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Capitation – a fixed, prospective payment to a health care delivery organization – was tried and then mostly rejected in the 1990s. Physicians and patients feared that it would lead to limits on choice and denial of needed care. The negative reaction to capitation was so strong that Joe Dorsey and Don Berwick recently called capitation one of health care’s “dirty words”.

Capitation earned much of its negative reputation because, as Dorsey and Berwick point out, insurance companies too often “claimed to manage care but in many cases only managed money.” Payment levels were set artificially low, and the system had little way to monitor the quality of care and watch for patterns of under-use.

We should not, however, let capitation’s failings prevent us from learning lessons from its successes. Scattered among the bad experiences of the ‘90s were innovations that resulted from capitation’s original design: aligning economic and clinical incentives to promote creativity in delivering the best care for patients.

Indeed, Dorsey and Berwick, who were both then at Harvard Community Health Plan, credit capitation for such advances as early electronic medical record adoption, patient reminders, creative roles for advanced practice nurses and physician assistants, and quality measurement.

So, as the call for payment reform grows louder (both Governor Patrick’s Healthy Mass Compact and Senate President Murray’s recently introduced legislation seek to link payment to quality), we need to look at ways to capture the value of capitation while fixing the problems with it. We know that additional innovations could flourish in a payment system that supports flexibility and creativity in ways that the current system does not. For example, group visits, e-visits, and home visits — all of which have great potential in the management of chronic illness — are implausible in our fee-for-service system.

Nearly two months ago, Blue Cross unveiled plans to offer a new optional quality contract to our providers. The goal of the contract is to base payment on quality, outcomes, safety, and efficiency, rather than on the number of services provided and the complexity of each service. We tried to combine the best features of capitation and pay-for-performance, while correcting the problems of first-generation capitation models. The new model, which we’re calling an alternative quality contract, combines a global payment with significant incentives for quality performance.

Some have suggested that our new contract is merely reverting to the flawed capitation model of the past. Here are several ways our alternative quality contract differs from capitation:

The global payment does not represent a reduction from current payment levels
The global payment is based on actual costs. Our goal is not to reduce payments made today for health care but rather to slow the rate of increase in cost to be closer to inflation over time, while giving providers flexibility to find new, innovative, better ways to deliver care.

Under capitation, health plans often set reimbursements below costs, forcing providers to find immediate efficiencies to achieve a margin. The global payment is based on current costs, and increased every year in line with inflation. When providers manage their costs below the payment level, they keep the difference to reinvest in their organization.

The global payment is adjusted for health status
The global payment is set for each member/patient based on their age, gender, and health status. This should eliminate incentives for practices to favor healthy members and may even encourage efficient and effective clinicians to take on sicker patients.

The global payment is comprehensive, and paired with quality incentives
The global payment includes all services received by the member/patient, so that everyone within the health care organization has the same incentive to provide the most efficient, effective care. For example, if a physician spends extra time with a patient, and the patient avoids an unnecessary hospitalization, the patient enjoys better health and the savings benefit the physician and medical organization. Today’s system works in the opposite way: a prevented admission lowers a provider’s revenue.

On its own, the global payment could create incentives for under-treatment, because physicians are paid the same amount regardless of the amount of care they provide. Under the BCBSMA payment model, we have coupled global payment with significant financial incentives based on performance against quality measures, to guard against this possibility. Quality incentives are paid based on the latest nationally accepted measures of quality, effectiveness, and patient experience of care.In short, the new BCBSMA quality contract attempts to maintain the positive features of capitation while rewarding the best clinical performance.

Amid the growing consensus that linking payment to quality is an essential tool to slow the growth of health care cost, we have to be ready to look at new payment models. And maybe to look at old models in new ways.Andrew Dreyfus is executive vice president for health care services at Blue Cross Blue Shield of Massachusetts and former president of the Blue Cross Blue Shield of Massachusetts Foundation.

This program aired on March 19, 2008. The audio for this program is not available.