Capitation is here to stay. You may not like it. You might even hate it, but unless you’re willing to go with patients who are strictly private pay, you must learn to deal with it. If you need convincing, look at the number of capitated lives in your region. In Philadelphia, for example, you have three major carriers – Cigna, Aetna U.S. Healthcare and Keystone – controlling 87% of the market.

Just because these carriers have your patients, doesn’t mean you’re at their mercy when it comes to negotiating capitated contracts. Here, I’ll explain the factors to consider before you bid on a contract, and how, with the right tools, you can determine the rate that’s in your best interest every time.

Member access is critical to carriers. To increase your odds of winning favorable managed care contracts, the first thing you should consider is forming a network large enough to provide access to managed care lives in your area.

One of the main reasons organizations like LensCrafters and Pearle Vision have been so successful is that they can show a major carrier like Cigna that they have 300 franchises in northeast Pennsylvania.

If you received a request for proposal (RFP) from Cigna for 200,000 lives, how many providers would you need in your group to handle it? With a 10% utilization rate, you’d be faced with 20,000 eye exams. This might overwhelm a group of two or three doctors, but be quite manageable for a network that included 100 doctors.

Forming a network is not without risk. With no guarantee of ever getting a managed care contract, you can fully anticipate a budget of $40,000 to $50,000 to form a network. After you go through the process of forming the network, you have to develop utilization review and quality assurance programs. Consider such critical issues as:

• Who will be on your board?
• Who will be your medical director?
• Who will be optometric director?
• How will you administer claims?

To bid on a managed care contract, you have to know your cost per patient. To determine this, look at your annual overhead and deduct your (owner) compensation and all related benefits. Then look at the number of patients you’ve seen. If you divide the two, you’ll get a very a simplistic determination of what it costs you to see a patient.

If you don’t know your costs, then you can’t negotiate a contract to your advantage. Suppose it costs you $10 to see a patient and you only bid $2.42. You’ll have a problem because you’ll have to either reduce your utilization percentage dramatically, or become real lean and mean, and sell a lot of contact lenses.

Let’s consider an example of a practice with 10,000 patients and $500,000 in overhead costs per year.

$500,000 in overhead ÷ 10,000 patients equals $50 per patient, per annum (PPPA).

To determine the cost per member per month (PMPM), divide the PPPA rate by 12. In this example, the PMPM rate is $4.17 ($50 ÷ 12).

To arrive at a break-even point, factor in owner compensation. For this example, let’s assume a typical owner compensation amount of 30% of total revenue.

$4.17 x .30 equals an additional $1.25, which amounts to a capitation rate of $5.42 per member ($4.17 + $1.25).

This calculation gives you the average cost per patient. It may actually cost you more money to do an eye exam or perform cataract surgery. You may want to get more specific and break your costs down per procedure if you want to bid on specific codes, such as cataract surgery, or conjunctivitis, red eye and blurred vision cases.

To break down your cost per patient by procedure, you have to go through every Current Procedure Terminology (CPT) and International Classification of Disease (ICD) code and delegate actual expense to that category. (For an example, see "Calculating Profit Margin by Code" on page 63.)

If you don’t bid on what I refer to as "the five prongs," you won’t win a contract with any major carrier: These are the items the carriers are looking for you to bid on:

• vision care
• medical office visits
• surgical
• optical hardware
• ambulatory surgery center (ASC).

Most ophthalmologists typically bid on these services. If you don’t want to do basic vision care, then you need to either contract it out or hire an employee optometrist.

Setting a capitation rate for optical hardware can be tough because it’s hard to know where to set it when you’re dealing with frames and lenses. I rarely quote a capitation of any kind on an optical shop. Instead, I typically request $100 per year, per member.

Surgery centers can be very lucrative under capitation. Most ASCs are seeing a profit of $600 per patient, per procedure. So, with a Medicare ASC reimbursement of $933 for cataract surgery, you can anticipate average surgery center costs of roughly $330.

