MedStar Franklin Center:  The Case Against Global Capitation

Baltimore County, Maryland is one hour north of Washington DC, where politicians appear impotent to contain runaway healthcare expenditures.  In January 2014, the Centers for Medicare and Medicaid Services (CMS) in partnership with the state of Maryland, piloted an “All Payer Model,” where every insurer, including Medicare and Medicaid, paid a fixed annual amount irrespective of inpatient or outpatient hospital utilization.  Maryland agreed to transition hospitals from fee-for-service arrangements to this global capitation model over five years. 

Capitation, in general, reimburses a fixed amount per patient, unrelated to service volume.  This sets an artificial fiscal ceiling and disincentivizes hospitals, physicians, and other healthcare personnel to provide healthcare. The philosophy is if hospitals or physicians reduce their output and save money, the unused funds can be kept by the organization. The basic premise of capitation pays hospitals, physicians, and others to AVOID providing care, an unfortunate consequence. 

Maryland is experimenting with global capitation, which allots a fixed sum to an institution from each payer, making revenue predictable, while at the same time, encouraging stewardship by the hospital to allocate funds wisely.  When expenses are lower than the prearranged sum, that hospital retains the leftover funds as additional profit.  To ensure care is not withheld to increase revenue, quality measures are assessed and shared publicly.  A 2015 report in the New England Journal of Medicine showed expenditure reductions of 0.64% and inpatient admissions decreased by 5%.   However, with unproven payment arrangements, unintended consequences always occur. 

The unforeseen casualty in this story is the pediatric department at MedStar Franklin Square Hospital.  On April 3rd, 2018, MedStar abruptly announced all pediatric inpatient care and emergency services were closing, effective April 6th, and all pediatric staff, including eight physicians, were terminated.  Sadly, Baltimore County is home to some of the nations’ most vulnerable families, struggling with high rates of drug addiction, domestic violence, and poverty.  The hospital catchment area serves children attending thirty-seven schools, half of whom are covered by Medicaid. In 2017, Franklin Square pediatric ER evaluated 17,000 children and over 800 were admitted as inpatients.

For hospitals in global capitation arrangements, higher profit margins materialize in those service lines with low utilization.  Commercially insured patients bear responsibility for out-of-pocket costs, co-pays, cost shares, and deductibles; therefore, they tend to be low utilizers. It is well accepted that costs generated by Medicaid patients are considerably higher than commercially insured patients.  Following Oregon Medicaid expansion, emergency department (ED) visits increased by 40% and follow up studies determined this upsurge did not dissipate over time.  MedStar Franklin Square has finite monetary resources; the pediatric service line is a “loss leader” when half of the pediatric patients have Medicaid coverage.

In the corporatized medicine world, improving profit margins is essential to justify inflated executive salaries, such as those of CEOs Kenneth Samet and Samuel Moskowitz, who in 2015, grossed nearly $5 million and $1 million, respectively. MedStar Franklin Square, a nonprofit hospital, was granted tax-exempt status in exchange for providing services to local communities, such as charity care and medical outreach.  However, global capitation payment arrangements slim the profit margin substantially, requiring maximum efficiency to optimize revenue. 

When hospitals make short-sighted decisions, the public should know the increased risk they will face.  Pediatricians are specially trained to provide care to children, their expertise lowers mortality rates for patients under the age of 18.  The death of 12-year old Rory Staunton is a cautionary reminder of consequences when subtle signs of disease in children are overlooked by non-pediatric experts.  Medical records released by his parents, showed he had signs of impending sepsis, including fever, elevated heart rate and respiratory rate, and a blood pressure of 103/50, far below normal in an adolescent who is 69 inches tall and 169 pounds. 

