The Malpractice Insurance Capitation-Liability Theory

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A New Litigation-Equation Philosophy of Liability

[One Healthcare-Executive’s Experiential Opinion] 

[By Dr. David Edward Marcinko; MBA, CMP™]insurance-book

Developed by iMBA Inc, the factors that comprise the so-called “litigation-equation” include: (1) patient communication factors, (2) provider healthcare delivery systems and reimbursement factors, (3) payer factors and, (4) revised liability legislation and patient encounter data factors. All are briefly reviewed below:

Communication Factors

Patient communication factors for the CLT include; reduced economic and financial fear, consideration of cultural barriers, improved medical awareness through continuing education, concern for geographic access, focused primary and specialty care availability, management information systems, and the frequency and duration of utilization.

Reimbursement Factors

Provider reimbursement factors and healthcare delivery systems include both soft and hard varieties.

Soft CLT provider factors include increased patient availability to services, accessibility to timely appointments, office and quality care satisfaction surveys, communication assessments, known fixed costs and technical information interchanges.

Hard CLT factors include managed operational procedures, illness severity, defined treatment options, clinical variations, outcomes measurements and quality monitoring, performance quotas, aligned financial incentives, and predictable reimbursements.

Payer Factors

Payer factors of the CLT include practitioner screening and shifting, quality assessment, behavioral modification and team care, provider discipline, complaint management, cost and call economic considerations, and adequate capitalization rates.

Liability Factors

Finally, liability factors of the CLT include allegation frequency and severity, standards of care, defensibility, risk management, premium pricing, loss adjustment, legislation, settlement losses, and administrative costs.



To fully understand the CLT, all four parts of the litigation-equation must be recognized. These factors, when integrated with underwriter data and experience, may help determine the level of liability risk and the ultimate cost of malpractice coverage.

For example, if capitated medical care is deemed to involve less risk than in the traditional indemnity environment, then the cost of liability coverage should gradually decrease as the percent of capitated managed care increases, in any particular office setting.

In actual terms, the CLT suggests that capitated insurance and patient care risk are inversely, but not necessarily proportionally, related since experiential data will determine the percentages.


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4 Responses

  1. According to Barry Senterfitt
    Managed Healthcare Executive

    Capitation and other risk-sharing arrangements have been pursued by provider organizations for the past two decades. Yet the law on whether such arrangements result in the provider organization being in the business of insurance has not fully evolved in all states; according to Mr. Senterfitt.

    For example, many states do not have a statutory definition of “insurance.” Case law, attorney general opinions, and statutes related to unauthorized insurance provide guidance to determine whether a particular business arrangement constitutes insurance. Courts often look to the same common elements as most other jurisdictions when evaluating whether a contract is insurance:

    • An insurable interest;
    • A risk of loss (insured event);
    • An assumption of risk by another party (risk transfer);
    • Distribution of the risk among a large similar group; and
    • Consideration for the assumption of risk (premium).

    In healthcare, the risk sharing concept was addressed by the United States Supreme Court in an early case involving the establishment of a network of pharmacies. The Court held that a primary element of an insurance contract is the underwriting or spreading of risk. And, the National Association of Insurance Commissioners [NAIC)] distinguished between reimbursement methodologies that were directly tied to delivery of services from those that were not. The report found that service-based reimbursement methodologies, such as discounted fee for service, per diem payments, case rates and DRGs, were not usually regulated as insurance risk.

    Other research papers and law review articles triggered by the NAIC white paper found that the general consensus is that provider organizations that contract directly with employers or individuals and assume the risk of providing services, even on a partial basis, are more likely to be regulated than providers that contract with licensed HMOs or insurers.



  2. On the CLT

    Many elements of capitation seem to decrease the liability risk for the physician. One challenge has been the perception, whether true or not, that primary care physicians are motivated or incentivized to withhold care under this model.

    For example, during the late 1990’s and early 2000’s, there was a notable trend to sue physicians for non-referral to specialists. In a frequently cited case that involves capitation, a jury in California awarded $3 million in 1995 to the family of Joyce Ching, who died of colon cancer that went undiagnosed for months. In Ching v. Gaines, the jury decided that the primary care physician failed to refer Ching to a specialist in a timely manner.

    The lawsuit also charged that capitated payments made to Ching’s primary care physicians contributed to the non-referral decision, a charge that typically is cited in these type of lawsuits. The frequency of such lawsuits seems to be declining recently. Insurers have been more vigilant in disclosing capitation arrangements to patients beforehand.

    Also, bonuses paid to PCP’s for limiting access to care have been mostly eliminated.

    Brian J. Knabe; MD


  3. Median Health Plan Costs by Product (PMPM)

    The following 2013 are median Independent/Provider-Sponsored health plan costs by product per member per month according to Sherlock Company:

    Commercial Insured:
    HMO – $38.86
    POS – $39.05
    Indemnity & PPO – $47.08
    Commercial ASO – $21.63
    Medicare Supplemental – $37.59

    Advantage – $75.40
    SNP – $139.35
    Cost – $43.73

    HMO – $32.56
    Child Buy-In – $23.29
    Comprehensive Total – $38.59

    *2013 Data, Per Member Per Month

    Source: Sherlock Company


  4. Capitation Market Dynamics

    Continuing changes in the Health 2.0 marketplace today make evaluating capitated contracts both difficult, and vital, to the success of a physician’s practice.

    Market dynamics have shifted to a less restrictive form of managed care arrangements. This shift has resulted in the prevalence of more PPO products than more restrictive HMO coverage. The shift in insurance coverage initially appears to favor the physician’s ability to remain in “fee-for-service” [albeit it at reduced rates] contract arrangements however, it also makes remaining capitated contracts more critical to evaluate. The fewer patient members under capitated arrangements the more financial risk the physician may incur.

    And, the emergence of a new machination, known as micro-capitation, illustrates the fluid nature of this concept.

    Hope R. Hetico RN MHA


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