Hospitals Told Not to Capitate for 'Wrong' Reasons

August 1, 1996

SAN DIEGO--There are many sound reasons why a medical center may want to capitate its oncology services and just as many wrong reasons, said Paul M. Kennelly, who recently assumed the position of president and CEO of the management services organization at the City of Hope Oncology Network in Southern California.

SAN DIEGO--There are many sound reasons why a medical center maywant to capitate its oncology services and just as many wrongreasons, said Paul M. Kennelly, who recently assumed the positionof president and CEO of the management services organization atthe City of Hope Oncology Network in Southern California.

He called it a "leap of faith" to take the step to capitation,but added that "most hospitals, if they prepare properlyfor it and continue to monitor the process, are doing very wellwith capitation."

Retaining market share is among the many attractive reasons forcapitation, Mr. Kennelly said in his presentation at a symposiumsponsored by the Society for Ambulatory Care Professionals andHealth Technology Assessment of the American Hospital Association.

"When you are capitated, basically you've captured that bookof business, and it's very difficult for the business to go elsewhere."What's more, he added, a hospital can build market share if it'squick to the draw and plunges into capitation before its competitors.

Noting that "fee-for-service" is a "dirty word"among California insurers, Mr. Kennelly said that capitation isalso a logical response to the growing phenomenon of managed care.And capitation can improve an institution's cash flow. "Anychief financial officer can appreciate that the capitation checkscome on a certain day every month like clockwork," he said.

But Mr. Kennelly urges hospital administrators to capitate forthe right reasons. "I have a real philosophical problem withcapitation if it's done to control things," he said. "Youshould be capi-tating because it's the right thing to do, it'sthe right reimbursement mechanism for your facility, and it representsan opportunity to truly have a partnership and good working relationshipamong your hospital, your physicians, and your insurance plans."

If, however, controlling premiums and dollars is the main drivingforce behind capitation, "you are capitating for the wrongreason," he said. Going forward under those circumstances,"you will find yourself in trouble either philosophicallyor financially with your capitated partners. I would walk awayfrom capitation at that stage because you just aren't ready todo it."

Relations With Physicians

Mr. Kennelly advised hospitals planning to capitate not to competewith their oncologists for outpatient chemotherapy and other suchservices. He acknowledged that this places hospitals in a "toughsituation," since replacing lost inpatient business withoutpatient business may seem a natural step.

"I don't have a good answer for you unfortunately, but itdoes require some honest dialogue with your doctors," hesaid. "If you are going to put them out of business, it'snot going to really matter much if you've got a capitated contractor not because you won't have any doctors to serve your contract."

In a capitated system, Mr. Kennelly insisted, hospitals, for theirown self-interest, must have a strong relationship with theirphysicians. "The power of the pen is still the most importanttool the doctors have," he noted. "Believe me, theycan hurt you. If you are capitated and you treat them badly, you'reat risk. Suddenly doctors will do rounds a little later and patientsend up staying an extra day. They will remember, and they knowhow to send a message."

When you capitate, it's really a marriage, Mr. Kennelly said."Typically, it's a full risk arrangement with your medicalgroup or IPA, and it is very difficult to unwind once you getinto it. And if you are dealing with HMOs or other managed carehealth plans, they are not likely to let you out of it very easily."

Changes to Expect

As a hospital prepares for capitation, it will need improved informationsystems. Hospitals have banks and banks of data, Mr. Kennellysaid, but extracting it into meaningful information that allowsadministrators to make good decisions can be very problematic.

Capitation also mandates a cultural change within a hospital'sorganization. "You will be thinking differently, acting differently,and probably managing differently than you are today if you aregoing to be successful," he said.

He alluded to the dilemma that these changes presented to his83-year-old institution. "To say that this institution hasan established way of thinking and operating is kind of an understatement,"Mr. Kennelly said.

He noted that the City of Hope struggled with the challenge "ofbeing responsive to a market place that's demanding change whileat the same time hanging on to the values that got it to the pointthat it is today."

With capitation, institutions also need to be aware of brick-and-mortarconsiderations. "If you are very much into capitation, you'regoing to find you will probably have extra facilities. And you'regoing to need to think of what you're going to do with those facilitiesbecause the trend is not toward full beds."

Of course, the question remains whether capitation will last."Whether it is transitional or not is an open book,"he said, "but I would suggest that it probably is transitionalin some form. In a few years, someone will come along with a newway and mess us all up again."