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Think Again: Capitation Models for Pharmacists? Part I

Capitation payment models including pharmacist were a thing in the 80s and 90s. However, since the late 2000s, few studies have evaluated the effectiveness of pharmacists under this payment model. This trend is in stark contrast to the trend of pharmacists becoming increasingly better trained to handle direct patient care responsibilities — first by establishment of the doctorate (i.e. PharmD) in 2004, followed by increasing participation in residency training. By my own napkin math, around 25% of pharmacy school graduates entered into a post-graduate (PGY-1) residency based on 3,822 matches and 14,800 graduates in 2019. That number continues to grow each year.

What is capitation?

If you’re unfamiliar with capitation models, you’re not alone. I too am writing this from a position of ignorance and together we’ll learn how pharmacists can fit into capitation and bundled payment models. Two Harvard Business Review (HBR) articles do a better job than I ever could in explaining these concepts so I’ll refer you to them directly:

  • The Case for Capitation (July-August 2016) — by Dr. Brent C. James, MD and Gregory P. Poulsen of Intermountain Healthcare. Reviews the cost-plus, fee for service, per case, and capitation revenue models. Makes a strong case for capitation as a revenue model to reduce healthcare waste.¹
  • How to Pay for Health Care (July-August 2016) — by Michael E. Porter and Robert S. Kaplan of Harvard Business School. Importantly, Michael of ‘Porter’s 5 Forces’ fame favors bundled payments over capitation in achieving value-based reimbursement.²

At a very high level, under capitation the insurer makes an advance per patient per month (PMPM) payment to a provider organization for the population of plan members they are contracted to cover. The payment is intended to cover the medical services of the population over the defined period, regardless of whether members seek services or not. The global capitation provider/organization assumes the full risk of contracted plan members. Risk is generally the delta between total capitation payment and the total cost of care — profits are seen if population costs are below capitation, losses otherwise. Risk to the global cap provider can be mitigated by sub capitation (“sub cap”), where sub-specialties can be contracted to deliver services under a negotiated PMPM payment from the global capitation. The sub cap provider assumes partial risk related to the subset of contracted services for plan members — for example, cardiology referrals. For global cap and sub cap providers, profit maximizing potential is seen when effective and efficient care is delivered under the capitation amount. In this model, the three forms of waste are theoretically eliminated — avoidable patient cases, suboptimal/duplicative cases, and inefficient units of care (e.g. tests and medications).¹

Pharmacists under Capitation

From what I can tell, pharmacists have not traditionally been in the conversation for capitation payments — at least not at any meaningful scale. More specifically, pharmacists have not meaningfully participated as sub capped providers of care with the ability to earn profits from delivering cost effective high quality care. Even in the studies of the 1990s and 2000s, using pharmacists for medication therapy management (MTM) services in capitation payment models was use to drive down utilization costs for the global capitation provider — at the employ of the provider.³ In the referenced study by Altavela et al, the pharmacist also did not see patients directly. The pharmacist left recommendations for the physician via handwritten notes, where only 69.7% of recommendations in the treatment arm were accepted.

Is there a better model? A model where the pharmacist is not a service for the physician, but a sub-capped sub-specialty of a global capitation — where the pharmacist profits directly from reducing utilization costs through MTM? If the pharmacist can treat the population for less than the sub capitation payment, the pharmacist keeps the delta as profit. If the pharmacist cannot, the pharmacist eats the loss. High risk for sure — but high reward as well? Would this model be better than existing pharmacist collaborative practice and embedded models? After all, the physician ultimately still owns the risk associated with the patient in those models — and the pharmacist assume little risk at all. What about bundle payment for care improvement (BPCI) model that leverage pharmacists? Or an accountable care organization (ACO) that leverages pharmacists and can pay them a number of ways — fee-for-service (FFS), capitation, or bundled?

Pros and Cons (and a whole lot of unknown)

The up-side is fairly straight forward — an opportunity for pharmacists to directly profit from the work they do. It’s an opportunity to detach pharmacist for volume-based and cost-avoidance metrics.

