5169.0: Wednesday, October 24, 2001 - 2:35 PM

Abstract #24355

Average cost based reimbursement and risk theory: Implications for health care policy and practice

Thomas Cox, BA BSN MS MSW, School of Nursing, Virginia Commonwealth University, 4600 Bunn Avenue, Richmond, VA 23231, 804-222-3568, tcox@hsc.vcu.edu

There is ever increasing concern about the impact of capitation agreements on consumers and providers. A firm conceptual understanding of the nature of capitation agreements is impossible without adequately understanding the implicit risk theoretic basis of average-cost based agreements. While providers are increasingly refusing to enter capitation agreements, a clearer understanding of the nature of such agreements may help steer political debate on health care financing from mystification and myth toward rational discourse.

This paper will discuss the mathematical and risk theoretic structure and financing of capitation agreements and Diagnosis Related Groups (DRGs). It will analyze the impact of these financing mechanisms on health care providers and consumers. Neither capitation contracts nor DRGs are sound financing mechanisms unless they compensate providers for the specific risks they assume. Widespread misunderstanding of probability and risk maintains the illusion that the long-term financial good of providers is promoted by these agreements. The true nature of average-cost based financing as risk transfer devices must be recognized, acknowledged, and steps taken to prevent the use of funding mechanisms, such as Diagnosis Related Groups (DRGs) to avoid detrimental effects on health care consumers and the health care system.

Learning Objectives: At the conclusion of the session, the participant (learner) in this session will be able to: 1. Describe the risk theoretic structure of average cost based reimbursement plans; 2. Analyze the profit and loss implications of becoming an average cost based provider of service; 3. Describe the effects of shifts in average costs imposed by geography, volume, experience and acuity on the risk theoretic structure of average cost based reimbursement plans; 4. Articulate the need for policy changes in financing of heath care services that compensate average cost based providers for the additional financial risks they assume.

Keywords: Risk Assessment, Financing

Presenting author's disclosure statement:
Organization/institution whose products or services will be discussed: None
I do not have any significant financial interest/arrangement or affiliation with any organization/institution whose products or services are being discussed in this session.

The 129th Annual Meeting of APHA