Compose a list of duties and responsibilities of healthcare corporations Develop a list of healthcare practitioners that a healthcare administrator will encounter and differentiate their scope

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The Evolution of Physician Credentialing into Managed Care Selective Contracting

John D. Blumt

I. INTRODUCTION

In a field littered with analogies, health care in the mid-nineties is best characterized as an enterprise caught in the violent cross winds of a tropical storm known as managed care. Like a series of hurricanes, managed care has reshaped the landscape of health care delivery in drastic and unpredictable ways. While the forces of managed care have increasingly al- tered more health care markets, others are only beginning to feel the winds of change. As managed care overtakes fee-for-service (FFS) medicine, profound alterations in health de- livery are occurring which affect every aspect of American health care.'

Particularly noteworthy is the use of capitation as a primary method of reimbursement. The ramifications of capitated health care are broad and warrant exploration from several vantage points. One basic concern in capitated health plans and managed care is the effect of new payment incentives on physician evaluation for purposes of credentialing. This Ar- ticle focuses on managed care credentialing—the process of appointing, reappointing, and delineating clinical privileges—from a legal perspective. While the Article centers on the link between capitation and credentialing, it has broader applicability in that the same phy- sician evaluation mechanisms in capitated settings are found in discounted FFS arrange- ments as well. The piece provides a brief overview of capitation and credentialing, and a discussion of trends that have altered hospital medical staff credentialing processes. Later sections analyze the regulation of managed care credentialing, organizational liability for inappropriate credentialing, including a consideration of the impacts of the Employee Re- tirement Income Security Act (ERISA), and physician rights in the new environment of capitated plan credentialing.

IL BACKGROUND

A. CAPITATION

Capitation is more than a buzzword, it is a cornerstone of the health care industry oc- topus of the nineties, for its presence cannot be easily ignored and its expanse is broad. Simply put, capitation is a system of reimbursement based on a flat payment, generally cal-

t Professor of Law and Associate Dean for Health Law Programs, Loyola University Chicago School of Law.

' Jerry F, Pogue, Capitation Strategies, INTEGRATED HEALTHCARE REP, (Integrated Healthcare Rep,, Lake Arrowhead, CA), Dec, 1994, at I.

174 AMERICAN JOURNAL OF LAW & MEDICINE VOL. XXII NOS. 2&3 1996

culated on a monthly basis.2 It has been argued that capitation best lends itself to integrated health systems, with a broad base to distribute risk and a high patient volume; nonetheless capitation is being applied to providers at all levels ofthe health care delivery system. As yet, capitation has not surpassed FFS reimbursement, but it is likely to become the domi- nant form of payment. Public and private payers alike see capitation as the primary vehicle to control costs by setting limits on payment, and shifting the financial risk to the health providers.3

Like any complex development, capitation can be viewed in various ways. A thor- ough analysis is difficult because capitation is a payment system whose use on a large scale is relatively new and like managed care, is a work in progress. It is unlikely that capitation will ever totally replace FFS medicine, and it seems reasonable to expect that different capitation payment schemes will evolve from those currently in use.4 In some health care markets, practitioners and institutions are heavily capitated, but nationally capitation is not yet the dominant form of reimbursement. Even though most providers are not totally capi- tated, as clinicians and institutions obtain a larger percentage of payments through capitated health plans, significant changes in medical practice will occur.

A logical and primary vantage point from which to assess capitation is a financial one. When exploring capitation as a payment system one quickly realizes that it is more than a process of providing a set payment per patient on a monthly basis. Establishing payment rates and negotiating capitated agreements involve detailed and complex financial assess- ments.^ Appreciation of how capitated rates are set by payers requires a thorough under- standing of health care costs and patient utilization patterns at a specific provider and mar- ket level.6 In negotiating capitated contracts providers need to know their average fees, utilization rates, and income on a per capita basis, factors which physicians, until recently, have not routinely collected.''' There is a growing body of literature and an expanding num- ber of consultants dealing with the fmancial nuances of capitation at all stages ofthe reim- bursement process. Both payer and practitioner strategies will vary with the maturation of capitated systems.

On the acute care level, capitation works in some respects like prospective payment in that hospitals know in advance what set amount they will receive per capitated life. Unlike prospective payment, the hospital must view capitation collectively to determine if its total capitated payments can support inpatient operations. A clear impact of capitated payment schemes is that hospitals experience dramatic decreases in inpatient lengths of stay.^ In situations where institutions are fully capitated, their interests extend beyond the acute care setting, and it becomes a hospital's responsibility to place patients in the most appropriate, cost-effective treatment settings, even if that means placement outside the acute care facil- ity.^ In theory, the fully capitated hospital can act as a vehicle to ensure patients a contin-

2 Lauren M, Walker, Turn Capitation into a Moneymaker, MED, ECON,, Mar. 13, 1995, at 58, 58 (providing a general overview on the details of capitation from a physician perspective),

3 Stephanie B, Byrne, Getting Real About Capitation, HOSP. & HEALTH NETWORKS, Sept. 5, 1995, at 66, 66; see also Mark E, Toso & Anne Farmer, Using Cost Accounting Data to Develop Capitation Rates, TOPICS HEALTH CARE FINANCING, Fall 1994, at 1, 2,

'^ Toso & Farmer, supra note 3, at I. Capitation has already fallen out of favor in some markets and is being replaced by risk/reward models built on FFS payment. See Twin Cities Market Seen Moving Away

from Capitation of Health Providers, 1 Managed Care Rep, (BNA) No. 21, at 509 (Dec. 6, 1995). 5 See Toso & Farmer, supra note 3, at 6, 9 (calculating capitation rates and discussing the negotiation

of capitation contracts), (>Id. '^ Id. 8 Leigh Page, Trailblazing, AM. MED, NEWS, Aug. 8, 1994, at 3. 9 Frank Cerne, Dollars & Sense: Creating Incentives to Effectively Manage Change, HosP. «& HEALTH

NETWORKS, Apr, 5, 1994, at 28, 30.

PHYSICIAN CREDENTIALING 175

uum of appropriate care, but in reality it is more a matter of deciphering the least costly alternatives.'0

While capitated physicians do not necessarily have a lock on judicious medical prac- tice, capitation clearly shifts the incentives doctors have to a more conservative manage- ment of patient care." Capitated physicians need to approach medical care from an expan- sive point of view by striving for quality of care in an environment where clinical decisions must be weighed against questions of appropriate resource utilization. In a capitated prac- tice environment, clinical practice guidelines become essential practice aids, and quantifi- able outcome measures serve as a check on the efficacy of individual and group practices.'^ The capitated physician is rewarded for preventing illness, so in theory, prevention, patient education, and screening should be far more important than in FFS settings.'3

Perhaps the most interesting aspect of capitation for physicians is that it shifts the bal- ance of power between primary care and specialist physicians. Under capitated medicine, the primary care physician, the so-called gatekeeper, generally bears financial risk, and de- cides what, if any, specialty services should be provided.''^ Payment to specialists comes from a referral pool, and is usually made on a FFS basis. In such an arrangement, the spe- cialist physician is dependent on primary care doctors who do not want to be labeled as tri- age artists and be

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