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Health Care Cost Accounting
A capitation payment arrangement can be an effective means to control healthcare costs
because it allows both the insurer and the employer to predict costs for healthcare services
more accurately. When a capitation payment method is used, the financial risk of caring for
the patient is transferred to the medical delivery system. If the healthcare delivery system
does not have a cost accounting system or the ability to develop cost information on each
payer and service line, then it will become necessary to find a way to develop such
information prior to entering into a capitation contract. A six step method is recommended
for developing a capitation payment rate. Cost accounting information is used as well as
data from a market study. The steps are:
1. Determine the delivery system cost base
2. Develop use rates
3. Calculate capitation rates
4. Adjust rates for impact of incremental volume
5. Negotiate the contract
6. Monitor contract performance
Using the capitation payment method, the health care provider assumes that for a given
insured population, the provider will cover all health care services for a fixed payment per
member per month (PMPM). This capitation payment could cover the full continuum of
services, including acute hospital stays, non-acute hospital stays, outpatient visits, home
health visits, primary care physician visits, specialty physician visits, and tertiary physician
visits.
An acceptable payment must be fair both from the insurers point of view and from that of
the delivery system or provider. The insurer will be limited by what the consumer can
afford to pay for health insurance. Managers of the health care delivery system must know
the per capita cost of providing care to the insured population and compare that cost to
what the insurer is being paid per capita per month.
DEVELOPMENT OF A CAPITATION PAYMENT RATE
Determine Delivery System Cost Base for Targeted Population
o The first step in determining the capitation rate is to predict the costs of providing care to
the insurers population, based on assumptions about the population and on the cost
structure of the delivery system. Informationfrom a cost accounting system is necessary for
this step. Accurate cost data should be figured by service and should be broken out into the
components of fixed and variable costs. Using this method, inpatient service lines are
defined by grouping diagnosis-related groups (DRGs) into 16 categories. Although
decision support systems allow products or service lines to be defined using any of a
number of variables, a classification of services on the basis of DRGs is preferable because
