Is Provider Capitation Working: Effects of Capitation on Integration and Hospital Costs of Care

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BACKGROUND: Capitation holds health providers fiscally responsible for the services they deliver or arrange and thus provides strong motivation for physicians and hospitals to integrate activities and reduce costs of care. OBJECTIVES: The objective of this study was to assess 2 potential effects of capitation: (1) its effects on the integration of functional, financial, and clinical processes between hospitals and physicians and (2) its effects, in conjunction with process integration, on hospital costs. STUDY DESIGN: We studied a 1995 American Hospital Association (AHA) special survey that has information on 44 different physician-hospital integrative activities and on global capitation contracts held by management service organizations, physician-hospital organizations, and other similar entities. These data were combined with the AHA's Annual Survey of Hospitals, InterStudy HMO data, the area resource file, and state regulation data. Multivariate analysis was used to assess the relationship between capitation and integration and then to examine the influence of these factors and others on hospital costs. We studied 319 urban hospitals with complete data. FINDINGS: Provider capitation was found to promote integration between hospitals and physicians in relation to administrative/practice management, physician financial risk sharing, joint ventures to create new services, computer linkages, and an overall measure of physician-hospital integration. However, anticipated effects of integration and capitation on hospital costs were not evident. CONCLUSIONS: Global capitation is motivating tighter integration between physicians and hospitals in a number of respects. Although capitation is currently having the intermediate effect of encouraging process integration, it is not yet having the ultimate anticipated effect of lowering hospital costs.

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