The U.S. Department of Health and Human Services (HHS) is condoning hospital systems to sacrifice the lives of children to reduce healthcare costs through global capitation.  MedStar Franklin Health likely prefers treating commercially insured patients over those on Medicaid.  They are not alone.  One year ago, Mayo CEO Dr. Noseworthy encouraged prioritizing commercially insured patients over those on Medicaid to preserve financial strength of the institution.  Small and large communities throughout the nation have lost critical access, including Albert Lea, Minnesota, Kitsap County, Washington,  and Louisville, Kentucky, yet politicians are too distracted by legislative gridlock to see what is happening in their own backyard.  Bob Dylan said it best, “How many deaths will it take ‘till he knows that too many people have died?”  The answer is not to hinder access or discourage utilization; the answer, my friend, is to incentivize hospitals to protect the lives of our most vulnerable citizens. 

Healthcare is a Human Right – Maryland has put together a rally, Put Children Over Profit, protesting the closure of pediatric services at MedStar Franklin Square on Tuesday, May 8that 1:30 pm.  Stay tuned…

Niran Al-Agba (@silverdalepeds) is a third-generation primary care physician in solo practice in an underserved area in Washington State who blogs at peds-mommydoc.blogspot.com.

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33 replies »

  1. The National Health Expenditure data includes lots of costs beyond what insurers and government payers pay for. If you ask commercial insurers for a breakdown of their medical claims costs, they will tell you that 40% of claims are for hospital care, both inpatient and outpatient combined. Another 40% is for physician fees and clinical services including non-hospital owned labs, imaging, PT, durable medical equipment, etc. The remaining 20% is for prescription drugs. Medical claims account for 80%-85% of health insurance premiums. That’s where the money is. It’s not with executive salaries as much as you might like to think it is.

    Moreover, doctors drive almost all healthcare spending when they admit patients to the hospital, prescribe drugs, order tests, refer patients to specialists, consult with patients and perform procedures themselves. So, what doctors actually take home as income after practice expenses is really beside the point from a healthcare cost standpoint.

    It’s funny in a not so funny way that every part of the healthcare system thinks the cost problems are not with them but elsewhere in the system. Even the hospitals believe this and they’re a huge part of the problem with their ridiculous charges and lack of transparency. Unfortunately, a lot of our regulatory structure is designed to protect and insulate hospitals from competition from ASC’s and other non-hospital entities. We need to change that but the entrenched interests are extremely powerful.

  2. Encourages cherry picking of patients, so the more complex and sicker have limited choice of quality MDs and use more expensive ER/safety net services.

  3. “thing go badly”

    It’s just sick patients – no big deal.

    “is now well established”

    As are childhood obesity and texting while driving.

    “unrestrained FFS reimbursement lacks the mechanisms to restrain excessive volume of services”

    That talking point’s been dead for years now. Find a new one.

  4. This is a great list! You make the point very well that is missed by those not involved in hands-on healthcare work. I, like you, believe the “system” costs increase while the pithy 8% physicians are getting shrinks. It seems so obvious that this artificial economic system doesn’t work. I believe the economists and health policy people try to extrapolate from experience in other sectors and actually think you can use these “blunt tools” to bring down cost. The system will likely have to be destroyed by these people before things turn around. Thank you for your points above. Salient and well written.

  5. I bet you could find that capitation costs more than FFS.

    Note: the type of cap is relevant for each of these items. Small cap: doc is capitated only. Big cap: doc is responsible for costs of his specialists, drugs, hospital usage, whatever.

