Since capitation is a form of health premiums and since actuaries are trained to be model builders and compute correct premiums, it is natural that actuaries are being called upon to sign off on capitation.

Typically, need will arise where the self-funder exchanges an unknown risk (mental/nervous, or prescription drugs, e.g.) for a known factor (capitation) and wishes to have an independent assessment of such capitation. Even though the assumer has the upside risk, the self-funder wishes to know whether or not the capitation is reasonably accurate. Thus, the actuary is requested to give an independent opinion.

Some, but not all, of the factors entering into the compilation are these:

  • Scope of Capitation: Primary care, special care, hospitalization, pharmacy, etc.
  • Capping Exposure with Stop-Loss
  • External Factors: Geography, how long providers have been in practice and community practice.
  • Practice Factor: Average age, income, profile of patients and practice characteristics of providers.

In the actual computation, often based upon a model, these factors are assembled and dealt with under these headings:

  • Business Control Risk: Good rule of thumb is to capitate only what s controllable. The more the provider does in-house, the more of the practice risk may be capitated.
  • Morbidity Risk: Only a small percent of the patients cause the large majority of the costs. Critical here is the factoring of the seriously ill patients.
  • Administrative Risk: Expenses, as well as practice costs, must be covered. Will capitation result in added expenses such as records, statistics, legal, etc.?
  • Pricing the Risk: Costs of outside vendors must be deemed to be non-controllable items; past experience of the providers is the only guide in pricing. Pricing must contemplate contingencies.
  • Underwriting the Risk: Once the capitation is set, the provider must conduct its practice to not change its practices so as to make the capitation invalid.

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