced Primary Care Capitated Payment Rates for Pediatric Patients
CDPHP Medicaid CDPHP Commercial
Mean base capitated rate, mo $22.00a $36.00a
Range base capitated rate, mo $14.00–$37.00a $21.00–$66.00a
Covered EPCI services Standard services: telehealth, 1-on-1 or group education classes,
emergency offi ce visits or off-hours basic visit, preventive
counseling, brief behavioral or mental health assessment and
medical management
Eligible cost/quality incentive
PMPM
$5.32b $5.32b
Example quality measures HEDIS measures: immunizations, asthma medication ratio,
antidepressant medication management, disease screenings, lead
testing, antibiotic use in children, member experience (CAHPS)
CAHPS, Consumer Assessment of Healthcare Providers and System; HEDIS, Healthcare Effectiveness Data and Information
Set.a Not risk or age adjusted, pediatric PMPM.b Most practices receive 33% of eligible performance incentive payments.
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PEDIATRICS Volume 138 , number 2 , August 2016
CONCLUSIONS
Practices are more likely to succeed
financially in APMs, such as
capitation, if they understand how
these models alter practice finances
and how to calculate the breakeven
rate and if they take advantage of
the added flexibility to improve
efficiency and value. Additional
work should focus on analyzing
practices in blended payment
models and the relationship
between differing staffing ratios,
patient panel size, and patient
outcomes.
ACKNOWLEDGMENTS
The authors thank CDPHP’s
Bruce Nash, Eileen Wood, and Ali
Skinner for providing us with data,
model support, and invaluable
editorial comments. We also thank
Cheryl Arnold, Theresa Cleveland,
Sunnah Kim, and Chip Hart for
their helpful comments on this
manuscript.
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7
ABBREVIATIONS
APM: alternative payment model
APP: advanced practice provider
CDPHP: Capital District
Physicians Health Plan
EPCI: Enhanced Primary Care
Initiative
FFS: fee-for-service
FTE: full-time equivalent
PCMH: primary care medical
home
PMPM: per-member per-month
FINANCIAL DISCLOSURE: The authors have indicated they have no fi nancial relationships relevant to this article to disclose.
FUNDING: Supported by the Merkin Family Foundation.
POTENTIAL CONFLICT OF INTEREST: The authors have indicated they have no potential confl icts of interest to disclose.
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DOI: 10.1542/peds.2015-4367 originally published online July 29, 2016; 2016;138;Pediatrics
James Perrin, Ali Moghtaderi and Mark McClellanSteven A. Farmer, Joel Shalowitz, Meaghan George, Frank McStay, Kavita Patel,Fully Capitated Payment Breakeven Rate for a Mid-Size Pediatric Practice
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