    1. Big cap has got to impede the rapid acquisition of a diagnosis. Use of lab, imaging, echo, etc.
    2. It, big cap, must slow the nimble use of specialists.
    3. When attorneys discover that capitation is being used, they must see easier paths towards med-mal litigation.
    4. Because providers get money regurlarly and without necessarily being keyed by patient illness or complaints, this default money is totalky waisted.
    5. It always needs risk adjustment to be fair and this adds administrative complexity and costs.
    6. It often requires the provider to protect himself with reinsurance and this is inefficient and adds to total cost, as does all insurance.
    7. In general, and for costs, and depending on type of cap, it must slow the application of the most modern interventions and treatment pathways and enforce the use of staid, orthodox treatment. This could increase costs by delaying recovery times.
    8. It must cause more disharmony in provider groups because some docs will be working much harder than others and receiving the same income, just because of random variation. This dissension has costs.
    9. Docs on capitation are going to use other resources–that they do not get charged for–MORE…in order to protect themselves from anticipated more malpractice litigation: longer LOSs in hospital; more reckless use of expensive drugs, more use specialists.[I’m capitated. I have small capitation. I do not get charged for use of dermatoligists. I realize that I have more exposure to litigation because attorneys know my incentives are to undertreat. Therefore, why not send my patients to dermatologists, etc., whenever I have the slightest concern for that need?]

  6. Steve2, Yes, capitation in Maryland also forced closure of many service lines at Harbor Hospital as well. There will certainly be others in the future.

    Direct Primary Care is not a capitated product because the monthly fee paid by the patient covers the care, but not the tests or imaging. Also, there is no regulatory burden placed on DPC physicians by a third party. The care is between the physician and patient directly.
    With CMS involved, the care is back to forced EMR use, forced submission of patient data prior to payment for services from the government. It is an entirely different animal.

    Another way to look at this…. if one is paid $90/month by CMS to provide care for an elderly patient, and needs extra care for some reason, the physician is incentivized to refer them to the ER or urgent care. If a patient is paying $75-100/mo to a physician directly, it behooves the patient and the physician to work together to improve health. The patient is invested as is the physician. The incentives are completely different in the free market. A patient has choice and can take their dollars elsewhere. Isn’t that better for patients? Having choice?

  7. Thank you Pesto Sauce. Yes physician fees are 8% of healthcare costs. Isn’t it ridiculous that all these policy wonks keep trying to drill down that amount to 5% rather than chasing the $200 billion dollar industry the PBM/GPOs have carved out? Yes, most physicians have a cap on the number of Medicaid or Medicare patients they will accept because getting $1.50 for providing care and then absorbing liability if anything goes wrong is far too much risk for reward. Capitation didn’t work in the 90’s and it wont work now. My father almost lost his practice when he refused to sign on for capitation back then, I will never forget what a disaster it was. The docs who signed on averaged 3 lawsuits/100 Medicaid patients they accepted. Terrible odds. It is almost better to stop practicing medicine and that is what will happen to many.

  8. Findlay, as usual, being on the front lines of health care myself, I completely disagree with you that “blunt tools to constrain unnecessary, inappropriate, and excessive care” like capitation are good ways to “force” providers to practice within a budget. The caps cannot be “calibrated” because we are talking about people, who get ill unexpectedly. I understand this model may be “well established” but we have a declining mortality rate and costs are actually not being contained despite all the new payer models CMS keeps developing, nor will they be until someone gets the idea to bring physicians and patients together in closer proximity. Capitation already failed in the 90’s and will not work any better all these years later. The “good” physicians who provide top notch care will leave organized medicine and go to cash only or DPC models as they are “forced” to do anything more than they are already doing. It’s just that simple.

  9. I do hear what you are saying, but right now the risk is on the insurers (sort of) but most of all the physicians. Its easier to take a “risk” if your income is $65 million like Helmsley vs. 100k like a PCP.

  10. Such an excellent point. Can you imagine what a PBM or GPO would do with capitation? They would quit and life would go back to normal. We could bring down costs by $200 billion based on the last estimate. Wow now that is cost containment.

  11. You are absolutely right. It all adds up. All those expenses that are unnecessary to provide actual healthcare, should dry up. I do not need a CEO to teach me about how to care for patients.

  12. Every test or procedure or interventions should be considered carefully. Physicians can do better at having end of life discussions.

