American Society of Dermatology
2721 Capital Ave.
Sacramento, CA 95816-6004
Phone: (916) 446-5054
Message: (561) 873-8335
Fax: (916) 446-0500
American Society of Dermatology, Inc.
A Voice for Private Dermatologists Since 1992


Determining an appropriate capitation rate as a baseline for negotiation purposes requires the following calculations:

1. Ask the carrier for utilization information to determine the number of visits per 1000 plan members per year.6 The example below provides a generic number of 190 which is sometimes used in the industry for utilization of dermatological services in a managed care setting.7

Example: Suppose that the plan you are reviewing has a utilization rate for dermatologic services of l7-18%, which translates into 190 visits per 1000 patients per year.

2. Calculate the per patient revenue in your practice by dividing your total annual income by your total number of patient visits.
Example: $500,000 ÷ 6500 patient visits = $77

3. Determine a theoretical capitation rate for your practice by multiplying your per patient revenue (example 2) by the number of visits per 1000 enrollees per year (example 1) and divide by 12 months to determine the per member per month (PMPM) capitation rate.
Example: $77 per patient revenue x 190/1000 utilization rate ÷ 12 months = $1.12 PMPM

4. Determine the general distribution of services you provide in relation to the income generated. To do this calculation, you will need to refer to your frequency report from your computerized billing system, if automated.
Example: Assume you perform 160 Mohs and reconstructive surgeries per year at $700 per patient, which translates to $112,000 per year in revenue. If your total annual revenue is $500,000, Mohs and reconstructive surgeries provides approximately 22% (.22) of your revenue.

Perform this calculation for each major type or group of procedures you perform.

I don't have a computerized billing system!

If your billing system is not automated, here's what you can do to determine the frequencies of your services you perform. Select 100-150 patient ledgers for analysis. Tally the number of times each procedure is performed and the fees collected (revenue) for each procedure Then, add together all revenue for this batch of patients. Finally, divide the revenue for each procedure by your total revenue for all procedures analyzed in this process.

With these calculations and your menu of services clearly established, you are now solidly prepared to negotiate with any HMO. For instance, if Prudential HMO wants all of your services except Mohs and reconstruction - minus any exclusions such as those listed in the "Not Covered" section of your guidelines (see appendix) - you simply subtract 22% of $1.11, leaving a new cap rate of $.89 PMPM. If that rate exceeds what the HMO is offering, you can delete more services or determine if other administrative or clinical areas can be trimmed.

However, if Prudential HMO will only pay $.55 PMPM, you can continue to cut services until either you've come to a mutual agreement or decide to call it quits with that HMO.

6 The carrier may or may not be able to provide you with utilization figures. Our editorial advisor for this section of the guide, Al Ferry, Ph.D. from Integrated Health Care Systems in Fresno, California, informs us that most insurance carriers have not yet determined the utilization rates for specialty care. They are in the process of compiling this information as they gain experience with discounted fee-for-service contracts for specialty care. Therefore, do not assume that the carrier is any more knowledgeable about capitation in your specialty than you are!

7 Dr. Ferry has compiled dermatologic utilization data from his medical practice management consulting. He states that utilization for dermatologic services generally ranges between 16 to 18 percent. In a well managed gatekeeper plan, dermatologic utilization con be as low as 14 percent.

Determining a realistic or appropriate utilization rate will be your biggest challenge when calculating capitation figures. Utilization depends on several factors including the demographics of the patients in the plan, the types of cases you could expect from the patient population, and your practice style, that is, the types of procedures your perform and your treatment and charging pattern compared to other dermatologists.

The bottom line is that no one can provide you with one, hard and fast utilization figure. You will need to research the patient/case mix of the contract being negotiated, as well as consider your practice style when determining an appropriate utilization rate.

At a minimum, you should be able to use the example calculation in this section to determine whether the contract under consideration is within reason or totally off base. Remember, your first capitation contracts will be a learning process which allows you to gather information for future contracting negotiations.