Every few years, new and supposedly different mechanisms that transfer insurance risks to health care finance mechanisms are introduced. Eventually their flaws are recognized by health providers, financial analysts, and health services researchers. Despite forty years of negative capitation experiences many authors (Arrow et. al, 2009; Gapenski and Pink, 2011) ignore capitation's abundant flaws and suggest that capitation can reduce costs without sacrificing quality or quantity. This is not true.
Insurance risk transferring health care finance mechanisms, include: Global and partial capitation, carve outs, provider risk/profit sharing, episode/bundled payments, Diagnosis Related Groups payment systems, and the Medicare/Medicaid prospective payment systems for physicians, hospitals, nursing homes, and home health agencies. Case mix adjustments are a common effort to cover the flaws in capitation (See Section 14). These approaches transfer insurance risks to different degrees, but the critical issue is the difference in size between entities transferring, and assuming, insurance risks.
Insurance risk transfers from individuals, and small insurers, to large insurers are efficient and effective when: Claims are relatively infrequent; Most policyholders have no, or modest, claims; and Few large claims exist (Borch, 1974; Hogg and Klugman, 1984; Bowers, Gerber, Hickman, Jones, and Nesbitt, 1997). Transfers of similar risks from large insurers to individuals, or small insurers, almost always results in less efficient risk management.
While capitation contracting parties are usually corporations, all clinically efficient health providers, including: Hospitals, Nursing Homes, Home Health Agencies, Physicians, Nurses, and Emergency and Operating Room personnel are affected, as facilities try to avoid adverse financial outcomes, such as: Missed profit goals, Operating losses, or Insolvency. I will show that when capitation is implemented in clinically efficient settings, individual staff members must cut medically necessary and appropriate patient care or their facilities will miss reasonable financial goals of earning profits, and avoiding operating losses and insolvency. The assertion that capitation creates more efficient health care (finance) systems is a myth.
These, more appropriate, analyses will show that small insurer portfolio size has a severe impact on insurer (Risk assuming provider) operating results (clinical and financial efficiency). Capitation impairs, not improves, provider clinical efficiency. Capitation advocates assumed, but never showed, that capitation works in efficient health care (finance) systems, a critical logical, mathematical, and statistical failing. When appropriately conceptualized and analyzed, capitation induced, insurance risk disaggregation, reduces post-transfer risk management efficiency, forcing insurance risk assuming health care providers to become less efficient, clinically and financially.
By comparing the impact of portfolio size on: Loss Ratio variability, Profitability, Operating losses, Insolvency risk, Surplus requirements, and Maximum Sustainable Benefits (MSBs), I show that insurance risk transferring, health care finance mechanisms increase health care costs, decrease health system capacity, and decrease health care (finance) system efficiency. Inefficient provider insurance operations lead to volatile financial outcomes, inefficient and negligent care, increased costs, and delayed and denied medically necessary and appropriate care.