  • Capturing value. Pharmacists create value through their comprehensive understanding of pharmacology and therapeutics. Rarely do pharmacists ever meaningfully capture value — why else has the profession pushed for provider status for years?⁴ In lieu of provider status, pharmacists should be exploring models of direct reimbursement today. And in the face of increasing robotization and digitization, pharmacists should looking at non-dispensing roles and responsibilities today. A capitated model is one of many potential revenue models for pharmacists going forward — and it may not even be the best.
  • Returning the workforce to patient care. I’d imagine if a capitation model works out and demonstrates not just value to the plan, but profits to the pharmacist there will be no shortage of pharmacists interesting in participating. Most pharmacists did not go into the profession to be pure dispensers. It is time to extricate pharmacists from dispensing responsibilities.
  • A natural bridge to digital pharmacy. It is evident that digital therapeutics and digital health technologies will drive healthcare outcomes of the future. In a sub cap MTM model for chronic disease management, pharmacists can become the defacto experts in digital health tools. After all, with medication and adherence related tools, is there anyone closer to the patient and the product than a pharmacist? Digital pharmacy, what I’m loosely defining as the delivery of pharmacy cognitive services that leveraging wearables, mobile applications, and/or web platforms, is another potential avenue for pharmacists to generate revenue and drive their quality outcomes.

Within big ideas lurks big potential problems. I’ll try to outline the more obvious ones — I’m open to hearing other you may see!

  • The fee-for-service (FFS) model is still the predominate reimbursement model on the market — 95% of all physician office visits in 2013.⁵ Assuming a minor decrease in that figure since 2013 and the best case scenario where the remainder is global capitation, this is still a relatively small market opportunity. Maybe 10%? And how much of this market would work directly with pharmacists for MTM?
  • The pharmacist will take on real downside risk. The sub capitation model is population-based and the pharmacist cannot choose the patients or their risk. The sub capitation payment is risk-adjusted but the implication is that some patients will he high utilizers of care regardless of the interventions taken. The PMPM amount will be important and require detailed actuarial analysis — in essence, the pharmacist will act much like a payor in assessing the risk of the plan members in negotiating the rate and perhaps stop-loss. The other consideration is whether pharmacists would truly be paid the entirety of the risk justified PMPM capitation payment.
  • The pharmacists in this model will need significantly greater malpractice insurance. Alongside real financial downside risk, there is also real legal liability associated with a truly independent practice. Decisions that end in poor outcomes will be thoroughly questioned and potentially litigated.
  • The model only works if the pharmacist can actually affect care. The Altavela et al study demonstrates a recommendation model does not work in the context of sub capitation — the pharmacist takes on risk, but has no tools to mitigate risk. A hyperbolic example would be a sub capitated ENT specialist’s only treatment modality being a Neti Pot. The risk mitigation tool for pharmacist is the prescriptive authority to independently adjust medication therapies. How comfortable would primary care physicians be with this concept?
  • Infrastructure will be a barrier and difficult to scale. Who are the pharmacists that will be doing this? Hospital-affiliated practices, often operating under Account Care Organizations (ACOs), already utilize pharmacists in these roles (though not reimbursing them via PMPM capitation payments). Independent physician associations or medical groups may not be on the same electronic health record (EHR), so how can the pharmacist access patient records? And no single pharmacist can venture out on their own to do such MTM work at scale — the protocols/guidelines, actuarial analysis, contracting, and variety of overhead. Do we need pharmacist group practices? An association of independent and ambulatory care pharmacists — independent physician associations (IPA) for pharmacists?
  • Legal and regulatory restrictions; conflicts of interests that may exist or develop. Should the pharmacist providing sub cap MTM services also be the pharmacist that fills the prescription? As the patient can choose their pharmacy, what happens if they want to fill with a more expensive service? Can the pharmacist select sub optimal therapy that minimizes spend/maximizes returns? Can Medicare/Medicaid capitation payments be made to pharmacists, who are not currently considered providers? Lot of potential legal, regulatory, ethical, and operational considerations to sort through here.
  • We’ll need a lot of pharmacists or we’ll need to be limited in scope. If it wasn’t apparent already, I’m talking about a business model rather than a clinical model. The clinical model is well established — the business model is completely undefined. Farmer et al found their fully capitated pediatric practice break-even PMPM figure to be $24.10.⁶ The variables included 10,200 covered patients, 6 clinicians seeing 25 visits a day for 220 clinical days. The assumptions were 3.24 visits per patient per year, from which they derived the 1700 panel size (the number of patients each provider can be accountable for). Expenses and overhead were 62% and 30% of revenue, respectively. What kind of sub cap would a pharmacist receive? How many visits would a pharmacist receive per patient per year? How long would those visits last (likely longer, in my experience)? Let’s say 30 minute visits, so 16 patients per day per pharmacist. And let’s say 3 visits per patient per year. 10,200 covered patients at 3 visits per patient per year is 30,600 visits. At 16 visits per day, that will take 1,912 working days. Getting to 220 working days would require 9 pharmacists! A median salary of $128,000 would translate to $1,152,000 in costs for pharmacists alone — $9.41 PMPM or 39% of the global capitation — before any operating expenses and overhead! What is clear from my Napkin Mathᵗᵐ is that pharmacists would need to be used in targeted fashion, in disease states readily impacted and well managed by existing pharmacy clinical service models.