  13. Barry, there is a lot of variance. I am probably too honest and direct. I have been told to leave a room before for trying to have a discussion about end of life care with a pediatric patient family. When their child became worse over the next day or two, then they only wanted to speak with me (I was not involved once he worsened and was in the ICU.) You may want an honest and objective prognosis but not all patients do. My patients are like you they are “give it to me straight doc” kind of people. I do not like that “fighter” thing either as if the person who does not want to fight is a quitter. We have to change the conversation to change the approach and the outcomes.

  14. Yes, Steve 2, we do need to be more honest with people. Even those who handled my fathers care gave my other family members too much hope. I needed to remain silent so as not to be the “doctor” rather the “daughter” but there was no reason not to be completely honest about the expectations.

  15. Barry, I agree with most of what you said. The idea of a donut hole and more patient investment are very appealing. I also think FFS in primary care makes sense, though see where specialty care may have incentive to “do more.” There is not that much we can do in primary care to jack up the price… or to be honest, we would have done it already. As far as end of life, it is outside of my expertise, however, I think we do too much overall throughout our lives. Alot of things do resolve on their own or with small changes in diet, exercise, etc…. I have been involved with many terminal pediatric cases where support was withdrawn and I have sat next to many families and held their hands and cried with them. I believe good care is about relationships and not interventions.

  16. You are right. HHS likely knows but doesn’t know how to fix it. They are not going to squeeze out the rich people who need cholesterol checked…. sadly, it is our most vulnerable citizens, children

  17. Dr. Palmer – great sentiments but you know that “everything is the fault of the hapless physician.” If the healthcare system explodes, the responsibility for the failure of the government will rest on our shoulders 🙂 I like how you think, though.

  18. Thanks Jason for your comments. I agree these policies were likely well-intentioned, however the meaningless part is negatively affecting children and likely other marginalized sectors. These children are our future. Hospitals need to stick to hospital care and let outpatient physicians stick to care of patients in their clinics and not HOPD.

  19. Capitation and global budgeting can be, but do not have to be, blunt tools to constrain unnecessary, inappropriate and excessive care — the main aim, along with forcing providers to practice within a budget. If the fixed budget or caps are unrealistic and not carefully calibrated things go badly. In most cases, that does not happen because this forms of health care financing is now well established. It is also the probably wave of the future–in some forms still to evolve– as the US slowly but surely joins its EU allies in realizing that unrestrained FFS reimbursement lacks the mechanisms to restrain excessive volume of services (treatment) and thus costs. It’s just that simple.

  20. There will always be some natural variance. My critical care docs all have slightly different takes on when to withhold care. It is a tough call. Overall, my impression is that we actually do a bit better on this than we had in the past, conceding that I don’t think we have good data. When I trained, many, many years ago it seemed like we always did “everything”. Patients went to the ICU to die, and get lots of care in the process. Now, if someone is truly terminal we don’t just send them to the ICU. Guess I tend to see as part of a larger overall problem. Too much testing/procedures when they won’t really make much of a difference in management or outcomes.


  21. Absolute truth. The feds are worming their way out of entitlements, and one could almost say justifiably so…but the methods are horrific. They can’t be honest and say “this program is going to be cut and will end on July 1” because votes.

  22. Capitation failed in the 90’s, people have short memory banks on this. It’s all cheaper until it’s not. A couple of leukemia and lymphoma lawsuits will break them just like it did 25 years ago. DPC isn’t capitated. JUST THE DOCTORS’ FEE and maybe dirt cheap Rx here and there, but labs, pharmaceutical prescriptions and hospitalization go a separate route, i.e. Medicaid or third party. Again everybody fails to talk about the source of cost–doctors’ fees are a tiny part, rated at 8% by JAMA articles I can’t think of right now…costs are covered by the good payor over the loss-leader, the charging of the insured PPO gallbladder patient $40,000 simply because it can, and the charging of the Medicaid gallbladder $550. Medicaid is bankrupt and most decent docs have stopped accepting $1.75 as payment for a consultation because they need to keep the lights on. The feeding frenzy for Medicaid by third party payors in cahoots with government is to divvy up that $1.50 in things like a nurse phone call, a ‘script for dirt cheap Amoxicillin, and hoping it all goes away. Put the patient in charge and end medicaid and third party payment along with gag clauses on fee disclosure and we’ll see the boat get rocked…in a good way!

