The Growth of Medical Groups Paid through Capitation in California

BACKGROUND: In California, it is common for health maintenance organizations (HMOs) to contract with large medical groups that are paid through capitation and are responsible for managing a full spectrum of medical services. METHODS: We studied six large medical groups in California--Bristol Park Medical, Friendly Hills HealthCare Network, HealthCare Partners Medical Group, Mullikin Medical Centers, Palo Alto Medical Foundation, and San Jose Medical Group--that are paid through capitation and that are growing as a result of contracts with managed-care organizations. We conducted interviews and obtained data on factors such as patient enrollment, capitation and other revenue, numbers of days spent by enrollees in the hospital, and numbers of visits to physicians per enrollee. RESULTS: Between 1990 and 1994, the number of HMO enrollees whose care was paid for through capitation in the six medical groups increased by 91 percent, from 398,359 to 759,474. In 1994, the mean number of hospital days per 1000 HMO enrollees ranged from 120 to 149 for non-Medicare patients and from 643 to 936 days for Medicare patients. By comparison, in 1993 the mean numbers of hospital days per 1000 HMO enrollees not covered by Medicare were 232 for California and 297 for the United States; for HMO enrollees covered by Medicare, the numbers were 1337 for California and 1698 for the United States. In 1994, the average annual number of visits to physicians for HMO patients in the six groups not covered by Medicare ranged from 3.1 to 3.9; for Medicare patients, it ranged from 7.2 to 9.3; these rates were slightly lower than statewide and national rates. Four of the groups have sold their assets (such as facilities, supplies, equipment, and patients' charts) to outside investors; the physicians remain employed by physician-owned professional corporations. CONCLUSIONS: Medical groups paid through capitation offer a model for the status of physicians in managed-care systems that differs from the employee status offered by staff-model HMOs and the subcontractor status offered by HMOs that negotiate directly with individual physicians. Despite their growth, such medical groups in California face substantial challenges, such as obtaining the financial assets necessary to sustain rapid growth.