Ideation

So what would a framework for a pharmacist in a capitated payment model look like?

  1. Pharmacist independent prescriptive authority. As discussed earlier, if the pharmacist can’t make independent clinical decisions, they can’t fully mitigate the risk associated with the cost and effectiveness of care. The impetus being that physicians would have to be comfortable with this practice. Does this happen through obtaining provider status? Sure — that would help immensely. Can it happen under a broadly written practice agreement? Most likely.
  2. Targeted chronic disease management. It’s clear from Napkin Mathᵗᵐ that pharmacists cannot and should not cover the entirety of the plan population. As with any subspecialty, pharmacists should be referred for management — but in what disease states? My own opinion is that we’re most effective in disease states that are 1) highly guideline driven, 2) have education barriers, or 3) have adherence barriers. Top of mind areas for effective pharmacist intervention are hypertension, hyperlipidemia, diabetes, asthma, and COPD. However, Cutler et al found that medication nonadherence cost of cardiovascular disease and diabetes greatly pale in comparison to disease states such as osteoporosis, HIV/AIDs, Parkinson’s, cancer, and addiction.⁷ For example, gastrointestinal (GERD, Crohn’s) nonadherence was had a median per person per year cost of $20,715, driven primarily by avoidable hospitalizations. Perhaps those are better initial targets?
  3. Pharmacist group practices or independent pharmacist associations. This is not a model where a pharmacist can go it alone — the overhead (e.g. infrastructure), contracting, and actuarial work alone is more than a single pharmacist can handle. And as scope expands, so does the patient volume. A more scalable business model looks much more like a group practice or association.

One of the greatest challenges for the pharmacy profession is identifying what do we (as a profession) want to be want we grow up. And by growing up, I mean the obsolescence of brick and mortar pharmacies when automation, delivery logistics, and digital services makes wide swaths of the workforce redundant. I hope by then we have a plan that generates revenues based on cognitive services and value-based outcomes…

Credit for the genesis and continued fleshing out of this idea goes to several folks on Clubhouse — Dr. Danish Nagda, Dr. Mahek Shah, Matt Van Cuyk, Timothy Aungst, and many others on the stage and in our discussions.

References

  1. James BC, Poulsen GP. The Case for Capitation. Harvard Business Review. https://hbr.org/2016/07/the-case-for-capitation.
  2. Porter ME, Kaplan RS. How to Pay for Health Care. Harvard Business Review. https://hbr.org/2016/07/how-to-pay-for-health-care.
  3. Altavela JL, Jones MK, Ritter M. A prospective trial of a clinical pharmacy intervention in a primary care practice in a capitated payment system. J Manag Care Pharm. 2008;14(9):831–843. doi:10.18553/jmcp.2008.14.9.831
  4. Provider status: What pharmacists need to know now. American Pharmacist Association. https://www.pharmacist.com/provider-status-what-pharmacists-need-know-now.
  5. Zuvekas SH, Cohen JW. Fee-For-Service, While Much Maligned, Remains The Dominant Payment Method For Physician Visits. Health Aff (Millwood). 2016;35(3):411–414. doi:10.1377/hlthaff.2015.1291
  6. Farmer SA, Shalowitz J, George M, et al. Fully Capitated Payment Breakeven Rate for a Mid-Size Pediatric Practice. Pediatrics. 2016;138(2):e20154367. doi:10.1542/peds.2015–4367
  7. Cutler RL, Fernandez-Llimos F, Frommer M, Benrimoj C, Garcia-Cardenas V. Economic impact of medication non-adherence by disease groups: a systematic review. BMJ Open. 2018;8(1):e016982. Published 2018 Jan 21. doi:10.1136/bmjopen-2017–016982

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Dennis is an informatics pharmacist at Mayo Clinic and MBA candidate ’21. Writing at the intersection of healthcare, tech, and strategy. And coffee. And ramen.

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Dennison Lim

Dennison Lim

Dennis is an informatics pharmacist at Mayo Clinic and MBA candidate ’21. Writing at the intersection of healthcare, tech, and strategy. And coffee. And ramen.

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