  23. Full capitation, including responsibility for financing hospital care and specialist care, inherently means accepting actuarial risk. This is what health insurance companies do and that’s what they’re good at but even they sometimes get it wrong and lose money. More and more hospitals are entering the health insurance business but most haven’t been very successful at it as far as I can tell.

    It turns out that estimating actuarial risk isn’t so easy and insurers don’t get much credit for this skill set. That’s probably because there is a large constituency of so-called experts who want virtually all healthcare costs to be paid for by taxpayers. For these folks, the costs are the costs and we should just raise taxes as much as necessary to cover the costs. Annoying issues like healthcare fraud and futile end of life care are acceptable collateral damage in this context. Profits are evil and government knows best. It won’t work especially in our culture.

  24. I wonder how much variance there is among doctors before they tell a patient and family, I’m sorry but there is nothing more that we can do aside from provide comfort care. If I were the patient, I would want my doctor(s) to provide me and my family with an honest and objective prognosis so we can make a fully informed choice regarding treatment options rather than offer false hope coupled with treatment that may be futile or only marginally useful.

    Also, when it comes to end of life care, the words I hate the most in our healthcare system are fighter and give / gave up. In my opinion, there is way too much pressure in our society to fight the good fight often to placate spouses and other family members. That’s unfortunate and it probably costs the healthcare system a lot of money..

  25. End of life issue is tough. Often we just don’t know when someone is going to die. That said, many of us could probably do a better job of talking about end of life issues. Maybe we could do fewer procedures on patients who are completely demented.


  26. Two questions. First, if capitation caused Medstar to fail, did it cause others to fail also?
    Second, I thought that DPC was also a captivated product. How does that capitation differ, i.e. what makes some capitation better than others?


  27. Please talk about what to capitate:
    The PBMs are nicely in a position to capitate the per patient cost per year of all drugs in their formularies if their market cap is large enough…and the three dominant PBMs are surely large enough,with millions of covered insured.
    Managemaent services per 100 million dollars of acute care hospital per year seem large enough and competent to bid for cap coverage contract.
    Nursing and aids and tech labor unions should bid for total costs per year including overtime and benefits.
    Health plans themselves could bid on insuring claimed actuarial values so that they take some financial risk here. Too much cost sharing should drive a patient refund.
    Medicare administrative costs should be capped vis a vis foreign state run health plans. Ditto Medicaid and the VA
    Specialist medical groups–Eg East Bay Radiology–should be able to able to capitate.

    If you explore around in your imagination here, you find that almost every silo in healthcare financing should be able to shout: “yes, we can do the job, no matter the illness burden, for so much per year.” Thus it becomes rather illogical to lay this experimental financing idea only on certain physicians.

  28. I keep hoping to see some indication that health care pricing is actually related to health care costs, but those two terms — price and cost — continue to be conflated in ways that would make someone in retail or manufacturing want to pull out their hair. Healthcare billing has always reminded me of the old “throw a bunch of sh*t against the wall and see what sticks.” I hate being a curmudgeon but I have got used to it.

    The arithmetic is not too challenging. Add together all the stuff that COSTS something and that becomes the COST. In the case of healthcare that means land, facility, housekeeping, maintenance, depreciation, taxes (or not), debt service, amortization and of course professional compensation (wages for staff, docs, etc.)
    PRICE, on the other hand, is what is charged for the care — what appears on the bottom line of the invoice (that’s what people in the rest of the world call the “bill”) sent to whoever or whatever entity is expected to pay that invoice (or bill, if you prefer).
    This isn’t hard to understand, but no matter how much I try to splain it, the explanation seems to get lost in the weeds of FFS or “usual and customary charges” or capitation or a bewildering mixture of fees, charges and the inevitable third-party services of FOR-profit “providers” whose work is essential to the whole enterprise — clinics, labs, ;private referrals, rehab and post-acute care providers, home-health followup, etc. The list it endless. And all that’s before we get to the tangle of negotiations with insurance and drug companies that invariably have a hand in all that healthcare involves.

