DETERMINE THE PROFITABILITY OF THE CAPITATION RATE BEING OFFERED

To compute the profitability of a capitation rate offered, you need to determine how much higher your revenue per patient is than your overhead costs per patient, using the following calculations:

1. Calculate your overhead cost per patient visit:

Formula:
Annual overhead costs
(all expenses EXCEPT doctor's pay) ÷
Total number of patient visits per year in your practice =
Cost per patient visit

Example:
$380,000 overhead costs
($500,000 income less $120,000 doctor's pay) ÷
6500 patient visits per year =
$58.46 per patient visit

2. Calculate your capitation revenue per patient visit

Example:
20,000 patients in plan ×
$1.11 PMPM=
$22,190 monthly revenue

20,000 patients in plan ×
17.5% (.190) utilization rate ÷
12 months =
292 patients per month

$22,190 monthly revenue ÷
292 patients per month =
$76.03 revenue per patient visit month

3. Calculate your actual profit or loss in revenue per patient visit

Formula:
Capitation revenue per patient visit -
Overhead per patient visit =
Profit/loss (or doctor's income)

Example:
$76.03 revenue per patient visit month -
$58.46 per patient visit =
$17.57 Profit

Perform these calculations both for commercial contracts covering patients up to age 65 and for Medicare patients.

Tips on Utilization

If you are new to capitation arrangements and you are given the opportunity to do so, you may want to negotiate a discounted fee-for-service arrangement for six months to a year to determine an appropriate capitation rate for your practice.

Reduce your risk in a capitation contract by negotiating a trigger point at which your cap rate is increased or decreased if patient utilization exceeds or does not meet expected goals. For example, you could negotiate an increase in your cap rate by 10 percent if patient utilization or volume is exceeded by 10 percent.

When figuring your capitated income, you may need to factor in the effect of withholds and bonuses.

Withholds. Many capitated contracts contain a withhold clause, which allows the plan to withhold a percentage of physician fees (usually 10-20 percent of payment). This creates a risk-sharing pool to protect against over utilization of resources.

Bonuses. Instead of a risk pool, some managed care organizations offer bonuses of an additional 5-25 percent of annual compensation to physicians who perform at or above specified levels. These bonuses are frequently tied to patient satisfaction with your services.

It is important to determine whether such clauses will be included in the contract you are negotiating, since they can significantly affect your income.

Strategy

Some carriers are offering very low capitation rates in their contracts with dermatologists. You need not reject their offer immediately if you're offered a low rate. Rather, scale down the services you provide that fit the rate you are offered.