Remember, the lower your operating costs, the greater your profit. I know of four ophthalmologists in California who are actually running an ASC at a cost of $121 per patient, which means they’re making a profit of about $800 per patient.

My average ophthalmic group this year will easily make 27% profit from every capitated managed care agreement – not because they’re rationing care but because they’re smart about which patients they’ll see. They make sure they don’t have an adverse selection, which is an important point.

When you’re bidding on a managed care contract, you have to look at what type of patients you’ll get. For example, do hospital employees represent a good mix of patients? Absolutely not. You know, better than I, that hospital employees are high-utilization people.

Medicare is another group that obviously has much higher utilization than the average population. If your costs are $2.42 per patient, you really need to set your capitation rate at a minimum of 5 or even 10 times higher than that for Medicare patients because their utilization is very clearly at that weight.

When you’re calculating your capitation rate, review the carrier’s utilization carefully. Don’t always believe the percentage they quote you. Remember, they want their utilization to appear as favorable as possible.

When you’re dealing with 200,000 lives, the last thing you need is to have the utilization off by 10%. As a safeguard, put ceilings in your contracts. Indicate that your cap will climb proportionately commensurate with the increase in utilization above the figure quoted to you.

Leave floors out of your contracts because if you’re a good manager and your utilization is actually below what the carrier quotes you, you’ll make more money from the capitation.

If you’re going to bid with a major carrier, make sure that you have the capacity to see the patients. When doctors tell me that they’re "booked up 3 months in advance," I have to wonder why they’re bidding on major managed care contracts.

I’ve noticed that some doctors become very proud when they have 25 patients sitting in the waiting room and they’re running 2 hours late. But this isn’t something to boast about. Rather, it’s an indication that they’re not efficient and they don’t know their capacity. If they’re not careful, half of their patients could walk out the door.

To arrive at your capacity, determine the total number of available (open) 15-minute scheduling slots in your practice per year. Then determine how many patients you can see in a 15-minute slot.

If you don’t know how many patients you can accommodate in 15 minutes, have your staff track you to determine how much time you spend on each service. With an appropriate mix of post-operative, new and established patients, you can probably see three patients per 15-minute slot.

If you have 1,000 15-minute slots open per year, and you can see three patients per slot, you have the capacity to add 3,000 patients (1,000 slots x three patients) without adding physicians to your practice.

Compare your open-slot capacity to the number of patients you expect with the managed care contract, taking utilization rates into account. (See "Calculating Utilization" at the end of this article.)

If you don’t have the capacity to book the necessary number of patients, you may want to hire a partner or a contractor, broaden your network, or maybe take on a limited number of patients. The important thing is to take your capacity into account before you win a contract.

When you’re evaluating a managed care contract, compare the capitation to what you might get under a fee-for-service agreement. This is what’s called a "fee-for-service equivalency."

For example, a capitation rate of 5.42 PMPM would give you $65.04 PMPA (5.42 x 12). If you have 3,000 members in the plan, you’d receive $195,120 in capitation income each year ($65.04 x 3,000).

Now let’s run a similar analysis for a fee-for-service plan, which pays you based on the number of patients you see. If you received a $35 reimbursement for E&M code 99213 (level 3 office visit for an established patient) on 2,000 patients, you would receive $70,000. In this example, you’d be better off with the managed care contract.

Keep in mind that when you perform a fee-for-service equivalency, you must compare all codes in your decision. You can also evaluate capitation rates by comparing them to your costs per relative value unit (RVUs). (See "Comparing Capitation to Cost Per Relative Value Unit" at the end of this article.)

You can compete with the big boys if you understand your cost of doing business. Before you even look at a managed care contract, calculate your overhead, your owner’s compensation, your capacity and your costs by code. These are the tools you need to negotiate a favorable managed care contract, improve efficiency and come out ahead in the capitation game.