    Unless and until healthcare can be made truly non-profit America will continue to have the most costly system in the world. I can already hear the cries that we already don’t earn what we are worth, but that is invariably from those who seem unable to differentiate between “profits” and professional compensation — the usual place where that happens being individual private practices which are not nonprofit in any meaningful sense of the word. (Just yesterday I came across another post discussing how important the doctor’s time is, and how they really need to watch every minute, lest they waste valuable time talking bullshit instead of sticking to the medical problems of their patients. Time, of course, is like opiates. Not every case needs the same amount. Some need less, others more. Any palliative care or hospice pro knows that.)

    This post mentions “inflated executive salaries” of course. Every dime of those packages originates on someone’s bill. There is no other revenue source for the money. No matter who pays what — insurance, state, copay, deductible, discount, subrogated amounts — it all adds up.
    All those different expenses added together become the cost.
    Unless and until every one of them is included, discussions about costs is at least incomplete — and therefor without merit.

  29. I’m not a fan of capitation either for exactly the reason you mentioned. It provides an incentive to provide too little care. Of course, pure fee for service provides an incentive to provide too much care especially when providers know that insurance is there to pay the bills.

    I do like the idea of reinsurance but reinsurance isn’t cheap and a lot of thought has to be put into setting the boundaries. I note that in Medicare Part D, once beneficiaries come out of the donut hole into the catastrophic coverage zone, Medicare pays 80% of the costs, the insurance plan pays 15% and the insured member pays 5%. A similar approach could be applied to all care but it would be expensive and taxes would likely have to be raised to pay for it. That’s not an easy sell politically.

    Toward the end of the three hour segment with Berkshire Hathaway CEO Warren Buffett, Vice Chairman, Charlie Munger, and Microsoft co-founder, Bill Gates on CNBC this morning, there was a discussion about healthcare costs. Charlie Munger, who has been Chairman of the Board of Trustees of Good Samaritan Hospital in Los Angeles for the past 31 years, noted that too many hospitals, including his, provide way too much care at the end of life in an attempt to postpone death. In the process, hospitals make a lot of money on the extra care a lot of which is probably futile or marginally useful at best. Much of this treatment would likely not be provided in other developed countries because people are more accepting of death when the time comes, their culture calls for doctors and hospitals to stop treatment sooner than we do, and they don’t face the same societal litigiousness that we do.

    It would be helpful to hear more from doctors in the trenches on how to address this issue, not just with the elderly who have already lived a normal life span and then some but with very sick children as well. It’s a very sensitive subject for politicians and commercial insurers as well as for patients and families. In my opinion, it cries out for physician leadership to help address the societal legal issues, moral issues and economic issues.

  30. It sounds like the policy did exactly what was intended. And I suspect HHS is quite aware of it. Who did you think they were going to squeeze out, rich people who need their cholesterol checked?

  31. In global cap all the financial risks fall on the providers who therefore need re-insurance.

    It is only fair, then, that all the med-mal litigation risks fall on the payers in their captain-of-the-ship role.

  32. Hi Niran,

    Thanks for this. Your example speaks to the danger of using blunt policy tools across different constituencies and the fact that well-intentioned global policies often fail to protect vulnerable populations.

    Overall, global capitation does seem to “encourage physicians to be more financially responsible in the selection of services provided to the patients as well as the supplies used in surgical procedures” (http://mds.marshall.edu/cgi/viewcontent.cgi?article=1123&context=mgmt_faculty). But, as you point out, this is meaningless in an environment where governments fail to compel the provision of care of marginalized communities.

    The economic/political question is whether hospitals need further incentivization or if further refinements to the existing model and PMPM are sufficient.